Michigan Property Taxation - Distinguishing between
Special Assessments and an Ad Valorem Tax
Published in the MICHIGAN ASSESSOR, June 2004, Pages 35 - 38
by Joseph M. Turner
The interaction between special assessment levies and ad valorem levies has grown more complex over the years. Consequently, distinctions have become less obvious. As the administration of special assessments becomes more complex, opportunities for disagreements and costly litigation rise. The blurring is in part, due to the growing use of ad valorem special assessments. They are derived from the application of millage rates instead of the traditional method of some fixed cost being divided by the number of levy years. At the present time, Michigan has more than 125 special assessments with ad valorem levies attached to them.
Furthermore, while the foundation for levying ad valorem taxes is frequently discussed in forums and publications, far less attention has been paid to the formation of special assessment districts; a requisite for levying any special assessment.
Also, a special class of special assessments (those arising from public safety issues) is coming under the spotlight more and more as dams and dikes deteriorate and create a need for expensive, major repairs.
This document offers one perspective on those topics. These materials begin with a brief review of some differences between special assessment levies and ad valorem tax levies. Then it discusses “benefiting properties,” “Benefit,” and their relationship to boundaries.
Distinguishing between a special assessment and an ad valorem tax
There are significant differences between a special assessment levy and what most people regard as “property taxes,” the ad valorem tax. Both taxes use “market value” in the determination of the propriety of the levy. Ad valorem levies use market value to generated the tax. Special assessments require a change in market value to apportion the levy. In the discussion which follows, True Cash Value (a statutory reference to “market value”) and Market Value will be used as synonyms.
A special assessment is not a property tax. Michigan case law is replete with that admonition. In Fluckey v Plymouth, 358 Mich. 447, 453; 100 N.W. 2d 486 (1960) the court stated, “The theory of the special assessment is that a special benefit has been conferred, over and above that conferred upon the community itself.” In 1996, Michigan’s Attorney General said in Opinion 6896, “The law is settled that special assessments are not taxes.”
The ad valorem property tax is the tax most citizens are familiar with. This tax is levied as a millage rate multiplied by a portion of a property’s market value. The portion is called a “taxable value.” Pursuant to M.C.L.A. 211.10 ad valorem taxes must be levied on all property, real and personal, except that specifically exempted by law. [“All property real and personal within the jurisdiction of this state, not expressly exempted, shall be subject to taxation.”]
Special Assessments are not levied to offset the general expenses of government - ad valorem taxes are. A special assessment is a charge government may invoke to recover costs of a public improvement. These costs may be recovered as special assessments from individual parcels of real property only when a property’s market value has risen as a direct, specific and unique result of the public improvement. Special assessments are exclusive and may not be levied on taxable personal property. They may not be levied against real property that has not received a direct, specific and unique monetary benefit from the public improvement.
The sole, specific and unique benefit required for the levy of a special assessment, is an increase in market value.
This increase in a specific property’s market value must be measurable and factual. When this condition is met, a special assessment may be levied, but only in an amount proportional to the increased market value of the property. The idea was expressed in Kadzban v city of Grandville, 442 Mich. 495; 502 N.W. 2d 299 (1993) in this way: “we clarified the test for determining the validity of special assessments. An earlier Court of Appeals opinion suggested that there were three alternative bases that would support a finding of special benefits sufficient to justify a special assessment: 1)an increase in the land’s value, 2) relief from some burden to the land, or 3) the creation of a special adaptability of the land. Rejecting that approach, this Court said that special assessments are permissible only when the improvements result in an increase in the value of the land specially assessed.”
Special assessments escape constitutional and statutory restrictions placed
upon ad valorem taxation. None of the constitutional millage caps apply nor do
such limitations as the Headlee amendment and Truth in Taxation regulations.
Special assessments may be levied against property that would normally be exempt
from ad valorem taxation such as a church or hospital.
Special assessments escape constitutional and statutory restrictions placed upon ad valorem taxation. None of the constitutional millage caps apply nor do such limitations as the Headlee amendment and Truth in Taxation regulations. Special assessments may be levied against property that would normally be exempt from ad valorem taxation such as a church or hospital.
Historically, special assessments have almost always been levied as an annual lump sum representative of the cost of the public improvement which caused the property’s value to increase. The levy may include any interest costs permitted by law. Ad valorem taxes are levied, not as an incremental part of some finite amount, but as the product of a millage rate and a portion of a property’s market value - its Taxable Value.
One caveat exists with regard to historical special assessment levies; special assessments based upon property value are growing in use. The way for ad valorem special assessment levies was paved in a significant ruling, St. Joseph Township v Municipal Finance Commission 351 Mich. 524; 88 N.W. 2d 543 (1958). The Court explored PA 33 of 1951 and ruled law prohibiting ad valorem special assessments was improper. It also ruled that special assessments based upon a property’s market value were proper. A rationale for permitting ad valorem levies is that charges for some services such as police and fire protection are properly apportioned based upon the value of the property receiving the benefit. In AG Opinion 6896 cited earlier, the Attorney General stated, “special assessment millage imposed under 1951 PA 33 must be levied on the true cash value of the affected property.” Thus the SEV and not “taxable value” is used for ad valorem special assessment levies. The restriction to SEV was subsequently modified so that Taxable Value now may be used in the levy of ad valorem special assessments.
Taxpayers Rights and the Administration of Special Assessments
The administration of ad valorem taxes is significantly different from special assessments with respect to taxpayers rights. Ad valorem taxes may be challenged on an annual basis by attacking the value of a property, real or personal. They may be attacked based upon constitutional limitations with regard to millage rates. They may be attacked by Constitutional mandates requiring uniformity, equity and equalization of assessments. Such challenges can be made annually at a local board of review. Relatively speaking they may be inexpensive to pursue and simple to invoke.
Special assessments, on the other hand enjoy a presumption of validity under Michigan law which makes their appeal difficult and costly. There are few windows of opportunity to appeal special assessments. Three important ones exist: (1) after the formation or (2) modification of the district and (3) shortly after a special assessment roll is confirmed. Once the initial appeal is period is past, the presumption of validity begins and a special assessment is much more difficult to appeal and only under very specific circumstances.
Critical dates with regard to ad valorem and special assessment levies are distinctly different. In order to levy an ad valorem tax, assessors must first make a determination on December 31 of each year whether an individual property is exempt from taxation or not. If the property is not exempt, a determination of its True Cash Value is made and, through a series of administrative procedures, a “taxable value” is created. That value is then used by all taxing jurisdiction as the basis against which their millage rate is applied during the calendar year following the December 31st date. With the exception of ad valorem special assessments, December 31 means nothing. Special assessments are predicated upon a sequence of codified events.
It’s Geography Not Value!
In the case of special assessments, geography rather than value, is the first determinant. Properties to be specially assessed must lie within a specific geographic area known as a Special Assessment District (SAD).
The district must be created before progress can be made towards levying a special assessment. The Michigan Supreme Court held: “It is the duty of” a unit of government, “when a special improvement is made, the benefits accruing from which are regarded as local, to determine the boundaries of the district within which the property is supposed to be specially benefited by the improvement”...”The carving out of a special assessment district in a city is a practical matter, depending wholly upon the facts.” Lawrence v City of Grand Rapids 166 Mich 134, 131 N.W. 581 (1911). Once the SAD is identified, then a proper apportionment of costs can be made against properties lying within the SAD.
The SAD may only be formed after evaluating two geographic areas: the service district and an aggregate area where properties receive a special and unique “direct benefit” from the public improvement. Sometimes the two districts are congruent. A good discussion of the service district and Special Assessment District is contained within materials written by Ernest Reschke, CMAE IV, for the MAA course, Abatements and Special Authorities. Mr. Reschke is a current and long time instructor of that course.
Mr. Reschke tells us that a service district’s boundaries are usually determined by economic, scientific or engineering studies. Information from them delineates the area in which some unique action or event directly connects real property to a public improvement for which a special assessment is to be made. In the case of storm sewers, it may be the area from which water drains and the areas protected from aggregated runoff flooding. In the case of water lines or sanitary sewers it may be properties provided with connections for water or sewer service. In the case of an economic development project, an analysis of the geographic distribution of financial benefits such as revenue streams from taxation, the creation of jobs and the geographic distribution of economic stimulus is appropriate. Economic development means a public improvement resulting in job retention, job generation, economic benefit or financial gain to taxing entities. The technique used to identify benefiting properties is known as a “benefit analysis.”
From time-to-time, there exists within the “service district” a more restricted geographic area where a specific, unique and direct enhancement of property values has arisen as a result the public improvement. Where property values have increased in this way, the law permits a special assessment district to be formed. Properties lying within it may be charged a “tax” that reimburses the “public” for costs incurred if the properties were made more valuable. Such properties are known as “directly benefiting properties.” The geographic area comprised of these specially benefiting properties forms the SAD or Special Assessment District.
The final definition of special assessment district boundaries is a significant issue --- for several reasons. First, it enables a financial burden. Secondly, once set special assessment boundaries are hard to modify from the perspective of individual property owners. Thirdly, special assessments in general, are cloaked in a presumption of validity [In re Eight and One-Half Mile Relief Drain, 369 Mich. 641, 649; 120 N.W.2d 789 (1963).]
Lake Improvement and Lake Level Special Assessments
One of the most restrictive forms of special assessment levies is that related to dams and impounded waters as authorized under Michigan’s Natural Resource and Environmental Protection Act. These assessments focus on public safety issues with their primary concern being on the welfare of the public and the safety of dams and similar structures.
For example, in Part 307 of the Natural Resources and Environmental Protection Act, the emphasis of law is not on the rights of the individual taxpayer. In the matter of Van Etten Lake 149 Mich App 517; 386 N.W. 2d 572 (1986) the court said, “It cannot be reasonably argued that the purpose of the act is to also create or protect individual rights as to inland lake levels. The focus of the act is clearly on the public welfare and not on individual riparian rights.”
Notwithstanding this language, there is protection of individual rights pursuant to Part 307 special assessment levies. That protection is implemented through the establishment of Special Assessment District boundary lines. This fundamental concept is central to the directive found at M.C.L.A. 324.30711 “the cost of a project ...shall be defrayed by special assessments against the following that are benefited by the project.” Boundary lines are established for one purpose; to determine who pays and doesn’t.
Benefitting Properties and Value
Boundaries are located by identifying “benefiting” properties. The term “benefit” has been clarified and well defined through two recent court cases Kadzban v City of Grandville; supra (1993) and Dixon Road Group v City of Novi, 422 Mich 858, 365 N.W. 2d 749 (1986).
Benefit means a measurable, factual increase in an individual property’s market value directly resulting from a public improvement. Special assessments may only be levied against properties receiving a benefit greater than that conveyed upon the public at large. Special assessments need not be apportioned in an amount exactly equal to the dollar increase in value a specific property receives from the public improvement, but the apportionment must be reasonable.
Value is established through measurements made before and after the public improvement’s creation. There are “indirect benefits” which identify the service district and a sometimes a distribution of “Directly Benefiting” properties. It is the latter which determine the geographic area to be bounded as a Special Assessment District (SAD).
The Special Assessment District (SAD) boundaries are to be established in a manner consistent with this mandate by first determining which properties benefit from a public improvement and which do not. That determination is followed by a determination of directly “benefiting properties” that may be specially assessed.
Within Michigan, special assessments and ad valorem taxes both generate millions of dollars in revenue annually. Special assessments escape the constitutional caps ad valorem taxes are subjected to. There are real “needs” leading to an increase in the number of active special assessments. Much of Michigan’s transportation, sewer, water and other infrastructure such as dams have aged. Special assessment levies are useful tools to repair the aforementioned infrastructure and they offer opportunity for new revenue to the state’s cash strapped jurisdictions.
The administration of Michigan’s special assessment laws is complex and consequently, fraught with pitfalls. Increased usage of special assessments increases opportunity for mistakes. As the use of special assessments is scrutinized more closely, there will be more skillful attacks upon them. Government administrators need the input of assessing personnel to a help avoid those pitfalls. Citizens seek clarification and justification for these tax levies from assessment administrators.
For all these reasons, Assessors can expect more and more demand for their knowledge of special assessment administration. It is my sincerest hope the information contained in this document will stimulate discussion and in some way be of assistance to assessment administrators.
Joseph M. Turner, CMAE III firstname.lastname@example.org is an Instructor of the MAA Annual Short Course “Special Assessments.” His certificate is R-1798. He is CEO of Michigan Property Consultants L.L.C., 2719 State St., Saginaw, MI 48602.