Property tax hole spurs Proposal A reform push

Jonathan Oosting
The Detroit News
Edward Klobucher, city manager of Hazel Park, talks in his office about how Proposal A has affected property taxes in Hazel Park.

Lansing — Michigan emerged from the Great Recession a decade ago, but many cash-strapped communities still face financial threats because of property tax laws that have prevented them from fully benefiting from the economic rebound.

Local governments rely on property tax revenue to provide essential services and maintain infrastructure, but taxable property values dropped precipitously during the Great Recession and remain below 2008 levels in more than 700 cities, townships and villages, according to Michigan Treasury data reviewed by The Detroit News.

Part of the issue, experts say, is Proposal A of 1994 capped annual growth in taxable property values at the rate of inflation or 5 percent, whichever is less, to protect property owners from runaway tax increases during a boom economy.

“Nobody — nobody — was thinking about what would happen to local units of government if the property tax values were to collapse,” said Gary Wolfram, a free-market economist and Hillsdale College professor. “And that was never corrected.”

Proposal A also ended millage rate "roll-ups," increases that had been allowed for communities with property values growing slower than inflation. The result has been a "disaster" and created "unintended negative consequences that are sh------ all over local governments," said Hazel Park City Manager Ed Klobucher. 

As of 2017, taxable values in the Oakland County community remained 48 percent below their 2008 level despite increasing market values.

After years of calls for reform, there are emerging signs that Michigan lawmakers could consider a course correction this year.

“I think we have evidence to suggest that Proposal A has performed marvelously for its one intent of holding back the runaway increases in property taxes,” Senate Majority Leader Mike Shirkey, R-Clarklake, recently told reporters. “But when it was passed, nobody anticipated 10 years or more of regressive degradation of property values, and the effect that has had, I think, is measurable.”

Reviewing Proposal A does not mean the Legislature will change it, Shirkey made clear, “but I think we have an obligation. It’s called oversight.” He has not offered a plan. 

Some Democratic lawmakers are also interested in reviewing Proposal A as they push for changes to the state's school funding system that was also overhauled by the 1994 initiative.

“It was flawed then, and I think it’s still flawed,” said Senate Minority Leader Jim Ananich, D-Flint, noting he voted against the proposal. “I don’t have the answer of what it is we should be doing, but I know we’ve created a situation where our schools are continually under-funded ... and our cities are struggling to make it.”

Proposal A raised the state sales tax rate from 4 percent to 6 percent and created a new state education tax to support schools, which had been funded primarily through local property tax revenues until legislative repeal in 1993. It also authorized charter schools and created "schools of choice." Voters were promised more evenly funded schools and lower property taxes.

“And then, you know, the Great Recession comes along,” Wolfram said.

Taxable value losses

As of 2017, taxable property values in Detroit remained $3.7 billion below 2008 levels, according to Treasury Department data. Values were down $1.3 billion in Warren, $1.3 billion in Southfield, $1.2 billion in Dearborn, $1.2 billion in Farmington Hills, $1.1 billion in Livonia and $1 billion in Sterling Heights.

Industrial communities in Metro Detroit were hit the hardest on a per-dollar basis, but other parts of the state were not spared. Taxable values in 2017 remained 59 percent below 2008 levels in Hillsdale County’s Fayette Township and 58 percent below pre-recession levels in Tuscola County’s Indianfields Township.

“We had some communities lose more than 50 percent of their taxable value,” said Tony Minghine, deputy executive director of the Michigan Municipal League. “And now (growth) is limited by inflation or 5 percent, so you never get back to where you were.”

Under Proposal A, the taxable value of a property parcel resets once it is sold to roughly half the property's cash value. But the separate Headlee Amendment of 1978 forces local millage rates to automatically roll back when taxable values increase.

For many longtime owners, property taxes are significantly lower today than they would be if not for the Great Recession, but the loss in taxable values and resulting collections "created a very dire situation for local units of government," Klobucher said. 

Hazel Park generated about $5.5 million in property tax revenues in 2018, down from $7.7 million in 2010. The city cut costs and staff but avoided more drastic action — or state emergency management — because local voters approved three separate millage increases between 2011 and 2015, Klobucher said. 

"The expenses that are causing pressure for cities are expenses that are usually rising faster than the rate of inflation — especially pension costs, health care and repairing aging infrastructure," he said. 

Plummeting property values contributed to a financial crisis in Ecorse, which the state took over from 2009 to 2017. As of 2017, taxable values in the Wayne County community remained 61 percent lower than 2008 but are beginning to rebound, said city Assessor Gary Evanko.

“When the tax base shrunk pursuant to the financial meltdown, every community was grasping for whatever they could do to keep the door open and keep employees on the payroll,” Evanko told The News.

Former emergency manager Joyce Parker spearheaded millage increases and a special assessment to general new revenue, but the resulting rates “could be considered burdensome for the taxpayers,” he said.

Statewide, total taxable property values fell from $363 billion in 2008 to $316 billion in 2012 but had climbed back to $327 billion by 2016, according to Treasury. Growth is limited by 5 percent per year, unless a property is sold, at which point its actual assessed value becomes the new base for tax purposes. 

In some communities, inflation-adjusted taxable values are lower than they were in 2000, posing "a significant risk to their fiscal health," Treasury said in a fall 2018 report.

Property taxes are the "800-pound gorilla" for local governments and their primary funding source, Deputy Treasurer Jeff Guilfoyle told lawmakers this week. Statewide property tax collections peaked at $14.2 billion in 2008, dropped during the 2008 housing market crash and were at $14 billion as of 2018. Adjusted for inflation, collections remain down about $1.5 billion, according to Treasury.

State restrictions "keep your property taxes from growing," but "that has put significant pressure on local governments," Guilfoyle said before the House Tax Policy Committee.

Because Headlee does not restrict property tax growth from new construction, it has a lesser impact on suburban communities with vacant land for housing subdivisions, he noted. The effect is more severe in older communities that are fully built out.

Taxable property values in Ann Arbor climbed by $597 million between 2008 and 2017, a 12 percent increase, according to Treasury. Values in Huron County’s Chandler Township are up 384 percent, or $126 million.

But for other municipalities, the sharp reduction in taxable property values during the Great Recession was magnified by then-Gov. Jennifer Granholm's cuts to state revenue sharing payments, which are another primary source of funding for local governments. Twenty-three cities, including Detroit, also levy a local income tax.

As of 2016, state revenue sharing payments were 20 percent below their high water mark of 2002, according to the Michigan Treasury.

It was a "double whammy" for Hazel Park, Klobucher said.

"We cut as much as we could until we couldn’t cut anymore. ... We have far fewer employees now in 2019 than when I took over in 2002," he said. "There’s only so much you can cut and still be able to provide services.”

Potential reforms

Lawmakers should approach Proposal A reform talks with caution and prioritize spending reforms over tax increases, said Michael LaFaive, senior director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy.

“There’s another side to the local government coin, and that’s the local citizen,” he said. Prior to passage of Proposal A, “I recall very distinctly the outcry over property tax hikes that seemed to cause people to put their homes up for sale simply because they couldn’t afford it anymore.”

Michigan officials could improve Proposal A by allowing property tax values to fully rebound in the aftermath of a decline while retaining the cap in growth years, Wolfram said.

“That’s what I would do, but it’s unfortunate that it’s in the Constitution, because it makes it a little bit harder,” he added. Revising the law itself would require voter approval.

Minghine said lawmakers could amend Proposal A or Headlee implementation laws without the need for another statewide vote in a way that would "stay true to the intent of voters" who wanted to prevent runaway property tax growth.

Lawmakers could exclude from Headlee calculations the "popped up value" that occurs when a property is sold, which would allow those gains to "benefit your community so they could provide services, parks and infrastructure," he said.

Lawmakers could also allow Headlee millage rates to both roll up and down, Minghine suggested. "This wouldn't change anyone's taxes today, but in another recession, and you see values growing at less than the rate of inflation, your millage rate could go back up to negate that."

“There are just a couple minor fixes that would absolutely provide a different recession protection and allow us to really track with the economy in a much more realistic way,” he said. “I think any tax system at any state in the country has to do that, or it won’t work. And we’ve built one that doesn’t do that.”