Bracing for the Development Wave

Michigan Tax Laws Slow Gentrification for Property Owners: For Renters, Not So Much

Homeowners in Highland Park are concerned about increasing property taxes when property values start to climb. Will higher property values drive up taxes so much that homeowners are forced to sell? It happens in Texas. Before I left Austin I was paying more than $15,000 in property taxes a year for my 900 square foot home. The east side of Austin is where black people owned homes and businesses. Almost all of the black owners have sold to newcomers.

The State of Michigan limits the amount of revenue local governments can raise through property taxes in the current constitution. Two constitutional amendments passed by voters since then go even farther to protect long term property owners. They are called the Headlee Amendment of 1978 and Proposal A of 1994.

In areas where property values increase rapidly, long-term property owners pay significantly less property tax than new buyers. Property owners like it when the value of their property increases, but they don’t like it when their property tax increases. Property owners are also likely to vote, which means they attract the attention of legislators. This has led to laws protecting long time property owners.

Property tax rate caps have been in place since the current constitution was passed in 1963. A locality can annually charge 15 mils (1.5%) of the State Equalized Value (SEV) of a property without having to seek approval from voters. The SEV for any property equals 50% of the market value of the property. The market value is assessed by the local assessor and reviewed by the state. Voters in a locality can vote to increase this limit to 18 mils (1.8%) of the SEV. The total property tax in a locality must not exceed 50 mils (5%) of the SEV including all taxing authorities. This sounds straightforward, but many exemptions exist including for debt service and judgments. These push Highland Park’s rate to 88.9 mils or 8.9% of the SEV.

The Headlee Amendment to the State Constitution, requires that localities roll back their tax rates if property tax revenue exceeds the rate of inflation. For example if property tax revenue increased by 10% and inflation was only 5%, a city is required by law to reduce its tax rate to make the increase in revenue equal to inflation. It also requires rate increases or new taxes to be approved by voters. Finally it requires that if a tax base is broadened, by eliminating loopholes or exemptions for instance, that the tax rate must be reduced to produce the same revenue as the previous tax base.

Frustration among homeowners still facing tax increases greater than inflation led to Proposal A passing in 1994. Proposal A limits the annual growth of the taxable value of property to the lesser of 5% or the rate of consumer price inflation. For instance if a property’s value increased by 10% in a year and inflation rate was 2% in a given year, then the increase in taxable value of the property would be capped at 2%. If a property’s value increased by 10% and inflation rate was 7%, then the increase in taxable value of the property would be capped at 5%.

Because of Proposal A when property values start to go up in Highland Park, long-term property owners will have their taxable value capped. When a property is sold the taxable value is uncapped and returns to the SEV. This means new buyers pay more than long-term owners. If the total property tax revenue increases city-wide by more than the rate of inflation, the Headlee Amendment kicks in and lowers the tax rate the city can charge. The rate reduction affects all owners equally benefitting long-term owners and new buyers.

Even though property owners’ tax increases are limited they are not obliged to pass along that savings to renters. Renters will be the people most hurt by rising property values and inflation. Wages have not increased as rapidly as consumer prices since the 1970’s and even “the great resignation” of 2021-22 has not changed that according to recent economic reports. Wage increases have been more than offset by consumer price inflation.

The more we can support Highland Parkers buying property now the better off the owners will be when Highland Park property values increase in the future.