Property Tax Increases Are Reducing Home Affordability

Home prices have skyrocketed across the country and the main beneficiary is seeming to be local municipalities.  With property taxes based on market values, the property tax base of most municipalities in the country have effectively doubled.  In addition to this major increase in valuations based on new sales and actual market value, there are also municipalities that are raising rates far in excess of actual market value. Both of these situations combined lead to higher costs of home ownership and higher costs of rent. I recently wrote about how rents will skyrocket over the next 5 years, and property tax increases are one of those factors.

Recently the Benton Harbor, MI Mayor spoke about how important affordable housing is, meanwhile the city has taken strong actions to make housing unaffordable for its citizens.

The U.S. Conference of Mayors says, nationally, the median monthly rental price has increased by 18% and the median purchase price for housing has increased by 21% over the last three years. It adds nearly one in seven Americans report they’re concerned by rising housing costs. Muhammad said that’s why help is needed more than ever.

This is really interesting because even outside of rising home prices, the city of Benton Harbor has systematically increased taxable values over the sales prices of homes to an extent that rents in the city need to be increased by 13% just to cover this increase. In addition to that, Benton Harbor already has the highest property tax rates in southwest Michigan.

Michigan Property Tax Rules:

In Michigan we passed “Prop A” in 1994 which was designed to limit the property tax increases that municipalities could put on property.  Unless a sale occurs, the taxable value of the property can only be increased by 5% or the rate of inflation, whichever is lower.

Michigan has 2 values for property, the assessed value and the taxable value.  The assessed value is what they feel a property is worth and the local governments can increase this amount to whatever they like on a property.  The taxable value is the value that taxes are imposed on.  This is the number that is limited to 5% or the rate of inflation.   Over time, when properties don’t change hands, the assessed value outpaces the taxable value.

As an example, I have owned my house since 2011. The current assessed value for just the parcel with my house on it is $97,300,  while the taxable value is $68,181.  These numbers are also fake.  In our state the assessed value and taxable value are supposed to be half of the market value of the property.  Using my house as an example, the township is stating that the property is worth $194,600, but I am only being taxed on it being worth $136,362.

Property Tax Valuations and Appeals:

One of the key features of this 2 value system is that when a property is sold the assessed value and taxable value reset.  The local government will now have these re-assessed to the current market rate.  In most cases the reset is put in at the current market value of the property, which is the sale price.  If a house sells for $200,000 then the assessed value and the taxable value are reset to $100,000 each.  Here is where some municipalities are playing dirty.

In Benton Harbor City I bought a house for $35,000.  This property had been listed on the MLS for over a month when I purchased it, so my purchase price was the market rate.  Once the property was purchased it should have been protected at that rate.  I spent $6,000 on repairs, putting my all in cost at $41,000.

In late February all property owners in Michigan receive a letter stating any changes to the assessed or taxable value of the home.  For properties where a sale has not occurred in the last 12 months, the taxable can only change by the rate of inflation or 5%, whichever is less due to Prop A.  For properties that have sold, they can reset to market rate.  As I stated above, this property should have been reset to market rate, which would be $17,500; half of the market value of the property I paid for.  On my letter it stated the assessed value of the property was $43,500, the city was stating that my house was worth $87,000.

I have appealed several property tax valuations in the past and have won virtually all of them.  I filled out the appeal form and attached my purchase documents, as well as recent comparable sales in the area.  The end result was that my appeal was denied with the statement “No evidence provided to support change” As an added note, the assessed value of this property in 2020 was $22,300 and the taxable value was $21,346.

I am sure I am not the only person going through this.  All over the state I am sure that municipalities are doing this.  They are effectively resetting the property tax valuation to whatever number they want, regardless of the sale price, so that Prop A will effectively not matter,  they are getting their money now.

Upon reviewing the assessed values across most of the city, from 2020 to 2022 the assessed values increased by 200%.

How Does This Impact Affordability?  

In Benton Harbor City the Non homesteaded tax rate is 63.163 mills, while the homesteaded tax rate is 44.983 mills.  If the house was valued at what I paid for it, the yearly taxes would be $1,105, or $92.08 per month.  At the current rate the taxes are $2,748 per month, or $229 per month. This is $136.92/mo more to own this house, caused solely by the property tax bill being overly assessed. This is a 13.6% increase in rent needed over the current market rental rate of $1,000 per month.

Side note: In addition to having the highest property tax rate in the county, Benton Harbor city is also the only municipality with an income tax.  Residents pay 1%, while non residents who work in the city limits pay 0.5%. 

Earlier we talked about Prop A.  Over time properties that were purchased at very low dollar amounts effectively had their property taxes frozen due to many years of very low inflation.  Most of the houses purchased in the 90s and even the houses purchased during the 2008 great recession were set at very low assessed values at the time of purchase and the taxable values have grown very slowly. The official rate of inflation for much of the 1990s through 2019 was very low, so in most years property taxable valuations increased at under 1%.

For example, a comparable to the house I wrote about above, a 3 bedroom 1 bath house, currently has a taxable value of $10,000.  This gives a yearly non homesteaded tax rate of $632 per year for the property, or $52.67 per month.  Someone like me buys this house and they are going to jump the assessment value to $50,000 if my last property was any indication.  Now the taxes will be $3,158 per year, or $263.16 per month.  This difference of $210.49 per month is going to be added to the tenants rent over the long term.  In the near term the new buyer is still competing with older buyers who have low property taxes locked in.  A Boomer who bought his rental in the 1990s has a $210/mo cost advantage over a millennial who buys a rental today.

The current market rate for this house is around $1,000 per month. With an added cost of $210 in new property taxes, the new rental rate will become $1,210. It will take time because the homes that have not sold in a long time are still competing at a lower rate.  It won’t take forever though, because what tends to happen is the homes that already have the low property tax rate are rented at below market rate and the tenants in those properties choose to never leave, so the properties don’t get relisted on the market.  This increases the likelihood that rental properties on the market are more recent sales and are priced accordingly to the higher property taxes.

Property Tax Abatements:

Several property tax abatements have occurred in Benton Harbor for large projects.  The Harbor Shores golf course megaproject had a 10 year abatement.  The Whirlpool HQ building also had a 12 year abatement.

The Whirlpool HQ building was a $68 million project.  The first 12 years they were to pay no property taxes, with tax collection starting in 2024.  Currently the property is assessed at $17,554,100 with a taxable value of just under $14,000,000.  This is stating that the market value for the property is only $35,000,000, roughly half the cost to construct it 10 years ago.

At the current taxable rate, Whirlpool’s property tax bill will be $878,000 on this property.  If the assessed value were based off of the original build price of $68,000,000, then the taxes per year would be just over $2 million. If we doubled the price from the original build to be more in line with what the rest of the market has done over the last decade, then Whirlpool would be paying $4 million per year on this property.

By looking at this, Whirlpool, a fortune 200 company with a market cap exceeding $5 Billion and with over $17 Billion in yearly revenue is currently under paying $3.1 million per year in property taxes for just this parcel.

 What Actions Can We Take?

1. Stop assuming landlords and flippers are the reason for price increases.  Your local politicians are a major part of the problem.
2. Fire your local politicians.
3. Challenge your property assessments every year, even if you get a rejection.  They need to see thousands of challenges, not dozens.
4. Vote down all ballot initiatives until the property millage rates make sense.
5. The next time the local politicians talk about giving property tax abatements to large companies, protest them to first give property tax abatements to residents.
6. Support legislation to modify Prop A to ensure when a sale occurs that local governments can only increase the taxable value to the price of the sale.
7. Don’t invest in cities that over assess their taxes.  Invest in nearby townships instead.