Property Tax Reduction in Michigan

Property Tax Reduction in Michigan

Description

In the past few years, there have been numerous attempts to limit state and local government spending and taxes. The most famous of these, Proposition 13 in California, passed by an almost two-to-one margin and reduced property taxes about $7 billion. At the present time, limitations of one sort of another are in effect in sixteen states, seven of which apply specifically to property taxes. It is perhaps no coincidence that the most successful attempts to limit taxes have focused on the property tax. Widely recognized in opinion polls as the most unpopular tax in the land, the property tax fell into even greater disfavor in the 1970s. With residential property values increasing at a rate higher than the rate of inflation, property value assessment increases have become a matter of grave concern for many taxpayers. While these increases may have acted as catalysts for the proliferation of property tax relief plans in the 1970s, the public’s dissatisfaction with the property tax may run deeper. Is the public’s apparent desire for property tax relief related solely to the tax itself? Current evidence suggests an alternative point of view. The property tax serves as a useful outlet for individuals’ frustrations arising from a number of factors unrelated to the tax itself – declining real incomes, unemployment and so on. Why focus on the property tax? First, the tax is the primary source of revenue for local expenditures which provide services such as fire, police and education – services which directly affect individuals on a regular basis. Frustration about the quality of public services may be directed against the revenue source which finances those services – the property tax. Second, the tax is authorized through a series of referenda. In many communities these property tax-service referenda provide the only direct outlet through which individuals can express their preferences. Third, the tax is often paid up-front, in a few large payments, rather than being withheld from individual pay checks. Even the use of bank escrow accounts does not fully eliminate the effect caused by relatively direct payment of the tax. Is there anything special about Michigan that suggests it ought to be the focus of a tax-relief program? Unlike California, the Michigan state government has not used increases in assessed values to obtain higher taxes and a large government surplus. Increases in assessments have been slow relative to the recent California changes. And while property tax levies roughly doubled during the 1972 to 1979 period, the amount of state and local property taxes per $1,000 of state personal income steadily declined from $53 to $44, a 17 percent decrease. Examination of some national figures does not provide the answer to our question. A 1980 ACIR study reveals that in 1978 the amount of state and local property taxes paid per $1,000 of state personal income in Michigan was only 5 percent above the national average. Also, in Michigan in 1978, the property tax comprised 36.5 percent of all state and local taxes, while the national average was only slightly lower at 34.3 percent. Michigan taxes are higher than average, but not unusual in their magnitude. In fact, these figures are misleading, since they exclude the benefits from Michigan’s property tax relief, or circuit-breaker program, one of the most extensive programs of its kind in the country. In 1979 for example, benefits of the circuit-breaker in Michigan equalled 9.5 percent of all property tax collections (ACIR 1980). All of the evidence suggest that Michigan’s property tax system in not very different from that of other states. Why the apparent desire for tax reduction? Perhaps one answer lies in the residential portion of the property tax. Between 1971 and 1980 taxes on residential properties measure in current dollars rose about 2.5 times. And residential taxes per capita rose at a faster rate (150 percent) than average per capita personal income (133 percent). While these trends were moderated by the circuit-breaker system, the increase in two-earner households and in younger workers may cause our income per capita measure to overstate the growth of average homeowner income. Whatever the reason however, there is a clear sentiment among many citizens that property tax reductions would be desirable. For some this sentiment is based on the belief that cuts in government expenditures can be made with little or no loss in real output. For others, however, real cuts in expenditures are expected and are desirable. Our objective here is not to answer the questions of why or whether cuts are desired and whether they really make sense at this time. Rather, we will take as given that property tax reductions are to be made, and we will ask, what are the advantages and disadvantages of making cuts in a number of different ways. Before proceeding with the detailed analysis of alternative tax cut plans, some additional information will prove useful. In the next section we briefly review and characterize tax relief plans that have been in effect in other states, as well as the Michigan circuit-breaker. We will see that tax relief is not a new idea. Following this, in the third section, we begin the analytical portion of the chapter by discussing the set of criteria that one might use to evaluate property tax relief plans. Our focus will be on the distributional consequences of various plans, but other criteria are worthy of serious consideration as well. In the fourth section, we utilize data from a sample of 2,000 Michigan individuals in 1978 to analyze a set or reasonable tax reform plans. The fifth section describes the problem of program participation and how it can be improved, while the last section contains some concluding comments.

Source Publication

Michigan's Fiscal and Economic Structure

Source Editors/Authors

Harvey E. Brazer, Deborah S. Laren

Publication Date

1982

Property Tax Reduction in Michigan

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