Arbor Update

Ann Arbor Area Community News

Greden's Second Budget Letter

1. March 2005 • Scott Trudeau
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In his second, detailed budget letter to constituents Councilperson Leigh Greden (D – 3rd Ward) lists the City’s recent efforts to trim the budget without reducing services.

According to the Michigan Municipal League, cities and counties throughout Michigan are suffering the worst fiscal crisis since the Great Depression. 70 Michigan cities are on the verge of bankruptcy. Cities including Grand Rapids, Livonia, Plymouth, Ypsilanti, and Warren are closing senior centers and swimming pools, reducing solid waste services, and laying off police officers and firefighters.

Ann Arbor has avoided such draconian cuts. Indeed, we have not eliminated any major City services despite the ongoing budget crisis. We preserved City services by downsizing the City bureaucracy and implementing cost-saving program changes. We will continue to “trim the fat� wherever possible to avoid cutbacks in programs and/or tax increases, but those options remain limited. In this message, I will outline steps the City has taken in recent years to reduce spending without eliminating any major City services.

This letter is a follow-up to his earlier city budget overview.

  1. Ann Arbor’s got it easy so far, I think – we’re not anywhere close to desperate, and there’s lots we can do to avert actual crisis. Since we haven’t already been forced to cut down to the bone, we’ve got lots left to cut, spending side, and have the potential to raise a lot more income on the revenue side without increasing tax rates, if we allow new development. (Which we’re doing at some rate: Consider the new private dorm off North Campus, lower town’s Broadway Village, Kingsley Lane, the Eaton lofts, the Loft 322, 828 Greene, and the old Y site development, just to name a few that will probably see that tax jump last year, this year, or next year.)

    Cities without an active real estate market can’t raise revenues without new millages, since properties not coming into new ownership (either through sale or through being new properties) are very limited by Headlee and Proposal A in how revenue can increase. When property is sold with any significant amount of appreciation, though, the taxes coming off of it jump up to match the new price, and Ann Arbor has one of the best appreciation rates in the state.

    When new development is approved, the property is reassessed at the final development’s value as soon as building permits are granted. Especially in the case of vacant lots being developed or city-owned properties entering private developers’ hands, this can provide huge revenue boosts. In the case of large developments in the downtown area (Y, Eaton), some of this increase will probably get soaked up by TIFs, but that doesn’t mean it’s disappearing, just that it’s being captured for services that mostly benefit the immediate vicinity of the site. (Not a bad thing, if the development is going to stress the local utility lines, public parking, intersections, etc.)
       —Murph    Mar. 1 '05 - 11:11PM    #
  2. In the meantime, Proposal A means that essentially all business properties post-development have permanently capped tax assessments.

    The “cap” allows taxable value to rise only by the consumer price index or 5%, whichever is less. When inflation is more than 5%, that means taxable values actually go DOWN from year to year, even as actual values go UP.

    In recent years, the increase in property value has tremendously outpaced the CPI; hence the taxable value of a capped property rises slowly but makes up a steadily shrinking share of its market value.

    Basically the taxable value of every property is capped until it is sold or transferred. Hence, tax assessments on major corporate-owned installations like Briarwood Mall and auto plants will probably never be uncapped again. The tax bills on such properties shrink as a proportion of property value every year.

    Moreover, it’s easy to game the system by creating an entity called “1345 E. Main Corporation” or some such, and sell the entity instead of the real estate, which remains capped in the name of the corporation.

    (Some jurisdictions have been fought this, arguing that if over 50% of an entity’s ownership changes in a year, property owned by the entity is thus uncapped. But even if that rule were widely enforced, the buyer and seller could go through the motions of selling 1/3 interest in one calendar year, 1/3 more in the next year, and the remaining 1/3 in the third calendar year, and continue the low capped tax assessment under the new ownership.)

    Meanwhile, homeowners, who typically move every ten years or so, are paying property taxes based on comparatively uncapped assessments. So tax assessments on homeowners are only about a five year lag (on the average) behind actual values.

    Meanwhile, the gap between tax assessments and actual values on business property is probably already in the trillions statewide and is widening every year—a colossal loss for local governments.

    Bottom line, property taxes fall more and more heavily on homeowners, less and less on business properties. Hence, precisely as intended, we have angry taxpayers and bankrupt local governments.
       —Larry Kestenbaum    Mar. 2 '05 - 01:40AM    #
  3. So… Larry… What’s the solution? Uncap business property taxes? Won’t that see a flood of businesses leaving the state?
       —js    Mar. 2 '05 - 05:06PM    #
  4. For decades until Proposal A, all owners of taxable real estate in Michigan paid taxes based on 50% of market value.

    The huge giveaway of probably billions of dollars of what would otherwise have been local government tax revenue on corporate owned real estate hasn’t exactly revved up the state’s economy. Indeed, as the untaxed portion has grown larger every year, our economy has sunk further.

    Bankrupt local governments aren’t very appealing to new businesses looking for good places to locate, or existing businesses thinking about whether to leave.

    It would be awkward to undo this debacle now, but that doesn’t mean it can’t or shouldn’t be undone.

    During the campaign for Proposal A, its supporters told me “oh, that’s just a detail, it will be fixed.” Um, right.
       —Larry Kestenbaum    Mar. 2 '05 - 08:32PM    #
  5. This is the same as what happened in California—homeowners angry about property taxes joined a political backlash that capped the rates and corporations actually got most of the benefits, and then predictably the services that homeowners, students, et al need decline. It is also unjust for long-term homeowners to pay so much less in property taxes than first-time homebuyers in houses with lower assessed value, but this happens all the time under our brilliant system.

    Shopping malls aren’t going to move overseas despite the internet challenge and it wouldn’t kill our economy to make business pay a fairer share of taxes although they will claim that it will.
       —Matt    Mar. 2 '05 - 09:54PM    #
  6. So… We should write the governor and tell her to repeal A? Do we need petitions for a ballot initiative? I’m just looking for what the steps should be…
       —js    Mar. 3 '05 - 03:05PM    #
  7. Our governor doesn’t appear willing to take any political stand that carries any substantial cost. The state could have brought its budget during her first term largely into balance without the cuts they made if we had only frozen the Engler tax cuts being phased in, but she wouldn’t say anything. I wouldn’t start with her or count on her for much of anything, including courage in speaking out against the anti-gay backlash or telling citizens of Michigan honestly that they may need to pay taxes for the services they want.

    js I honestly don’t know where to start. California has turned its public schools from the best to among the worst in the nation thanks to its property tax revolt, and there appears to be no political ability to change the situation out there.
       —Matt    Mar. 3 '05 - 04:49PM    #
  8. It’s not just the Briarwoods and auto plants (and Pfizer – the single largest property tax payer in A2) that are gradually offloading their tax burdens onto homeowners, but also landlords. Even a smallish family-owned property management company will hold its houses for much longer than the average homeowner.

    Of course, as Larry notes, anybody can form a real estate holding company that just happens to have exactly one owner and hold one single-family dwelling that the owner happens to live in. In fact, you can probably get a better price for your house when you sell it if you’ve done this – when you move, you can sell the corporation instead of the house, and the buyer will enjoy the benefit of capped property taxes.

    (/me considers deleting this post and going to set up a consultancy to help people incorporate ownership of their homes instead.)
       —Murph    Mar. 7 '05 - 07:36PM    #
  9. Murph,

    Would it really be evil (unethical, immoral, distasteful, etc.) to do such a thing? Bring this tax dodge to the masses, begin to erase the discrepancy and then really force the state to revamp the tax structure (or disappear into a budgetary black hole)...
       —Scott    Mar. 7 '05 - 08:24PM    #
  10. Scott, that’s half my point – destroy corporate tax loopholes by freeing them to the masses. Charge a sliding scale fee for the service: $base_fee * $home_value / $area_median_home_value.

    Only problem: when the house changes hands from the homeowner’s possession to the homeowner’s corporation’s possession, it would be reassessed and the taxable value would jump. So it would really only be useful for people who are just buying a house, or for people who foresee a lot more appreciation in the future part of their tenure than in the past part of their tenure.
       —Murph    Mar. 7 '05 - 10:03PM    #
  11. Well, considering people move pretty frequently, it’d only take a decade or so to get a significant number of folks on board, assuming an aggressive marketing campaign.
       —Scott    Mar. 8 '05 - 01:08AM    #
  12. How about just stepping the taxable value of commercial property to the State Equalized Value (SEV) every 10 years or when the property changes hands, whatever is less?
       —Chuck    Mar. 8 '05 - 02:56AM    #
  13. Chuck,

    There you go proposing reasonable policy. Don’t you understand only hare-brained tax evasion schemes can fix the tax code? :)
       —Scott    Mar. 8 '05 - 02:13PM    #
  14. I wonder if there might be an incentive for downtown business owners who don’t own the building they’re in to push for such changes. It’s the landlords that are reaping the benefits while tenants are charged for increases to cover every other cost increase.

    Seems like that might be a factor in spaces remaining vacant longer, more rapid business turnover, and such. Would the changes being discussed result in more business owners owning their own buildings? Would that benefit downtown and the community in the long run?

    I’d appreciate hearing more thoughts on this from those of you who’ve pondered this longer than I have (15 minutes so far.)
       —Steve    Mar. 11 '05 - 11:50PM    #
  15. Steve, my first impression is to imagine that commercial property owners are raising the rents at a constant rate – the rate of the market around them – regardless of whether the property tax is held down (a single owner holds the commercial property) or allowed to rise (the property changes hands). On the other hand, there is such a thing as a landlord who is happy with a known tenant and a steady rent, and would rather keep the long-term tenant than hike rents speculatively. In that case, the commercial tenant might be able to achieve a lower price by renting than they would if they bought their space from the landlord (triggering the property tax hikes).

    In all honesty, were I caught up on my reading and spreadsheet-examining for my real estate class, I would be able to tell you just how much a factor property tax is in commercial rents. So far, I have I heard little that would suggest property tax to be the primary factor in commercial rents; in the areas where long-time tenants are being squeezed out by rent skyrocketing suddenly, it has boo to do with property tax, and everything to do with speculation. Decker Drugs wasn’t pushed out because the building changed hands for the first time in decades, but because the landlord got greedy and chose the quick cash of a national noodle chain (I find it almost offensive that such a thing exists) over the long-term consideration of the health of the surrounding downtown.

    But the effect of Proposal A on retail tenants is not something I’ve spent more than 15 minutes considering either, so maybe this impression will change. . .
       —Murph    Mar. 12 '05 - 07:45AM    #
  16. The company I work for manages about half a dozen commercial properties under 1-3 owners. The primary owner has recently been renegotiating a rental contract with one of our main clients which allows me to once again reinforce Murph’s supposition: property tax has next-to-nothing to do with rental rate increases. The only thing this owner has been thinking about is whether he’s losing potential profit depending on what rate is set for the next decade, as the annual increases included in our contracts are based in some fashion on the CPI or Consumer Price Index (i.e. cost of living increases.) Costs are essentially irrelevant to that determination. It’s all about how much money can be made in an acceptably formulaic fashion.
       —Marc R.    Mar. 12 '05 - 04:25PM    #