New, Loss, Adjustment, Losses, and Additions

1. New, Loss, Adjustment, Losses, andAdditions

2. EQUALIZATION MANDATE • Article IX, Section 3 of the 1963 Constitution of the State of Michigan provides for the “uniform general ad valorem taxation of real and tangible personal property not exempt by law …” • MCL 211.10 provides that “(a) n assessment of all the property …shall be made annually in all townships, villages and cities by the applicable assessing officer as provided in section 3, article IX of the state constitution of 1963…” • MCL 211.34(2) provides that “(t)he county board of commissioners shall examine the assessment rolls of the townships or cities and ascertain whether the real and personal property in the respective townships or cities has been equally and uniformly assessed at true cash value.” • MCL 209.4 provides that the State Tax Commission (acting as successor to the State Board of Equalization, pursuant to MCL 16.186) “shall determine whether the state equalized valuation of … property in the county was set at the level prescribed by law or should be revised to provide uniformity among the counties …”

3. EQUALIZATION PURPOSE • Quality local assessing practices can assure uniformity among parcels within a classification and within a local assessing jurisdiction. • Equalization is to assure uniformity in the level of assessment from one property to another, among the classifications within each assessment jurisdiction, among the cities and townships in each county, and among all of the counties within the State of Michigan. • Lack of uniformity results in a non-uniform distribution of the tax burden. • Lack of uniformity can exist between assessing units due to the failure to value property at 50% of true cash value, even if the assessments within the unit are uniform. • This lack of uniformity is corrected by means of a County Equalization Factor. The goal of the equalization process is to assure that the level of the assessment that results from the assessment process is uniform for all properties in the State.

4. EQUALIZATION PROCEDURE ADJUSTMENT: Assessment changes that are implemented to recognize the results of the equalization study, and which were accounted for in setting the equalization starting base for the year in question. Adjustments are also sometimes described as changes in assessment to establish uniformity and meet the 50 percent requirement. Assessment changes due to a change in the market value of property improvements, components or structures valued in the preceding year’s assessment roll. Market value changes are Adjustments if they were reflected in the equalization study to set the starting base for the current year.

5. EQUALIZATION PROCEDURE • Assessment changes for reasons other than the recognition of the results of the current equalization study are treated as “New” or “Loss”. • “New” or “Loss” are: • Physical changes in the property • Changes in the taxable status of the property • Certain occurrences that directly orindirectly result in the recognition of an increase or reduction in market value (such as some improvements to public services, certain actions by the STC or MTT, and land division or assemblage activities).

6. Examples of Equalization Plus Adjustments • Increases in value due to general price increases in the area. • Increase in value due to increased demand arising from the building of a new industrial plant. • Increase in value due to a new freeway that generally improves access from the city. • Increase in value due to improvement in the school system. • Increase in value due to a reduction in property taxes. • Increase in value due to zoning changes. • Increase in the value of an individual assessment solely to establish uniformity, where no physical change in the property has occurred.

7. Examples of Equalization Minus Adjustments • Decrease in value due to general price decrease in the local market. • Decrease in value due to an industrial plant closing. • Decrease in value due to zoning changes. • Decrease in value due to financial difficulties in the school system. • Decrease in value due to an increase in property taxes. • Decrease in value of an individual assessment to establish uniformity.

8. Examples of Equalization New • Placement of a legal description on the roll for the first time after splitting a larger parcel or assembling smaller parcels. • A classification change which results in the inclusion of a parcel in a class for the first time. • The return of a parcel from an exempt status. • The valuation of a new building or other new property improvement on the roll for the first time. • Property that was previously omitted from the roll. • Value added to reflect additions or improvements to existing structures or other property improvements. • Further completion of new construction that was partially complete on the previous tax day

9. Examples of Equalization New • The value increase occasioned by the platting of a parcel. • Value changes resulting from a State Tax Commission or March Board of Review determination that omitted property should be added to the assessment roll. • In the ABSENCE of an equalization study, increases in value of a personal property parcel when compared to the previous year, except for the values of items or components which are statutorily assessed as personal property but are real property in nature. • Increased land values or value increases caused by improved economic conditions which were not reflected in the equalization study. This sometimes happens when a starting ratio is not based on a reliable and accurate study but rather is merely an estimate.

10. Generally, the equalization study, if properly conducted, will reflect increases in value such as those described in #11 above. Sometimes if the study does not include samples which are representative of the property in question, such circumstances may justify New (or Loss) treatment when the property in question is of a large enough value and has a significantly different level of assessment than that indicated by the equalization study, so that the tentative equalization factor would change.

11. A representative sample need not include parcels representing each and every subdivision or plat (or each subgroup) in the unit’s classification. However, a sample should contain parcels with study ratios that, in their aggregate, indicate the average ratio for that unit’s classification.

12. Consider the following example: • Z Township has 11 industrial parcels; 10 relatively small satellite machine shops and 1 relatively large manufacturing plant. The county equalization department (CED) performed no 2002 study to set the 2003 starting base ratio and true cash value for the industrial real classification. The CED posted the values from line 308 of the 2002 Form L-4023 (with a 48% ratio) to line 301 of the 2003 Form L-4023. Therefore, the 2003 starting ratio is 48.00%.

13. To set the 2003 assessment, Z Township contracted for an appraisal of the large manufacturing plant. The appraisal (net of current loss, adjustment, and new) indicates a 42.00% starting ratio for 2003 for the plant. The assessor has increased the assessment to 50% of the appraised value. Even though the increase is not the result of value that is new to the roll in the usual sense (such as new construction, exempt and returning to the roll, or split new); the surplus amount of assessment increase must be taken as equalization new for Forms L-4021, L-4022 and L-4023, assuming that the Equalization Director agrees that the appraisal is a valid indicator of true cash value.

14. The remaining amount of assessment increase that is taken as Equalization New is the amount of the increase taken to raise the ratio from 42.00% to 48.00% (the starting ratio shown on line 301 of the L-4023). The amount of assessment increase that is taken to raise the ratio from 48.00% to 50.00% is taken as plus adjustment. If the entire assessed value increase was taken as plus adjustment, an unjustified factor of less than 1.00000 could result.

15. !!! IMPORTANT !!! • The value taken as Equalization New is not recognized either as capped value additions, or as additions for Headlee rollback purposes.

16. For example, suppose that the manufacturing plant has a 200,000,000 TCV for 2003. • 2002 AV = 200,000,000 x 42.00% ratio = 84,000,000 • 2003 AV = 200,000,000 x 50.00% ratio = 100,000,000 • 2003 NEW = (200,000,000 x 48.00% ratio) – 84,000,000 = 12,000,000 • or • =200,000,000 x (48.00% - 42.00%) = 12,000,000 • 2003 Plus Adjustment = 200,000,000 x (50.00% - 48.00%) = 4,000,000 • 2002 2003 Loss/Losses +/-Adjustment New/Additions • AV 84,000,000 100,000,000 0 4,000,000 12,000,000 • CV NA NA 0 0 0 • For MRF and Truth in Taxation 0 NA 0

17. If the CED had made a reliable and accurate study for the Z Township industrial real property classification for the 2002 assessment year, the entire increase in value would typically be recognized as plus adjustment. • (Note: the CED may make the case for stratifying the plant’s values for equalization purposes on Form L-4018.)

18. Examples of Equalization Loss • Retirement of a parcel (legal description) after a split, an assemblage, or a platting. • Removal of a parcel from the classification when a parcel is changed from one classification to another (Agricultural to Residential). • Removal of a parcel to a tax exempt status. • The physical destruction or removal of a property component or improvement. • Value reductions resulting from a State Tax Commission MCL 211.154 order or from a March Board of Review determination that improvements improperly assessed to the wrong parcel.

19. Examples of Equalization Loss • In the absence of an equalization study showing a starting ratio greater than 50%, reductions in value in a personal property parcel when compared to the previous year, except to the extent that the parcel includes items or components which are statutorily assesses as personal property but are real property in nature. • Decreased land value or the value decreases occasioned by deteriorated economic conditions that were not reflected in the equalization study. This sometimes happens when a starting ratio is not based on a reliable and accurate study but rather is merely an estimate.

20. CAPPED VALUE Mandate Article IX, Section 3 of 1963 Constitution of the State of Michigan - “… taxable Value … 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 … or 5 per cent, which ever is less, until the ownership of the parcel of property is transferred.” MCL 211.27a implements the section of the Constitution and provided a detailed definition of “transfer of ownership”. MCL 122.34d provides detailed definitions of “Additions” and “Losses” and provides the formula for calculating Taxable Value.

21. CAPPED VALUE • Fulfill the constitutional and statutory requirements described in the Mandate. • Limit the amount by which the value used to compute taxes can increase in any one year. • Unless a “Transfer of Ownership” has occurred in the preceding year, each year’s Taxable Value (TV) must be limited to the lessor of the State Equalized Value and a the Capped Value (CV). • CV increases from previous year’s TV by the lesser of the rate of inflation or 5%. • CV = [(Previous Year’s TV - Losses) X Inflation Rate Multiplier1] + Additions • 1The lesser of the Consumer Price Level or 1.05 PURPOSE

22. Examples of Capped Value Additions • Increase in value from inclusion of an omitted building (limited to the taxable value it would have if it had recognized when built, at the inception of Proposal A, or the last Transfer of Ownership plus the permitted taxable value increases. • Increase in value arising from the inclusion of personal property that was not reported on a personal property statement. • New construction on the property • Value arising from property returning from exempt status2. • Value arising from replacement of a structure destroyed by act of God or accident (subject to limitations). • Increase in value arising from an environmental cleanup (subject to question because of WPW Acquisition court decision). • Increase in value arising from introduction of public services 2cases involving industrial exemption certificate or poverty exemption limit the amount of the Additions to the amount the property would have had if it had never been exempt.

23. Examples of Capped Value Loss • Demolition of an existing building • Destruction of a building by a flood. • The exemption of property acquired by a school district (or other exempt entity) in the preceding year. • Decrease in value due to impaired occupancy (subject to question because of WPW Acquisition court decision). • Decrease in value caused by the recognition of environmental contamination (subject to question because of WPW Acquisition court decision).

24. HEADLEE MANDATE Article IX, Sections 25 through 31 of the 1963 Constitution of the State of Michigan provides for a procedure that reduces local and county millage rates. MCL 211.34d implementing statutes Separate revenue reduction procedure limits the ability of the State of Michigan to increase revenue by more than the rat of inflation

25. HEADLEE PURPOSE Operating tax revenue (not including bonded indebtedness) for the current year cannot exceed tax revenue for the previous year, increased by the increase in the inflation rate after being adjusted for taxable value Additions and Losses. Additions may increase revenue. Losses may reduce revenue. Millage Reduction Fractions (MRF) prescribed by MCL 21.34d PERMANENTLY REDUCE the maximum authorized millage rate that may be applied to a property’s taxable value. Headlee overrides are no longer acceptable - Voter authorized additional millages is the only method available to increase millage rates.

26. HEADLEE PROCEDURE Generally ADDITIONS are any property new to the assessment roll. Generally LOSSES are any property that was formerly a part of the assessment roll but which is gone from the current assessment year. A MILLAGE REDUCTION FRACTION (MRF) is applied to the maximum authorized millage rate. MRF = (Prior Year’s Taxable Value - Losses) X inflation Rate Multiplier Current Year’s Taxable Value - Additions The purpose of the calculation is assure that revenue is not collected in excess of that allowed under the Michigan Constitution.

27. EXAMPLES OF HEADLEE ADDITIONS • New construction and other physical improvements to property. • Personal property listed as New Acquisitions that have been property reported on the newest acquisition year of the Personal Property form and which do not represent a “rebooked” cost. • Personal property that is physically moved in from another assessment or tax levying jurisdiction and which has either been properly reported as a “Move-In” or has been verified by audit.

28. EXAMPLES OF HEADLEE ADDITIONS • Property that was physically located in the jurisdiction but was omitted from the assessment in the previous year. • The increase in value arising from the removal of property from exempt status. (IFT and Poverty exemptions are limited to the amount necessary to return current taxable value to the amount it would have been, had the property not received the exemption). • The increase in value made arising from the replacement of a structure destroyed by an act of God or accident - subject to limitations.

29. EXAMPLES OF HEADLEE ADDITIONS • The increase in value made arising from an environmental cleanup (given WPW Acquisition, the appropriateness of these Additions may now be subject to question). • Increase in value arising from the introduction of public services such as roads, sewers, and other utilities.

30. EXAMPLES OF ITEMS THAT ARENOT HEADLEE ADDITIONS • Platting, splitting, or combinations of property. • Change of zoning of a property. • Increases in Taxable Value attributable to uncapping in the year following transfers of ownership. • Increase in reported costs of personal property on an acquisition year (other than the most recent acquisition year), unless properly reported as a “Move-In” or the assessor has audited to verify that the property is new to the applicable levy jurisdictions.

31. EXAMPLES OF HEADLEE LOSSES • Demolition of an existing building • Destruction of a building by a flood, storm, or fire • Exemption of property acquired by a school district or other qualifying entity in the preceding year. • A decrease in value due to impaired occupancy (Given WPW Acquisition, the appropriateness of these Losses may now be subject to question). • A decrease in value caused by the recognition of environmental contamination (Given WPW Acquisition, the appropriateness of these Losses may now be subject to question).

32. EXAMPLES OF ITEMS THAT ARENOT HEADLEE LOSSES • The platting, splitting or combination of a parcel of land. • A change in zoning.

33. It is not necessarily the case that value changes that are identified to be Equalization New, or Capped Value Additions, or Headlee Additions must be all three, or even two of the three. 7 Examples Follow:

34. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 1. If the classification of the property is changed from Agricultural to Residential, the value removed from the Agricultural Class is Equalization Loss to that Class and Equalization New to the Residential Class, but no Capped Value Additions or Losses and no Headlee Additions or Losses are recognized.

35. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 2. If personal property is moved from one location in an assessment jurisdiction to another location in the same jurisdiction which is in a different school district, the value added to the new school district is not Equalization New and the value removed from the old school district is not Equalization Loss. However, although the movement does not result in Capped Value Additions or Losses if reported under the same parcel account, it is Capped Value Additions and Losses if afterward reported under a different parcel account.

36. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS • 2. Continued: • Further, for the assessing unit’s millage rollback calculations, absent an assessor audit, even if reported under a different parcel account, the movement will not be reported as a “Move-In” using Form 3966 and it will, therefore, not be treated as Headlee Additions for the new account. However, absent audit, it will be treated as Headlee Losses for the previous account. • For the ‘change in school district’ rollback calculations, the entire prior year’s taxable value is Losses to the school district that the personal property left. The entire current year’s taxable value is rollback Additions to school district the property entered.

37. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 3. Previously exempt personal property will be treated as Equalization New, but only to the extent that it results in an increase from the previous year’s assessment. The previously exempt personal property may be treated as Headlee Additions, but only if it is reported as a “Move-In” on Form 3966, or verified through an assessor’s audit.

38. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 4. The exemption of personal property may be treated as Equalization Loss, but only to the extent that it results in a decreased value for the parcel from the previous year’s assessment. The newly exempt personal property will be treated as Headlee Losses.

39. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 5. Leased equipment previously reported by the lessor and acquired by the lessee will be Equalization New to the lessee and Equalization Loss to the lessor. The previously reported leased equipment will be Headlee Losses for the lessor’s parcel, unless verified by an assessor’s audit. It will not be Headlee Additions for the lessee’s parcel, since it is not a “Move-In.”

40. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 6. Equipment reported by a previous owner and acquired by a new owner who keeps it located in the same assessment jurisdiction (change in accounts, but no change in jurisdictions) will be Equalization New to the new owner and Equalization Loss to the prior owner. The equipment will be Headlee Losses to the prior owner, unless otherwise verified by an assessor’s audit, it will not be Headlee Additions to the new owner, since it is not a “Move-In.”

41. Combinations of Equalization NEW, Capped Value ADDITIONS, and Headlee ADDITIONS 7. If a parcel has been split, combined or platted, the new parcel created will be deemed to be Equalization New and the retired parcel(s) will be deemed to be Equalization Loss. However, there are no Capped Value Additions or Losses and there are no Headlee Additions or Losses. The same general principles that are applied above to the comparison of Equalization New, Capped Value Additions and Headlee Additions, also apply to Equalization Loss, Capped Value Losses and Headlee Losses.

42. ERRONEOUS ACTIONS BY ASSESSORS - PERSONAL PROPERTY Many assessors mistakenly assumed that if a value reduction was Headlee Losses, it must also be a Capped Value Losses. THIS ASSUMPTION IS INCORRECT The method established to calculate Headlee Losses and Additions for personal property was knowingly and intentionally designed so that, in the absence of verification through an assessor’s audit, it would not understate Headlee Losses and would not overstate Headlee Additions. This was done so that the Headlee Millage Reduction Fraction would not be understated.

43. The State Tax Commission does not expect there to be more than a handful of instances, even in the largest of jurisdictions, where the Personal Property Capped Value is properly set in an amount less than the State Equalized Value. Most personal property declines in value from one year to the next. In most instances where the Capped Value appears to be less than the State Equalized Value, there is likely to be a mistake, and an analysis must be made to determine whether the value is actually capped. In particular, the assessor must be prepared to recognize four situations:

44. 1. Instances where the taxpayer changes the Section in which it reports its property. For instance, if all of the property is reported in Section B one year and reported in Section F the next, there is probably an incorrect report in one of the years, that may result in omitted or improperly reported property. 2. Instances where the taxpayer has “rebooked” its costs and has reported on the most recent acquisition year, while omitting all previous acquisition years.

45. 3. Instances where the value may be properly capped, arising from the fact that assets have increased in value, rather than declined in value. Examples are cases where the assessment is composed primarily of fluid pipeline property, fine art, other Section G reported assets that present unusual valuation problems and assets that have, in the past been undervalued, resulting in a capped under-assessment. Even in these cases, Bulletin 1 of 2000 provides that the value is capped, only if the effect on the entire assessment is such that the assessment, after adjusting for Additions and Losses exceeds the lesser of the rate of inflation or 5%. Bulletin 1 of 2000 also indicates that an asset-by-asset review is necessary before concluding that the value is capped.

46. 4. In instances where the assessment was estimated in the preceding year, in the current year, or in both years, all net changes are deemed to be either Headlee Additions or Headlee Losses. Such changes will also be deemed to be Equalization New or Loss.

47. DETERMINING ADDITIONS AND LOSSES USED IN THE CALCULATION OF THE “HEADLEE” MILLAGE ROLLBACK AND THE “TRUTH IN TAXATION” ROLLBACK FOR PERSONAL PROPERTY

48. 1. The State Tax Commission has directed that a new system for determining ADDITIONS and LOSSES shall be used in the calculation of the “Headlee” Millage Rollback and the Truth in Taxation Rollback for personal property, starting in assessment year 2004. This new system is set forth in State Tax Commission Bulletin 19 of 2002. • 2. The directives in Bulletin 19 of 2002 apply only to the calculation of the “Headlee” rollback (MCL 211.34d) and the Truth in Taxation rollback (MCL 211.24e). They DO NOT apply to the calculation of capped value or to the equalization process.

49. 3. In the past, the procedure for determining ADDITIONS and LOSSES used in the calculation of the “Headlee” Millage Rollback and the “Truth in Taxation” Rollback FORPERSONAL PROPERTY stated that all changes in taxable value were either ADDITIONS or LOSSES. Starting in assessment year 2004, this procedure shall no longer be used. The State Tax Commission recognizes that any practice that would understate the amount of the constitutionally mandated “Headlee” rollback of taxes is impermissible. Calculating a MRF that is too high is not permitted, and would likely be found to be unconstitutional.

50. The following practices must be avoided because they would understate the amount of the “Headlee” rollback of taxes and produce a MRF that is too high: a. Avoid Understating LOSSES - Understating LOSSES results in an understatement of the amount of the “Headlee” rollback of taxes. In order to avoid understating LOSSES, it is necessary to determine the amount of “move-ins” of used equipment. (“Move-ins” of used equipment will be defined later in this outline.)