aUp 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.