An Overview of Michigan’s Tax Abatement Programs

Introduction

Since 1990, Michigan’s state and local governments have assumed an increased role in encouraging economic development within the state.  Legislation has been enacted to create many types of assistance to businesses, such as job-training programs, grant and loan programs, and infrastructure improvements.  This paper will address another type of state-aided development: tax abatement and tax credit programs.  Both tax abatements and tax credits waive some or all tax liability for a particular parcel of land.  Their goal is to lower the financial burden of development projects in selected industries or geographic areas, thereby increasing the incentive for projects that might otherwise not occur.

The paper will begin with a brief history and overview of tax abatement programs.  The second section analyzes the various programs enacted by the state government.  The final section compares certain aspects of these programs to other states.

Tax Abatement Programs: A Brief Overview

According to a recent study published by professors at Indiana University (1), tax abatement programs originated as an effort by southern states to industrialize their largely agricultural economies in the 1930’s.  Mississippi and Louisiana were the first states to pass such programs in 1936.  The practice spread rapidly in the years following World War II as states began to take a more active role in economic development.  In 1964 there were 15 states using abatement programs, by 2005 the authors of the study found these programs in 35 states.(2)

The study points out that these programs are an attractive option to states for the following reasons.

First, the tax burden of a business is one of the few things that are under state and local governments’ control.  Second, tax abatements are politically easier because they do not explicitly require cuts or diversions in spending from other programs.  The proliferation of these programs is credited to the fact that abatement programs in one state or jurisdiction compels surrounding and competing states to adopt these practices as well.

Tax Credit and Abatement Programs in Michigan

Michigan's oldest and largest tax abatement program is the Industrial Property Tax Abatement Program, enacted in 1974.  According to Citizen's Research Council of Michigan, between the years 1984-98 this program helped over 11,000 projects to create almost 194,000 jobs (3).  It provides at least a partial reduction on property taxes of industrial development, expansion, and rehabilitation projects.  Replacing obsolete plants and machinery can increase the reduction to 100% of improvements.  As the name implies, the program is aimed at the industrial sector.  Eligible industries include: Manufacturing and Warehousing, High-tech and Research, Utilities, and strangely, convention centers (4).

Another important program is the Renaissance Zone Act in 1996.  This established areas in 38 counties across the state that virtually eliminated state and local taxes for individuals and business within these areas.   Authors of the bill recognized a need to “facilitate economic development” and “prevent physical and infrastructure deterioration.” (5)  Renaissance zones were originally designated urban, rural, or ex-military sites.  In 2000, a category for agricultural processing was added.  Abatements last between 10-15 years, during which time the state reimburses some public entities such as local school districts and public libraries for lost revenue.

The state also provides a similar program for residential development and improvements.  Neighborhood Enterprise Zones (NEZ) were established in 1992 to help distressed residential areas.  The program allows local governments to waive 50% of property tax liability on new construction, or the same amount of a property tax increase on rehabilitated projects.  Criteria include high unemployment rates, lagging appreciation of home values, and a declining population. (6)  There are only 10 designated NEZ’s:  Several Metro Detroit communities (including Detroit), Battle Creek, Lansing, Saginaw, Muskegon, and Flint. (7) According to CRC, the advent of Proposal A, which restricted property tax increases, limited the desirability of building in NEZ’s.

Another important program is the Michigan Economic Growth Authority (MEGA).  Established in 1995, MEGA grants are aimed at bringing high-paying, technology driven jobs to Michigan.  MEGA provides a combination of Single Business Tax and Income Tax credits for high-tech businesses that devote at least 25% of operating expenses to R&D. (8)  An interesting requirement is that it is incumbent on the group applying for a MEGA tax credit to show that the proposed development would not have occurred absent of MEGA’s assistance.  According to the Michigan Economic Development Corp., since the program’s inception, it has helped create 120,000 jobs and $11.5 billion worth of investment.

The final important tax incentive program is the Brownfield Tax Credit Program.  Enacted in 1996, the program encourages private-sector investment in environmental clean-up and redevelopment of contaminated or obsolete sites.  For a project to qualify, a municipality must set up a Brownfield Redevelopment Authority and apply to MEGA.  The program provides two types of incentives for qualifying projects.  The first is a SBT credit of 10% of eligible costs to a limit of $1 million, with one project each year allowed a maximum of $30.  Projects in state-designated core communities may also qualify for tax increment financing to help cover costs. (9)  According to the MEDC, since 2000 the program has awarded $273 million in tax credits, and has helped draw $3.8 billion in private investment.

Comparing Programs across States

There are several dimensions across which tax abatement programs can differ, such as duration limitations, state or local awarding process, and program eligibility requirements.  In this section, three other measures are explored; one that deals with bearing the cost of lost tax revenue and two measures that many other states employ to ensure projects deliver promised benefits.

Dealing with Lost Revenue

Tax abatement programs may help attract jobs and investment, but it leaves the state and local jurisdictions with lost revenue.  This can negatively affect public entities like school districts and libraries that rely on both local taxes and state aid.  Michigan is one of only five states that include provisions to reimburse certain organizations for lost revenues. (10)

Claw-Back Provisions

There are two effective elements to tax abatement programs that Michigan has chosen not to utilize. The first is a claw-back provision, so named because it allows a state to take back money from a project if the project fails to produce jobs, tax base, etc.   In the case of tax abatement, this would mean companies could face a reduction or elimination of tax breaks.  It helps shield the state from losing money on unsuccessful projects.  Currently, 14 of the 35 states include this provision in their abatement programs. (11)

Special Conditions for Abatement

States often include special conditions that must be met in order for tax abatements to take effect.  These requirements vary, but usually include minimum requirements for job creation or value or investment added. (12) These programs are similar to claw-back provisions in that they provide incentives for companies to deliver what is promised, and also allow the state to avoid losing tax revenue on a project that does not bring the expected benefits to the community.  Of the 35 states with abatement programs, 20 set these special conditions for businesses. (13)

Conclusion

Michigan is among the leaders in the number of tax abatement programs offered.  The strength of Michigan’s programs is their variety.  They target blighted areas and contaminated sites as well as high tech investment and job creation.  However, as with most economic development programs, it is difficult to determine how much would have occurred in their absence.  Regardless, with Michigan lagging behind most other states in many economic indicators, the state will continue to try to encourage increased business activity and tax revenue.

Notes

1  “Variation in Property Tax Abatement Programs Among States”, Dalehite Mikesell and Zorn, Economic Development Quarterly, May 2005

2  Ibid.

3  “Survey of Economic Development Programs, 2001” by Citizen's Research Council of Michigan, www.crcmich.org

4  Ibid.

5  http://www.legislature.mi.gov

6  “Survey of Economic Development Programs, 2001” by Citizen's Research Council of Michigan, www.crcmich.org

7  Ibid

8  http://medc.michigan.org

9  “Survey of Economic Development Programs, 2001” by Citizen's Research Council of Michigan, www.crcmich.org

10  “Variation in Property Tax Abatement Programs Among States”, Dalehite Mikesell and Zorn, Economic Development Quarterly, May 2005

11  Ibid.

12  Ibid.

13  Ibid.