Property taxes are the primary revenue source of most local governments, and the administration of the property tax system is also a primary role of local governments. The power to tax is granted by the people to the government in the federal and state constitutions. The state’s taxation power extends in the constitution to local governments. However, the Michigan Constitution only authorizes cities, villages, townships, counties and some special purpose district to levy a property tax, and only cities can also levy an income tax. Local governments do not levy sales taxes or tax on business activities, other than the property tax.
Taxes fund local government services that benefit, or potentially benefit society in general, and especially when funding by a specific fee charged to users is impractical, unfair or contrary to the purpose of the program or service. Taxes generally are assessed in some manner based on an indication of a person’s ability to pay—through the individual’s consumption or purchases (sales taxes); income; or accumulated wealth (property and estate taxes). Gas and weight taxes, on which state and federal transportation systems are funded, are both a consumption tax and an indication of a person’s usage of highways and bridges funded by those revenues.
Property taxes originated in a time when agriculture was the dominant means by which many people earned their living, and the value of a person’s property was considered an indicator of their financial ability to support local government programs and services. While the property tax system is subject to a number of criticisms as the primary means by which local government services are funded, it does offer a number of administrative advantages. Property is difficult to hide, so tax avoidance is minimized. The revenues are relatively stable compared to other taxation sources, and market distortions are minimal.
Property taxes are assessed on real estate—land values and the value of improvements (structures) on the land. Taxes are assessed based on the property’s value, which is an estimation of what the property would sell for in a normal transfer of ownership. That value would not be known precisely, of course, until the property actually sold, so assessors base their sales studies on what prices similarly situated properties have recently sold. Property owners might not agree as to whether other properties in the sales study are truly representative of what their own property would sell for, or whether there are mitigating factors that would adversely affect the value of their own property. Property owners can discuss with the local government assessor the method by which their properties’ values were determined and if the disagreement is not resolved to the property owner’s satisfaction, the property owner can appeal his or her assessment to the board of review. Boards of review, with the agreement of the township supervisor, can also issue hardship exemptions for those who are unable to support the public good. Boards of review must follow prescribed guidelines developed by the township board. Adverse decisions by the board of review can be further appealed to the Michigan Tax Tribunal.
Property assessments, however, are only half the property taxation story. The other side are millage rates which are applied to property values to arrive at the tax bill that is levied on property. The term “millage” means a rate per thousand, so a millage rate is a multiplier that is applied on a property’s rate per thousand dollars of taxable valuation.
Every parcel of property is located in multiple tax levying jurisdictions. The state of Michigan levies a statewide school education tax, with a rate of six mills on all properties. School operating taxes usually 18 mills, are also levied on all property., However a person’s primary residence (homestead) and agricultural property are exempt from this tax. Counties, intermediate school districts, special purpose districts such as a library district and local governments also levy taxes. The local governments prepare the tax bills on behalf of all of the other tax levying entities, so a single tax bill includes the taxes levied by all applicable entities.
Historically, property taxation adhered rigorously to a principle of uniformity—that similarly situated properties would be similarly assessed. However, when real estate values rapidly accelerated, property assessments similarly increased, which caused considerable hostility to property taxes. The Michigan Legislature adopted a number of laws intended to blunt the rate of increases, and the voters also approved a property tax relief measure in 1978. The so-called “Headlee Amendment” to the Michigan Constitution requires local entities to roll back their millage rates so that property tax revenues remained in line with the rate of inflation. But the taxes on individual parcels continued to rise during periods of high volume of property sales that “bid up” valuations.
In 1994 the legislature placed on the Michigan ballot a proposal, approved by the voters, that changed the method by which schools were funded, and also capped the rate of assessment increases on individual parcels of property. Referred to as “Proposal A,” the change to the Michigan Constitution ended uniformity and substituted a new principle of assessment stability and predictability. Assessment on individual properties can now increase at a rate not to exceed the rate of inflation or five percent, whichever is smaller. Property begins at an assessed valuation which is 50% of a property’s true cash value, but the assessment is adjusted each year to arrive at a new valuation on which the taxes will be based, called the property’s “taxable value.” When market forces increases the value of a parcel by 5%, the taxable value is reduced to a new amount that reflects the rate of inflation or 5% (whichever is less) compared to the prior year. When the property is sold, however, the taxable value reverts to its assessed valuation at 50% of true cash value. Property that is owned by the same person for a longer period of time will have a taxable value less than similar property that has changed ownership more recently. Consequently, two property taxpayers owning properties that are comparable in value will pay taxes in different amounts if they have owned their properties for different periods of time.
Michigan’s local governments also rely on state government for a large portion of their operating revenues. Michigan’s Constitution apportions a share of the sales taxes collected by the state to townships, cities and villages based on their respective populations. For many years Michigan also shared a portion of its income and sales tax revenues pursuant to a state law. However, the state’s budget challenges in the first decade of the 21st Century resulting in the legislature reducing an annual appropriation of statutory revenue sharing that approached $900 million down to a level in 2013 that is closer to $300 million. Only a handful of townships now receive this source of state money, which is now called the Economic Vitality and Incentive Program (EVIP). Hyperlink to MTA testimony The state legislature grants EVIP money to local governments for complying with legislative-determined policy objectives such as sharing services, displaying its financial information on a website, or for limiting employee fringe benefit expenditures.
A special assessment is a charge against property for a public improvement that confers a special benefit to that property that is different from the benefit enjoyed by the general public (Fluckey v City of Plymouth, 358 Mich. 447, 1960).
Historically, special assessments have been used to raise revenue for constructing and maintaining local capital improvements such as water and sewer mains, street improvements, and sidewalks. Over the past 30 years, special assessments have evolved into a financial resource for funding police and fire protection, road improvements garbage collection, and similar municipal services.
Because public money cannot be used for private interests, the only way a township can expend public money for any improvements made to private property, such as private roads or street lights in a subdivision, is through the special assessment process.
Local governments also charge fees for some services, particularly when a service used by a distinct stakeholder group and when the local government’s tax base does not support a wide range of services. Fees are often levied and paid directly to the local government, or may be billed, collected and remitted by a third party such as a cable television franchise holder.