As has been explained in previous Digest articles, Michigan property taxes are, on their face, behaving a bit strangely right now. Despite home values being on the decline in many parts of the state, property tax bills are actually increasing. This is one of many side-effects of the state's decade-old cap on increases in a home's taxable value.
This phenomenon has led both to a good deal of dissatisfaction among Michiganders, and to a proposal by two Michigan legislators that is intended to fix this problem. But despite the claims of the bill's sponsors (and the uncritical acceptance of those claims by the media), their proposal would do much more than simply "make sure that if a home's market value decreases, the property's taxable value will not increase". To understand why, it's necessary to look deeper into the mechanics of how Michigan's fairly convoluted property tax cap works.
Under the existing cap, if in any given year a home's assessed (market) value increases by more than the inflation rate or 5% (whichever is lower), then the lower of those two alternative measures is used in calculating the amount by which the home's taxable value can increase in that year. In short, this limitation is meant to ensure that property tax bills never jump by "too much" as a result of a leap in housing prices.
Until recently, home prices have been increasing much faster than limits set by the cap, meaning that the taxable value of many homes has been suppressed to a level far below their actual market values. But with the recent housing downturn, taxable values under Michigan's capped system are now being allowed to catch-up with the actual values of residents' homes, despite declines in those actual values.
Effectively, the agreement established by this cap says that, "We won't increase your tax bills very much in any given year, but this means we may in some cases end up increasing them by a little bit every year, regardless of what's going on with your property's actual value". The bill proposed in Michigan, ostensibly designed to block tax increases when home values decrease, would actually eliminate the second half of this agreement entirely -- "catch-up" periods in which your taxable value increases by more than your assessed value did would no longer be allowed. Instead, taxable value can never increase by more than assessed value in any given year, and if assessed value decreases, so does taxable value, regardless of how far below assessed value it currently stands.
Aside from starving state and local coffers, ending the "catch-up" component of the cap would further divorce the Michigan property tax from being a tax on the actual value of property, as all attempts to align taxable and market values would come to an end.
Got all that? If not, it's probably not your fault. Assessment caps are a notoriously complicated and side-effect plagued type of property tax relief. What makes more sense, as a large number of states already recognize, is enacting a property tax circuit-breaker that gives property tax relief to those whose incomes are lowest relative to their tax bills. This can provide a much simpler, less expensive, and more progressive solution. Michigan already has a circuit-breaker, and if lawmakers are interested in reducing their constituents' property taxes, divvying out relief through that program would be much preferable.