A Closer Look at Proposals A and C

The passionate debate over property taxes in Michigan has finally materialized in two proposals that will appear on this November's general election ballot.

Proposals A and C, if passed, would fundamentally change how property is assessed for tax purposes in Michigan, from market value of property to purchase price. Both could significantly impact city, county and public school funding, real estate values, and the amount of taxes paid by homeowners and businesses. One of them, intended to reduce the tax burden on homeowners, might actually do the opposite.

The better known of the two is Proposal C, or "Cut and Cap", and was initiated by Governor Engler after the Legislature failed to pass his requested tax reduction in 1991. It exempts 30% (phased in over five years) of a property's assessed value from school operating taxes. And, it caps assessment growth to the rate of inflation or 3%, whichever is less, until the parcel is sold, at which time it would be reassessed at market value.

Furthermore, the proposal requires the state to reimburse local school districts for the loss in revenue due to the 30% exemption. The reimbursement would supplement local revenues to match the revenue generated by millage rates levied in 1991 or the then-current year, whichever is less.

Given a modest economic recovery, the Governor's assumption that "Cut and Cap" could be financed out of growth in state revenues seems reasonable. Mackinac Center analysts also argue that needed cuts in government spending coupled with budget savings through privatization could easily bridge the gap if revenue growth proves unexpectedly sluggish.

For beleaguered Michigan taxpayers, "Cut and Cap" would come as welcome relief from the nation's fourth highest property tax burden and unpredictable increases in annual assessments. Local units of government could still increase millage rates, but there would at least be a vote on the issue, rather than automatic hikes by way of rising assessments.

Just as the value of any asset is reduced as the cost of holding it rises, its value is enhanced when the cost of holding it declines. Accordingly, when other states such as Massachusetts and California cut their property taxes a few years back, property values almost instantly rose. Because "Cut and Cap" cuts taxes, it would have that same effect here--a healthy phenomenon widely acknowledged by economists as "tax capitalization."

Though "Cut and Cap" would be helpful to the overtaxed Michigan economy, it would represent a departure from the state's traditional goal of uniform assessment. As the years go by, a parcel that's sold could suddenly experience a huge increase in assessed value (and resulting tax) while an identical one next door that was never put on the market and hence has had its assessment hikes limited to 3%, keeps its taxes relatively low.

The other proposal, to appear as "A" on the ballot, originated with the State House of Representatives. It would cap annual assessments at 5% or the rate of inflation, whichever is less, but only for "homestead" parcels, i.e., owner-occupied residential property. The constitutional provision that requires uniform millage rates on all classes of property would be scrapped.

Under "A," commercial and industrial property assessments would increase with market value, and over time could experience a higher effective tax rate than homesteads. Homestead property assessments would still be readjusted to market value when the property is sold, but in the interim would be undervalued if market values increased by more than 5 percent per year. Moreover, unlike "Cut & Cap," Proposal A contains no explicit tax cut provision.

In a recent Mackinac Center analysis, economist Patrick Anderson shows how "A" takes a bizarre turn when the effect of allowing different millage rates combines with the millage rollback provisions of the Headlee amendment passed in 1978. Headlee requires that total property assessments for a tax jurisdiction increase at no more than the rate of inflation. If assessment increases exceed this limit, the millage rate is automatically "rolled back" to eliminate any effective tax increase above the rate of inflation. Currently this applies equally to all classes of property--residential, agricultural, and industrial/commercial.

With "A", the Headlee rollbacks are calculated on each class of property separately. It is therefore entirely possible that assessment increases on commercial and industrial property might trigger a millage rollback, while those on homestead property do not. This is even more likely since at any given time commercial and industrial property will be assessed much closer to market value than residential property. This means that business owners could actually experience lower millage rates than homeowners, and that new home buyers would have the highest effective tax rates of all! Proposal A's provisions, in other words, are potentially confusing, contradictory and counterproductive.

Many people forget that the Legislature froze property assessments in 1991, and that the freeze will end next year. Unless Michigan citizens or their representatives enact some form of limit, assessments may skyrocket 10 percent or more when that time comes.

"C," though certain to yield non-uniform assessments over time, is nonetheless a well-defined and predictable proposal that actually cuts property taxes--something this state sorely needs. "A," on the other hand, would not only create disparity in assessments, but in actual millage rates as well while providing no immediate property tax relief; and its interaction with Headlee makes its implementation problematic and its effect uncertain.

Voters who want property tax relief should know that only one of the two ballot proposals this year will actually deliver it.