Personal Property Tax Reform – Two Sides of the Same Coin: Tax Exemptions And Revenue Replacement

Personal Property Tax Exemptions

In December 2012, the Legislature enacted and the Governor signed legislation that provides personal property tax exemptions for “small taxpayers” and for “eligible manufacturing personal property.” These exemptions are found in Public Acts (PAs) 397 through 404 of 2012. In addition, the Legislature enacted and the Governor signed PAs 406 through 408 of 2012, to provide mechanisms to potentially replace a portion of the lost personal property tax revenue from the two exemptions.

Under the exemption for a “small taxpayer,” all of a taxpayer’s industrial and commercial personal property within a local tax collecting unit is exempt if the combined taxable value of such property within the unit is less than $40,000 (less than $80,000 true cash value). This exemption is effective as of December 31, 2014, but is only available if the taxpayer has filed an affidavit with the Township as of the prior February 20 of each year (beginning February 20, 2014) attesting that its industrial and commercial property in the Township has a taxable value less than $40,000.

The exemption for eligible manufacturing personal property (EMPP) has two components: one for “new” property and one for “existing” property. These two exemptions are effective December 31, 2016. The exemption for “existing” EMPP will be phased-in from 2016 to 2022. In 2016, existing EMPP that was newly acquired in 2005 or before is eligible for exemption. Like the small taxpayer exemption, a taxpayer must file an exemption claim by February 20 of each year for property that becomes eligible for exemption in that year; however, once an exemption claim is filed for particular personal property, the taxpayer is not required to file a subsequent claim for exemption for that property. Eligible manufacturing personal property that is acquired new and placed in service in 2013 or after is eligible for the “new” property exemption, which is obtained by filing a one-time affidavit of exemption by February 20, 2016.

Revenue Replacement

Local units rely heavily on personal property tax revenue. As part of the property tax reform legislation adopted in 2012, PAs 406 through 408 of 2012 provided the proposed mechanisms for the replacement of a portion of revenue lost to the personal property tax exemptions. There were essentially two components for revenue replacement: (1) allocation of a portion of revenues derived from the State’s six percent Use Tax, and (2) a locally-assessed “Essential Services Special Assessment.” As a result of the recent legislation adopted by the Legislature in March 2014 and signed by the Governor on March 28, 2014, the two components for revenue replacement have been revised.

2012 Revenue Replacement

The first component of the replacement revenue proposal that was enacted in 2012 was the allocation of a portion of State Use Tax revenues to local units.

The State imposes a six-percent “use tax” on out-of-state purchases (akin to the State-imposed six percent sales tax imposed on in-state purchases).

The 2012 legislation set forth calculations to determine the amount of loss due to the new exemptions and established the criteria for being classified as a “qualified municipality” that would be eligible for a distribution from the State from the Use Tax revenue. A “qualified municipality” was defined as one that experienced a reduction in taxable value of more than 2.3% due to the new exemptions. If a municipality experienced a loss of taxable value less than 2.3%, then the municipality would not be eligible to receive a distribution from the Use Tax revenues. Further, if a municipality increased its millage rate to replace “debt loss,” the municipality would not have been eligible for replacement funding. Significantly, the replacement revenue would only approximate 80% of the lost revenue due to the personal property tax exemptions.

The second component for replacing lost revenue due to the personal property tax reform and exemptions was the establishment by the municipality of a special assessment district for “essential services,” which include police, fire and ambulance services. The assessment would be imposed on commercial and industrial property owners within the municipality’s boundaries. There was no threshold for loss (as was the case with replacement revenue from the Use Tax), however, a municipality could not establish a special assessment district, if the municipality increased a millage rate for essential services obligations incurred before 2013 as a result of the new personal property tax exemptions.

Under the 2012 replacement revenue mechanism and due to the “reprogramming” of Use Tax revenue, in order for the personal property tax exemptions and replacement revenue mechanism to take permanent effect, State voters must approve a state-wide ballot proposal at the August 5, 2014 primary election.

2014 Revenue Replacement

While the 2012 legislation to enact personal property tax reform was heralded as an important step for the business climate in Michigan, local governments were to experience the greatest loss – especially any municipalities that did not meet the threshold for a 2.3% reduction in property value. As a result, the Legislature and the Governor, with significant input from organizations representing local governments, worked to revise the revenue replacement side of the coin.

In a 10-bill package that was approved by the Legislature at the end of March 2014, and signed by the Governor on March 28, 2014, the revenue replacement provisions of the reform legislation from 2012 were revised to provide 100% revenue replacement to municipalities and eliminate the 2.3% loss threshold. Further, the legislation modified the provisions regarding the essential services special assessment.

Under the 2014 legislation that was signed into law, four cents out of every six cents levied under the Use Tax would be collected by a new state-created authority, the Local Community Stabilization Authority (“LCSA”), which would be responsible for the collection of and disbursement revenues derived from the Use Tax. The component available to municipalities would be considered a local tax and not a State tax, so as to be beyond the reach of the Legislature and Governor for budgeting purposes. The LCSA would be authorized to levy the local component of the Use Tax, distributing the proceeds from the local share to municipalities based on any loss in property tax revenue debt service millages and other general millages attributable to the personal property tax exemptions. The LCSA would provide replacement revenue to a local municipality’s tax increment entity (or entities).

Under the 2014 legislation, the Essential Services Special Assessment would be levied on a state-level and not on a local level, as had been provided under the 2012 legislation. This “state-level” special assessment would be levied against “eligible personal property” — personal property that was exempt from personal property taxes because it was exempt under a New Personal Property Exemption under PA 328, if granted after 2013, or extended because of the personal property tax reforms; as Qualified New Personal Property; as Qualified Previously Existing Personal Property; or exempt under an industrial facilities exemption certificate extended because of the personal property tax reforms. This state-level essential services special assessment would begin in 2016.

Taxpayers would pay the special assessment based on the acquisition cost of the eligible personal property (the property’s fair market value at the time it was acquired, including any freight costs, sales taxes, installation costs, and other capitalized costs (except capitalized interest)). Special assessments would be sent out by the Department of Treasury not later than May 1, with payments due September 15. Any special assessments unpaid as of September 15 would be delinquent. The Department of Treasury would send a notice out no later than October 15 for delinquent assessments. Delinquent payments could be paid until November 1, along with a penalty of 1% for each week the assessment is late. If the special assessment is not paid by November 1, the local assessor or the State Tax Commission (as appropriate) would be required to rescind the personal property tax exemption of the taxpayer and then any taxes due because of the rescission would be included in the winter tax bill.

August 2014 Ballot Proposal

All of the 2014 legislation with respect to the replacement revenue is subject to voter approval at the August 5, 2014 primary election, due to the change in the State Use Tax.