taking on the headlee amendment and proposition a

In 1978, Michigan passed something called the Headlee Amendment. This was followed in 1994 by a piece of legislation known as Proposition A. Among other things, these two laws put limits on property assessment increases. As I understand it, they basically make it impossible for local governments to raise a property’s assessed value by more than the rate of inflation, unless the property changes hands. What this means in practice is that people holding properties for several years pay substantially less in taxes, comparatively speaking, than people just purchasing property in the state of Michigan. (AN example will follow.)

Headlee and Proposition A, as they’ve been explained to me, have proven particularly destructive to older, fully built-out cities like Ypsilanti that don’t have room to sprawl. As we have very little new development, and fairly little churn in existing properties, our tax base stays relatively stagnant. And, at the same time, costs have continued to rise. It’s because of this, as I understand it, that our previous Ypsilanti administration was so gung-ho to develop the brownfield property we know as Water Street. They were able to piece together a 37-acre parcel that, when cleared of its existing buildings, would lend itself to large-scale, newly assessed development. If it had worked, we’d be singing their praises right now. But, it didn’t work. Millions were spent to acquire the properties, and, as everyone knows, no subsequent development has taken place.

Over the years, several people have told me that we need to repeal the Headlee Amendment and Prop A, but, to my knowledge, no serious coordinated attempt has ever been made at the state level. Michiganders, as we’ve all just seen in Ypsi, do not like the idea of paying more in taxes, especially in such a dismal economy, and it’s hard to imagine a legislator stepping up to suggest such a thing. Nonetheless, that seems like what needs to be done.

Over the course of the past several weeks, as we’ve discussed the merits of the Ypsi income tax proposal, there have been a number of comments left here on the site about Headlee and Prop A. I thought that I’d collect a few of the best thoughts here… The following quotes come from Washtenaw County Commissioner Conan Smith, and Ann Arbor entrepreneur and brewer Todd Leopold. (It should also be pointed out that Conan’s day job is Executive Director of the Michigan Suburbs Alliance, a non-profit charged with aiding in the redevelopment of Detroit’s older surrounding communities, like Ypsilanti.)

First, we have this from Todd Leopold:

…Here’s (an) example as to why Prop A is killing Ypsi and other Michigan cities.

Yesterday there was an article in the AANews about Tecumseh Products closing a plant in (duh) Tecumseh. It stated that they were the largest taxpayer in Tecumseh, as well as the largest employer. Obviously they’ve been there for years. Know how much they paid to the city of Tecumseh every year in taxes? $120,000.

Back to my small building that I mentioned before. It was just sold this year, so it is finally assessed at it’s true value. Know how much we pay in personal property, and property tax solely to the City of Ann Arbor? $60,000.

Yep. This teeny tiny 10,000 square foot building and small business with a grand total of 3 full time employees pays half of the taxes that an international company that has the most employees the city of Tecumseh. Why? Because of the world’s dumbest tax law.

Michigan and its cities are fighting economic battles against other States and countries with both hands tied behind its back.

Until you fix Prop A, Ypsi is fighting a losing battle. Even if you find places to cut this year, you’ll have to keep cutting next year, and the year after that, and the year after that…. until (magically, I suppose) enough new construction comes to Ypsi to counterbalance the millions of dollars of tax revenue that is “lost” by assessing property like it’s still 1990…

Doesn’t make a hell of a lot of sense, does it?

And here’s some of what Conan had to say in defense of our proposed income tax:

…Michigan’s municipal finance system has put dozens of cities across the state in the same tough situation. Those, like Ypsi, that have depended on the manufacturing industry for tax base have been hit particularly hard. How we answer these challenges today will define our communities for generations.

I look at Ypsi, at the two dozen other cities I work with that are in the same position, and I can’t help but plead, “Invest.” Invest in tomorrow. It’s going to suck today. No doubt. But the citizenry that chooses to sacrifice self for community in these trying times is the one that will prosper as we make the hard transition to a new economy…

As we all know, the citizens of Ypsilanti chose not take Conan’s advice, thus hastening our inevitable collision with the realities of Headlee and Prop A. So, now we need to prepare for the crash as best we can.

Here’s Conan again, on those realities we’re headed for, and what needs to be done to remedy them:

…The state needs to address municipal finance policy. They need to fix the Prop A / Headlee issue, and they need to renew and stabilize the revenue sharing policy. It would be immensely helpful if lawmakers would also enable a handful of additional fiscal tools (alternative taxation, bonding authorities, support for regionalism), but those other issues are essential. The advocacy community has mounted a strong campaign around these policies and there is solid data to back them up. Whether this dysfunctional legislature will act or not is an entirely different question…

Maybe some action is already underway. Conan says they’ve got the data to show that Headlee and Proposition A are destructive (I’d like to see it), and, according to the “Ann Arbor News”, at least one of our Ypsi City Council folks is already talking about taking the fight to Lansing. Here’s a clip:

…”Council Member Brian Filipiak, D-3rd Ward, who supported the tax, said some residents have suggested he start a political action committee to put pressure on state government to reform the Headlee Amendment and Proposal A. He said he will check to see if a similar committee has been formed in other cities because it’s easier and more effective to join an existing group than to start a new one”…

Here’s Todd’s take:

…Looks like I’m not the only one with a working calculator. The ONLY chance that there is of repealing Prop A is if Michigan cities band together…. entrenched business interests and residents who could care less about attracting new business and residents to Michigan will fight like hell to stop this. They won’t want to be taxed fairly.

I think that repealing Prop A will require something on a ballot, and I dread that inevitability. Essentially, older residents will have to vote themselves into higher taxes, or at least initial higher taxes followed by millage and tax reductions as the State would have an enormous surplus. I don’t think that these long time business owners and residents will vote for that, sadly…

So, where does all of this leave us?

Do we all agree that Headlee and Prop A have to go? If so, what’s our next step? And what’s to take their place? How can we ensure that our cities have enough money to provide necessary services, but, at the same time, not tax people out of their homes and deter business? What solutions have worked well elsewhere?

As much as I enjoy attacking one another here in Ypsi as the money runs out, I’m thinking it might be nice for a change to look outward and focus our energy and anger there. I like the idea of banding together and going to Lansing with pitchforks and torches, demanding that the legislation be destroyed. It may not solve our immediate problems, but it would feel good to get in the ring and take a few swings.

At the very least, it seems as though we could start a state-wide petition calling for the repeal of Headlee and Prop A. (The question is what to replace it with?) I also think it would help if someone knowledgeable on the issue would make a short documentary on the origins of the legislation, what it’s meant to cities like Ypsilanti, and how it makes our state less competitive. If we had those few components, I think we could launch a pretty compelling campaign.

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26 Comments

  1. egpenet
    Posted November 14, 2007 at 12:14 am | Permalink

    A lot of properties have already changed hands in Ypsialnti over the last ten years. Much more will change hands, and take the pop (as we say) in the next one to three years, thanks to the latest mortgage bust, foreclosures and plant closings. After that, the next bunch of turnovers will be the baby boomers moving out. But that’s five to ten years down the road.

    Eventually, every home in town will have popped and the city will STILL be short.

    One way to transition is to determine the “spread” between homes that have popped (say, since 2000) and those which have not. It is a $5000 spread between similar sq.ft.? $10,000? Whatever it is … devise a transition program where equivalent homes that have poped get a % reduction in their rate of increase the same year that homes that have NOT popped get an equivalent % increase over their previous inflation limit.

    Once it’s apples and apples, we’re done. In a low inflation environment, it’s actually a zero sum game.

    As I say, until there is real government reform with real cuts in government spending, there will never be enough revenue.

  2. Posted November 14, 2007 at 7:03 am | Permalink

    Why can’t we just get that damn baseball stadium in there?

  3. Jim
    Posted November 14, 2007 at 8:27 am | Permalink

    Yes! Yes! Yes!

    Headlee and Prop A have all sorts of perverse effects.

    Prospective home-buyers in Michigan face some of the highest property taxes in the nation, giving young people one more reason to flee the state. You can’t have ‘cool cities’ if young people and newcomers can’t afford to live in them.

    Long time residents are incentivized to stay in their houses, even when they would be happier moving to a condominium or apartment. We can help the elderly pay for housing without also subsidizing wealthy middle-aged homeowners.

    I think that a campaign to repeal the harmful aspects of Headlee and Prop A could take many angles. We could stress local autonomy. We could stress fairness. We could liken the current system to other well-intentioned but inefficient schemes of price control and rent control that conservatives love to hate. We could appeal to the realtors and new home builders who are hurt by people’s inability to move to more suitable housing. Most effective, I think, would be to emphasize the current system’s harmful effect on prospective first-time home-owners. Suburbanites may not feel much sympathy for cities and city-dwellers, but they do care about their children and their children’s ability to buy a home in Michigan.

  4. egpenet
    Posted November 14, 2007 at 8:33 am | Permalink

    Actually, the BEST way … rather than flush the system in Lansing with money … is to fix the system at one time … some rollback, some roll forward … done.

    If we DO have a 10% to 15% fall in housing price equity, how does THAT affect the deal? If my house appraises for less, the taxable value should decline, and the tax decline. Hum?

  5. Jim
    Posted November 14, 2007 at 8:45 am | Permalink

    Egpenet, could you explain your first comment?

    A decline in home values should decrease the inequality in the system, but 10-15% is not enough to eliminate the gap in taxable value that has developed since Prop A passed. Taxes now often more than double when a house is sold.

  6. egpenet
    Posted November 14, 2007 at 9:26 am | Permalink

    As the so-called housing bubble plays itself out with subprime defaults from mortgages set since 2000 … and as the fallout in property values continues from that bubble and spills into the broader economy … and as the Michigan economy continues to erode … seems to me taxable values should also decline.

    Why are wee paying more in taxes when our prperties are worth less? That’s another question.

    What I was fishing for is a starting point that would NOT flush the coffers with cash on the first hit, but would tend to set us on a path to equalization. OK … so we start out with a 20% pop for homes that have not changed hands since 1997 (last 10 years) … and we rollback taxes on homes that popped during the same time. From that point on, we fine tune each year on a declining basis, until similar properties find some equitable middle ground.

    Much too complex a solution. The whole thing is a dumb law, mainly because it is nearly impossible to unravel.

    Let’s go with a flat tax.

  7. egpenet
    Posted November 14, 2007 at 9:28 am | Permalink

    As the so-called housing bubble plays itself out with subprime defaults from mortgages set since 2000 … and as the fallout in property values continues from that bubble and spills into the broader economy … and as the Michigan economy continues to erode … seems to me taxable values should also decline.

    Why are wee paying more in taxes when our prperties are worth less? That’s another question.

    What I was fishing for is a starting point that would NOT flush the coffers with cash on the first hit, but would tend to set us on a path to equalization. OK … so we start out with a 20% pop for homes that have not changed hands since 1997 (last 10 years) … and we rollback taxes on homes that popped during the same time. From that point on, we fine tune each year on a declining basis, until similar properties find some equitable middle ground.

    Much too complex a solution. The whole thing is a dumb law, mainly because it is nearly impossible to unravel.

    Let’s go with a flat tax.

    OK?

  8. Demosthenes
    Posted November 14, 2007 at 9:47 am | Permalink

    I am still confused about the difference between Headlee and Prop A. I know they compliment each other somehow. But I also know they are not identical laws. Can someone please explain the differences?

    What I have pieced together from these discussions is this (but I don’t know if it is correct.): Headlee requires a rollback in millages when properties “pop” under Prop A so that the net increase in revenues collected by the government still matches inflation. Does Headlee also apply to increasing revenue resulting from taxes on new construction? What about redevelopment? Is redevelopment’s increase in a property’s taxable value a Headlee trigger?

  9. Demosthenes
    Posted November 14, 2007 at 9:50 am | Permalink

    egpenet,

    As I understand Prop A: If my house (or yours) decreases in value by 10% this year, the assessed value of the property will decrease by that amount. However, if the taxable value of the property is still below the decreased assessed value, because of Prop A over the years, the taxable value will still increase at the rate of inflation, even as the assessed value comes down…until assessed value and taxable value are equal.

  10. Glen S.
    Posted November 14, 2007 at 10:16 am | Permalink

    I agree that the “Headlee/Prop. A” combo has all kinds of negative implications for Michigan and for local communities, and I’m all in favor of an effort to repeal them.

    However, I find it somewhat ironic to hear people claiming lately about how their taxable values should be declining as their real (assesed) values go down due to the housing downturn.

    Only a few short years ago, headlines boasted of double-digit increases locally in real and assessed values. If I recall correctly, rising values in the City of Ypsilanti led the County for two years in a row … and I don’t recall anyone back then complaining about how their taxable values weren’t keeping up with actual values.

    My point is that the Headlee/Prop. A combo distorts the property tax landscape during housing upswings as well as downturns. And, the the greater the upswing/downturn, the greater the distortion…

  11. Dirtgrain
    Posted November 14, 2007 at 10:52 am | Permalink

    I think only one person has mentioned the elderly. Overall, how would repealing these two laws affect the poor–especially when they are in neighborhoods with a lot of incoming higher-income new homeowners?

  12. Steph
    Posted November 14, 2007 at 11:17 am | Permalink

    It would probably be easy for people to take advantage of it, but couldn’t there be an exemption for the elderly?

  13. Demosthenes
    Posted November 14, 2007 at 11:50 am | Permalink

    Don’t tax me!

    Don’t tax the elderly.
    Don’t tax the “wealthy” property owners.
    Don’t tax the poor students.
    Don’t tax businesses.
    Don’t tax non-residents.
    Don’t tax workers.
    Don’t tax social security.
    Don’t tax pensions.
    Don’t tax John Delcamp
    Don’t tax Glen Sard.

    Don’t tax me.

    Isn’t everyone a special interest that should be exempt?

  14. Kirk
    Posted November 14, 2007 at 12:46 pm | Permalink

    Prop A and Headlee are unfair but property taxes in general are going to have problems. If we didn’t have Prop A and Headlee and we had 10% increases in home values for 7 years (for example) then property taxes would almost double in that time. That’s faster than almost anyone’s income increases and a flood of cash like that encourages irresponsible spending by government.

    On the other hand, if the housing market completely falls apart and taxable values sharply decline, city revenues would drop by the same percent while city expenses probably stay the same or go up.

    Conan’s comparison of Tecumseh Product’s building and his in Ann Arbor is also misleading without knowing what the millages are. I suspect tax rates are lower in Tecumseh than they are in Ann Arbor. There is no doubt an inequity but it is probably not as great as his figures imply.

    I don’t know what the solution to this is but I think it has to involve more than just repeal of Prop A and Headlee.

    Peace.

  15. Kerri
    Posted November 14, 2007 at 9:05 pm | Permalink

    We need to have a bake sale right outside of the state capitol to raise money for Ypsi (or for a bunch of struggling cities, if we could get others to join in). I think that would be a fun publicity stunt that could draw some attention to what’s going on.

  16. Posted November 15, 2007 at 3:02 am | Permalink

    Kirk-To answer your question, according to the city of Tecumseh website:
    “The 2006 millage rate for Homestead property is 42.0888. Non-Homestead property is 60.0888.”

  17. Posted November 15, 2007 at 7:58 am | Permalink

    The other half of the todd (not Conan) / tecumseh comparison – Ann Arbor’s non-homestead rate is 59.1823. So, almost identical to Tecumseh’s.

  18. Kirk
    Posted November 15, 2007 at 9:49 am | Permalink

    I’m surprised they are the same, I stand corrected!

  19. todd
    Posted November 15, 2007 at 10:18 am | Permalink

    Kirk, go to Google “Maps”, “find business”, and put in “Tecumseh Products” in “Tecumseh Michigan”. You’ll see that it’s at 100 E Patterson. Zoom in relatively closely, and click on “satellite” in the upper right hand corner.

    Tecumseh products…and we’re talking just the series of very close buildings, takes up an entire city block. They then have several parking lots that take up more city blocks….it looks like there are two or three. Now it wouldn’t surprise me to find that T. Products had some sort of a small tax exemption from the City of T., but $120K for all that? Please.

    Prop A doesn’t take just a few million dollars off of the tax rolls, it takes hundreds of millions off the tax rolls, but what’s worse is that it does it year after year after year….and it gets worse every year.

    But, speaking to Marks’ thread question….when I actually spoke with some folks with some power in Michigan to try and change the spirits laws so that we could sell whiskey and rum that we make at our bar, I was told that in no uncertain terms that there was no chance of changing the laws that line the pockets of Michigan wholesalers.

    Do you know how the man I was speaking to made this point? He said, laughing, “you stand a better chance of getting rid of Prop A”. He then went on to explain how Prop A is the sacred cow of all sacred cows. Speaking against it, apparently, is political suicide in Lansing.

    Grassroots won’t do it, IMHO. Either Mayors from nearly bankrupted Cities have to band together and convene in Lansing, or an entire political party will have to champion the cause.

    I don’t think that it is possible to repeal the law. Too many people benefit from it. I mean, can you imagine the spin that will come out for the pro-Prop A side? In retrospect, that is the most insidious part of Prop A….so many people make money off of it, that it’s repeal proof.

  20. Demosthenes
    Posted November 15, 2007 at 11:09 am | Permalink

    Perhaps another approach would be easier on this issue.

    At face value, limiting government revenues to the pace of inflation seems reasonable unless we want government to become larger over time.

    The problem is that government expenditures, needed to maintain status quo services, are rising faster than the pace of “inflation”. Inflation rate defined by whom?? Doesn’t the first sentence in this paragraph sound self-contradictory? How “the rate of inflation” is calculated for the purposes of Headlee and Prop A, needs to be adjusted to be the REAL rate of inflation.

  21. Posted November 15, 2007 at 11:32 am | Permalink

    Ypsi (and most cities) needs more money and it has to come from somewhere. However, repealing Headlee/Prop A suddenly would come as a _huge_ shock to a lot of long-time homeowners and that could have seriously bad side effects. Many of those people would decide “Hey, $3000 a year more in taxes? Screw that, I’m going to Arizona.” Lots more houses on the market = lower property values = temporarily lower tax base.

    What’s more, property taxes are already one of those weird taxes with no real bearing on reality. Without Prop A/Headlee, your taxes are directly tied to fluctuations in how much someone covets your property relative other property in the city, not even to how much you yourself coveted that home when you bought it. Tiny homes in trendy neighborhoods get taxed more than larger homes in sprawlier areas (with more costly per-home services, etc). It’s not a tax on how much you use or on how much money you make. It’s not a tax on value you’re capturing from your investment (like capital gains), because if your property value goes down you don’t get back any of the taxes you paid when the value was high. It’s not a tax on how many people live in your house. Again, it’s just a tax on how much the market loves your house relative to your neighbors’.

    I don’t want my taxes to be lower, just fairer. I’d love to end property tax altogether and pay the same amount as a flat tax or in income tax or something like that. Short of that, Prop A/Headlee seem to serve as a useful check on one of property tax’s unfairnesses.

    I say all of this as a new homeowner that isn’t particularly tied to Headlee/Prop A myself, but I recognize how important it is for at least a few people who watched property values explode around them in the 90’s, while at the same time their real income went down.

  22. Kirk
    Posted November 15, 2007 at 3:27 pm | Permalink

    I feel like I have made some of you think I am defending Prop A when my main point was the same as Patrick’s. Property taxes in general are not that fair.

    Rather than striving to repeal Prop A (which some of you say is impossible anyway) it might make more sense to go around it by modifying the State laws that restrict the types and levels of taxes allowed local government.

    BTW, I am also a relatively recent homebuyer and have little vested interest in Prop A.

  23. mark
    Posted November 15, 2007 at 8:18 pm | Permalink

    Thank you all for your thoughts. After reading through all of your comments I’m left thinking that it would be a waste of time to go after Headlee until such time that other cities are beginning to fail. (Maybe in three years or so.) In the meantime, I like the idea that we focus on working within the current framework, perhaps adjusting the way that inflation is calculated. (If I’m not mistaken, Headlee also has something like a 3% a year cap. If that’s the case, not only would inflation need to be calculated idfferently, but the cap would have to be lifted.)

  24. todd
    Posted November 17, 2007 at 6:10 pm | Permalink

    Patrick: “Ypsi (and most cities) needs more money and it has to come from somewhere. However, repealing Headlee/Prop A suddenly would come as a _huge_ shock to a lot of long-time homeowners and that could have seriously bad side effects. Many of those people would decide “Hey, $3000 a year more in taxes? Screw that, I’m going to Arizona.””

    That’s funny, I had that “Screw this, we’re moving” idea when I was handed the tax bill after the Prop A pop this year. : )

    In all seriousness, the taxes aren’t the killer in AA…it’s the rent. Or at least that’s how it is for us.

    But I hear what you are saying, Patrick. We have to ease into the change if we ever get one.

    Mark, I honestly think that you’re right….we have to wait for a few cities to go belly up. A grassroots campaign would be tilting at windmills, IMHO. I’m no political insider, but Prop A is here until the majority of legislators finally pick up a calculator, and figure out that Michigan is choosing to financially strangle itself.

  25. egpenet
    Posted November 17, 2007 at 6:18 pm | Permalink

    Actually, we WOULDN’T have to “easee” into a change. It would be NOT easy, but a formula could be detrmined for use by local assessors to apply a uniform formula to all properties …
    lowering those which have popped, while (gulp!) raising those which have not popped.

    The non-poppers shouldn’t double, although they would rise. The poppers would get a nice reprieve. At that point, we see where inflation or deflation takes us.

    BTW, CPI is NOT calculated properly by the Fed. It is WAY UNDER reported. I don’t know where bernacke buys his toilet paper, pork chops, or Rice Krispies … but the current figures used by the Fed are at LEAST 1.5-2.0% below the real rate. Property owners, seniors on social security and others getting disability, vets, etc. … we’ve all been getting shorted for sevral years.

  26. Matthew
    Posted February 16, 2008 at 5:28 am | Permalink

    There are provisions in Proposal A to increase taxes by a vote of the people. The is the democratic way. It is not right to take this away from us and put tax increases solely in the hands of politicians which are heavily influenced by businesses.
    Businesses like Techumse or yours are given tax credits and breaks by state and local governments based on the number of employees you have and the value to the municipality. Thsi has little to do with the Headlee amendment or Proposal A. I suggest that without proposal A all businesses would pay more in taxes and yes it would be fairer, but it would do little in incourage them to come and stay in Michigan. All business would pay more taxes and all homeowners would pay more taxes. Seeing how my state and local goverment waste money I am happy to be protected by these laws. If the tax increae is truely just, put it on the ballot like the law allows, educate the people and let the people vote on a tax increase, not a few fat cat elected officials.

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