Arbor Update

Ann Arbor Area Community News

Proposal A comes home to roost

4. February 2007 • Murph
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What seemed like a good idea in 1994 is becoming more and more visibly a fiasco. Proposal A was widely adored at the time of passage for using an increased sales tax to fund schools while providing tax breaks to homeowners. With both municipal and school budgets now relying significantly on the sales tax, the drastic drop in sales tax revenues that comes from economic downturns is threatening a death spiral of faltering schools and cities reinforcing Michigan’s economic crisis.

  • The Michigan Suburbs Alliances explains the state revenue sharing formula (pdf), based on the sales tax, and the impact of its downward trend.
  • The Freep notes that, in a down housing market, property values and sale prices are falling – but the cap on taxable value increase over the past 12 years means that tax bills are still rising from their artificial lows of the past decade – and the “pop-up” that happens at sale can discourage buyers.
  • The A2News reports that school officials across the State are panicking at the service cuts the expected $224/student revenue shortfall would force.
  • As has been previously discussed on this site, Proposal A is insidious in transferring property tax burden onto homeowners in the long term – the taxable value of corporate property is effectively capped forever, while private homes “pop up” on average every five years.

With the hangover from yesterday’s feel-good anti-tax measures upon us, perhaps we as a State can move past the fallacy of bleeding our way to health and work on real solutions. Or, perhaps not.

  1. Whether or not anything significant will be done depends on the Republicans who control the State Senate.

    Granholm is preparing to take fairly drastic measures to improve the state’s financial picture.

    According to today’s AA News, she will be starting to commute the sentences of prisoners no longer a threat to public safety to save money.

    For tax reform involving the schools, we must wait until her Thursday budget message. She is expected to call for higher taxes “in part to avert a $377 million cut in K-12 funding yet this school year.”

       —David Cahill    Feb. 4 '07 - 11:12PM    #
  2. This is the single dumbest tax law I’ve ever heard about. Kestenbaum had to (god bless ‘im) explain how Prop A worked three or four times before I understood not only how it worked, but what the idealized purpose to the law was.

    This “Pop Up” that Murph refers to basically says “if you are a new resident/business owner in Michigan, you’re going to pay the taxes for the rest of us”. Brilliant plan for getting new businesses to move here.

    The only thing that’s missing is ‘hazing’ for new business owners:

    “OK, Google, you can set up shop here, but only if your CEO can drop this bing-cherry in the martini glass that’s across the room using nothing but your butt-cheeks. Oh, and here’s the tax bill for my home. I insist that you pay it for me. Thanks, and good luck with the cherry.”

    This ingenious law assumes that there’s going to be enough new business/homeowners to pay the reduced taxes of those who stay put. This might work in a State like California (although it would still be absurdly unfair), but geez, why would you install this tax scam in a State that has struggled mightily to attract new businesses and talented residents?

       —todd    Feb. 5 '07 - 12:16AM    #
  3. Prop A was the brainchild of “His Grimness” former Governor Engler. What do you expect?

       —David Cahill    Feb. 5 '07 - 12:51AM    #
  4. Kestenbaum had to (god bless ‘im) explain how Prop A worked three or four times before I understood not only how it worked, but what the idealized purpose to the law was.

    I still don’t totally understand! What is the purpose? Hurt renters and poor people by implementing a regressive sales tax to compensate for property tax?

       —ann arbor is overrated    Feb. 5 '07 - 01:43AM    #
  5. AAIO: “I still don’t totally understand! What is the purpose? “

    Operator: “Larry Kestenbaum. Mr. Larry Kestenbaum. Please pick up the nearest white paging phone. Larry Kestenbaum. Mr. Larry Kestenbaum. Thank you.”

       —todd    Feb. 5 '07 - 01:59AM    #
  6. I’ve never understood the rationale behind a cap on residential property taxes. In terms of fairness, why should current residents pay less than future residents, when they will continue to benefit from the same city services?

    Worse, all lowering taxes accomplishes in desirable areas is increasing property values, because people can afford bigger mortgage payments. It’s a formula for an upward death spiral whereby fewer and fewer services can be funded (because of low tax revenue) and property values continually rise, leaving people less money when (inevitably) there’s a crisis and people are later asked to pay more taxes. The only ones who win are the mortgage companies and the people who are cashing out of the market completely.

       —Anna    Feb. 5 '07 - 03:56AM    #
  7. Actually, Debbie Stabenow was a leader in the state Senate at the time of Prop A and was one of its champtions.

       —JennyD    Feb. 5 '07 - 03:58AM    #
  8. Not only are sales taxes regressive, but for the most part are either not deductable or hard to deduct from one’s Federal Taxes. Property taxes are easy to deduct if one itemizes. However, I do see one good thing coming out of this and that is the State is looking at its boneheaded policy of locking people up in prison and throwing away the key. The freep reports that Michigan houses about 20% more prisioners than surrounding states.
    I hope Granholm gives the $2 Billion Prision Industrial Complex a good kick in the ass.

       —Chuck L.    Feb. 5 '07 - 05:14AM    #
  9. Todd/AAIO: I hear you. I’ll get to this thread tomorrow.

       —Larry Kestenbaum    Feb. 5 '07 - 06:11AM    #
  10. In hindsight, it’s easy to criticize Prop A. But I don’t think it’s all bad as some people are portraying it.

    Before Prop A, public school funding was accomplished almost entirely by local property taxes. If you lived in a wealthy school district or where the tax base was growing rapidly, you could enjoy a well-funded public education. But if you lived in an urban or rural district, you faced both high taxes and low school funding because you could rarely generate enough funds to pay for schools from a much more modest tax base. The schools in rural Kalkaska were the poster child for this broken model of school funding when they shut down 10 weeks early in 1993 because they simply ran out of money.

    When Propsal A was passed, it was presented nationally as an innovative method for school financing. No longer would financing for local schools be left to the whim of local voters and to the differences in local tax bases. Instead, all districts would get a guaranteed level of funding per student from the state. This was accomplished by levying a statewide tax of 6 mills on all properties and an additional 18 mills on non-homestead properties (second homes and rental, commercial and industrial properties). The state sales tax was also increased from 4% to 6%. All of these funds were dedicated to funding public schools. One of the promises of Proposal A that has been realized is that it reduced the gap between the districts with the highest funding per student and the lowest. Many districts at the low-end enjoy much better and more stable funding from Proposal A than they did under the old system. This also ended the almost constant stream of millage requests that districts were forced to seek from voters, especially in rapidly growing districts. As in most things, the needs of the growing suburbs dictated much of the policy discussion.

    Proposal A also promised and delivered a huge tax cut for property owners, both homestead and non-homestead. Before Proposal A, the average taxpayer was paying around 34 mills just in school property taxes. The shift to a blended funding of property taxes and sales taxes brought a reduction of anywhere from 10 to 28 mills (difference between non-homestead and homestead). So even businesses paying 24 mills are much better off in that regard than they were in 1994.

    As for the issue of capping taxable value, clearly it’s created problems over time, especially with the business properties (which is a result of the implementation of Proposal A – the proposal itself didn’t mandate that outcome). But keep in mind that in high-growth communities, the ever-increasing property assessments hit those on fixed incomes (seniors and the disabled) or with large land holdings (farmers) the hardest. Skyrocketing property values drove up assessments and with them taxes. That process was great for local school funding but for those on fixed incomes, it meant more of their money was going to pay taxes. In high-growth communities, it wasn’t (and isn’t) unusual to see double-digit jumps in assessed value. Now imaging trying to pay property taxes when such leaps occur when you’re on a fixed income.

    There’s no doubt that little old ladies haven’t been the primary beneficiaries of capping taxable value (one could argue they’ve been hurt because they have a harder time selling due to the ‘pop-up’ impact on potential home buyers) but it was one of the “benefits” of Proposal A and it’s hard to argue that it didn’t deliver what it promised. I think everyone was well aware of the disparity that was going to occur because it had already been documented in California following the passage of Prop. 13.

    In 1994, the voters were clearly tired of high school taxes, the constant requests for school millages, the disparity in school funding and they were willing to take a chance on something other than the status quo. I would say that in concept, Proposal A is probably better than what we had. But I also think there’s way it needs to be reformed and right now, its flaws are having a harmful effect on our schools and local governments.

       —John Q.    Feb. 5 '07 - 09:26AM    #
  11. Wow, so to keep incumbents in, renters are forced to pay their landlords’ taxes at over double the mill rate. If you think about who rents: people without the means to buy and people who are disabled or elderly and can’t care for a house, it seems to me to be even more grossly unjust. Homeowners can already deduct local taxes and interest from their federal tax bills, making it an even bigger relative burden on renters.

       —Anna    Feb. 5 '07 - 06:00PM    #
  12. As to school operating millage, most renters pay four times the homeowner rate: 24 mills versus six. That’s pretty steep (and awful public policy, agreed), but it’s only a portion of the total property tax bill. And the differential is less in Ann Arbor due to “interim” measures to protect well-funded districts from an abrupt cut down to the state average.

       —Larry Kestenbaum    Feb. 5 '07 - 07:17PM    #
  13. Only three people ever really understood school finance, both before and after Prop A. One died, one went mad, and the third person forgot all about it. (Apologies to Lord Palmerston.) 8-)

       —David Cahill    Feb. 5 '07 - 07:37PM    #
  14. Despite the current problems with Prop A, it is not a terrible idea. Because Michigan solved the school funding problem by equitably funding all districts based on a per-pupil count the state avoided one of the funding lawsuits that plagues other states like New Jersey, New York, and elsewhere.

    The big problem is that school funds are no longer unlimited in Ann Arbor, and for the first time in years, the district has to look structurally at its spending to get more bang for the buck.

    For example, friends in Dexter and Saline pay $100 or more for a student to play a HS sport. In AA we pay $30. Also, AA has some programs that are quite specialized and perhaps quite costly and we might not be able to afford them. Or we might need to get smarter about how we operate them. also, our middle school, per-pupil costs are the highest of all levels in the district. That seems a little odd because elsewhere in the state and nation, high school costs are higher, with elementary schools the lowest.

    One other thing, a couple of years ago when I was fighting my home’s SEV (bought a new house), I collected the SEVs for all homes sold and the sale price. Turns out the most expensive homes had SEVs far below 50% of market, while the least expensive homes were much closer to that.

    Which means that the folks with the most money were paying proportionately less in property taxes than the people with less money.

    Go figure.

       —JennyD    Feb. 5 '07 - 07:39PM    #
  15. Regarding the portion of rent devoted to a landlord’s property taxes: those paying rent amounting to more than a certain percentage of their income (i.e., most Ann Arborites) can receive a refund of some of the property taxes their landlords paid on their behalf. All you need to do is fill out MI-1040CR.

    It takes an extra ten minutes to fill out and can mean a couple hundred dollar refund instead of a bill from the state.

       —Parking Structure Dude!    Feb. 5 '07 - 07:54PM    #
  16. “Wow, so to keep incumbents in, renters are forced to pay their landlords’ taxes at over double the mill rate.”

    True but I don’t know how the math works out for total tax burden. Let’s face it, in an apartment complex, there’s a lot more people contributing to the tax bill than there is in the typical single-family home. In the US, the entire tax system is tilted to the benefit of homeowners. I didn’t really appreciate how true that was until I became one of the people benefiting from the system.

    Also, PSD is correct that renters can get a credit on state taxes. I would guess that like Earned Income Credit, this is one of the least utilized credits that could make a huge difference to many taxpayers.

       —John Q.    Feb. 5 '07 - 08:52PM    #
  17. The problems of Prop A notwithstanding, Michigan still has one of the highest levels of per-pupil spending:


    And are likewise very near the top in teacher salaries:


    (The only states higher than Michigan, California and Connecticut, have much higher costs of living. If you factor in cost of living, Michigan salaries are probably the highest in the country).

    I would be more sympathetic to the idea that we must figure out how to keep spending high even while our economy struggles IF we were getting a lot for our money. But we’re just not. Our results are marginal, for example:


    Look at Minnesota. I spends almost $1,000 less per student per year, it pays teachers $10,000 less per year, but ranks 8th in the nation in average ACT scores compared to Michigan’s 25th.

    Regardless of the particular tax method used to fund schools, as things stand, we are no longer close to being one of the top few richest states. By per-capita income, we are down to 24th (and falling):


    The true cost savings are going to have to come when teacher contracts are renegotiated, but the good news is that, if other state like Minnesota are a guide, we should be able to get better performance than we’re getting now even while spending less.

    In any case, it seems that Michigan schools are overdue for some serious educational and financial restructuring.

       —mw    Feb. 5 '07 - 10:27PM    #
  18. Too many kids to educate, that’s the problem. If there were just some way to get them to enlist in the military, we could send them to die in the war. What we need is a draft, and assurances that the war will never end (oh, the democrats, right… so it’s settled then)!

       —chai    Feb. 7 '07 - 06:06AM    #
  19. Who’s bright idea was this?

    from todays snooze.

    is this legal,
    using firetrucks to deliver pizza?
    what is the cost per mile?
    why are we taxpayers paying for this?

    Tuesday, March 13, 2007

    Free pizza if smoke detectors work
    The Ann Arbor FireDepartment and Domino’s Pizza are teaming up this week to offer free pizzas to residents with working smoke detectors.

    Here’s how it works: At various times from Monday through Friday, firefighters will join in deliveries around the city from a fire truck. If
    all smoke detectors in a home are working, the pizza is free.

       —a2 taxpayer    Mar. 13 '07 - 07:31PM    #
  20. a2 taxpayer – why not ask the Mayor?

       —just me    Mar. 14 '07 - 03:41PM    #
  21. I don’t think Michigan’s “pop up” in a property’s tax rate following its sale is unusual. California’s Proposition 13 from 1978 inspired similar policies elsewhere. The long-term consequences, while predictable, are hard to understand for the average voter. “LOWER TAXES NOW” is a lot easier to sell. :-)

       —A    Mar. 20 '07 - 12:08PM    #