In a Nutshell
- Michigan taxpayers have adopted two major property tax limitations – the Headlee Amendment in 1978 and the taxable value system created as part of Proposal A of 1994. One common refrain heard over the years has been that these two limitations work together to limit taxes even more than what was intended by either limitation alone.
- Our research found that during the precipitous drop in property values that accompanied the Great Recession, Proposal A’s assessment limit had a mitigating effect on the Headlee Amendment’s levy limit rather than a compounding effect. The two tax limitations together led to more revenue collection than just the Headlee Amendment limitation alone.
- However, the data show that the annual tax revenue growth rate post-recession is slower than it was pre-recession. We have created an unsustainable system where local governments cannot grow their property tax base without new development and this is leading to increased tax rates in many communities.
Michigan taxpayers have adopted multiple tax limitations over the years to keep the property tax burden from growing too great. This has helped taxpayers to plan for their property tax bills and limited the impact on their wallets. However, these limitations have also constrained the amount of property tax revenue collected by local units and this has impacted local budgets and the services provided. One common refrain heard from local officials over the years is that the two major property tax limitations – the 1978 Headlee Amendment and Proposal A of 1994 – have worked together to limit taxes even more than what was intended by either limitation alone.
The Citizens Research Council released a report earlier this year detailing Michigan’s overlapping property tax limitations and their impact on both local governments and taxpayers. While we did find that these overlapping limitations, as well as Michigan’s over-reliance on local property tax revenues, create an unsustainable municipal finance system, we also found that local governments were better off with the additional tax limitation instituted with Proposal A. The taxable value system created by Proposal A actually served to mitigate some of the revenue decline that would have been caused by Headlee Amendment tax rate rollbacks during and after the Great Recession.
The Headlee Amendment and Proposal A
While rate limitations were written into the Michigan Constitution when it was adopted in 1963, they did not restrain property taxes enough and voters adopted the Headlee Amendment in 1978. This did many things, including requiring direct voter approval for any new local taxes and instituting a property tax levy limit that requires a local government’s millage rate to be rolled back if revenue grows at a rate greater than inflation.
Since the Headlee Amendment levy limit is applied unit-wide, some individual property owners still experienced yearly growth in their tax bills greater than inflation. This contributed to the adoption of an assessment limit on property value growth for individual parcels of property with Proposal A of 1994. Beginning in 1995, the market-value based system of assessing property was replaced with a modified acquisition value system as the property tax base and increases for each parcel of property were constitutionally limited to five percent or the rate of inflation, whichever is less. When property is sold, the tax base reverts to market value and annual increases are capped again with the new owner.
Proposal A was superimposed on the current system with Headlee Amendment limitations. Transfers in property ownership cause taxable values to “pop up” to market value and those pop-ups can cause local governments’ revenue to grow faster than inflation and lead to Headlee tax rate rollbacks. This type of interaction is part of the reason why people think that Proposal A compounded the Headlee Amendment limitations.
Proposal A mitigates Headlee Amendment tax rate rollbacks
The two property tax limitations work to control taxes in very different ways. The Headlee Amendment limits unit-wide growth in the amount of taxes collected on existing property to the rate of inflation. Proposal A limits growth in the taxable value of individual parcels of property to the rate of inflation. One of the key questions we attempted to address in our recent report was: Is the combination of the two tax limitations together more restrictive to property tax revenue growth compared to the limits imposed by each individually?
Surprisingly, we found that the answer to that question is no, or, at least, not in all circumstances. We analyzed property tax data from 41 local governments across Michigan from 1994 to 2020 to model how the tax limitations interacted retrospectively. In order to focus on the limitations, we held policy preferences (i.e., changes in the tax rate) constant and applied the 1993 authorized tax rate to every scenario. We ran the numbers under three different hypothetical scenarios:
- No tax limitations scenario based on market value and a 1993 millage rate with no limitations
- Headlee Amendment scenario with the Headlee limitations alone impacting property taxes based on a 1993 millage rate and tax rate adjustments calculated on market value
- Headlee Amendment and Proposal A scenario reflecting current law with levy and assessment limits based on the 1993 millage rate and tax rate adjustments as calculated on taxable value
While the scenario with no limitations always leads to significantly more revenue collected, it is provided simply as an upper bound to show what would happen to property tax revenues with no limitations to moderate their growth. What we were really interested in was how the different tax limitations impacted revenue growth. In almost all cases, we found that the scenario with the combination of the Headlee Amendment and Proposal A tax limitations yields more revenue in recent years than the scenario with just the Headlee Amendment restrictions.
Property Tax Scenarios in Cambridge Township (Lenawee County), 1994 to 2020
Source: Michigan Department of Treasury, SEV and TV data from reports L-4028 and L-4029 and Ad Valorem Tax Levy Reports
The chart above highlights revenue growth in the three different scenarios in one community. The combination of the two limitations together led to more revenue growth than just the Headlee Amendment limitation alone in most communities included in the study because of the Great Recession and its steep property value declines.
Prior to the Great Recession, property values were growing quickly. Without Proposal A to limit taxable value growth for individual parcels of property, values were growing with the market and this was leading to big tax rate rollbacks caused by Headlee’s levy limit. Proposal A lessened the tax rate rollbacks because they were calculated based on taxable value, which grew more slowly than market value. The chart below shows the difference in tax rate rollbacks in Oakland Township when they are calculated based on taxable value (both limitations – tan line) compared to when they are calculated based on market value (just Headlee limitation – teal line).
Hypothetical Tax Rate in Oakland Township based on 1993 Millage Rate and Tax Rate Adjustments, 1994 to 2020
Source: Michigan Department of Treasury, SEV and TV data from reports L-4028 and L-4029 and Ad Valorem Tax Levy reports
In addition to the lessened tax rate rollbacks, the institution of Proposal A created a growing gap between taxable value and market value. While this gap appeared to be made up of lost tax base, it was actually a reservoir of taxable value that could be, and was, tapped into when property values declined with the Great Recession. In other words, when market values started declining, local units of government could still see tax revenue growth because taxable value was so far below market value that it was still increasing in many communities. In addition, the slow growth of taxable value allowed local governments to keep their tax rates higher.
With the length and depth of the Great Recession, the lessened tax rate rollbacks and reservoir of taxable value enabled the additional tax limitation instituted by Proposal A to have a mitigating effect on the Headlee Amendment rather than a compounding effect.
Great Recession was a turning point
It is important to note that without the Great Recession and the property value declines that occurred during it, the numbers might look very different. In most scenarios, the projected revenues were very similar no matter the limitation prior to the Great Recession. This varied by community, but the Great Recession and its precipitous drop in property values led to the Headlee Amendment restrictions being particularly severe. Again, this is because property values were growing significantly before the recession causing millage rates to be rolled back so that local governments were collecting tax revenues at much lower rates during and after the recession. Within this system, the end of tax rate rollups enacted in 1993 had the strongest influence on limiting taxes.
The Great Recession was a unique situation and the only recession in recent history that saw severe property value declines. While it could not have been predicted when Proposal A was adopted in 1994, Proposal A did serve to mitigate some of the effects of the recession on property values and tax revenues. That being said, future tax policy should not be based on rare events.
Moving forward: post-recession revenue growth is slow
The data show that the annual tax revenue growth rate post-recession is slower than it was pre-recession. The relationship between the appreciation of property values and tax revenues is diminishing. We have created a system where local governments cannot grow their property tax base without new development and this is leading to increased tax rates in many communities. This is not sustainable.
If you would like more information on how the property tax system is unsustainable or, specifically, how Proposal A mitigated the impact of the Headlee limitations, please see our full report, podcast, and/or webinar on this topic.
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