Real estate listings include the amount the seller is paying each year in property tax, but a buyer's new tax bill will likely be much higher ― and it's not easy for a buyer to learn what that new tax bill will be. For some buyers, a larger tax bill may be inconvenient; for others, it could present financial hardship.
We believe real estate listings should be required to provide the new owner's anticipated property tax payment. Adding this simple calculation to real estate listings will better equip potential buyers with the information they need to make more informed purchasing decisions.
Complicated policy, confusing information
Michigan property tax bills are hard to understand because of Proposal A, the state law that reformed property tax collection and assessment in 1994.
Proposal A capped the rate at which property values, and thus property tax owed, could grow.
Prior to Proposal A, property taxes were calculated by multiplying the local millage rate by the property's state equalized value (SEV), equal to one half of a property’s market value.
Proposal A created a new value to calculate tax payments: Taxable value (TV). When a property is purchased, taxable value and state equalized value are the same. Over time, the growth of a home's taxable value is limited to the rate of inflation, or 5%, whichever is less.
State equalized value continues to grow at the same rate as market value.
This arrangement protects existing owners from excessive growth in property taxes. But when a home is sold, the property's taxable value resets to its state equalized value, generating a tax increase ― potentially a large tax increase ― for the new owner.
That's because the seller’s property tax payment was determined by multiplying the millage rate by the growth-restricted taxable value, and the new owner’s payment is equal to the millage rate multiplied by the unrestricted state equalized value.
This policy applies to nearly all residential properties.
Unfortunately, real estate listings in Michigan only include information on the property tax bill the seller is paying, and not the projected property tax bill for the buyer. Many real estate buyers do not fully understand Michigan property tax laws, and therefore may be surprised and unprepared for the higher tax bill after they've purchased a new home.
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Consider these examples from two Michigan properties that were listed in July of 2023:
The first home — a four-bedroom, three-bath, 2,200-square-foot home in southeast Michigan — had a taxable value of $65,050. But the property's SEV — half the home's market value — was $107,500. Using the local tax rate of 35.5 mills and the taxable value, the current owners paid $2,102 in property tax. That's the rate shown on the real estate listing.
But while the home's taxable value was restricted, the state equalized value continued to grow. When the property is sold, the state equalized value would become the new baseline for taxes. Calculating the tax bill using the state equalized value yields a different result: an annual tax payment of $3,816 a year. That's a difference of $1,714 a year, or 81.5% higher than the amount noted on the listing.
The real estate listing provides information based on the actual tax payments,calculated using taxable value, of the seller. The new homeowner may be shocked when their tax bill is 81.5% higher than amount noted on the listing.
For another home recently listed for sale — a four-bedroom, four-and-a-half bath, 3,200-square-foot home in southeast Michigan — the numbers are even more startling. With a taxable value of $202,540 and a local tax levy of 35.5 mills, the sellers are paying $6,543 a year in property tax. But during the sellers' ownership of the home, its state equalized value grew to $341,390. When the property changes hands, the buyers will receive an annual tax bill for $12,119 ― an 85% increase, and more than $5,500 the amount shown on the listing.
We can fix this
The first step in changing this policy is determining who has the authority to enact it.
We believe a legal opinion is needed to determine whether the Michigan State Tax Commission has the authority to require real estate listings to report anticipated property tax payments for buyers, or whether legislation is necessary.
The change we're proposing to real estate listings does not solve the myriad local government finance challenges in Michigan, but through increased transparency, it offers a move in the right direction.
Mark Skidmore is a professor of economics at Michigan State University. Timothy R. Hodge is an associate professor of economics at Oakland University. Submit a letter to the editor at freep.com/letters.
This article originally appeared on Detroit Free Press: Michigan property tax laws complicate real estate purchase estimates