Proposal A was a dramatic ballot initiative passed by the voters of the State of Michigan on March 15, 1994. Prior to the application of Proposal A for the first time in the assessment year of 1994, the method of calculating a property tax levy was to multiply the state equalized value by the authorized millage rate. Proposal A significantly changed the administration process for assessments while preserving the traditional method of calculating assessed values. In contrast to prior practice, tax billings are now computed by means of multiplying the taxable value by the authorized millage rate. In addition, Proposal A changed the school funding process, which is now funded by the State, primarily from an increase in the general sales tax from 4% to 6%. The result of Proposal A was a typical reduction in overall property taxes paid, but with the concession of a 50% increase in sales tax paid on consumer goods and services.
Capped Value is a new term that was introduced with the inception of Proposal A. Capped Value is computed as: (the prior year's Taxable Value - losses) x (the lower of 1.05 or the Consumer Price Index factor) + additions. The CPI factor is synonymous with the rate of inflation and is determined by the Michigan State Tax Commission for use by all assessing departments in the state. The result of the formula is that Proposal A limits the capped value from increasing by more than the lesser of 5% or the rate of inflation, unless an addition to value has been added or there has been a transfer of ownership in the preceding calendar year.
Taxable Value is also a new term that was introduced with the inception of Proposal A. Taxable value, for a given year, is the lower of that year's State Equalized Value or that year's capped value (see above). The essential significance of this is that a Taxable Value generally may not increase by more than 5% in a given year. Of the three valuation numbers listed in this section the Taxable Value is the number which is of key interest to residents and property owners in the sense that it generally means that a property tax bill will increase only by the rate of inflation, all else being equal. Since many fixed incomes (e.g., Social Security or certain pensions) are indexed to the CPI as well, nominally the resident pays more property taxes than last year, but in real terms pays no more than the prior year's tax bill.
Uncapping the taxable value
Another important provision of Proposal A is the concept of "uncapping the taxable value." The gap between the Assessed Value and Taxable Value may increase substantially over time, particularly with economic conditions of low inflation and strong real estate sales. In the case of a property that has sold, in the assessment year following the transfer of ownership, the Taxable Value and the Assessed Value are set to the same number. It is entirely possible for a situation to exist where identical houses on the same street may have dramatically different tax bills, resulting from one house having been recently sold and one which has not been recently sold. The impact of this provision increases over time.