As Michigan local governments begin to think about next year’s budgets, there is significant uncertainty regarding revenues:
- The housing market continues to be weak, which leads to lower property values and lower assessed values.
- The State’s revenue sharing program remains uncertain as the state grapples with its own financial troubles.
- Interest rates are at historically low levels, so investment income is now just a fraction of what it used to be.
- Development-related income from building permits, land sales and zoning requests, is also significantly lower than in years past
- Limits on taxable value growth, established with the passage of Proposal A in 1994, remain constrained.
This last bullet is of particular interest, since it is what drives the allowable tax revenues from property owners. Under Proposal A, taxable value is allowed to increase at the rate of inflation, or 5%, whichever is lower. Last year, Michigan property owners saw a decrease in taxable value, since the Proposal A inflation factor was calculated to be a negative 0.3%. This year, the rate of inflation is expected to be 1.7%, which means for all parcels of property not already “capped” at the property’s assessed value, the taxable value will increase 1.7%. As illustrated in the chart below, during the 15-year history of Proposal A, the inflation rate has fluctuated between -0.3% and 4.4%, with an average of 2.5% per year.
In a time of seriously constricted revenues, any increase in taxable value is a relief for most local governments. However, due to the repeated decreases in assessed value for many communities in the past 3 years, the 1.7% increase will likely translate into less than a 1% increase in total taxable value.
Knowing the inflation factor for next year’s taxable values lends some certainty to the budget process, but once again, the numbers suggest another difficult budget year for Michigan’s local governments.