Friday, March 13, 2009

Demands for Housing Assessments Up, and Municipalities Are Feeling a Pinch

I attended a very nice property tax workshop yesterday in the state capitol complex in Lansing. It covered the implications for all of us, including those in government who rely upon property tax revenues, of falling housing prices--especially in a state with plenty of other economic challenges.

The best thing about the day was that it helped me better understand a time-series diagram included in this excellent article from the Grand Rapids Press. The point of the article is that demand is up--way up--for housing reassessment. Given that housing values have fallen, lots of people are interested in having their property value reassessed in the hopes of having a lower property tax bill.

Here's the diagram:


Now let me tell you what the article does not, which will help the diagram make more sense. The red line that rises and then falls is straightforward: it represents an average home's assessed value (i.e., 50 percent of its market value). Of course, since housing-market values rose, peaked in 2006, and have been dropping since, the red line follows an identical pattern. And normally a house is assessed for its value only at the moment it is sold.

But once a home has changed hands, a homeowner's taxable value on that piece of property is not normally linked after that to housing prices. Instead, a homeowner's taxable value--and long as she does not sell--normally grows either at the growth rate of the consumer price index or at a rate of 5 percent, whichever of the two rates is smaller. And that's what the blue line represents. For example, if you purchased an average home in 1997 for a market value of roughly $230,000, then your taxable value at that moment would have been half of that: $115,000 (as depicted). And normally, if you kept your house, then the taxable value of your house over the period would have grown according to the blue line. Note that the red line would have been irrelevant to you since (1) you were holding onto the piece of property--not selling, and (2) the market value of your house was growing faster than your taxable value. You would have been happy to be taxed according to the blue line, and not the red one. This rule is driven in Michigan by something called Proposal A (1994).

Now here's where it gets interesting for government officials relying on property-tax revenue for their municipalities. By law, for any household, the red line cannot be lower than the blue line. More specifically, for any given home, its taxable value cannot be higher than 50 percent of its market value. So governments throughout Michigan are facing the very real possibility that their property tax revenues will drop for huge sections of the state, as dropping market values of homes force the taxable value of homes downward.

The two lines are especially close for counties in the greater Detroit area, and also for Kent (which includes Grand Rapids), Ottawa, and Muskegon counties on my side of the state. Which explains why the local assessors in the article are especially busy with reassessments.

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