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June 7, 2019

‘Special assessments’ and taxes – a distinction without a difference

This post appeared in the Detroit News on June 20, 2019

When do taxpayers stop being protected by the tax limitations put in place to protect us? When is a tax not a tax? The answer: when the legislature calls the tax by a different name.

Most people are familiar with property taxes. We are taxed on the value of our land and buildings (some businesses are taxed on the value of equipment as well). Michigan’s local governments rely heavily on property taxes to fund services such as police and fire, libraries, parks, and refuse collection. The services provided are of benefit to the general public.

Michigan local governments also may use a financing tool called the special assessment. When a city, village, or township creates a new road, builds a dam, installs sidewalks, invests in street lighting or drains, some properties will benefit from those projects more than others. Special assessments are used as a means of recouping the cost of these infrastructure improvements by apportioning at least a share of the cost among those benefiting properties.

The differences, although subtle, are clear. That is until a 1951 law began to blur the lines between these distinct roles.

That law allowed special assessments to be based on the value of the property, like a property tax.

It also allowed revenue from special assessments to be used to pay for the most basic of local government services, police and fire protection.

Furthermore, it allowed the special assessments to be apportioned on all properties in the jurisdiction. All properties were deemed to be receiving special benefit, even though public safety services primarily benefit people, not properties. In fact, people visiting the places levying these peculiar special assessments do not even have to own property in the jurisdiction to benefit from police and fire services.

When the Citizens Research Council started looking at this issue in the 1980s, only about 5 percent of local governments were using this finance tool. Our new paper found that in 2018, 11 percent of local governments — mostly townships, but also a few villages and small cities — were funding services this way. They are used all over the state, but most heavily in Metro Detroit.

Why should you care? Michigan has placed a lot of restrictions on the property tax to save owners from being taxed out of their homes. There are limits on the tax rates each type of government may levy. Voter approval is required to levy new taxes. The Headlee Amendment to the state constitution requires tax rates to be “rolled back” if property values increase faster than the rate of inflation. These provisions do not apply to these property value-based special assessments.

In fact, many townships and cities are using these special assessments to tax at rates higher than they could if they were using the property tax. Even though state law limits charter townships to 10 mills of taxation, Canton Township in Wayne County is able to levy 12.3 mills (2.8 mills of property tax and 9.5 mills of special assessment). Clinton Township in Macomb County levies 14.5 mills (5.5 mills and 9 mills). And Commerce Township in Oakland County levies 3.1 mills of property tax and 4.6 mills of special assessment.

Because so many local governments continue to struggle to fund local government services, efforts have been made to allow a wider number of governments to use them.

Instead, we think the legislature should eliminate these unit-wide property value-based special assessments. Special assessments should be levied only for recovering costs that increase the market value of specific properties; they should not be unit-wide and they should not support general government services.

The special assessments in question are being used to fund public safety. These are essential services that cannot just be eliminated, so we recommend the establishment of emergency service authorities. These are multi-jurisdictional governments authorized to levy taxes – but they do it in accordance with constitutional limitations and state law.

Finally, we hope that this issue shines a brighter light on Michigan’s broken municipal finance system. When starved for resources, local governments are left to adopt bad policies. This is in no one’s best interest. Local-option taxes should be considered to supplement and replace property taxes, including sales or excise, income, transportation, “sin,” or other specific taxes. Additionally, the state and local governments should take a serious look at the municipal finance and service delivery system, which has not changed much since the 1800s despite advances in transportation, communication, and technology.

Eric Lupher is president of the Citizens Research Council of Michigan.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

‘Special assessments’ and taxes – a distinction without a difference

This post appeared in the Detroit News on June 20, 2019

When do taxpayers stop being protected by the tax limitations put in place to protect us? When is a tax not a tax? The answer: when the legislature calls the tax by a different name.

Most people are familiar with property taxes. We are taxed on the value of our land and buildings (some businesses are taxed on the value of equipment as well). Michigan’s local governments rely heavily on property taxes to fund services such as police and fire, libraries, parks, and refuse collection. The services provided are of benefit to the general public.

Michigan local governments also may use a financing tool called the special assessment. When a city, village, or township creates a new road, builds a dam, installs sidewalks, invests in street lighting or drains, some properties will benefit from those projects more than others. Special assessments are used as a means of recouping the cost of these infrastructure improvements by apportioning at least a share of the cost among those benefiting properties.

The differences, although subtle, are clear. That is until a 1951 law began to blur the lines between these distinct roles.

That law allowed special assessments to be based on the value of the property, like a property tax.

It also allowed revenue from special assessments to be used to pay for the most basic of local government services, police and fire protection.

Furthermore, it allowed the special assessments to be apportioned on all properties in the jurisdiction. All properties were deemed to be receiving special benefit, even though public safety services primarily benefit people, not properties. In fact, people visiting the places levying these peculiar special assessments do not even have to own property in the jurisdiction to benefit from police and fire services.

When the Citizens Research Council started looking at this issue in the 1980s, only about 5 percent of local governments were using this finance tool. Our new paper found that in 2018, 11 percent of local governments — mostly townships, but also a few villages and small cities — were funding services this way. They are used all over the state, but most heavily in Metro Detroit.

Why should you care? Michigan has placed a lot of restrictions on the property tax to save owners from being taxed out of their homes. There are limits on the tax rates each type of government may levy. Voter approval is required to levy new taxes. The Headlee Amendment to the state constitution requires tax rates to be “rolled back” if property values increase faster than the rate of inflation. These provisions do not apply to these property value-based special assessments.

In fact, many townships and cities are using these special assessments to tax at rates higher than they could if they were using the property tax. Even though state law limits charter townships to 10 mills of taxation, Canton Township in Wayne County is able to levy 12.3 mills (2.8 mills of property tax and 9.5 mills of special assessment). Clinton Township in Macomb County levies 14.5 mills (5.5 mills and 9 mills). And Commerce Township in Oakland County levies 3.1 mills of property tax and 4.6 mills of special assessment.

Because so many local governments continue to struggle to fund local government services, efforts have been made to allow a wider number of governments to use them.

Instead, we think the legislature should eliminate these unit-wide property value-based special assessments. Special assessments should be levied only for recovering costs that increase the market value of specific properties; they should not be unit-wide and they should not support general government services.

The special assessments in question are being used to fund public safety. These are essential services that cannot just be eliminated, so we recommend the establishment of emergency service authorities. These are multi-jurisdictional governments authorized to levy taxes – but they do it in accordance with constitutional limitations and state law.

Finally, we hope that this issue shines a brighter light on Michigan’s broken municipal finance system. When starved for resources, local governments are left to adopt bad policies. This is in no one’s best interest. Local-option taxes should be considered to supplement and replace property taxes, including sales or excise, income, transportation, “sin,” or other specific taxes. Additionally, the state and local governments should take a serious look at the municipal finance and service delivery system, which has not changed much since the 1800s despite advances in transportation, communication, and technology.

Eric Lupher is president of the Citizens Research Council of Michigan.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

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