The Cap on Assessment Increases

The second tax limitation feature of "A" is a limit on assessment increases for individual parcels. The Headlee amendment currently limits tax increases caused by assessment growth to the rate of inflation, but applies the limit to all existing property, taken as a group. "A" would place a limit of 5% or the rate of inflation, whichever is less, and apply it to individual parcels. This limit on assessment growth would add to the tax savings created by the exemption, although it could be offset by millage rate increases.

In addition, the cap on assessment increases would result in less "Headlee" rollbacks in millage rates, since SEV would not grow as fast as actual values. Thus. millage rates would be higher under "A" than under current law, although property tax burdens would be significantly lower because of the limit on school operating millage.

Market Value Versus Acquisition Value Assessment

The cap on individual parcel assessment growth would change the current assessment scheme from a market-value system to an acquisition-value system. Rather than attempting to estimate the current market value of all parcels, assessors would rely on the cost of acquiring the property, even if it was years ago, in determining the current assessment. "A" would cap the annual adjustment at the inflation rate or 5%, whichever is less, until the ownership of the parcel is transferred.

The inflation rate has been under 5% for most of the past decade, and land normally increases in value at about the inflation rate. If these trends continue, many areas of the state would find that the majority of their parcels do not hit the assessment cap. In fact, the total State Equalized Value of property in the state – including new construction, which probably added another 1-2% each year – increased by an average of 5.2% per year in the ten years from 1982 through 1991.[6]

Thus, on average, the 5%-or-inflation cap on individual parcel assessments would not have been effective in reducing property taxes over the past ten years. However, the cap is not designed to protect "on average" – it is designed to protect owners whose circumstances have given them rapidly increasing assessments. This would be likely in tile following instances:

  • The inflation rate increases to 5% or more.

  • The market value of property increases due to more productive uses, for example, when converting farmland to residential use, or when private sector investment increases the productivity of nearby land.

  • Consumers shift preferences, making some areas more desirable than others, even without a change in the underlying use of the land.

  • Government actions increase or reduce the tax burden of certain parcels, restrict development rights or land usage, or finance improvements.

  • Assessing practices are arbitrary, improper, or changing.

Uniform Taxation

This proposal does attempt to make one change voters rejected in the past: it limits annual assessment increases on individual parcels of property.Limiting annual assessment increases on individual parcels would provide predictability to homeowners, and avoids the backlogged and clearly unfair assessment appeals system

The downside is that it creates disparities in effective tax rates. Owners of similar houses on the same street can end up paying significantly different tax bills, depending on how long they have owned their property. Their tax bills would probably be less than either would have paid had Proposal A not passed, but the lack of uniformity is a problem.

Uniformity and theConstitution

The lack of uniformity in an acquisition-value assessment scheme raises the question of whether such a system violates the U.S. Constitution's guarantee of equal protection under the laws This question was answered conclusively in a case involving a provision similar to "A" in the California constitution.

The U.S. Supreme Court, in Nordlinger v Hahn,[7] ruled that states may limit assessment growth oil individual parcels, and thus create different effective taxation rates, without violating the US Constitution's guarantee of equal protection under the laws. The court ruled that a state may establish an acquisition-value system of assessment, since it had at least two rational bases: The preservation of neighborhoods, and the predictability and affordability ("reliance interests") of future property taxation.

The U.S. Supreme Court, in the prior case Allegheny Pittsburgh Cool v Webster,[8] had ruled that arbitrary differences in tax rates, when those differences were contrary to state constitutions directing uniform taxation, violated the equal protection clause of the U.S. Constitution. The court noted in the Nordlinger deacision that the rational bases for the California constitution's assessment-growth cap contrasted with the facts in Allegheny which "precluded any plausible inference that the reason for the unequal assessment practice was to achieve the benefits of an acquisition-value tax scheme."[9]

Proposal A would create an acquisition-value assessment scheme for the State of Michigan which would share the same rational bases as California's Proposition 13, and thus should be upheld against any federal Constitutional challenge.