In 2011, Michigan legislators began discussing a complete elimination of the personal property tax. Sen. Mike Nofs, R-Battle Creek, introduced a bill that would end the tax outright, but mentioned that these tax cuts could be phased in so as to mitigate shocks to local government revenue.
At the same time, the Legislature was also discussing the elimination of the Michigan Business Tax, one of newly-elected Gov. Rick Snyder’s top initiatives. Since businesses could earn credits on their MBT liability based on how much they paid in personal property taxes, replacing the MBT with a new tax might increase a firm’s overall tax liability. After the Legislature replaced the MBT with a Corporate Income Tax that did not provide such credits in May 2011, Gov. Snyder stated that he hoped to address the personal property tax later that same year.
Discussion continued well into 2012. Proponents of reforming the personal property tax limited their initiative to personal property taxes on manufacturing equipment and minimum taxable values — that is, to exempt companies that own less than a certain value of personal property in a taxing jurisdiction, also known as a de minimis requirement or a “small parcel exemption.” They also discussed whether to phase in these new exemptions. Opponents of the proposed reforms wanted a guaranteed replacement of revenue for local government units.
The Michigan Senate passed a bill to reform the personal property tax on May 10, 2012. It provided a small parcel exemption for industrial and commercial personal property (but not utility personal property), and phased-in exemptions for manufacturing personal property. “Manufacturing” covers industrial personal property and also some commercial personal property if it is used as “eligible manufacturing personal property.”
Manufacturing personal property would be exempt in two ways. All new personal property would be exempt and existing personal property would be exempt if it had been subject to the tax for 10 years.
Finally, the Senate created a replacement fund that would reimburse local governments for lost revenue. These revenues would be “derived from an anticipated revenue increase resulting from the elimination of certain tax expenditures upon the expiration of certificated credits.” Other provisions would halt the personal property tax reductions if the Legislature failed to appropriate the funds.
The House passed a version in December of 2012 (during the “lame-duck” session) with the same small parcel exemption and phased-in manufacturing exemptions, but changed the revenue replacement mechanism. Instead of increased revenues from expiring tax credits going to replace local government personal property tax revenue, the House essentially earmarked a portion of the state’s Use tax as replacement revenue. The state would allow a separate authority to levy a local Use tax, and for every dollar of revenue this local Use tax raised, the state would offset this increase be reducing its statewide Use tax levy, making the plan revenue-neutral to Use taxpayers.
The Use tax is similar to a sales tax — both are assessed on the price of a purchased product. The difference is that a sales tax is levied on the sellers of goods and services, whereas a Use tax is levied on the user of a good or service. Some items that are subject to Michigan’s Use tax include vehicles, boats, snowmobiles and aircraft, in addition to goods purchased over the Internet or via catalog.
While the exemptions would begin to be implemented in 2012, this Use tax replacement mechanism would not start until fiscal year 2016 (Oct. 1, 2015). It would generate $41.7 million in local Use taxes in the first year, ramping up to $362.4 million in 2023 when all the manufacturing personal property exemptions would be fully implemented. Revenue in subsequent years would rise based on a commercial and industrial “property growth factor.”
In addition, the bills also allowed local units that provide ambulance, fire, police and jail services to levy an additional property tax assessment on industrial real property (not exempt per the small parcel exemption) to replace lost revenue starting in 2016. The provisions that could halt the phased-in reductions were eliminated in the House version.
Also in this version, reimbursement for debt mills — property taxes that go to pay the borrowing costs for voter-approved projects — would begin immediately, but losses from operational mills would start in fiscal 2016. Counties, cities, villages and townships that lost more than 2.3 percent of the value of taxable property in their area as a result of the changes to the personal property tax would receive reimbursement from the state for their losses, minus any revenue they could have levied from the additional property tax replacement assessment. It was estimated that local units of government would recover about 80 percent of the revenue they would lose as a result of changes to the personal property tax, and 100 percent of the cost of ambulance, police, fire and jail services.
Finally, the House called for a public vote to certify the changes in the August 2014 primary election. The Headlee Amendment of Michigan’s constitution requires “direct voter approval” to create new local taxes or increase local taxes above existing voter-approved limits. The House’s plan to replace local revenue rests on a new authority levying a new local Use tax.[*]
The Senate concurred with the House’s version of personal property tax reform, and Gov. Snyder signed the bills into law in December of 2012. He called the tax the state’s “second dumbest,” the first being the MBT that had been eliminated the previous year.
In February 2014, the Legislature revisited the personal property tax issue, perhaps responding to concerns from local units of government about not getting enough replacement revenue. In addition to some minor changes, the Legislature voted to increase the state Use tax amounts that would be designated for reimbursing local governments. There would be $96.1 million going to this fund in fiscal 2016, increasing to $572.6 million by fiscal 2028, and increasing automatically by a 1 percent growth factor thereafter.[†] The bill also eliminated the option for local units of government to levy an additional real property tax assessment.
Instead of local governments assessing replacement millages, the state itself would levy a special local property tax. The revenue from this would go to offset some of the state’s losses from devoting a portion of the state’s Use tax revenue to reimbursing local governments. The state would tax this otherwise-exempt manufacturing personal property at 2.4 mills of its acquisition cost in its first five years of taxation, 1.25 mills after in years six through 10, and 0.9 mills thereafter. Since the tax would be based on acquisition cost and not the depreciating value of business equipment, these decreasing rates were intended to simulate the decrease in taxable value under a depreciation schedule.
The Legislature also added a provision that allows the state’s economic development agency, the Michigan Strategic Fund Authority, to exempt certain manufacturing property from this tax altogether or to assess an “alternative” tax at half those rates on that property. These assessments do not apply to property owned by taxpayers under the small parcel exemption thresholds.
The rates for this replacement revenue mechanism still represent a substantial personal property tax decrease,[‡] considering the average tax rate on commercial personal property is 40 mills, and the average tax rate on industrial personal property is 28 mills. While manufacturing firms subject to the personal property tax will have a smaller tax liability, overall the state expects that these replacement taxes will raise $117.5 million when fully implemented.
The Michigan Strategic Fund Authority can influence how much these replacement taxes raise. There are no limits to the abatements it can approve, although there is one condition firms must meet in order to qualify — the business must invest in at least $25 million worth of personal property.
Overall, this reform package is expected to reimburse local units of government for revenue lost as a result of this reduction in the personal property tax. The replacement revenue will come from the new “local” Use tax revenues, which are offset by equal reductions in the state Use tax. The reduction in state Use tax revenue is expected to lower state coffers by $502.2 million by fiscal year 2028. Currently, the state’s general fund is $9.5 billion, the total state budget is $51.4 billion and state spending from state resources is $29.0 billion. Even without inflating this to the size of future budgets, this package would have a relatively small impact on the state budget.
Even then, the legislation notes an intent to fund some replacement revenue through an expected increase in state revenue due to expiring business tax credits. There is no mechanism to ensure that this expected revenue be used exclusively to replace the redirected Use tax revenue, but the legislative intent is clear that no area of the state budget will face cuts due to the personal property tax reforms. The three new exemptions to the personal property tax will result in a tax cut of an estimated $600 million by 2024. The new special assessment levied by the state on exempt manufacturing personal property is estimated to raise about $117.5 million by 2028. In the end, this legislation package creates a net tax cut of about $500 million for Michigan businesses, when all elements are fully implemented.
This new package of bills was signed into law in April 2014.
Key Provisions of Personal Property Tax Legislation
- Exempts new manufacturing equipment from personal property taxes
- Phases out personal property taxes on existing manufacturing equipment
- Exempts business establishments with less than $80,000 in equipment in a local tax-collecting unit from personal property taxes
- Creates a taxing authority that will reimburse local government units with revenue from a new “local” Use tax, with the state’s Use tax rate being decreased based on local Use tax revenue.
- A new, but smaller tax levied on exempted manufacturing personal property to defray some of the revenue impact to the state budget.
[*] Note that this new “local” authority established by the legislation claims jurisdiction over the entire state, and the tax it levies applies statewide.
[†] The growth factor is “the average annual growth rate for industrial and commercial personal property taxable value from 1996 to 2012 rounded up to the nearest tenth of a percent, which is 1.0 percent.” “Public Act 80 of 2014” (State of Michigan, March 28, 2014), sec. 3(5)(a)–(n), http://goo.gl/w0gQqH (accessed June 20, 2014).
[‡] While the 0.9 mill tax rate is considerably lower than the current average levy on manufacturing personal property, it is possible that over time some businesses may pay more than they otherwise would have.