By the time this article goes to print the newer version of personal property tax (PPT) reform should be on the governor’s desk for his signature. After decades of debate and multiple approaches to eliminate this complicated and cumbersome tax, local governments and businesses alike have agreed on an approach to reform and lessen the tax on small businesses and industrial manufacturing businesses in Michigan and ease the administrative burden for all involved. This reform represents significant tax relief for small businesses and industrial manufacturing businesses, 100% reimbursement to local units and a structural reimbursement method that avoids the unreliable appropriations process.
The first round of reform was signed into law in December 2012 and would have provided reimbursement to local governments at a rate of 80%, with the local option of an essential services tax to increase that level of reimbursement for losses associated with police, fire, ambulance and jail services. Although this was the best offer from the state at the time, local governments, including counties, were not happy with the overall level of reimbursement and the local assessment approach.
So the administration went back to the drawing board and came up with additional funding and a plan to eliminate the local assessment piece. The major components of the new approach include a statewide essential services tax collected by the state, 100% reimbursement to local units, voter approval of a diversion of the state’s use tax, and a delayed dynamic reimbursement formula aimed at recognizing the movement of industry throughout the state.
Reimbursement to local units
Under the new plan, all local units of government will receive 100% reimbursement for losses associated with this reform beginning in 2016. The losses to counties for the small parcel exemptions already enacted will not be reimbursed in 2014 or 2015, but will start once the larger exemptions go into effect in 2016. Expiring business tax credits beginning in 2016 will create available funds in the state’s general fund to pay for this reimbursement. These credits, along with the enactment of the State Essential Services Assessment will cover most of the cost of the reimbursement to locals. But even with utilizing all of these funds, the state will still face a shortfall in the general fund of approximately $126 million in 2022.
Because of the deals struck in 2012 and the basic structure of the reimbursement formulas, priority reimbursements for certain losses (static formula) will be taken off the top before the calculations for the dynamic formula go into play. The dynamic formula is explained in detail below.
Priority reimbursements include: small parcel losses (a major benefit to those units with lots of smaller businesses), school debt loss, losses to intermediate school districts, school district losses not reimbursed by increased payments from the School Aid Fund, losses associated with essential services (police, fire, ambulance and jails), and debt loss to tax capture authorities. Once these items in the static formula are paid out, local units will receive 100% reimbursement for the rest of their losses until the dynamic formula kicks in, beginning in 2020.
Beginning in 2020, and increasing by the same amount each year, 5% of the remaining reimbursement, after the priority reimbursement, will be distributed proportionately based on each local unit’s share of the exempt manufacturing personal property. This dynamic formula will recognize a “profit sharing” type scenario that is intended to recognize the movement of industry throughout the state while still providing support for struggling counties that are losing industry. This represents virtually the same situation as if local units were still taxing the property at a local level. If a local unit has a certain amount of personal property in 2013, they may have more or less than that amount in 2025. If we only received reimbursement based on what was on the ground in a local unit in 2013, reimbursement would not be based on loss, but for what existed in one point in time.
The Ballot and How Counties Can Help
In August 2014, voters will be asked to approve a ballot proposal that would divide up the state’s use tax into two different pots of money, the “state share tax” and the “local community stabilization share tax.” A certain amount of money will be diverted from the state’s general fund to the “Local Community Stabilization Authority” that is charged with reimbursing local units for their losses associated with PPT. This authority will be required to reimburse based on the formulas enacted via this legislative package.
If the bills pass as planned with all of the reimbursement formulas intact, the MAC board has voted to support the ballot proposal in August. The MAC board made this decision in part because the administration found a way to provide a stable and enhanced level of funding reimbursements to counties. In addition, they are well aware of the potential effects of leaving an important and unresolved issue hanging out there during a lame duck session. Anything can happen. During the last lame duck session, we were almost faced with the complete elimination of PPT with no reimbursement plan at all. If the ballot proposal passes in August, all of the reforms and the reimbursement formulas go into effect. If the measure fails at the ballot, then the reforms and reimbursement do not go into effect and we are back at the drawing board. Although it is a complicated ballot question, the intention is simple; divert money from the general fund for the authority to reimburse locals. The general electorate may or may not understand the issue, so it is incumbent upon the supporters of the measure to educate their constituents. Short of a constitutional amendment, this approach is the best alternative we have to an annual appropriations battle.
Governor Signs PPT bills 3-28-14
The bills amending the Personal Property Tax (PPT) reform package were signed into law today by Governor Snyder. SB 821 – 830 amend various acts to create a better reimbursement formula for local units of government should the electorate pass the ballot proposal this August. Counties, cities, townships, school districts, law enforcement and the business community were all present for the ceremonial bill signing this afternoon. See previous articles and the monthly newsletter for all the details on the reform or call MAC for more information.