Contact: Eric Lupher
Company: Citizens Research Council of Michigan
Date: August 10, 2021
The Citizens Research Council of Michigan has released a major study of Michigan’s property tax limitations undertaken to evaluate their effect on taxpayers and local governments a quarter-century after the last limitations were created with the adoption of Proposal A in 1994.
In Michigan’s Overlapping Property Tax Limitations Create an Unsustainable Municipal Finance System, we treated evaluation of the system as if we were modeling the policies at the time of adoption with the benefit of knowing what actually happened to property values. We gathered tax rates and 26 years of property values for 41 local governments, including a cross-section of counties, cities, and townships throughout the state.
By holding tax rates constant at the 1993 amounts, we were able to isolate how property values and the tax limitations have reacted to changing economic conditions.
The key takeaways:
- States generally limit growth of property tax burdens in one of three ways – rate limit, assessment limit, or levy limit. Michigan uses all three, making it among the strictest property tax limitations of the states. Statutory tax rate limits, the Headlee Amendment’s assessment limit, and the taxable value system created by Proposal A all work to limit the growth of tax burdens and constrain year-to-year changes.
- The Great Recession and its impact on property values led to the overlapping tax limits having a mitigating affect, keeping the tax base from declining further than it could have. Since the Great Recession, which was a unique event, tax bases have been growing at relative slow rates.
- The property tax system is not sustainable. Local government tax revenues are constrained in their growth unless they add new development to their tax bases or increase tax rates. Land is finite and cannot continue to be developed. Tax rates are statutorily limited. Local governments need revenue that can grow with their economies.
Except for the brief pandemic-induced recession in 2020, Michigan has enjoyed economic growth since the end of the Great Recession (2007-2009), but local governments generally have not benefited from that expansion. Under Michigan’s combination of tax limitations, three sources can contribute to growth in the property tax base: 1) appreciation of property values, 2) the “pop up” to reflect market values at the time a property is sold, and 3) new construction. Appreciation is limited to the lesser of the rate of inflation or five percent and pop ups to reflect market value trigger tax rate reductions. That places pressure on attracting new construction, but that is not sustainable because many local governments are built out, land is finite, and urban sprawl is contrary to our best interests.
Additionally, we found anecdotal evidence that local governments have reacted to constraint of their tax bases by asking voter approval for tax rate increases. For instance, over 80 percent of the local governments in Oakland County have increased their overall tax rates since 2007. Michigan laws limit the tax rates local governments can levy, so this too is unsustainable.
The report offers policy options state policymakers should consider addressing the unsustainable municipal finance system while still providing the protections taxpayers sought when they adopted the tax limitations.