How Midwest Property Tax Revisions May Affect Taxpayers

August 2019

By Dorothy Radicevich, Steve Kaye, Daniel Fadden, and James McKillen
This article was originally published in State Tax Notes on July 8, 2019.
 
The Midwest’s varied structures of property tax assessment make it a unique region.

The fact that Illinois, Iowa, Minnesota, and Ohio only tax real property while exempting personal property would appear to create a competitive advantage, but it does not account for higher tax rates needed to meet budgetary needs or assessment ratios that can shift the tax burden to businesses. Most other Midwestern states levy tax on both real and personal property. Although rates tend to be lower in those states, taxpayers are paying on both real and personal property. Further, those taxpayers with capital-intensive business can be affected more significantly because of the nature of personal property taxation.

However, in recent years some Midwestern states have revised their property tax systems to offer competitive advantages when compared with surrounding states. Many of these revisions have also lessened the administrative burden on taxpayers and local assessment and taxing jurisdictions.
 

Indiana

Indiana, which taxes both real and personal property, recently took steps to remain competitive with neighboring states. Much of its focus has been on alleviating the personal property tax burden on small businesses, which provides tax savings and encourages investment in and growth of small businesses.

The changes began in 2015 with the enrollment of S.B. 436, which amended section 3 of Indiana Code 6-1.1-3-7.2 to remove the requirement for counties to adopt an exemption ordinance to provide a personal property tax exemption to businesses with less than $20,000 total cost in the county. As a result, the exemption was available to all taxpayers in Indiana with less than $20,000 total cost in a county beginning with the January 1, 2016, assessment date. Taxpayers were required to file a notarized certification annually to the county assessor before May 15, stating that their business personal property in the county was exempt from taxation under this section.

S.B. 436 also brought about taxpayer-friendly procedural changes. Section 2 of Indiana Code 6-1.1-3-7 was amended to remove the requirement for taxpayers with an assessed value of greater than $150,000 to file returns in duplicate, which removed a procedural burden that many taxpayers may not have been aware of when filing returns. Also, taxpayers with personal property in more than one township in a county — or two or more taxing districts within the same township — were required to file a single return with the county assessor, along with a schedule allowing for allocation between townships and taxing districts.

Following those changes, the personal property exemption was further modified in 2016 through House Enrolled Act 1169-2016. Under the legislation, the personal property tax exemption for businesses with less than $20,000 total cost in a county remained in effect, but section 1 of Indiana Code 6-1.1-3-7.2 was amended so that taxpayers would no longer be required to file a notarized certification to the county assessor to claim the exemption. Beginning with the January 1, 2016, assessment date, taxpayers could declare the exemption by using a personal property form (specifically Form 103-Short, Form 103-Long, or Form 102, as applicable). Because of the timing of the bill’s passage, for the January 1, 2016, assessment date only taxpayers also could file a notarized certification to the county assessor to claim the personal exemption. Although this was a minor administrative change, it reduced the burden on taxpayers, who could simply declare the personal property exemption on the personal property tax forms.

In 2019 the personal property exemption was expanded via S.B. 233, which amended Indiana Code 6-1.1-3-7.2 and increased the exemption from $20,000 total cost in a county to $40,000 total cost in a county beginning with the January 1, 2020, assessment date. Similar to the 2016 change, beginning with the January 1, 2020, assessment date taxpayers would declare the exemption by using a personal property form (Form 103-Short, Form 103-Long, or Form 102, as applicable). While this may appear to be a minor increase in the exemption threshold, it will affect many taxpayers and help Indiana remain competitive. As the Indiana Chamber of Commerce said on January 25:
 
By raising the threshold to $40,000, the exemption will now cover an additional 28,300 returns. These newly covered filers are paying, on average, only $145 in tax per return. Most of these taxpayers still pay more than $145 to their accountant. This exemption change will bring the threshold closer to that desired sweet spot. Because these returns collectively only generate a nominal amount of tax revenue (about $4 million as a cumulative statewide total), the revenue loss to individual units of government will be negligible.

S.B. 233 also amended the property tax code, which seemingly negated some of the purpose of the personal property exemption. The bill repealed Indiana Code 6-1.1-3-7.3, which allowed for a local service fee passed by ordinance, not to exceed $50, to be imposed on taxpayers eligible for the personal property exemption. The fee was due and payable at the same time as property taxes. Although only 12 counties imposed a service fee, the repeal of this section was consistent with the legislature’s intent to provide relief through the personal property exemption.

The final change to the property tax code under S.B. 233 reflected Indiana’s intent to increase transparency and enact business-friendly procedures. The legislation amended Indiana Code 6-1.1-3-6 to require the assessor no later than 30 days before the filing date of personal property forms annually to notify taxpayers by mail or electronic mail, if consented, of the due date of personal property tax returns, the telephone number and email address of the assessor’s office, and instructions on how to obtain the appropriate personal property tax forms. Before this change, the assessor was only required to furnish a personal property return before the filing date.
 

Michigan

Michigan has also reformed its personal property tax system, beginning with the enactment of a seven-bill package in December 2012. These changes have been heralded as making the state “a more attractive place for businesses to invest and grow.”1 Public Acts 397 through 403 established exemption opportunities for certain types of personal property owned by businesses. The State Tax Commission estimates that the acts, as amended, “exempt about [half] of the personal property from ad valorem taxation.”2

Beginning in tax year 2014, Mich. Comp. Laws 211.9o allowed an owner of business personal property, with a combined true cash value of $80,000 or less in a local tax jurisdiction, to claim a personal property tax exemption — otherwise known as the small business taxpayer exemption. To claim the exemption, the statute mandated that the property owner must file an affidavit (Form 5076) annually with the local assessing unit.

Since the small business taxpayer exemption’s inception, additional steps have been taken to ease the administrative burden for claiming it. Over the past five years, the annual filing deadline of February 10 was extended to February 20. More importantly, beginning in 2019, taxpayers are no longer required to claim the exemption annually if they continue to qualify for it. Once they no longer qualify, the taxpayers are required to file a rescission form and a standard personal property statement by February 20 of the year when the property is no longer eligible.3 As a result, eligible small business taxpayers are spared the inconvenience of annual compliance filings and enjoy the absence of ad valorem summer and winter personal property tax bills.

While the small business taxpayer exemption targets a larger number of small businesses, Michigan has also established a substantial exemption for some of its largest businesses by phasing out the personal property tax for eligible manufacturing personal property (EMPP).

EMPP is statutorily defined as “all personal property located on occupied real property if that personal property is predominantly used in industrial processing or direct integrated support.”4 Industrial processing incorporates a wide variety of manufacturing activities;5 however, the exemption is expanded even further by the incorporation of direct integrated support. Activities defined as direct integrated support include research and development, testing and quality control, engineering, receiving or storing equipment, and sorting and distribution — provided each relates to industrial processing.6 Support activities do not have to occur at the same physical location as the industrial processing, nor do they have to be conducted by a related entity. Under the EMPP exemption, only assets acquired in certain years are still subject to ad valorem tax, while all remaining years are exempt. For example, in 2019 only assets acquired from 2009 to 2012 are subject to the tax. After 2023, the phaseout will be complete. Qualifying taxpayers will no longer have any summer or winter personal property tax bills.

An essential services assessment was established to offset a portion of the EMPP exemption’s revenue impact on localities. While the assessment can be construed as a replacement for the exempted tax rates, the rates used are constant, established at the state level, and substantially lower than ad valorem tax rates that vary based on local jurisdictions. Overall, taxpayers qualifying for — and properly claiming — the EMPP exemption will benefit substantially from reduced tax liabilities. The benefit will depend on the vintage and quantity of personal property owned by a taxpayer.
 

Wisconsin

Unlike neighboring states Illinois, Iowa, and Minnesota, Wisconsin taxes both real and personal property. To gain a competitive advantage, then-Gov. Scott Walker supported changes to the taxation of personal property to lure more manufacturing business to the state. And as part of the fiscal 2018-19 budget, the Legislature approved the repeal of the personal property tax on machinery, tools, and patterns, effective January 1, 2018, which will cost an estimated $75 million. In Wisconsin, the definition of personal property includes all goods, ware, merchandise, chattels, and effects of any nature or description, having any real or marketable value, and not included in the term “real property.”7

Wisconsin has periodically changed its statutes by eliminating the personal property tax on agriculture equipment, supplies, manufacturing equipment, and computer equipment.8 It is one of 38 states that taxes business personal property. Starting with the January 1, 2018, personal property filing, Wisconsin has eliminated the taxpayer requirement to report Schedule C, “Machinery, Tools & Patterns,” as well as Schedule D1, “Exempt Computer Equipment & Software (Owned), Cash Registers & Single Function Fax Machines” on Form PA-003, “Statement of Personal Property.” Form PA-003 is filed annually with a local assessing official (city, town, or village) to report tangible personal property assets. The January 1, 2018, law change applies only to locally assessed personal property.

The exemption does not apply to manufacturing personal property assessed by the Wisconsin Department of Revenue, which is reported on the state Form M-P. Wisconsin statutes section 70.11(27) exempts “manufacturing machinery and specific processing equipment, exclusively and directly used by a manufacturer in manufacturing tangible personal property.”9 This exemption only applies to businesses classified as manufacturing by the DOR.

As part of the state budget, the Legislature agreed to hold municipalities harmless for the lost revenue by providing state aid to each local taxing entity equal to the amount of lost revenue had these personal property items been taxable.10 According to the DOR, as of May 6 the state has released nearly $14.4 million in aid payments to counties to replace the lost revenue. And according to the department’s Division of Research and Policy, “property tax is the primary tax for local governments — school districts, technical college districts, counties, municipalities (towns, villages, and cities), and special districts (town sanitary districts, metropolitan sewerage districts, and inland lake districts). Gross property taxes levied in 2017 for collection in 2018 totaled $11.02 billion, by far the largest tax in the state and local government finance system. For comparison, in fiscal year 2018, state income tax collections were $8.48 billion and state sales tax collections were $5.45 billion.”
 

2017 to 2018 EAV Comparison

Property Class Estimate Value  
  Y 2017 Y 2018
  Real Property  
Residential $369,646,391,700 $388,614,618,400
Commercial $102,743,722,000 $109,739,356,600
Manufacturing $14,433,782,050 $15,085,912,900
Agricultural $2,104,285,300 $2,156,126,600
Undeveloped $1,969,136,900 $2,014,079,800
Agricultural Forest $3,015,819,300 $3,084,110,300
Forest $7,336,553,300 $7,370,166,400
Other $11,943,496,900 $12,090,782,400
Real Property Total: $513,193,187,450 $540,155,153,400
  Personal Property  
Boats and Watercraft $22,958,800 $21,343,800
Machinery, Tools, and Patterns $5,214,541,700 $1,897,248,400
Furniture, Fixtures, and Equipment $5,140,730,400 $4,857,998,200
Other $2,413,127,500 $2,529,309,700
Prior Year Error Adjustment $103,260,000 $71,638,000
Personal Property Total: $12,791,358,400 $9,305,900,100
Total: $525,984,545,850 $549,532,691,500

As the DOR chart indicates, the equalized value on machinery, tools, and patterns decreased $3,317,293,300.

Moody’s upgraded Wisconsin’s general obligation rating to Aa1, with a stable outlook, which reflects the expectation that the state will experience moderate economic growth. Wisconsin’s goal is to further chip away at the personal property tax to attract more manufacturing businesses to the state.
 

Conclusion

Taxpayers in Midwestern states have witnessed a wave of recent reform regarding property tax exemptions. In most cases, the changes were made to reduce the burden on business owners and incentivize increased investment in the respective states. If taxpayers are not monitoring the changing property tax landscape, they could be forfeiting tax saving opportunities.

This article is not intended to comprehensively outline the exemptions offered or the compliance requirements of each state discussed. Taxpayers who own property in these states should consult with property tax professionals or tax return preparers to ensure that they are properly claiming all available benefits.
 

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[1] Michigan Economic Development Corp., Michigan Personal Property Tax Reform (2014).
[2] State Tax Commission, Assessor Guide to Eligible Manufacturing Personal Property Tax Exemption and ESA (2019).
[3] Mich. Comp. Laws 211.9o (5).
[4] Mich. Comp. Laws 211.9m (8)(c).
[5] Mich. Comp. Laws 205.54t (3).
[6] Mich. Comp. Laws 211.9m (8)(b).
[7] Wis. Stat. section 70.04.
[8] Wis. Stat. sections 70.111 (2), (4), (6), (7), (9), (10), (11), (17), (21); 70.11(39).
[9] Wis. Stat. section 70.11(27).
[10] Act 59 (A.B. 64), Laws 2017.