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Michigan approves tax incentives for data centers

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Michigan Gov. Gretchen Whitmer signed legislation on Feb. 13, 2020, concurrently updating a tax incentive agreement covering state data centers, and authorizing reimbursements to school districts in order to offset the revenue impact of the agreement.1

Background Michigan legislators have provided tax incentives to attract data centers to the state since 2016. Initially, the state enacted a sales tax exemption for data center equipment at qualified data centers.2 In an effort to provide additional tax incentives for data centers, Michigan is utilizing its historic renaissance zone program, enacted in 1996.3 Michigan renaissance zones are geographic locations that legislators seek to protect to encourage economic development.4 Businesses operating in a renaissance zone receive many benefits, including an exemption from Michigan business tax liability and general property tax.5

Senate Bill 455 S.B. 455 provides qualified data centers operating in designated renaissance zones with the potential to receive both real and personal property tax exemptions.6 The bill specifically targets “eligible data center property located at the site of a renaissance zone that was approved in 2016 by the Michigan strategic fund with a minimum investment of $100 [million].”7 “Eligible data center property” includes all personal property in the qualified data center.8 The term “qualified data center” is defined in the same manner as the sales and use tax act in which the exemptions applicable to qualified data centers apply.9 The bill’s enactment was contingent upon H.B. 5187 being enacted into law.10

House Bill 5187 The Michigan House of Representatives drafted H.B. 5187 to reimburse and redistribute, by way of the sales tax, the lost funds local school districts will realize due to the enactment of S.B. 455. H.B. 5187 seeks to make restitution to local school districts through sales tax deposits into the state school aid fund.11 Pursuant to existing funding laws, 60% of the collections of the sales tax imposed at a rate of 4 percent, and all of the collections of the tax imposed at the additional 2% sales tax rate (approved in 1994) must be deposited in the Michigan school aid fund.

Commentary The legislation to supplement tax incentives for data centers did not pass without significant opposition. Opponents of the bill believe that the benefit data centers will receive drastically outweighs the benefit Michigan will realize. Furthermore, those opposed are concerned about the legislative cost and the lost opportunity local school districts will encounter due to lost revenue in property taxes.

While the legislation is designed to increase the economic benefit Michigan receives from having data centers in the state, it is also aiming to make the local school districts whole in the process. However, Michigan would need to draw bigger data centers, similar to that of recent years, to increase the potential economic benefit. This may be difficult to do given the parameters of the legislation, especially because “approximately 40 data centers already operating in Michigan generated about $14 million annually in taxes prior to the [2016] legislation.”12

Gaines Charter Township in Kent County is one of the school districts that will be taking a massive blow to its funding due to local data centers capitalizing on the recent tax exemption legislation. The legislature hopes that the enactment of H.B. 5187, which requires that “all money received and collected under this act must be deposited by the department in the state treasury to the credit of the general fund,”13 will significantly help Gaines Township. In addition to the local school districts, Gaines Township’s General Fund has designated appropriations for law enforcement, public works, fire services, parks and trails, public transportation, salaries and benefits, and departmental operating costs.14


 
1 Act 28 (S.B. 455) and Act 29 (H.B. 5187), Laws 2020.
2 See Act 251 (S.B. 616) and Act 252 (S.B. 617), Laws 2015.
3 Specifically, the Michigan Renaissance Zone Act, Act 376 of 1996, established the Michigan Renaissance Zone initiative to foster economic opportunities in the state; facilitate economic development; stimulate industrial, commercial and residential improvements; prevent physical and infrastructure deterioration of defined areas; and provide for the reuse of unproductive or abandoned industrial properties. Michigan Strategic Fund, 2017 Michigan Renaissance Zone Annual Report: Memorandum to Members of the Michigan Legislature from Jeff Mason, President of Michigan Strategic Fund, 1 (Nov. 30, 2018); Michigan Renaissance Zone Act, Act 376 of 1996, § 125.2689, Exemption, deduction, or credit.
4 The legislative intent supporting the creation of renaissance zones provides “[t]he legislature of this state finds and declares that there exists in this state continuing need for programs to assist certain local governmental units in encouraging economic development, the consequent job creation and retention, and ancillary economic growth in this state. To achieve these purposes, it is necessary to assist and encourage the creation of renaissance zones and provide temporary relief from certain taxes within the renaissance zones.” Act 376 of 1996, § 125.2682 (eff. July 17, 1996).
5 Most state and local taxes, including both real and personal property tax, are abated within renaissance zones for a specified number of years. Michigan business tax liability is abated for company operations within a renaissance zone. Corporate income tax liability, however, is not eligible for abatement under the program. Michigan Strategic Fund, 2017 Michigan Renaissance Zone Annual Report: Memorandum to Members of the Michigan Legislature from Jeff Mason, President of Michigan Strategic Fund, 4 (Nov. 30, 2018).
6 MICH. COMP. LAWS § 211.7ff. The Michigan House of Representatives passed the bill by just two votes, while the Michigan Senate passed the bill by a somewhat greater margin.
7 MICH. COMP. LAWS § 211.7ff(7). The site of a renaissance zone approved in 2016 continues to be considered as approved in 2016 if that site is subsequently approved as a renaissance zone for the same entity in any future year.
8 MICH. COMP. LAWS § 211.7ff(8)(a).
9 MICH. COMP. LAWS § 211.7ff(8)(b).
10 S.B. 455, enacting § 2. Also, S.B. 455, enacting § 1, provides that the bill’s enactment was contingent on the enactment of H.B. 5188. Act 30 (H.B. 5188), Laws 2020, which was enacted on February 13, 2020, contains the use tax amendments that correspond to the sales tax amendments made by H.B. 5187.
11 MICH. COMP. LAWS § 205.75(8). The provision requires that: “[a]n amount equal to all revenue lost to the state school aid fund as a result of the exemption under section 4ee, as determined by the department, must be deposited into the state school aid fund.” Under the provision, “[a] person that claims an exemption under section 4ee shall report the sales price of the data center equipment as defined in section 4ee and any other information necessary to determine the amount of revenue lost to the school aid fund as a result of the exemption under section 4ee annually on a form at the time and in a manner prescribed by the department.”
12 Rachel VanGilder, Switch applies for Renaissance Zone at pyramid site, WoodTV, June 6, 2016, https://www.woodtv.com/news/switch-applies-for-renaissance-zone-at-pyramid-site/.
13 MICH. COMP. LAWS § 205.75(1).
14 2019 Gaines Charter Township Budget, adopted Dec. 3, 2018, https://www.gainestownship.org/Adopted%202019%20Budget.pdf.




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