MUNICIPALITIES;

Regarding the state payment in lieu of taxes (PILOT) for new manufacturing machinery and equipment, you asked for (1) a general description and history of the program, especially its funding levels; (2) a description of legislation allowing towns to tax part of the value of the exempt property; and (3) the governor’s proposals for the program.

This report summarizes legislation passed in February 2003 that allows towns to tax part of the value of exempt property and the governor’s budget proposals relating to the program. We enclose (1) the Office of Policy and Management’s (OPM’s) general program description (2) an OLR Report summarizing the history of the program through April 2002 (2002-R-0376), and (3) the Office of Fiscal Analysis’ grant information sheet for the program showing its past and projected funding history.

PA 03-2, AN ACT CONCERNING MODIFICATIONS TO CURRENT AND FUTURE STATE EXPENDITURES AND REVENUES

By law, certain new machinery, equipment, and large trucks are exempt from property taxes for five years after being acquired. The state reimburses municipalities for 100% of the revenue lost from such exemptions approved before October 1, 2000, and 80% for exemptions approved on or after that date.

PA 03-2, enacted in February 2003, allows a town, by vote of its legislative body, to impose a tax in its 2004 municipal fiscal year on machinery, equipment, and trucks approved for the exemption from its October 1, 2001 grand list. The tax must be no more than the difference between the state reimbursement grant, as modified by the governor under the extra rescission authority granted in PA 02-1, May 9 Special Session, and the grant amount approved in PA 03-2.

PA 02-1, May 9 Special Session, authorized the governor to make deeper-than-normal rescissions in FY 2002-03 budget appropriations after October 1, 2002. The governor can already rescind up to 3% of the total appropriations from any fund or 5% of any appropriation when he determines that (1) circumstances have changed since the budget was adopted or (2) there are not enough estimated resources to fund all appropriations. The additional rescission authority allowed him to reduce total FY 2002-03 budget appropriations from any fund by up to an additional 5% or a maximum of 8% and to reduce any FY 2002-03 appropriation by up to an additional 5% or a maximum of 10%, but no more than $ 35 million.

The only municipal aid grants excluded from the extra rescission authority were (1) Education Cost Sharing, (2) Town Road Aid, (3) Payment in Lieu of Taxes (PILOT) – Colleges and Hospitals, and (4) PILOT – State-Owned Property. (PA 02-7, May 9 Special Session, added a requirement that, if the governor reduced allotments for municipal aid, the aid be reduced proportionately. )

GOVERNOR’S PROPOSAL (SB 1037)

As part of his proposed changes to implement his FY 2004-05 biennial budget, the governor is proposing to restructure the manufacturing machinery and equipment PILOT program.

Property Eligible for Property Tax Exemptions and PILOT

Under current law, the property tax exemptions and the PILOT apply to:

1. new or newly acquired machinery and equipment used in manufacturing or biotechnology, including machinery and equipment used for research and development, metal finishing, or producing motion pictures, video, or sound recordings;

2.

new commercial trucks and vehicles used in combination with them that have a gross vehicle weight rating of more than 26,000 pounds and are used exclusively for carrying freight in inter- or intrastate commerce; and

3. any new commercial truck and vehicle used in combination with it that has a gross vehicle weight rating of more than 55,000 pounds.

SB 1037, referred to the Finance, Revenue and Bonding Committee, restricts the type of manufacturing machinery and equipment eligible for the property tax exemption and the PILOT to exclude (1) processing equipment; (2) equipment used to produce movies and video and sound recordings; and (3) equipment used for direct mail distribution.

SB 1037 also restricts the exemption to new property that has not been used before and eliminates newly acquired property transferred or leased from someone who is not eligible for the exemption. It limits the exemption to manufacturers or biotechnology companies within specified classification codes in the North American Industrial Classification (NAIC) System manual and requires applicants for the exemptions to list their NAIC codes.

These changes take effect July 1, 2003, for assessment years beginning October 1, 2003.

SB 1037 entirely eliminates the property tax exemption and the PILOT for trucks, starting with the October 1, 2002, assessment year. The bill requires assessors to notify taxpayers who received exemptions for property for assessment years beginning on October 1, 2002 if their exemptions have been eliminated under the bill, requires the notice to include the amount of the resulting tax increase, and establishes a special procedure for handling resulting changes in towns’ October 1, 2002 grand lists.

PILOT Grant Reductions and Changes

The bill reduces the annual PILOT grant to towns for the remaining mandatory exemptions from 80% to 65% of the lost revenue starting with FY 2003-04. The bill applies the lower reimbursement rate to all exempt property, not just that approved for exemptions in the future.

The bill also allows proportional reductions in PILOT grants if appropriations are not sufficient to fully fund them and extends the deadline for OPM to modify PILOT payments from December 1 to December 15 annually.

The grant reductions take effect on passage and apply to assessment years starting on or after October 1, 2002.

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