How should we fix the Pop-up Tax?
By Michael J. LeVan
G.P.B.R. – Government Affairs Chairman
M.A.R. – Public Policy Committee
There is no doubt that the lackluster Michigan economy has had a negative effect on home values in Michigan. But what about the Pop-up Tax, how has that impacted house prices?
Homes, like cars, are now purchased based upon monthly payment, not total price. When a buyer meets with a mortgage lender, they determine what the buyer can spend per month on housing expenses (that is principal, interest, taxes and insurance.) The total loan amount, and hence the purchase price that they can pay, is merely a by-product of the interest rate and the monthly payment that they can afford. Since real estate taxes are a component of that monthly payment, any increase in taxes reduces the amount available to pay interest and principle. This reduction in the amount available for the mortgage payment means a smaller loan amount, which in turn reduces the amount that a buyer can pay for a home. A $300 monthly tax increase reduces a buyer’s purchasing power by $50,000! That means buyers get less house for the money and sellers get less for their homes.
Where does all of that extra tax money go? From the Government’s point of view, the answer is nowhere. As a new homeowner, the Pop-up Tax will subtract thousands of extra dollars from your wallet, but won’t add a penny to the budgets of your city, county or state. With the small exception of a few extra dollars to the Michigan Education Fund, the rest of those dollars are “washed away.” In fact, your hefty tax increase actually acts as a subsidy to lower the increases of your neighbors’ property taxes.
While this was certainly not the intent of the legislature, it is a fact in scores of Michigan communities whose tax revenues are capped by the Headlee Amendment.
The Headlee Amendment requires that a Municipality’s total tax revenues from existing properties may only increase at a rate equal to the increase in the Consumer Price Index. Since under Proposal A, the Taxable Value of all existing homes, and hence each homes tax bill, is already adjusted for inflation in the same manner, the extra taxes collected on the homes that changed ownership create an excess. The Headlee Amendment requires the municipality to eliminate the excess created by the “Pop-up Tax” by rolling back their overall millage rate. Thus, the large extra taxes paid by a few new homeowners effectively create tiny rebates for all of the other property owners.
Since this was clearly not the intent of Proposal A, how do we fix this mess? The answer is surprisingly simple and significantly more fair than the existing system. It is also revenue neutral and maintains the current cap for those who chose not to move.
Because property values appreciate at different rates in different areas, each community has a different ratio of total taxable value (TXV) to total State Equalized Value (SEV). Rather than bring all sold properties up to the maximum ratio of 100% of SEV, the objective should be to bring everyone to the average ratio of all sales in that community that year. Thus at the time of sale, homes that have been taxed at below market levels will increase to the average and homes that have been taxed at higher levels will experience a decrease to the average. If you choose not to sell your home, you will continue to enjoy the benefits of an inflation rate cap on your Taxable Value.
This ratio is simple to calculate and would be available from your local assessor. The ratio of TXV to SEV in the Grosse Pointe Park last year, for example, was 70.1%. Thus, if you purchased a new house there last year, your Taxable Value would be set at 70.1% of the current SEV rather than 100% as is currently the case. This would result in an average tax savings of 30% to the new homebuyer with no decrease in funds available to the City, County or State.
This method is fair to both buyers and seller. It continues to protect existing homeowners. Over time, it brings everyone toward the middle, rather than polarizing tax bills at the high and low end. It does not discourage home sales. It will actually raise transfer tax revenues to the county and state by re-energizing the real estate market. And, lastly, it is revenue neutral.