To assess a property is to determine its value for tax purposes.[xiii] In Michigan, there are three types of value placed on real and personal property: true cash value, state equalized value and taxable value.
The true cash value of a property is meant to represent the property’s market value. The two are not exactly equal, however: If, for instance, real property has been sold in a particular year, the cash value of the property in that year is not necessarily the sale price, but rather the property’s value relative to other real property of the same type in the assessing jurisdiction. The assessment of personal property, in contrast, is based upon depreciation of the property’s acquisition costs.[xiv]
In years in which a parcel of real property remains in the same hands, however, its cash value is determined by a tax assessor working for the city or township in which the property is located. The assessor’s determination of the property’s cash value effectively establishes the property’s state equalized value, which is defined as 50 percent of the property’s cash value.[xv] Thus, a property’s SEV increases and decreases with an assessor’s estimate of the property’s cash value.
Taxes are calculated in one of two ways, depending on whether or not the property was recently purchased. If the property was purchased in the previous calendar year, the property’s taxes are based on the property’s current calendar year SEV. If the property was not purchased in the previous calendar year, the property’s taxes are calculated on the lesser of the property’s SEV and its "taxable value." Taxable value, which is defined in the Michigan Constitution, serves as a limitation on how much assessments on property may increase in a given year.[xvi] Taxable value is related to SEV in the following way: If the cash value — and thus the SEV — of a property increases in a given year by more than 5 percent or the rate of inflation, whichever is less, the taxable value of the property is calculated by increasing the previous year’s taxable value by the lower of the two rates (see example calculations in Graphic 2).[xvii] Thus, in areas where property values (i.e., cash values) are increasing quickly, a property’s taxable value will frequently lag behind its SEV, effectively lowering the overall taxes that would have been assessed on the property absent the constitutional limitation.[xviii] In areas where property values are falling, the constitutional provision does not apply, and taxable value and SEV will fall and be equal from year to year.
Graphic 2: Taxable Value Example Calculations
Slowly rising property values. Imagine that a property has been assessed at a cash value of $142,000 in one year and a cash value of $144,000 in the next — an increase of approximately 1.4 percent. The SEV during this period thus increased from $71,000 to $72,000 (likewise an increase of 1.4 percent). Also assume for the moment that the property was transferred in the first year, so the SEV and the taxable value were the same ($71,000).
If the inflation rate during the intervening year was 2.6 percent, the rate of increase in the property’s value (and SEV) is less than both 5 percent and the inflation rate, and the constitutional limitation does not cap the growth of the taxable value. Thus, the taxable value of the property in the second year is simply equal to the second year’s SEV: $72,000.
Rapidly rising property values. Imagine that a property has been assessed at a cash value of $142,000 in one year and a cash value of $150,520 in the next — an increase of 6 percent. The SEV during this period thus increased from $71,000 to $75,260 (also an increase of 6 percent). Assume for the moment that the SEV and the taxable value were the same in the first year ($71,000).
If the inflation rate during the intervening year was 3 percent, the 6 percent increase in the property’s cash value (and SEV) exceeds the inflation rate. Since the inflation rate is less than 5 percent, Michigan’s constitutional limitation caps the growth of the taxable value at the 3 percent inflation rate, and the taxable value of the property in the second year is equal to a 3 percent increase in the previous year’s taxable value.[xix] The new taxable value can be calculated by taking the previous year’s taxable value (and SEV) of $71,000 and multiplying it by 1.03. The resulting taxable value in the second year would then be $73,130, while the SEV, based on the cash value in the second year, would be $75,260.
A second year of rapidly rising property values. Now imagine that the cash value of the property in the previous example rises from $150,520 in the second year to $154,000 in the third year — an increase of approximately 2.3 percent. The SEV during this period thus increased from $75,260 to $77,000 (also an increase of about 2.3 percent).
If the inflation rate from the second to the third year was 1.9 percent, the 2.3 percent increase in the property’s cash value (and SEV) exceeds the inflation rate. Since the inflation rate is less than 5 percent, Michigan’s constitutional limitation caps the growth of the taxable value at the 1.9 percent inflation rate, and the taxable value of the property in the third year is equal to a 1.9 percent increase in the previous year’s taxable value. (The taxable value in the second year was not the same as the $75,260 SEV, but was rather $73,130, due to the constitutional constraint on property tax growth.) Thus, the new taxable value can be calculated by taking the previous year’s taxable value of $73,130 and multiplying it by 1.019. The resulting taxable value in the third year would then be approximately $74,519.47.35
Michigan law limits only increases in the taxable value of a property, not decreases.36 The constitutional cap therefore does not apply, and the taxable value simply declines along with the SEV from $71,000 in the first year to $69,000 in the second.[xx]
The total taxable value of all property under the jurisdiction of a taxing authority (such as a local school district) is called the "tax base."[xxi] This tax base is described annually in a property tax report prepared by a county official known as an "equalization director." The equalization director must file the report with the State Tax Commission every year by the fourth Monday in June, and the report must include the following:
the total taxable value as of the fourth Monday in May of that year;[xxii]
the taxable value for each class of property;
the total taxable value of all property in the county that is categorized as a "principal residence" or as "qualified agricultural property"[xxiii]; and
the total taxable value for all property that is categorized as something other than a "principal residence" or "qualified agricultural property" (also called "nonhomestead property").
An example of the document is pictured in Graphic 3[xxiv].
Graphic 3: School District Valuation and Tax Levies Form, Midland County
[xiii] The assessment of real and personal property involves a complex variety of factors. This primer does not explore these factors, but rather focuses on the tax revenues generated to finance public schools. Interested readers can see the broad statutory language in MCL § 211.27(1) and access the state’s assessor manuals on the Michigan Department of Treasury Web site at www.mi.gov/treasury/0,1607,7-121-1751_2228---,00.html (accessed on April 3, 2007).
[xiv] For an example of the personal property tax reporting form used by an assessor, see www.michigan.gov/documents/taxes/632_2007_181916_7.pdf.
[xv] The process by which local property values are equalized following an assessor’s determinations of true cash value involves adjustments for inflation and other factors. Readers interested in an overview of the equalization process can consult "Bulletin No. 9 of 2006: Equalization Calendar, Equalization of Assessments," (State Tax Commission, Michigan Department of Treasury, 2006), www.michigan.gov/documents/treasury/Bulletin9of2006_177475_7.pdf (accessed April 13, 2007).
[xvi] This is a feature of Proposal A of 1994, appearing in Article IX, Section 3, of the Michigan Constitution of 1963. A number of other taxes on property are not governed by taxable value; see particularly "Certain Properties in Local School Districts," under Property.
[xvii] In instances of general deflation, the rate of increase would still be dependent on the general price level. If the general price level has decreased, taxable value would still be the lesser of SEV or the taxable value in the previous year reduced by the percentage decrease in the general price level.
[xviii] According to a 2006 report, taxable value statewide for real and personal property was $93.9 billion less than SEV: Andrew Lockwood, "The Michigan Property Tax Real and Personal: 2005 Statistical Update," (Tax Analysis Division, Bureau of Tax and Economic Policy, Michigan Department of Treasury, 2006), 1, www.mi.gov/documents/treasury/2005StatUpdatePropTaxReport_178063_7.pdf (accessed April 13, 2007). State taxable value was 84.6 percent of SEV in 2000: Citizens Research Council of Michigan, "The Growing Difference between State Equalized Value and Taxable Value in Michigan," (Citizens Research Council, 2001), www.crcmich.org/PUBLICAT/2000s/2001/memo1058.pdf (accessed January 20, 2006). See Finance and Organization for county comparisons of taxable value and SEV in 1994 and 2000.
[xix] If the inflation rate had exceeded 5 percent, Michigan’s constitutional cap would have allowed the taxable value to increase by no more than 5 percent from the previous year’s cash value. In this case, the new taxable value would then have been calculated by multiplying the old taxable value (and SEV) of $71,000 by 1.05, and the resulting taxable value in the second year would then have been $74,550. The SEV of $75,260 then would have been greater than the taxable value, since the SEV (and cash value) increased by 6 percent, not 5 percent.
[xx] If a property’s value has increased quickly over a number of years, but later decreased, the taxable value would lag the SEV during the years of increase (due to the constitutional amendment), remain constant during the years of decrease until the SEV fell back to the taxable value, and then become equal to (and decline in lockstep with) the SEV. In general, then, the taxable value is the lesser of the capped value and the SEV.
If, on the other hand, a property’s value falls in one year and then increases faster than inflation in the following year, the taxable value is still limited by the rate of inflation in the second year.
[xxi] For a database of taxable value by school district or county, see http://mdoe.state.mi.us/taxvalue/Default.aspx. Users without the appropriate account must click the "Public Access" radio button to enter the database. Districts are searchable only by district code. Users can obtain district codes by searching for a district in the School Code Master database available from the state’s Center for Educational Performance and Information at http://cepi.state.mi.us/scm/directory/step2.asp?intSearchType=2.
[xxii] MCL § 211.27d. The items specified by (2), (3) and (4) also appear to be due on the fourth Monday in May, but the statute specifies the day only for this item (1).
[xxiii] This property is reported separately since it receives a "homestead tax exemption" in many school districts.
[xxiv] This form has been replaced by Form 2849 (www.michigan.gov/documents/2849f_2649_7.pdf), but the new form had not yet been used at the time of this writing. Graphic 3 shows only the second page of the report because the first page contains primarily tax rates and figures that are transferred to Page 2 to make calculations.