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
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
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.
A good rule of thumb is that for every $1,000 in taxable value change there is
about a $42 increase in annual property taxes for a homestead property,
depending on the school district to which it pays taxes.
UNCAPPING THE TAXABLE VALUE
Another important provision of Proposal A is the concept of "uncapping
the taxable value." The spread 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.
