The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 6911 August 7, 1996 TAXATION: The provisions of section 27a(2)(a) of the General Property Tax Act The provisions of section 27a(2)(a) of the General Property Tax Act that limit the annual increase in the taxable value of certain real property to the percentage change in the state equalized valuation violate Const 1963, art 9, s 3. Honorable Joanne G. Emmons State Senator The Capitol Lansing, Michigan You have asked whether the provisions of section 27a(2)(a) of the General Property Tax Act, MCL 211.1 et seq; MSA 7.1 et seq, that limit the annual increase in the taxable value of certain real property to the percentage change in the state equalized valuation violate Const 1963, art 9, s 3. Section 27a(2) of the General Property Tax Act reads as follows: Except as otherwise provided in subsection (3), for taxes levied in 1995 and for each year after 1995, the taxable value of each parcel of property is the lesser of the following: (a) The property's taxable value in the immediately preceding year minus any losses, multiplied by the lesser of 1.05 or the inflation rate, plus all additions. However, if a fraction the numerator of which is the state equalized value for the current year minus additions and the denominator of which is the state equalized value for the immediately preceding year minus losses is less than both 1.05 and the inflation rate, for purposes of this subdivision the taxable value is the product of the property's taxable value in the immediately preceding year minus losses, multiplied by that fraction, plus additions. For taxes levied in 1995, the property's taxable value in the immediately preceding year is the property's state equalized valuation in 1994. (b) The property's current state equalized valuation. [Emphasis added.] Briefly stated, the statute provides that the taxable value of each parcel of property, (1) for the 1995 tax year and thereafter, is the lesser of the following: 1. The property's taxable value in the immediately preceding year minus any losses, multiplied by the inflation rate, plus all additions; 2. The property's taxable value in the immediately preceding year minus any losses, multiplied by 1.05, plus all additions; 3. The property's immediately preceding year taxable value minus losses, multiplied by a fraction, plus additions. The numerator of the fraction is the state equalized value for the current year minus additions, and the denominator is the state equalized valuation for the immediately preceding year minus losses; or 4. The property's current state equalized valuation. The portion of the statute summarized in item 3 above and underscored in the preceding quote of section 27a(2) describes what is commonly referred to as the value change multiplier (VCM). When the VCM factor applies, it essentially changes the prior year's taxable value by the percentage change in state equalized valuation from the prior year. The VCM language of section 27a(2)(a) is the subject of your request. Section 27a(2) was added to the General Property Tax Act by 1994 PA 415 to implement changes made to Const 1963, art 9, s 3 in March, 1994, when the people adopted the constitutional amendment known as Proposal A. Const 1963, art 9, s 3, as amended by Proposal A, provides: The legislature shall provide for the uniform general ad valorem taxation of real and tangible personal property not exempt by law except for taxes levied for school operating purposes. The legislature shall provide for the determination of true cash value of such property; the proportion of true cash value at which such property shall be uniformly assessed, which shall not, after January 1, 1966, exceed 50 percent; and for a system of equalization of assessments. For taxes levied in 1995 and each year thereafter, the legislature shall provide that the taxable value of each parcel of property adjusted for additions and losses, shall not increase each year by more than the increase in the immediately preceding year in the general price level, as defined in section 33 of this article, or 5 percent, whichever is less until ownership of the parcel of property is transferred. When ownership of the parcel of property is transferred as defined by law, the parcel shall be assessed at the applicable proportion of current true cash value. The legislature may provide for alternative means of taxation of designated real and tangible personal property in lieu of general ad valorem taxation. Every tax other than the general ad valorem property tax shall be uniform upon the class or classes on which it operates. A law that increases the statutory limits in effect as of February 1, 1994 on the maximum amount of ad valorem property taxes that may be levied for school district operating purposes requires the approval of 3/4 of the members elected to and serving in the Senate and the House of Representatives. [Emphasis added.] The language added to Const 1963, art 9, s 3 by Proposal A is underscored in the above quotation. Before this constitutional amendment, property taxes were based upon the equalized true cash value of the property. Const 1850, art 14, ss 10-13, ratified at an election in November, 1900; Const 1908, art 10, ss 3, 4, 7, 8; Const 1963, art 9, s 3, as originally adopted. Moreover, since 1900, Michigan constitutions have mandated that ad valorem taxes on real property be subject to a uniform rule of taxation. The rule of uniformity requires that taxes be uniform both in the rate of taxation and in the base upon all property within the taxing unit. In Huron-Clinton Metropolitan Authority v Boards of Supervisors of Five Counties, 304 Mich 328, 335-336; 8 NW2d 84 (1943), the Michigan Supreme Court, quoting with approval from Exchange Bank of Columbus v Hines, 3 Ohio St 1, 15 (1853) explained the constitutional mandate for uniformity as follows: "What is meant by the words 'taxing by a uniform rule?' ... 'Taxing' is required to be 'by a uniform rule;' that is, by one and the same unvarying standard. Taxing by a uniform rule requires uniformity not only in the rate of taxation, but also uniformity in the mode of the assessment upon the taxable valuation. Uniformity in taxing implies equality in the burden of taxation; and this equality of burden cannot exist without uniformity in the mode of the assessment, as well as in the rate of taxation. But this is not all. The uniformity must be co-extensive with the territory to which it applies." (2) In adopting the constitutional amendments in Proposal A, the people of this state authorized and mandated certain narrow exceptions to the otherwise rigid uniformity required by Const 1963, art 9, s 3. One of these exceptions included limiting all future property tax increases (until the property is transferred) that might otherwise occur due to extraordinary increases in local property values. (3) Before the adoption of Proposal A, taxes were levied on a parcel's state equalized value (SEV) which is derived from and often the same as the assessed value of the parcel. The assessed value is 50% of the true cash value (usual selling price) of the property. Therefore, sudden increases in a property's market value that were unrelated to the general rate of inflation, e.g. its desirability as lakefront property, could drive taxes upward. A provision of the so-called Headlee Amendment, Const 1963, art 9, s 31, adopted in 1978, rolls back millage rates when assessments rise faster than the rate of inflation, but this provision is triggered only by an average percentage increase in assessments for the entire taxing unit. It has no effect on tax increases resulting from an increase in the assessment of any individual property. As a result, even after the adoption of the Headlee Amendment, public pressure continued for the protection of individual property owners from unaffordable increases in property taxes resulting from sudden sizable increases in property assessments. The Legislature responded by enacting Proposal A, subsequently approved by the people, which caps the increase in the taxable value of real property on a parcel-by-parcel basis. As noted above, the new language in Const 1963, art 9, s 3, provides, in relevant part: For taxes levied in 1995 and each year thereafter, the legislature shall provide that the taxable value of each parcel of property adjusted for additions and losses, shall not increase each year by more than the increase in the immediately preceding year in the general price level, as defined in section 33 of this article, or 5 percent, whichever is less until ownership of the parcel of property is transferred. When ownership of the parcel of property is transferred as defined by law, the parcel shall be assessed at the applicable proportion of current true cash value. [Emphasis added.] Summarized, Const 1963, art 9, s 3 mandates that the taxable value of each parcel of property, for the 1995 tax year and thereafter (unless the property is transferred) shall not increase by more than the lesser of: 1. The property's taxable value in the immediately preceding year (adjusted for additions and losses) multiplied by the inflation rate; or 2. The property's taxable value in the immediately preceding year (adjusted for additions and losses), multiplied by 5%. The primary rule of construction of constitutional provisions is to determine what the electorate intended when it adopted the language being construed. City of Jackson v Nims, 316 Mich 694, 720; 26 NW2d 569 (1947); Bacon v Kent-Ottawa Metropolitan Water Authority, 354 Mich 159, 170; 92 NW2d 1492 (1958). When Proposal A was presented to the Michigan electorate, the ballot description provided, in pertinent part, as follows: PROPOSAL A A PROPOSAL TO INCREASE THE STATE SALES AND USE TAX RATES FROM 4% TO 6%, LIMIT ANNUAL INCREASES IN PROPERTY TAX ASSESSMENTS, EXEMPT SCHOOL OPERATING MILLAGES FROM UNIFORM TAXATION REQUIREMENT AND REQUIRE 3/4 VOTE OF LEGISLATURE TO EXCEED STATUTORILY ESTABLISHED SCHOOL OPERATING MILLAGE RATES The proposed constitutional amendment would: 1) Limit annual assessment increase for each property parcel to 5% or inflation rate, whichever is less. When property is sold or transferred, adjust assessment to current value. Accordingly, the ballot description, like the amendment, clearly indicated that the intent of the amendment was to place a cap on the annual increase in assessments to the lesser of inflation or 5%. Nothing in Const 1963, art 9, s 3, as amended by Proposal A, or in the ballot description specifically refers to an additional limit based on the percentage change in SEV. In addition, the VCM limit language in section 27a(2)(a) is not implicitly necessary to implement the intent of the amendment and, in fact, clearly exceeds its scope. It does not solely cap increases in taxable value. Rather, it can also cause decreases in taxable value to below SEV when the SEV decreases, which leads to absurd results as shown in the examples below. EXAMPLE I Year TRUE Cash SEV % Change % Change Taxable Value Taxable Value SEV CPI With VCM Value W/O (4) (5) Factor VCM Factor ---- ----------- ------- ---------- ---------- ------------- ------------ 1994 $100,000 $50,000 $50,000 $50,000 1995 $106,000 $53,000 +6.0% +2.8% $51,400 $51,400 1996 $103,000 $51,500 -2.8% +2.5% $49,945 $51,500 1997 $103,000 $51,500 0.0% +3.0% $49,945 $51,500 In EXAMPLE I, from 1994 to 1995, the parcel's true cash value and SEV increased by 6%, the former going from $100,000 to $106,000, while the rate of inflation was only 2.8%. Applying the formula set forth in section 27a(2)(a), the increase in its taxable value was limited to the rate of inflation (2.8%) resulting in a taxable value increase from $50,000 to $51,400. However, from 1995-1996, a decrease in true cash value to $103,000 caused the VCM factor to apply, since the resulting change in SEV was less than the rate of inflation or 5%. The application of the VCM factor caused the taxable value to decrease to $49,945, an amount lower than the $51,500 SEV and lower than the $50,000 SEV the property had in 1994 when it had a lower true cash value. This affected the taxable value of the property in subsequent years, so that, by 1997, even though the parcel had appreciated in value since 1994 by 3%, its taxable value is below that of 1994. EXAMPLE II Year TRUE Cash SEV % Change % Change Taxable Value Taxable Value SEV CPI With VCM Value W/O Factor VCM Factor ---- ----------- ------- ---------- ---------- ------------- ------------ 1994 $100,000 $50,000 $50,000 $50,000 1995 $101,000 $50,500 +1.0% +2.8% $50,500 $50,500 1996 $102,000 $51,000 +1.0% +2.5% $51,000 $51,000 1997 $103,000 $51,500 +1.0% +3.0% $51,500 $51,500 In EXAMPLE II, the 1994 true cash value was the same as in EXAMPLE I, $100,000, and rose to the same value, $103,000, by 1997. In this example, however, because of the steady, even though small, 1% yearly increase in the property's value, its taxable value has each year remained the same as its SEV. Comparing the two examples, both parcels have, by 1997, appreciated by an identical 3%. Yet the parcel in EXAMPLE II is being taxed on its SEV, i.e., 50% of its true cash value, while the parcel in EXAMPLE I is being taxed on a taxable value less than it started with in 1994. Contrast this result with that in the last column of each example, which calculates taxable value without the VCM and where both parcels end up with the same taxable value as of 1997. The foregoing are not extreme examples. If a property's value increases more significantly in a single year than in the examples and then levels off or declines, the results will be markedly more absurd. The VCM limit, in effect, assures that once the taxable value of a property is established at a value less than the SEV for the same year, the annual increase in taxable value thereafter will always be less than the annual increase in the SEV, even when the percentage of increase in the SEV does not equal or exceed 5% or the inflation rate for that year. This clearly exceeds the limited mandate of Proposal A, which authorized a deviation from the uniformity of taxation requirement of Const 1963, art 9, s 3 only for the purpose of limiting an increase in taxable value to the lessor of inflation or 5%. As noted above, prior to the passage of Proposal A, property was taxed on its SEV. In adopting Proposal A, the people intended only to limit the increase in property taxes. While Proposal A allows taxable value to increase to an amount less than SEV, Proposal A does not authorize a decrease in taxable value to an amount less than SEV when SEV decreases. Thus, if the SEV decreases, the taxable value should only decrease to SEV, and no further. Since the VCM factor causes taxable value to decrease, even when it is already below SEV, the VCM factor violates Const 1963, art 9, s 3. It is my opinion, therefore, in answer to your first question, that the provisions of section 27a(2)(a) of the General Property Tax Act that limit the annual increase in the taxable value of certain real property to the percentage change in the state equalized valuation violate Const 1963, art 9, s 3. Having determined that the VCM limitation is unconstitutional, there remains the question of the effect of that determination on the rest of the statute. In MCL 8.5; MSA 2.216, the Legislature has mandated that unconstitutional statutory provisions be severed from the rest of the statute unless to do so would be inconsistent with the manifest intention of the Legislature. City of Highland Park v Fair Employment Practices Comm, 364 Mich 508, 520; 111 NW2d 797 (1961). The language of section 27a(2)(a) of the General Property Tax Act, absent the unconstitutional language, fully implements the constitutionally mandated limitation on increases in taxable value to the lesser of inflation or 5%. Thus, severance of the invalid language is not contrary to the manifest intent of the Legislature to implement the statutory changes required by the amendment of Const 1963, art 9, s 3. (6) The language in question may, therefore, be severed from section 27a(2)(a) of the General Property Tax Act and the rest of the statute may be given full effect. Since your second question is premised on a finding that the value change multiplier provision is constitutional, it need not be addressed. Frank J. Kelley Attorney General (1)
(2)
See also, Titus v State Tax Comm, 374 Mich 476, 480; 132 NW 647 (1965); Washtenaw County v State Tax Comm, 126 Mich App 535, 540; 337 NW2d 565 (1983), modified in part and reversed in part on other grounds, 422 Mich 346; 373 NW2d 697 (1985).(3)
Another exception was authorized in the first sentence of art 9, s 3, by the addition of the phrase "except for taxes levied for school operating purposes", which altered the prior requirement that all millages levied within a governmental unit must be uniformly applied against all property subject to tax in that unit. This change authorized the levy of a 6 mill state education tax on all property while an additional 18 mills of school operating millage could be levied on non-homestead property as implemented by, respectively, MCL 211.903; MSA 7.557(33), and MCL 380.1211; MSA 15.41211.(4)
Assuming no losses or additions(5)
Consumer Price Index(6)
In fact, the VCM limitation language was apparently not originally considered necessary at all to implement the constitutional changes. 1994 PA 415, when initially introduced as HB 5945, and later as Substitute H-3, did not contain the VCM language. House Legislative Analysis, HB 5945 (Substitute H-3) December 6, 1994. Rather, it resulted from an amendment first offered on December 6, 1994, just 8 days prior to final passage. 1994 Journal of the House, 2695, 2980.