Property taxes are a major source of revenue for the state of Michigan’s local governments and school districts. They are assessed on real estate, including residential, commercial and industrial properties. Property taxes are used to fund public services such as schools, police and fire departments, parks and libraries, and to pay for infrastructure improvements such as roads and bridges. In this article, we will explore the different types of property taxes in Michigan, how they are assessed, and recent updates to the system.
Types of Property Taxes in Michigan
Michigan has two types of property taxes: ad valorem taxes and special assessments. Ad valorem taxes are assessed based on the value of the property. This includes property taxes on real estate, as well as personal property taxes on items such as equipment, machinery, and inventory. Ad valorem taxes are the most common type of property taxes in Michigan.
Special assessments are property taxes that are assessed for a specific purpose, such as road or sewer improvements. They are not based on the value of the property, but rather on the specific benefits that the property receives from the improvement.
How Property Taxes are Assessed in Michigan
Property taxes in Michigan are assessed by local assessment offices. The assessor determines the assessed value of the property each year based on the market value of the property. The market value is determined by various factors such as the location of the property, the condition of the property, and the amenities and features of the property.
Once the assessed value of the property is determined, the property tax is calculated by multiplying the assessed value of the property by the millage rate. The millage rate is a tax rate expressed in mills (one mill is equal to one-tenth of one cent). The millage rate is set by local governments, including school districts, municipalities, and counties.
The millage rate varies depending on the location of the property and the services provided by the local government. For example, a property in a rural area may have a lower millage rate than a property in a more urban area because the rural area may have fewer public services to provide.
Recent Updates to the Property Tax System in Michigan
In 2018, Michigan voters approved Proposal A, a ballot initiative that amends the state’s constitution to limit property tax increases to the rate of inflation or 5%, whichever is lower. Proposal A also created the State Education Tax (SET), a statewide property tax that funds public education in Michigan.
The SET is assessed on all real estate in Michigan at a rate of 6 mills ($6 for every $1,000 of assessed value). The revenue generated from the SET is distributed to school districts throughout the state.
In addition to the SET, Michigan also has a Homestead Property Tax Credit (HPTC) that provides a tax credit to homeowners who occupy their primary residence. The HPTC is based on the homeowner’s income and property taxes paid.
Another recent change to the property tax system in Michigan is the introduction of the Michigan Tax Tribunal (MTT), an administrative court that hears appeals of property tax assessments. The MTT hears cases involving disputes over the assessed value of the property, the classification of the property, and the taxability of the property.
Challenges Facing the Property Tax System in Michigan
Despite recent updates to the property tax system in Michigan, the system is still facing challenges. One challenge is the impact of the COVID-19 pandemic on property values and tax revenues.
As a result of the pandemic, many businesses and households are facing financial hardship, leading to a decrease in property values and a decrease in property tax revenues. This has created an increased demand for property tax relief and a need for local governments to find alternative sources of revenues to maintain public services.
Another challenge facing the property tax system in Michigan is the issue of property tax delinquency. Property tax delinquency occurs when property owners fail to pay property taxes on time. This can lead to a loss of revenue for local governments and can have a negative impact on public services.
Conclusion
Property taxes are an important source of revenue for local governments and school districts in Michigan. They are used to fund public services and infrastructure improvements. While recent updates to the property tax system have addressed some challenges, there are still challenges that need to be addressed, such as the impact of the COVID-19 pandemic and property tax delinquency. It is important for local governments and the state to continue to monitor and update the property tax system to ensure it is fair, efficient, and effective.
Up until 1994, Michigan state property taxes were levied based on a property’s assessed value or 50% of the property’s market value. This equation which was common around the country, quickly fell into disfavor because of the variable’s sensitivity towards macroeconomic changes, and shifts in property value. State property taxes were highly elastic to property values; if there was an increase or decrease in the housing market the state property tax would proportionately shift.
This relationship was too sensitive and it created a financial burden for many landowners. If property values swelled, a drastic increase in state property taxes would be inevitable. More appropriately for Michigan, if the economy crumbled, the market value would fall precipitously. The decrease would lead to a lack of revenue for local governments, which in turn would disable the proper allotment of public services.
The close relationship between property values and state property taxes created widespread problems when the market experienced drastic shifts. Michigan’s answer for curbing these effects on landowners was to institute a new piece of legislation known as Proposal A.
This framework which was adopted in 1994, created a equation to determine state property tax. Proposal A based the state’s property tax on the land’s taxable value. Under Proposal A, the taxable value of a property is capped at either an increase of 5%, or at the rate of inflation. Whichever of these two is lower, will determine the amount of increase for the state property tax. If inflation was 6% for the given year, the state would increase property taxes by 5%. If inflation was 4% for the given year, the state would increase property taxes by the rate of inflation, or 4%.
Proposal A allowed property values to increase with corresponding boom in the housing market during the 90’s while maintaining  a stable level of state property taxes. The downside to Proposal A, unfortunately, is that it can also allow property values to decline without a corresponding decrease in state property taxes. The legislation only caps the increase of annual rates, it does not take into account a market that is declining.
For instance, if an individual owned a piece of land in Michigan for decades chances are there is a significant difference between the assessed value of the land and its taxable value. Generally, the taxable value of land increases more slowly than the property’s assessed value.
Even with a sharp decline in the property values over the last couple of years, the assessed value is still likely higher than the taxable value. Since Proposal A bases the state property tax off of the property’s taxable value a decrease in the yearly rate is not likely. With inflation present odds are a landowner will actually see an increase in their annual state property taxes.
The only exception found in Proposal A in regards to tax caps is in regards to land that is sold or transferred. During the year after the property is sold or transferred, the cap enforced by Proposal A is lifted, and the taxable value is reset to the assessed value.
Land that is transferred or sold, essentially adopt the state property tax laws from before 1994, or the institution of Proposal A. Following the reset back to the assessed value, the cap is then reapplied for the subsequent years. This scenario can lead to dubious circumstances. If an individual purchased land within the last couple of years, it is possible that his/her assessed value is less than the capped value.
