The most common question of the Assessor's Office since the passage of Proposal A in 1994 is: "What will the property taxes be on a property in the year following the purchase?" In most states, this is a question easily answered. But in Michigan, this is a question that is seldom answered before the beginning of the new tax year.

In 1994, the voters of Michigan passed a referendum commonly known as Proposal A. Proposal A originated as a reformation of K-12 education funding but has become more renown for the provision in the enacted law that allows for the "uncapping" of a property's taxable value in the year following a transfer. The following information helps explain this particular provision and its impact on the new property owner.

Background Information

Every property in the state of Michigan has three values calculated for it. The first is the assessed value, which is the value calculated by the assessor, and then through the equalization process transforms into what is commonly referred to as the SEV (State Equalized Value). The second is the capped value, and the third is the taxable value. The two values that will be focused on here are the assessed and taxable values.
   

Assessed Value

The assessed value is equal to 50% of the property's true cash value as determined on December 31 of the previous tax year. An example of this is if a property's true cash value calculation is $70,000 based on its December 31, 2015, status, the assessed value for 2016 would be $35,000 (50% of true cash value). That calculation formula is easy because it is the same for all parcels and there is no "cap in value" to deal with for the assessed value.

Taxable Value

The taxable value calculation has variables that do not make it the same for all properties. In cases where a property has not experienced a transfer of ownership in the previous year, the taxable value will be determined by:

1. Taking the previous year's taxable value
2. Subtracting any property loss that may have occurred (demolition)
3. Multiplying the result of Nos. 1-2 (above) by the Consumer Price Index (CPI) as established annually by the Michigan State Tax Commission
4. Adding any new value (new construction) that may have occurred in the previous year

That sounds complicated, and in some instances can be, but the majority of properties will calculate using the simple formula that does not have any new value or less of value. The following is an example of a typical annual taxable value calculation:

$35,000 = 2015 Taxable Value
No property loss
No new construction
CPI
x 1.3%
$35,105 = 2016 Taxable Value

This capped taxable value formula is a guaranteed protection the voters of Michigan gave themselves to ensure that their taxable values from one year to the next could not increase by more than the CPI, or 5%, whichever was less, as long as they were the owners of the property (and nothing had changed in the physical status of their property such as new construction). The taxpayers in Michigan need look no further than across the border to their neighbors in Wisconsin, whose tax system does not include this "capped" formula protection, to realize how fortunate they truly are.

How Michigan Compares

In Wisconsin, if the true cash value of a property is $70,000, the owner pays the taxes on $70,000. If the value of the property increases by 10% (in this example, $7,000) then the next year the owner begins paying taxes on a property worth $77,000. That same value scenario for a property located in Michigan would have resulted in an increase that is capped by the previously mentioned formula for the taxable value (1.03% increase for 2016) versus the 10% increase under Wisconsin tax laws.