A recent ruling by the Michigan Court of Appeals could have broad implications for Michigan tax policy. The court ruled that the spirit of Proposal A, which limits annual increases in property taxes, was violated by the decision of the city of Charlvoix to increase property taxes on the home of Nathan Klooster following his father's death in 2005. Mr. Klooster does not reside in the house, and was added to the house's deed only months before his father died. The court ruled that this did not constitute a transfer of ownership, and the taxes on the home should therefore have remained fixed. Under Proposal A, property taxes can increase only up to 5% or the rate of inflation so long as the same person owns the home in question. However, if the ownership of the home is transferred, the taxable value of the house can rise at a much greater rate.. The stated purpose of Proposal A was to provide incentives for homeowners to remain in the same home, encouraging neighborhood stability while simultaneously keeping the tax burden on homeowners low. The taxable value of a home is limited in the amount it can increase. During periods when the value of real estate is rising, this provides significant savings for taxpayers.
One issue this ruling clearly raises is the possibility of using legal loopholes to avoid a higher tax burden. Nathan Klooster does not live in the house in Charlvoix. His name was added to the deed in the final few months of his father's life, after it had become apparent he likely would live much longer. This legal maneuvering seems to have been engineered at least partially to avoid paying a higher share in property taxes. Such an arrangement could be produce not only among family members, but by anyone who intends to purchase a house. A proliferation of such activity would deprive the state of Michigan of substantial amounts tax revenue. It is clear that the state has lost untold billions of dollars since the passage of Proposal A, and that this situation would only be exacerbated if significant numbers of people begin to take advantage of the ability to avoid higher property taxes by transitioning to joint-ownership of homes before selling.
If the decision of the court is upheld, there will likely have to be some kind of legislative response. However, Proposal A cannot be overturned by an act of the state legislature, only by another ballot proposal. Such a proposal would take time to develop and could be difficult to pass. Limitations on property taxes, while potentially beneficial to financially struggling Michigan home owners, only further deprive our state government of much-needed revenue which could be used to prevent further cuts to vital public services. Regardless of the solution, it seems that serious proposals to reform Michigan's property tax system are likely in the near future.
Northern Michigan tax dispute could have 'bigger ripple'