WRITTEN TESTIMONY FOR MICHIGAN’S HOUSE OF REPRESENTATIVES
LOCAL GOVERNMENT COMMITTEE
March 20, 2014
FROM: Joseph M. Turner, CEO
Michigan Property Consultants L.L.C.
2719 State St.
Saginaw, MI 48602
Dear Madam Chairwoman, Committee Members and those in attendance:
I have been asked to briefly outline the history of the special assessment and distinguishing characteristics between Michigan’s special assessment levies on real property and the ad valorem property tax. Unfortunately, my service as Chairman of the city of Saginaw’s property tax board of review requires my attendance during Saginaw’s hearings which will be held at the same time this local government committee meets. Therefore, this written document is being produced in lieu of direct testimony.
The information being offered is based upon the training I’ve received as a certified assessment administrator, my own experiences within assessment administration, property appraising and economic development and research I’ve conducted as an instructor of classes in special assessment administration. I am not a lawyer and there is no intention to offer legal opinions or advice. I am not competent to do that. While I teach for and am a member of the Michigan Assessors Association, I do not make any representations that should be attributed to the MAA. Due to time constraints, I have not requested their review of these remarks.
Introduction
The purpose of the information being conveyed is to help committee members distinguish between a special assessment levy and the ad valorem property tax. The property tax, which demands money of a property owner to fund general government, has a history which can be traced back to the middle east and ancient times. The special assessment, which is often called a tax, works in a different way. The special assessment is based upon government enriching a taxpayer through a public project. The special assessment, as an extraction of money from a property owner based upon “benefit” (enrichment) can be traced back to the 1400s in Europe. First presented is the history of the development of the special assessment in Europe and then the U.S. and Michigan. Following the history will be a list of terms and concepts that are relevant to the contemporary special assessment levy in Michigan. For those of you who may wish to pursue a more in depth view of the contemporary special assessment in Michigan, my presentation includes a copy of an article which documents the legal authority for the special assessment and the process to create such a levy.
History of the Special Assessment:
The special assessment as a method of financing a public improvement in Michigan can be traced directly back more than four hundred years, to fiscal practices initiated in Europe. The information used herein to summarize the history of the special assessment has been gathered primarily from a definitive work on municipal finance that was published in 1898 by the Columbia University Press and authored by Victor Rosewater. Copies of “SPECIAL ASSESSMENTS A STUDY IN MUNICIPAL FINANCE still circulate as a Second Edition, published in 1968 by AMS Press of New York.
One might consider public policy with regard to two distinct methods of fund raising: a) the contemporary use of the ad valorem tax is to fund general government; and b) the special assessment as a unique charge based upon an increase in value ( “benefit”) flowing to nearby parcels of land from a public improvement. Rosewater addresses that consideration in this way:
“The idea of benefit was at one time the controlling factor in the imposition of all public charges. Only slowly and gradually and driven by force of necessity did the legislator and financier begin to adopt other basis for taxation. And long after the practice of apportioning the general public expenses according to the advantages or protection conferred by government had been in part, if not wholly abandoned, it was still the custom of many eminent economists to build their entire theory of public revenue upon the foundation of the benefit derived from its expenditure. Today this is no longer true.” (Pg 13, Rosewater)
Rosewater finds evidence of the special assessment tax in the United Kingdom dating back to 1427. These were in the form of an apportionment of “the work, or the expenses of the work, upon all whose landed interests received benefits therefrom.” This legislation focused on “the prevention of injury by means of common works of protection, rather than the enhancement of the value of property affected.”
In 1667, following the great fire of the city of London, an act was passed to regulate the rebuilding of the city. Section 20 of the statute empowered the municipal corporation
“to impose any reasonable tax upon all houses within the said city or liberties thereof, in proportion to the benefit they shall receive thereby, for and towards the new making, cutting, altering, enlarging, amending, cleansing and scouring all and singular the said vaults, drains, sewers, pavements and pitching aforesaid.” (Pgs 20-21, Rosewater)
In France, in 1672 the question arose whether, “when dark and narrow streets are widened, the proprietors of those houses which profit by such improvements ought not to contribute to the expense.” (Ibid., Pg 14) The question of contributions had apparently been decided in the affirmative several times before, according to Rosewater. So, in 1672 a decree was made that “the owners of several houses in Rue de Arcis facing the demolished buildings were ordered to bear their shares of the cost in proportion to the advantages which they received therefrom.” (Ibid., Pg 14) In 1807, a new law was enacted under the name of indemnities pour paiement de plus-value which stated:
“when by the opening of new streets, by the creation of new public places, by the construction of quays, or by any other public work, general, departmental or communal, ordered and approved by the government, private property shall have acquired a marked increase in value, such property may be charged with the payment of an indemnity which shall be adjusted according to half the value of the advantages acquired.” (Section 30, Loi relative au dessechement des marais, 16 Septembre 1807)
A series of laws permitting the extraction of funds from property owners was passed throughout the first half century of the 1800s in France. Rosewater provides a nice summary of the workings of the law of 1807 stating:
“The system enacted by the law of 1807 is in brief this: The liability of the property owners must be declared by a decree of the Chef de l’Etat rendered in the Conseild’ Etat. The assessment is fixed by a commission organized for the purpose whose duty it is to designate the property-owners who are specially benefited by the work, to determine the amount of the benefit, and to fix the share which each is to pay. As a rule, the decree which authorizes the assessment fixes the district of benefit; in every case it states the portion, not exceeding one-half, of the value of the accruing advantages which may be demanded.” (Ibid., Pg 16)
Rosewater’s description tracks very closely to the special assessment process found in Michigan. There must be a resolution by the governing body of the jurisdiction which finds that the proposed improvement is a public necessity, it provides for the fixing of a special assessment district in which properties may be specially assessed and there is a provision for levying those costs eligible to be specially assessed in “reasonable” proportion to the increase in market value of the property receiving a unique, measurable and direct increase in value from public improvement.
It should be noted that French law extended into portions of Belgium during the early 1800s. Thus, the French special assessment was introduced into Belgium. Following Belgium’s independence, “the doctrine of special assessment for benefit, not only persisted, but attained a wider application than it received in France.” (Ibid., Pg 16).
Germany’s heritage for the special assessment derives from classes of roadways which existed in the areas known as Prussia. Termed, Interessentenzuschusse or Interessentenchausseebcitrage. the procedures of the law contain the elements of a special assessment for benefit received.
According to Rosewater, there is a clear link to the special assessment found in the U.S. and Europe.
“the underlying principle of special assessment for benefit first appeared in this country in the provisions of a province law of New York in the year 1691. The effective clause of this statute was copied almost literally from the twentieth section of the English act passed in 1667, and re-enacted in 1670” ...”Only in the sense of adaptation can the system be said to have had its origin in the exigency and convenience of the American colonists.” (Ibid., Pgs 24 & 25)
Rosewater articulates several time periods in which the use of the special assessment spread across the U.S. First, there were developments “after the people began to recover from the effects of the war of 1812.” Then, during the 1840s and 1850s the use of special assessments continued to spread across the country, “coinciding to a great extent with the era of premature railway building.” The final expansion of its use began “immediately upon the close of the late civil war.”
According to Rosewater, “special assessments for benefits resulting from street improvements” were introduced into Michigan with the Detroit city charter of 1827.As a rule, during the 1800s the legal foundation for the modern special assessment was developed via litigation of various issues including the concept of “necessity.” The 1900s saw the need to address bonding issues following the great depression, litigation which led to the refutation of “benefit” based upon three principles and the affirmation of “benefit” meaning only one thing, an increase in a property’s market value. The late 1900s was the time during which the concept of an “ad valorem” special assessment was expanded along with the idea that a special assessment district could encompass an entire taxing jurisdiction. Clarification of the proper venues to appeal the special assessment also occurred during the last half of the 1900s. Special assessments levied under the “police powers” of the state are generally appealed to a court of law. Special assessments falling under the property tax laws of the state are appealed to the Michigan Tax Tribunal.
In a nutshell, the modern special assessment in Michigan is a method by which a government can demand money from a property owner because a government project made the property owner’s land more valuable. The amount of money that can be extracted under perfect conditions would be one dollar of assessment for every dollar of benefit. Given the vagaries of estimating the increase in value specifically from a project, the courts have demanded special assessment levies be “reasonably” related to the increase in value. The newest form of special assessment, the “ad valorem” special assessment uses a millage rate and a property’s taxable value to calculate the special assessment burden. Unlike the traditional special assessment which produced a specific amount due, the ad valorem special assessment is limited by time; the years for which the special may be collected. The “ad valorem” special assessment levy may increase or decrease as a property’s value changes from year-to-year.
Some Relevant Terms and Characteristics
♦ Though referred to as a tax, the special assessment is not a tax, but instead is remuneration a government unit may seek because a public project made certain parcels of real estate more valuable. A tax is to be used for general government. A special assessment is the amount a government unit may take from a taxpayer as reimbursement of eligible expenses because a public project enriched the property value of the taxpayer.
♦ An ad valorem tax (the common property tax) is based upon the value of a property and millage rates permitted by the state constitution, a specific law or a vote of the people.
♦ Two geographic districts are associated with a special assessment. The “Service District” which consists of all properties somehow connected to the public project (using legal, economic and scientific facts) and the “Special Assessment District (S.A.D.) which consists of properties which have a higher market value as a direct result of the public project.
♦ Historically, the special assessment has been levied as a fixed amount (e.g., say $5,000 for a street paving or sewer line or fresh water line). However, a previously rare form of special assessment which uses a millage rate and the property value to calculate an annual special assessment burden for each year of a specific time frame has become more common. This is the “ad valorem special assessment.” Currently more than 100 ad valorem special assessment levies exist in the state.
♦ In the ad valorem property tax, there are two fundamental mandates: equity and uniformity
♦ In the special assessment process, there are two fundamental mandates: necessity and benefit
♦ Equity is accomplished by adjusting an individual assessment to reflect the economic influences present in the neighborhood (e.g. average home prices, pollution, quality of schools, presence of parks or natural features et cetera)
♦ Uniformity is accomplished by utilizing a state manual and land value maps to assure that each assessment begins with common charges that will be modified by the property condition and other characteristics as well as outside influences found in the “neighborhood.”
♦ Necessity is the term used to indicate the legal requirement that a public body proceeding with a public project must articulate a “finding” that a particular project is necessary to accomplish a specific public goal.
♦ Benefit is a term indigenous to the special assessment process which refers to what exactly it is that a parcel receives from a public project. The term has been defined through Supreme Court decisions to mean one thing: a measurable increase in a property’s market value which results directly and uniquely from a specific public improvement. Prior to 1986, the term was interpreted to mean one of three things: a special adaptability of the land, a relief from some burden or an increase in market value. The Supreme court has made it clear through a series of rulings that the measure of benefit is one thing: an increase in market value.
♦ A special assessment apportionment (tax burden) must be reasonably proportionate to the “benefit” (increase in market value) the individual parcel to be assessed received
♦ Property of a taxpayer can be taken for nonpayment of a special assessment in the same way that it can be taken for nonpayment of an ad valorem tax
♦ A special assessment is much more onerous for the taxpayer than the ad valorem property tax for the following reasons...
1. A property tax can be appealed every year at no, or a very small, cost to the taxpayer
2. The opportunity to initiate an appeal in the special assessment process is always less than 45 days. This short time period makes it difficult for a taxpayer to identify a problem, Importantly, once the appeal window closes, it is closed forever. There is no annual appeal.
3. Most taxpayers are intuitively aware of the market value of their property and thus may easily detect an error if one should exist.
4. The average taxpayer cannot tell whether or not a special assessment levy is fair. The special assessment process is complicated, involving multiple hearings, presentations and very rarely is the level of benefit justified by an appraisal or similar factual determination of a change in market value resulting from the public project.
5. A special assessment appeal almost always requires the taxpayer to hire an attorney, and consultants such as engineers, appraisers or other consultants. Many taxpayers appeal the ad valorem tax without the help of any paid professionals.
6. There is no “presumption of validity” for the ad valorem assessment but there is a “presumption of validity” which is given to the special assessment process. This explains in part why a taxpayer must hire professional assistance to fight a special assessment but does not have to do so for an annual property tax appeal.
7. Because everyone within a jurisdiction is charged the same millage rate, the ad valorem property tax is regarded as a “uniform” tax which does not usually create any properties with unique tax burdens.
8. The special assessment always creates a higher tax on a property than other properties within the jurisdiction that are not specially assessed. For example, perhaps 200 parcels are specially assessed for a street improvement, and there are 2,000 parcels in the jurisdiction. This situation can cause the value of a specially assessed property to become lower. A potential buyer may choose one of the 1800 parcels which are not specially assessed for a street pavement rather than pick a property with higher taxes. Where there are unit wide special assessments (e.g. across the whole village or township or city) some buyers will look to adjacent communities which do not have the extra burden of a special assessment.
9. The area within which an ad valorem property tax may be levied is the geographic area in which the taxing authority has jurisdiction; normally a municipality, county, village, township or authority such as a school district.
10. The area in which a special assessment may be levied is an area which includes properties receiving an increase in their market value arising measurably, directly and uniquely from some public improvement; the boundary of which is delineated by the junction between those properties receiving the benefit and those which do not.
May I take this opportunity to thank Chairwoman Price for inviting my testimony on the structure and history of the special assessment in Michigan? I am honored by the request and grateful to interact in this way with each of you committee members. You have a complex and difficult job as elected officials. It is gratifying to see you make this effort to understand a very obscure area of Michigan’s property tax laws. After all, in a democracy, taxation is one of the areas where the rubber meets the road. It is the mechanism by which government extracts money from the taxpayer with the threat of taking real estate. Justice is paramount in the process, especially in a process not well understood by the layperson.
My one comment beyond hoping that this document provides a factual and historical background you find interesting is that I am very concerned that the special assessment process is being modified to the severe disadvantage of the taxpayer. It appears to me that attempts are being used to move it from the pure extraction of funds based upon enrichment of the property owner, to an extraction of funds to finance the ordinary functions of government. Rosewater addressed similar concerns by saying at the end of the late 1800s: “The special assessment legislation of the past few years has been directed not so much to a limitation or modification of the system as to the correction of abuses that had found their way into its administration.” One of the challenges you may face is that those feeling pressured by a lack of public funds see the special assessment for benefit as a cash cow to be used in ways not consistent with the nature of the special assessment for benefit.
Attached is an article which appeared in the Michigan Assessor Magazine. It provides documentation for the modern special assessment process based upon statute and litigation. It is my belief those of you who are interested, will find within it rules for levying a modern special assessment. As a note, I am not an attorney and my beliefs and understandings may not be consistent with what a seasoned attorney or a court of law might state. I urge you to verify whatever you might contemplate with competent legal counsel. The remarks made within this document and my other submission are mine alone and are not being made as representations of any group, agency or entity that I have a membership or affiliation with.