What will the personal property tax repeal mean to Oxford?
January 09, 2013
It's unclear what financial impact Michigan's new laws repealing personal property taxes for businesses will have on local governments like Oxford Township and Village.
The two municipalities will undoubtedly lose some revenue as a result of this, but exactly how much is the question.
And it's not an easy question to answer given how complicated and confusing the new laws seem to be, not to mention variables such a statewide vote in 2014, which could put the kibosh on the whole thing if it doesn't pass.
"This is one of the reasons I didn't want to vote for this one, but I did anyway because we had to do something," said state Rep. Brad Jacobsen (R-Oxford). "We didn't have any firm numbers. It was almost a theory we were working on (for) this whole thing. There's a lot of government done that way. We all know that."
Last month, Gov. Rick Snyder signed a series of bills into law that gradually phases out the personal property taxes that many businesses pay over the next 10 years and creates a system under which local governments can receive 80 or 100 percent reimbursement for this lost revenue, depending on the public service affected by the elimination of this tax.
Right now, Michigan businesses pay taxes to their local governments on personal property items they own and use such as equipment, tools, furniture and computers. Personal property is distinguished from real property, which consists of land and buildings.
Although he wasn't comfortable with the legislation's complexity, Jacobsen ultimately voted for it because "it's a continuation of the things we're trying to accomplish to create more jobs in Michigan."
"Doing this helps our existing businesses who may want to expand by opening up another facility or bringing in new, updated machinery. With (the tax savings), they should be able to create more jobs," he explained. "We should also be able to stimulate (the number of) companies coming into the state
"We're open for business. Come on in, move your company here."
How much personal property is there in Oxford and how much revenue does it generate?
In Oxford Township and Village, based on 2012 taxable values, there's $12.6 million worth of commercial personal property spread across 603 parcels and $27.2 million in industrial personal property spread over 58 parcels.
To put that into perspective, the township's total taxable value, including the village, is approximately $573.3 million. The vast majority of that is real property.
The township's eight operating millages derive a combined $345,310 in revenue from personal property taxes levied against commercial ($106,185) and industrial ($239,125) properties.
The biggest chunk goes for police and fire services, which receive $118,304 and $99,534, respectively.
Next is the public library, which garners $55,662 from taxes levied on personal property, followed by the township, which receives $37,821 for its operating budget.
The township's parks and recreation department receives the least amount at $33,990.
In the Village of Oxford, based on 2012 taxable value figures, there is $5.7 million in industrial personal property spread over 24 parcels and $3.8 million in commercial personal property spread over 208 parcels.
Again, to put that in perspective, the village's total taxable value is approximately $108.5 million.
The village's 10.62-mill property tax levy, which funds all of its municipal services, generated $101,919 in revenue in 2012, which breaks down to $61,037 from industrial property and $40,882 from commercial.
Details on the repeal
Just because most personal property taxes are facing extinction, does not mean the township and village will immediately lose all the aforementioned revenue with no hope of replacement.
One reason is because the new laws phase out personal property taxes over time.
Beginning Dec. 31, 2013, all commercial and industrial personal property is exempt for a taxpayer if the combined taxable value is less than $40,000.
Beginning Dec. 31, 2015, all eligible manufacturing personal property is exempt from taxation if it was purchased after Dec. 31, 2011, was not subject to taxation before Jan. 1, 2013 and was not put in use or placed in service outside the state before Jan. 1, 2013.
Also beginning Dec. 31, 2015, all eligible manufacturing personal property is exempt if it's been subject to or exempt from taxation for the immediately preceding 10 years.
Eligible manufacturing personal property is defined as being used more than 50 percent of the time in industrial processing or in direct integrated support of such activities. Since it's based on use, it could include both commercial and industrial personal property.
Although many media outlets have reported – or at least given the impression that – these new laws are bringing about the end of all personal property taxation in Michigan, there's one group that's not covered.
The new laws make no provision to exempt – not now or in the future – a business that conducts no manufacturing or industrial work, but has commercial personal property valued at more than $40,000.
For instance, there are 21 parcels that fit into this category in the village alone, according to information supplied by village Manager Joe Young.
"It was part of the compromise that this tax still exists," explained Mike Compagnoni, legislative aide to state Rep. Brad Jacobsen (R-Oxford). "Part of the reason for exempting (commercial and industrial personal property) under $40,000 was basically that often times the administrative hassle of tracking down (and collecting) very, very small dollar amounts was costing locals more money than it was actually bringing in."
For local governments worried about the loss of revenue from personal property taxes, the new laws provide for two methods of reimbursement or replacement.
One involves diverting a portion of the state's 6 percent use tax through a metropolitan authority – which must still be created – that will collect and redistribute the money proportionally to local governmental units in order to reimburse them for 80 percent of the revenue loss they experience from the elimination of personal property taxes.
The use tax is paid on things such as hotel and motel rooms, rental cars and out-of-state purchases.
"The way I understand it, due to technicalities, the use tax money from the state cannot just be handed out by the state to the different (local) entities – villages, townships, etc.," said Jacobsen, noting that's why the revenue would have to pass through this metropolitan authority.
"The money from the use tax goes into the metropolitan authority and then, by the formula that is provided to them (by the state), they send out the money."
Diversion of the use tax to this metropolitan authority, which will be comprised of five state residents appointed by the governor, requires a statewide vote of the people.
The repeal of the personal property tax is contingent on the passage of this vote in August 2014. If the vote fails, all personal property taxes will remain in effect.
"We have time to work on, tweak and adjust this before it all goes into an actual working mode," Jacobsen noted.
It should be noted that reimbursement from the state's use tax revenues will only apply to local governmental units that experience a reduction in taxable value of over 2.3 percent as a result of personal property tax exemptions.
The other method of reimbursement gives local governments the power to levy an "essential services assessment" to recover the other 20 percent of the personal property tax revenue loss associated with funding police, fire, ambulance and jail services.
This 20 percent, combined with the 80 percent reimbursement from the metropolitan authority, would allow local units to make up 100 percent of the revenue loss for public safety services.
This special assessment could be levied by local governments via board resolution beginning in 2016. No vote of the people would be required for this assessment and it would be collected like property taxes on the municipality's July bill.
However, the essential services assessment could only be levied on industrial and commercial real property belonging to taxpayers who are claiming the eligible manufacturing personal property exemption.
The assessment is limited to the amount previously paid in personal property taxes and can only be levied against those taxpayers whose total personal property taxable value exceeds $40,000.
Picking and choosing services
Oxford Township Treasurer Joe Ferrari indicated he's not a fan of the state's 80/100 percent reimbursement plan.
"That is just wrong of the state to determine what is important at the local level," he said. "Why would the legislature carve out just police, fire and ambulance services to be made whole (with regard to funding)? What about (other services) that residents have voted for and deem necessary such as library (and) parks and rec.? The (new law) says that those aren't as important even though residents of a community may have voted in a millage to fund those services.
"I would love to be able to do the same thing with my state income tax and pick and choose what part of state government I would like to fund at either 80 percent or 100 percent. I don't get that choice and neither should the state by overriding the decision of the local voters."
Ferrari also expressed his concern about "how long" these "replacement revenues" will last before "they are eliminated or just expire" and the locals have to make up for them.
"To keep up a certain level of service, county and local governments will have to go back to the voters to ask for a millage increase, thus shifting the tax burden to our residents," he said.