The allocation among the units of local government is performed annually by a county tax allocation board, unless the voters have "fixed" the allocation among the units, as have voters in most counties. For further explanation, see Fred Headen. Local Property Tax Limitation in Michigan, publication 295 (September 1989)and The 50-Mill Limit: An Update, publication l0l3 (November 1992), Detroit, Citizens Research Council of Michigan.
To be more precise, section 6 applies this limit first to the total millage of schools, townships, and counties, and then provides an exception for cities, villages, and other charter authorities whose tax limits are set by charter or general law. Thus. other units of local government also have an operating millage limit, and can levy additional millage only for voter-approved debt.
Draft amendment to section 1211-1212 of the school code. 1976 PA 45l, beginning atMCL 380.1211.
This is codified in section 34d of the General Property Tax Act. MCL 211.34(d)(12).
See Patrick L. Anderson, How the Headlee Arnendment Protects Michigan Taxpayers, 4th edition, revised, Farmington Hills. Taxpayers United for the Michigan Constitution. 1993. The Headlee Amendment Blue Ribbon Commission, appointed by the Governor under Executive Order 1993-1, is currently reviewing the constitutionality of nonvoted "limited" tax general obligation debt.
Michigan Department of Treasury, State Tax Commission. 1991 Ad Valorem Tax Levy Report. This period does not include the 1992 "freeze" year.
Supreme Court of the United States, No. 90-1912, decided June 18, 1992. 1992 US Lexis 3688.
Allegheny Pittsburgh Coal v Webster, Sup.Ct. Nos. 87-1303, 87-1310; 488 U.S. 336 (1989); 1989 US Lexis 433. This case concerned the practice of a West Virginia county tax assessor of assessing recently purchased property on its purchase price, but only making minor adjustments in subsequent years. This had the effect of creating large disparities in effective tax rates, since the adjustments lagged far behind actual market values. However, the West Virginia constitution. like the current Michigan constitution, requires uniform property taxation based on current market value. Also discussed in Nordlinger v Hahn, IA. citing also the California Court of Appeals decision upholding Proposition 13. Nordlinger v Lynch 225 Cal. App. 3d 1277.
Another example of state courts invalidating a scheme allowing disparate taxation is Drugman v Board of Assessors of Atlantic Beach (NY) (1988). 141 A.D.2d. 533 NY S.2d 495. Here. the Appellate division of the New York Supreme Court held that a village assessor's "practice of selective reassessment of only those properties in the village which were sold during the prior year contravenes statutory and constitutional mandates." (Quoted from State and Local Tax Insights, San Francisco. Morrison & Foerster. March1989.)
Further discussions of Proposition 1 3 include Ellen Worcester. "If Proposition 13 Is Invalidated, What Next?" Journal of California Taxation, Winter 1992, and Carlyle W Hall. Jr., "It's Time For a Change."
Los Angeles Lawyer(unknown date). Both are reprintedin State Tax Notes,February 17, 1992. Arlington VA. Tax Analysts.
Nordlinger v Hahn, IIB.
This point was first raised by Michael Sessa of the Macomb CountyTaxpayers Association in an April letter to Governor Engler and press release.
Property tax revenue under "A" without the "double rollback" was estimated by backing out the assumed "Headlee" rollback in millage rates for non-school operating millage, and adjusting the SEV for the effect of this increase in millage rates. (This is a small adjustment to reverse out some tax capitalization, and takes into account the limiting effect of the per-parcel assessment cap.) Comparing the product of these two estimates produces an estimate of the additional tax savings from the "double rollback." Since future property taxes will grow from this base, legislation that eliminated the 1993 millage rollback under "A" would have the effect of adding additional taxes for future years as well.
Probably the best newspaper analysis was contained in the Sunday, May 2 edition of the Detroit News and Free Press, based on a computer model developed by the Michigan Department of Treasury. This took into account a reasonable estimate of sales-taxable transactions, did not double-count property taxes and income tax credits, and incorporated likely changes in SEV and resulting "Headlee" millage rate rollbacks. Even this article did not show first-year results for the featured examples and mentioned reduced business taxes only as a reason one interest group was againstthe proposal.
Using the income tax code's allowance of 17% as tile share of rent used by landlord to pay property taxes, and a gross reduction of property taxes of $2.2 billion from $9.6 billion, or 24%, gives a rough estimate of a 4% reduction in the operating cost of rental property.
This rough estimate does not adjust for tourism spending or out-of-state purchases. The Michigan Department of Treasury, Office of Revenue and Tax Analysis has estimated, using US Department of Labor survey data, the impact of a sales tax increase on taxpayers of various incomes. However, the underlying survey data here relies on self-reported income. and could be unreliable particularly for low-income categories. See the following discussion on the incidence of the sales tax over a life-cvcle.
Consider the example of a person with little or no wage earnings, but who enjoys a luxurious life by spending an inheritance. Because his income is small, he pays little income tax. The sales tax, however, does not miss the purchases of boats, cars, clothes, liquor, restaurant meals, etc. Thus, a flat-rate consumption tax is much more "fair" in terms of taxing the "rich" than even a progressive income tax.
Estimating "business" property tax reduction is not straightforward. Much – though not all – agricultural land is used for profit, as is some timber-cutover, along with commercial and industrial property. Furthermore, public and out-of-state ownership along with interstate trade, make it impossible to estimate how much the reduction in business taxes directly benefits Michigan workers investors, and consumers. The rough, conservative estimate here assumes that something less than 20% of the gross statewide property tax reduction indirectly benefits Michigan residents through a reduction in embedded business taxes. This is quite conservative since the commercial, industrial, utility and agricultural classes of property account for close to 40% of the SEV in the state.
Presentation by Doug Roberts, Muskegon, Michigan. 24 April 1993.
Presentation by Doug Roberts, Muskegon, Michigan. 24 April 1993
According to Michigan Department of Treasury, Office of Revenue and Tax Analysis data, 12 school districts currently levy 18 or less mills. 50between 18 and 27 mills, and 497 levy over 27 mills. They project that, under Proposal A, 358 of the school districts would initially levy 18 mills or less.
Constitutional amendments become effective 45 days after their approval by the electorate:45 days after the June 2 election is July 17, 1993.
For example, the state Currently allows local units of government to levy an airport parking use tax of 30% (1987 PA 248) and hotel & motel use taxes of 1 1/2% to 6% (1974 PA 263, 1978 PA 106).
Furthermore, the "Tiger Stadium Tax." (1979 PA 180) if approved by the voters in any of a number of municipalities, allows further use taxes on hotels, motels, and motor vehicle rentals.
Bailey v Muskegon Co. Bd.. of Comm.. (1983) 333 NW2d 144, 122 Mich App 808.
Michigan's Constitution, at Article IX section 8, currently states:
"The Legislature shall not impose a sales tax on retailers of more than 4% of their gross taxable sales of tangible personal property.
"No sales or use tax shall be charged or collected from and after January l, 1975 on the sale or consumption of prescription drugs for human use, or on the sale or use of food for human consumption ..."
The proposal would precede this with "[e]xcept as provided in this section." and add:
"Beginning on the date this paragraph becomes a part of the constitution, the legislature shall impose the sales tax on retailers at an additional rate of 2% of their gross taxable sales of tangible personal property not exempt by law and the use tax at an additional rate of 2%. The proceeds of the sales and use taxes imposed at the additional rate of 2% shall be deposited in the state school aid fund established in section 11 of this article...."
"The Impact of Differential Expenditures on School Performance," Educational Researcher. May 1989.
This simplified discussion follows the convention that categorical aid is given to all districts, and then "recaptured" back from some.
The Supreme Court recently reinforced in Schmidt v Dept. of Education. No. 90858 (1992).
This estimate is calculated by using 1993 SEV against 1994 millage rates to produce property tax revenue under both "A" and SB 146 in1994, and then adjusting for "circuit breaker" savings.
This rough estimate is calculated by multiplying the fraction of Michigan taxpayers who itemize (35%) by the top current standard marginal rate (28%) and then applying this fraction against the net property tax reduction of about $1.9 billion in 1993.
See Patrick L. Anderson. How the Headlee Amendment Protects Michigan Taxpayers, (4th ed. rev.) Farmington Hills, Michigan. Taxpayers United for the Michigan Constitution. March 1993.
The two tax proposals in 1992 would have either created separate millage rates for different classes of property, or a separate assessment ratio for different local government units' millage. Other proposals in 1980 and 1981 would have similarly complicated the system. This proposal keeps the same millage rates and assessment ratio for all classes of property and units of government. It relies primarily on the same method to reduce and limit property taxes as Michigan constitutions for most of this century: a limit on millage rates.
A fragment of this revenue goes to the state, for utility property.
Jay Wortley and George Towne, Property Tax Reform Proposals in Michigan, Lansing, MI. Senate Fiscal Agency, July 1992. The base data is from US Department of Commerce, Bureau of the Census. Government Finances, 1989-90, and Advisory Commission on Intergovernmental Relations, State Fiscal Capacity and Effort, 1988, both published in Washington, D.C.
While this is a common practice among Michigan analysts it is not completely correct. The "Homestead" or "Circuit Breaker" income tax credit is only allowed on some property and within certain income parameters. Furthermore, age and disability status affect the credit. This income tax credit does not reduce the direct tax burden on the owner of the property but instead may allow a later, partial, indirect reduction in other taxes.
The average effective property tax rate on single family homes with FHA-insured mortgages was 2.10%, the fourth highest among the states and the District of Columbia, and almost double the U.S. average of 1.15%. See Significant Features of Fiscal Federalism, Washington. D.C., Advisory Commission on Intergovernmental Relations, 1989.
Government of the District of Columbia, Department of Revenue and Finance, Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison, June 1990. Detroit's effective property tax rate was 4.4%. This extremely high property tax burden helped Detroit earn the dubious distinction of also having the lowest property values among the 51 cities in the survey. See the discussion of Tax Capitalization in Appendix II for a discussion of how high property tax rates force property values low. For further discussion of the effect of the tax burden on the Detroit economy see Patrick L. Anderson, ed. Detroit Economic Development Plan, Detroit, MI. Economic Enterprise Foundation of Detroit, December 1988; and Fiscal Trends of the City of Detroit, Detroit, MI. Citizens Research Council, June 1991, report no. 300.
In addition to the references on state tax burdens cited above, see also Scott Mackey, "State and Local Tax Levels: Fiscal Year 1981." State Tax Notes, March 30, 1992; and Citizens Research Council of Michigan, Income, Spending, and Taxation – Michigan Compared to the US Average,Detroit, Ml, report no. 997, April 1991 and 1991 Michigan Tax Climate,report no. 30l, June 1991.
Patrick L. Anderson, Michigan in the Current Recovery: A Historical Perspective, Chicago, IL. The Heartland Institute, 1986, outlines this case and includes evidence that high-tax states have seen slower job growth than low-tax states. See also Gene Heck, Michigan in Perspective, report to the Michigan Senate, February 1988 for an exhaustive detailing of the economic decline of Michigan, and its relatively high tax and regulatory burdens.
The pioneering work was probably that of Robert Genetski and Young Chin. "Tile Impact of State and Local Taxes on Economic Growth." Chicago, IL. Harris Trust and Savings Bank, November 1978, and its December 1982 follow-up by Robert Genetski and Lynn Ludlow. "The Impact of State and Local Taxes on Economic Growth 1963-1980." Other studies of tax burdens and state economic growth include Joseph Bastet al., Coming out of the Ice: A Plan to Make the 1990's Illinois' Decade, Chicago, IL. The Heartland Institute, 1989, which summarizes and compares the results of 24 separate studies: Stephen Moore, "Taxes Economic Growth, and Budget Deficits: What Washington Can Learn From the States." Washington D C., Heritage Foundation, February 1990. Backgrounder no. 722/S which cites additional research results: and Richard Vedder.Do Tax Increases Harm Economic Growth and Development?, Flagstaff, AZ. Barn Goldwater Institute, report no 106, September 1989, which contains a lengthy annotated bibliography.
National Conference of State Legislatures, "Interstate T ax Comparisons and How They Have Changed Over Time," Denver, Colorado. Legislative Finance Paper No 66. 1989; quoted in "Taxes, Economic Growth, and Budget Deficits: What Washington Can Learn From the States," cited above. The five "tax increase" states were Ohio, Wyoming, Utah, North Carolina, and Iowa; the five "tax cut" states were California, Massachusetts, North Dakota. Montana, and Arizona. Alaska was excluded from tile survey.
Appendix II, on Tax Capitalization includes a short discussion of the three commonly used methods of assessing property.
Millage other than voted debt millage is called "operating" millage since it is intended for the operation of government rather than capital expenditures. "Special assessments" also appear on many tax bills, but these are levied to finance physical improvements that benefit the property and are not taxes. Unfortunately, this category has been abused. See Citizens Research Council. The Misuse and Abuse of Special Assessments in Michigan, Detroit MI. October 1983, report no. 944.
An excellent historical and legal overview of the 50-mill limit is Local Property Tax Limitations in Michigan, Detroit MI. Citizens Research Council, September 1989, report no. 295. Millage data are from Property Tax Reform Proposals in Michigan,cited above.
For a complete explanation of the Headlee amendment, sec Patrick L. Anderson, How the Headlee Amendment Protects Michigan Taxpayers, (4th ed., revised) Farmington Hills, Ml. Taxpayers United for the Michigan Constitution, March 1993. Single copies are available free from PO Box 1776, Farmington Hills, MI 48334.
A more precise evaluation would also include taxation of the income stream, risks, and the resale value of the property.
The capitalization ratio is commonly inverted, so that a 10:1 ratio is equivalent to a 1/10,. or 10%, capitalization rate or "cap rate." Cap rates vary with the economic climate and other factors, but 10% is a good approximation. The model used for revenue analysis of Cut and Cap used a more conservative 8:1 cap ratio.
Section 27 of the General Property Tax Act states: "In determining the value the assessor shall also consider ... present economic income … " The capitalization method is also explicitly recognized as a valid method for determining true cash value in case law and attorney general opinions: "The true cash value of property for ad valorem taxation purposes may be determined by any of the three acceptable tests, namely (1) the sales method, (2) the reproduction cost method, or (3) the capitalization of income method." OAG 1982. No. 6092. All three approaches should be used whenever possible. Meadowlanes Ltd. Dividend Housing Ass'n v. City of Holland, (1991) 473 NW2d 636, 437 Mich 473, rehearing denied. Expenses are explicitly recognized as elements of net income to be utilized in determining net economic income. Northwood Apartments v. City of Royal Oak (1980) 296 NW 2d 639, 98 Mich. App. 721.
Mortgage lenders typically assume that a percentage of income – often around 28% – will be available for house expenditures, including mortgage, property taxes, and insurance. Therefore, a $1 reduction in property taxes means an additional $1 is available to pay mortgage payments. Using a 10% 30-year mortgage as an example, each $100 reduction in monthly property taxes allows a homeowner to borrow an additional $11,395 with the same income and total monthly payment.
This is a simplified algorithm for estimating tax capitalization. There are other factors that would be involved in each individual parcel.
Many of the baseline assumptions for SEV, millage rates, new construction rates, and other variables were taken from an April 7, 1993 memorandum from Jay Wortley, Senior Economist, Jane Schultz and Elizabeth Pratt of the Senate Fiscal Agency, along with some additional nonpublished data supplied by the authors.