Local Government Law Bulletin December 10, 2013

State Legislature Takes Aim on Tax Increment Authorities

On June 14, 2013, a Wayne County Circuit Court Judge ruled that the downtown development authorities established by the City of Dearborn and eight other southeast Michigan municipalities could lawfully capture voter-approved extra-voted millages enacted to fund the Detroit Institute of the Arts (“DIA”) and the Detroit Zoo.

In response to this ruling, the Legislature considered and adopted a package of seven bills amending various tax increment statutes to expressly prohibit the capture of the DIA and Detroit Zoo millages, which Governor Snyder signed on June 16, 2013. The seven bill package included the following amendments:

  1. Public Act 61 of 2013 amended the Tax Increment Finance Authority Act;
  2. Public Act 66 of 2013 amended the Downtown Development Authority Act;
  3. Public Act 67 of 2013 amended the Brownfield Redevelopment Act;
  4. Public Act 62 of 2013 amended the Local Development Financing Act;
  5. Public Act 68 of 2013 amended the Corridor Improvement Authority Act;
  6. Public Act 63 of 2013 amended the Nonprofit Street Railway Act; and
  7. Public Act 64 of 2013 amended the Private Investment Infrastructure Act.

Under the various tax increment statutes, a tax increment authority (e.g., a downtown development authority or a corridor improvement authority) may “capture” millage revenues derived from the levy of local taxes on increases in the value of real and personal property within a specific development area. Those “tax increment revenues” may then be used by the tax increment authority to secure and pay the cost of public improvements made or services provided within the development area as a means to increase economic development. Often times, the capture of the tax increment from properties in the development area extends for 20 or even 30 years, thereby providing needed revenues to undertake significant public infrastructure projects, such as utility improvements or repairs, street improvement projects, and façade programs.

Affected taxing jurisdictions that do not “opt out” of the capture, receive tax revenue from properties located within the development area based on property values at the establishment of the district (if a downtown development authority), or at adoption of the development plan and tax increment financing plan (if a corridor improvement authority), for example. The affected taxing jurisdictions do not receive, however, any millage revenues generated from increases in the property values for properties located within the district. Instead, those increased revenues are captured by the tax increment authority.

The dispute with the zoo and art institute authorities initially arose as a result of informational letters from Attorneys General Mike Cox in 2009 and Bill Schuette in 2011. These informational letters, which are not official Attorney General Opinions, indicated that the tax increment statutes at issue did not authorize the capture of extra-voted millages adopted and levied after the establishment of a tax increment finance authority. Affected tax increment authorities in Wayne County disagreed with the informational letters and argued that tax increment revenues, even if generated from extra-voted millages approved and levied after adoption of a development plan and tax increment financing plan, are subject to capture unless (1) the affected taxing jurisdiction “opts out” under the applicable statute (e.g., from the district, under the Downtown Development Authority Act, or from a development plan and tax increment financing plan under the Corridor Improvement Authority Act), (2) a tax sharing arrangement for the return of some or all of the captured increment is in effect, or (3) the tax increment statute expressly excludes the millage revenues from the definition of “tax increment revenues.” The Wayne County communities argued that there was no such opt out by or tax sharing agreements with the zoo and art institute authorities, and, as a result, the litigation commenced in circuit court.

Under Public Acts 61, 62, and 66 through 68, amending the Tax Increment Finance Authority Act, Downtown Development Authority Act, Brownfield Redevelopment Act, Local Development Financing Act, and Corridor Improvement Authority Act, the term “tax increment revenues” was amended to expressly exclude:

ad valorem property taxes levied under one or more of the following or      specific local taxes attributable to those ad valorem property taxes:

(I) the Zoological Authorities Act…

(II) the Art Institute Authorities Act.

While the amendments to the tax increment statutes were narrow in their application – affecting only tax increment authorities in southeast Michigan relating to the Detroit Zoo and the DIA, many municipal officials view the amendments as an increased effort by the Legislature to further reduce the effectiveness of tax increment authorities. Tax increment authorities and affected jurisdictions throughout Michigan should be aware that Representative Eileen Kowall, a primary sponsor of Public Act 61 of 2013, and a co-sponsor of all of the amendments to the tax increment statutes mentioned above, is also working on legislation to further curb tax increment capture by tax increment authorities.

Although no specific legislation has been introduced at this time, Representative Kowall is working with representatives of municipal groups and tax increment entities, such as the Michigan Association of Counties and Michigan Downtown Association, on possible amendments to the statutes. Under consideration for inclusion in legislation would be “sunsets” on tax increment capture that would limit the duration of tax increment capture by a tax increment authority and additional “opt out” opportunities for affected taxing jurisdictions so as to permit a taxing jurisdiction to be able to exempt its millage from continued capture by a tax increment authority. Such amendments, if enacted into law, would certainly limit the ability of tax increment authorities to continue to capture revenues to undertake economic development and revitalization projects in Michigan’s downtowns, commercial corridors, and industrial areas, which would most certainly have an impact on job retention and expansion in Michigan’s communities.

Let’s start a partnership worth keeping.