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 S I 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, MI, report no. 997, April 1991
and 1991 Michigan Tax Climate,
report no. 301, 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, "The Impact of State and Local Taxes on Economic Growth,"
Chicago, IL, Hams Trust and Savings Bank, November 1978, and its December 1982 followup 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 Bast et 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 of24 separate studies; Stephen Moore,
"Taxes, Economic Growth, and Budget Deficits: What Washington Can Learn From the
States," Washington D.C., Heritage Foundation, February1990, Backgrounder no. 722/S, which cites additional research
results; and Richard Vedder, Do Tax Increases Harm Economic Growth and
Development?, Flagstaff, AZ, Barry Goldwater Institute, report no. 106, September 1989, which contains a lengthy
annotated bibliography.
National Conference of State Legislatures, "Interstate
Tax 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 the 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 all sections of the Headlee amendment, see Patrick L. Anderson,
How the Headlee Amendment Protects Michigan Taxpayers, (4th ed.)
Farmington Hills, MI, Taxpayers United for the Michigan Constitution, September
1991. Single copies are available free from PO Box 1776, Farmington Hills MI
48334.
Section 508 of the Michigan Income Tax Act of 1967; MCL
206.508. The Legislature is required by HJR H to implement the assessment cap,
and could define "homestead" differently for the purpose of the
assessment-growth cap. The income tax definition is broad enough to include, for
those who have lived in the same place for 10 years or more, up to 10 acres as a
"homestead" parcel.
In 1990, Residential property comprised about 59% of
all real and personal property in the state. Commercial and Industrial comprised
almost 33%. Agricultural comprised about 4%, Utility property about 3%, and
Developmental and Timber less than 1%.
A
1978 study of Michigan's property tax estimated there were 264 cities, 270
villages, 1,200 townships, 83 counties, and 624 local and intermediate school
districts, many of which overlap, and each of which have a separate property
tax. See Mike Addonizio, The Property Tax in Michigan: a Primer, Lansing, MI, Senate Fiscal Agency, February
1987, p. 4.
There
are already problems enforcing the 50-mill limit; a 1989 study found four
counties where aggregate operating millages exceeded the limit. See
Local Property Tax Limitations in Michigan, report no. 295, September 1989, and
Enforcement of the 50 Mill Limitation, report no. 1001, October 1991; Detroit, MI,
Citizens Research Council.
The Attorney General, in
Opinion No. 6654 of 1990, addressed the question of which millages must be
reduced to comply with the 50-mill limit, if multiple municipalities had millage
authorizations which, in total, exceeded the limit. The opinion stated that the
millage last authorized by voters must be reduced, which has been called the
"last in, first out (LIFO)" rule. In addition, the millage rates limited are
those rates after reductions required by the Headlee amendment. See the
discussion below on possible ways HJR H would allow tax increases on one class
of property.
In our opinion, Headlee rollups are already,
unconstitutional. However, they remain in statute and are now used by local
governments. See How the Headlee Amendment Protects Michigan Taxpayers, cited above.
For a more thorough discussion of the inequalities that
could result, see Appendix I.
1990 Opinion of the Attorney General no. 6654.
In fact, the
millage rollback factors estimated for 1993 under HJR H would allow "Headlee
rollups" under current state law, opening the possibility that millage rates
would actually increase in 1993
under HJR H.
Property
Tax Reform Proposals in Michigan, cited above, p. 4.
Supreme Court of the
United States, No. 90-1912, decided June 18, 1992; 1992 US Lexis 3688.
Michigan already has a relatively large program of
income tax credits, commonly called "Circuit Breaker" or "Homestead" credits,
designed to ensure that senior citizens are not placed in financial duress by
growing property taxes. For senior citizens, the credit can reach 100% of
property taxes above a certain amount, in certain income classes.
"Analysis of Citizens to Cut and Cap Your Property
Taxes Petition," Lansing, MI, Department of Treasury, August 1991.
Jay Wortley and George Towne, Property Tax Reform Proposals in Michigan, Lansing, MI, Senate Fiscal Agency, July 1992; Gary Wolfram, "Analysis
of Citizens to Cut and Cap Your Property Taxes Petition," Lansing, Ml,
Department of Treasury, August 1991 (revenue analysis February 1992).
Actually, the home she owned previously would
have increased in value, and she would have received a higher sale price for it.
The lower taxes on the home in the example would have been capitalized into the
sale price. The example assumes the increases in value for the two homes are the
same.
Depending on how Cut and Cap was implemented, the
assessment would probably not reflect full market value until the year after it was sold, and even then
may be limited to 3% over the market value shown by the sale price the year
before.
The incentive would arise from the ability to vote an
additional mill's revenue, but only have to directly pay 70% of it.
County of Oakland v State of Michigan,
178 Mich. App. 48, 443 NW2d 805 (1989), appeal granted in part, 453
NW2d 256.
For discussion of this and other aspects of the Headlee
amendment, see Patrick L. Anderson, How the Headlee Amendment Protects
Michigan Taxpayers, (4th ed.) Farmington Hills, MI, Taxpayers United for the
Michigan Constitution, September 1991. Single copies are available free from PO
Box 1776, Farmington Hills MI 48334.
The drafters of the Headlee amendment anticipated
future constitutional amendments. Article IX Section 26 concludes: "If
responsibility for funding a program or programs is transferred from one level
of government to another, as a consequence of constitutional amendment, the
state revenue and spending limits may be adjusted to accommodate such change,
provided that the total revenue authorized for collection by both state and
local governments does not exceed that amount which would have been authorized
without such change." Should Cut and Cap pass, this provision will be reviewed
closely. The Section 30 local share requirement is a "spending limit," as it
refers to the "proportion of total state spending paid to all units of local
government, taken as a group."
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 laggedfar 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, March
1989.)
Further discussions of Proposition 13 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 reprinted in
State Tax Notes, February 17, 1992, Arlington VA, Tax Analysts.
Nordlinger v Hahn, IIB.
In the Allegheny
case, the assessor for one county used an acquisition-value method, while
the rest of the state used the market-value method prescribed by the West
Virginia constitution. In ruling this unconstitutional, the court quoted with
approval the following decisions:
"[I]ntentional systematic
undervaluation by state officials of other taxable property in the same class
contravenes the constitutional right of one taxed upon the full value of his
property." Sunday Lake Iron Co [v Wakefield, 247 U.S. 352-53 (1918)];
Sioux City Bridge Co. v Dakota County, 260 U.S. 441, 445446 (1923);
Cumberland Coal Co. v Board of Revision of Tax Assessments in Greene County,
Pa, 284 U.S. 23, 28-29 (1931). "The equal protection clause ... protects the
individual from state action which selects him out for discriminatory treatment
by subjecting him to taxes not imposed on others of the same class."
Hillsborough v Cromwell, 326 U.S. 620, 623 (1946).
Under HJR H, residential
and agricultural property would be taxed at different rates depending on whether
it was "homestead" property, and residential and agricultural property would be
explicitly taxed at different millage rates from business property.
Foss
v Rochester (1985) 65 NY2d 247, 491
NYS2d 128, 480 NE2d 717.
Nordlinger
v Hahn, II.
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: I 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 Assn 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.
Michigan
State Chamber of Commerce v State of Michigan (1983) 417 Mich. 419, concerned the passage of
two partially conflicting proposals, both of which passed. The court ruled that:
"The voters exercised a choice between Proposals H and D as whole proposals and
chose Proposal H. Any piecemeal integration of nonconflicting provisions of
Proposal D would be in derogation of that choice."
