Don't Mess with Taxes

The property tax is the most unpopular tax in the U.S., polls show. But it's also the best way to finance local governments. Here's why: It links what cities have the greatest power over (land use) to their own financing base. Do a good job of land use and property values rise. If property values rise, government revenues increase. If revenues increase enough, governments can offer more services and even cut the tax rate. Everybody wins.

Alas, most homeowners don't see it that way, and this had led to numerous attempts to curb property tax increases, mostly with disastrous effects. Good example: Michigan's Proposal A, passed in the early 1990s, which forbade governments from increasing homeowner assessments by more than the rate of inflation or 5 percent a year, whichever was less. What about places where property values were skyrocketing? Local tax assessors could track those valuations, but as long as the homeowner stayed put, it wasn't reflected in his tax bill. Sell the house, though, and the new homeowner would be assessed on the full value, which could result in a tax bill thousands of dollars greater than the previous owner was paying.

It has taken awhile, but this system of punishing new homeowners is starting to cause big problems. First, there's the discontent of newcomers, who realize they're paying more than the old-timers next door. (The average homeowner in Michigan now pays about 78 percent of he would if he'd just moved in, according to a state research organization. This gap is widening over time.) Second, there's the "pop-up" tax (the tax on the true value of the house), which hammers newcomers right after they move in, dramatically pushing up their escrow payments. Finally, there are the trapped old-timers, many of them senior citizens who'd like to sell their homes and move to smaller houses or condos but can't. "People want to downsize, but their property taxes are as high or higher on smaller houses," a Detroit area real estate executive said.

So how to fix this mess? One state representative has an idea: Make it an even bigger mess by extending the assessment cap to anyone living in the same community for three years. Footnote: So whose lousy idea was Proposal A? It was championed by then-Gov. John Engler but lobbied for by the Michigan Association of Realtors. Today, some real estate executives realize they blew it. "I had my doubts then," said one. "But now I'm sure it was a mistake." Posted 8/1/2004