Taxes, Hold 'Em

Members of the Michigan Legislature are continuing to work on a business tax plan that will likely include changes to the way commercial rental properties are taxed, something that could settle the WPW debate, which has been a point of disagreement for more than three years. 

In addition to capping the taxable value of a property from year to year at the lesser of five percent of the current rate or the rate of inflation (as measured by the Consumer Price Index), Proposal ushered in another important element to the assessment of commercial rental property. 

After the passage of Proposal A, theGeneral Property Tax Act was amendedto implement the new changes to the state constitution, and provisions were made that allowed for property value tobe adjusted for certain “additions” and“losses” without regard to the assessment cap.  This language listed one of the losses to be a decrease in the occupancy rate of commercial rental property.  Conversely, an addition could include an increase in occupancy after the value had been adjusted for vacancy. 

WPW Acquisition Company, in the city of Troy, was granted a reduction inproperty taxes due to reduced occupancy.  Once the property was fully occupied, the city substantially increased their taxable value under the additions provision.  WPW sued the city, citing the constitutionally imposed CPI or five percent cap. 

Eventually, the Michigan Supreme Courtruled on the issue in 2002, holding that adding additional value to a property due to an increase in occupancy rate was not consistent with Proposal A and therefore unconstitutional.  They reasoned that occupancy was not part of the General Property Tax Act’s definition of additionsor losses when Proposal A was adopted bythe voters, and by allowing the legislature to classify increases in value as an addition, it contradicts one of the main purposes of Proposal A in limiting the growth rate of property taxes.  Thus, the supposed “loophole” was born as taxable value and could be reduced but not increased due to substantial changes inoccupancy rate.

Former State Representative John Pappageorge (R-Troy) next sought to raise the issue with House Bill 6017, introduced in June of 2004.  The aim of the legislation would have eliminated the occupancy provision from the list of losses that determine taxable value — in taxing commercial property with the exception of the assessment cap.  Fortunately, the bill received no action.

More recently, Governor Granholm cited a WPW “fix” as part of her “revenue neutral “Single Business Tax restructuring plan , which she announced to kick of f the 2005-2006 session. Rep. Andy Meisner (D Ferndale) and Sen. Gilda Jacobs (D-Hunting ton Woods) sponsored House Bill 4477 and Senate Bill 295 respectively. 

Under this plan, which was met with reservation from several members of the business community, the Pappageorge concept was taken a step further: Not only would the occupancy provision regarding loss have been removed, it would have been made retroactive to December 2001 — so any entity that had received a decrease in taxable value due to occupancy after December 2001 would have had its rates increased to pre-adjustment levels. This change was quoted as being a $60 million win for the state tax revenue, solely on the backs of commercial property owners. However, under the Pappageorge bill, the revenue estimate was pegged at $110 million, which raised questions about the revenue neutrality of Granholm’s plan.

The House Republicans introduced their counter proposal in late August.  House Tax Policy Committee Chair Fulton Sheen (R-Plainwell) moved a series of bills that were part of a large-scale $1 billion tax cut.  Among them were two relating to the WPW issue: House Bills 5096 and 5097.  The entire package includes approximately $100 million in loophole closures to offset future hits to state revenues, with $15 million of that coming from changes in the taxation of commercial rental property. 

The house’s solution is to exempt commercial rental property from the General Property Tax Act beginning December 31 of this year and to create a new Commercial Rental Property Specific Tax Act.  Property owners would file an affidavit for commercial rental property in order to be placed on the new tax role.  Owners wishing to remain on the General Property Tax Act would be subject to a brick and mortar evaluation without regard to occupancy. 

Commercial properties on the new tax roll would be all owed increases and decreases in taxable value with changes in occupancy.  This will allow commercial rental property owners to take advantage of beneficial tax policy that recognizes the importance the occupancy rate plays in the valuation of commercial buildings.  Under the plan, the amount of increase in taxable value due to occupancy would be limited to the amount of loss previously granted.  Where there is no change in the occupancy rate, properties will still remain subject to the CPI or 5 percent cap.  In essence, it returns the taxation of these properties back to the days before the WPW court decision.

What the senate will do with this issue remains to be seen. As of the publication date, Senate Majority leader Ken Sikkema (R-Wyoming) has said little about what direction he would like to go regarding business tax restructuring beyond stating he had “major reservations” about the house plan.  Chief among his concerns is how it would be paid for to offset decreases in state revenue. 

While Sen. Sikkema has offered no explicit timetable to begin dealing with tax restructuring issues, he has mentioned that the senate will be heard from after the budget is completed by the first of October. The house plan will be analyzed, and they will be more deliberate with the process. It is thought that they are likely to endorse the house concept of adjusting commercial rental property taxes.

The MAR Public Policy Committee will continue to be a part of the process, providing information and helping legislators address any additional issues that may arise.  By accessing the “Current Legislation” web page under the “Advocacy” section of www.mirealtors.com, you can stay up to date on the progression of this issue.