Significant confusion exists about why, in a decling real estate market, property owners do not see a corresponding decrease in their property taxes when the value of their house has decreased. 

 

Proposal A

On March 15, 1994, Michigan voters approved the constitutional amendment known as Proposal A.  Proposal A was designed to limit the growth in property taxes by the Consumer Price Index (CPI) until ownership in the property was transferred. 

 

How It Works

Prior to Proposal A, property taxes were based upon State Equalized Value (SEV).  With the implementation of Proposal A, property taxes are now based upon Taxable Value.

Each year, the Assessing Division must calculate the SEV for every property based upon the time frame as outlined by the State Tax Commission.  A property's taxable status is determined as of December 31, which is called Tax Day.  Additionally, each property has a Capped Value.  Capped Value is calculated by multiplying the prior year's Taxable Value with adjustments for additions and losses by the Consumers Price Index (CPI) as calculated by the State Tax Commission and cannot increase by more than 5%.  For 2010 the CPI has been calculated by the State Tax Commission at -0.3%.  

Taxable value (TV), which property taxes are based on, is defined as the lower of State Equalized Value or Capped Value.  Generally speaking, this means that unless the current year SEV is less than the previous year Taxable Value multiplied by the CPI, the Taxable Value for the current year will increase by the CPI. 

 

Actual Sale Price is not True Cash Value

The law defines True Cash Value as the usual selling price of a property.  The Legislature and the Courts have very clearly stated that the actual selling price of a property is not the controlling factor in the True Cash Value or State Equalization Value as calculated by the Assessor.  For this reason, when analyzing sales for the purpose of determining assessment changes, the Assessing Office will review all sales but exclude non-representative sales from the assessment analysis. 

 

Foreclosure Sales

Inherent in the definition of usual selling price is the assumption that the sale does not involve any element of distress from either party.  The State Tax Commission has issued guidelines concerning foreclosure sales and, generally speaking, these guidelines preclude the Assessor from considering foreclosure sales when calculating values for assessment purposes. 

For this reason, all distressed sales, such as sales involving mortgage foreclosures or sales involving transfers to or from relocation companies, are not considered as typical sales in the valuation of property for assessment purposes nor are they reliable indicators of value when making market comparisons for current assessed values or appeals. 

 

Transfers of Ownerships and Uncapping of Assessments

According to Proposal A, when a property (or interest in a property) is transferred, the following year's SEV becomes that year's Taxable Value.  In other words, if you purchased a property in 2008, the Taxable Value for 2009 will be the same as the 2009 SEV.  The Taxable Value will then be "capped" again in the second year following the transfer of ownership. It is important to note that a property does not uncap to the selling price but to the SEV in the year following the transfer of ownership. 

 

Principal Residence Exemption

If you own and occupy your home as your principal residence, it may be exempt from a portion of local school operating taxes.  If the percentage exempt as "Principal Residence" is 0% on your assessment notice and you wish to claim an exemption for the current year, a Principal Residence Exemption Affidavit must be filed with the City Assessor prior to May 1. 

Furthermore, if you currently have a Principal Residence exemption on your property and you no longer own and occupy the property as your primary residence, you must rescind the Principal Residence Eemption with the City Assessor.

 

How can I expect my assessment to change in 2010?

In accordance with State Tax Commission guidelines, a single year sales/assessment ratio study has analysed property sales that have taken place from  October 1, 2008   to September 30, 2009. Based on market activity in the 2010 assessment cycle, the majority of residential SEV's in the City of Petoskey will be reduced for 2010.  Due to the very limited sales data in so many neighborhoods, assessment adjustments will be based on market activity in the surrounding areas, general market or remain unchanged until market levels can be determined.  Without sufficient sales to make proper calculations, you may find that your 2010 assessment may not decrease as much as you would believe it should. 

 

How can my Taxable Value go up when my SEV goes down?

For the first decade or more after the passage of Proposal A, most property owners experienced significant and sometimes double-digit "property value" increases while their actual property taxes would increase by between 1 percent and 3 percent (rate of inflation as calculated). In fact, a Department of Treasury analysis shows that since Proposal A went into effect in 1995, home values in Michigan have increased 98.4 percent, while property taxes have only increased 42.9 percent.

Unfortunately, due to various economic factors, the opposite has occurred over the last several years and will occur again in 2009. Property values may be declining (or remaining flat) while property taxes for many taxpayers will increase by 4.4 % (as long as a property's taxable value does not exceed its state equalized value) as mandated by Proposal A.

Even with a decrease in SEV for 2009, if there is still a gap between SEV and Taxable Value and the 2009 SEV is greater than the Taxable Value in the previous year, the Taxable Value will increase to the limit of the CPI cap.  If, however, the 2009 SEV is lower than the calculation of last year's Taxable Value multiplied by the CPI, then the 2009 Taxable Value will be the same as the 2009 SEV.