Taking a hammer, not a scalpel, to how Michigan cities are funded

Lupher

Eric Lupher is president of the nonpartisan, nonprofit Citizens Research Council of Michigan, the state’s oldest public policy research organization

The numbers highlighted in Bridge Magazine’s recent analysis of the breadth and depth of local governments’ tax base losses (and property tax collections) since 2008 are staggering.

This analysis is confirmed by a Citizens Research Council of Michigan report issued in December that examined changes in local tax bases statewide.  Like Bridge, our analysis started by comparing today’s property tax base to the levels local governments taxed before the most recent recession. Similarly, we found that 85.0 percent of these local units have 2016 taxable values below what they had in at their inflation-adjusted peaks.

But a critic might argue that the decade leading up to the recession was characterized by a housing bubble with inflated property values. So the Research Council also compared today’s taxable values to 2000 values.  

By taking the “longer view,” the Research Council was able to document that 16 percent of the local governments had taxable values in 2016 that were below their respective inflation-adjusted 2000 taxable values. Our report found that despite the recovery in values since the Great Recession, many local units, particularly those in Southeast Michigan and along the I-75 corridor leading up to Midland and Bay City, are operating today on pre-2000 inflation-adjusted tax bases. Those experiencing the greatest loss in tax base are the local governments that were home to industry.

Bridge’s and the Citizens Research Council’s reporting agree ‒ the options currently available to Michigan’s local governments are limited. In light of the diminished tax bases, local governments are left to choose among a handful of broad areas to deliver public services to their constituents:

  • They can attempt to expand their tax bases to yield new revenues, but many urban local governments have little vacant land to offer for new development;

  • They can seek new revenue by applying higher tax rates to the diminished tax bases, but again many urban communities are already at or near their maximum tax rates;

  • They have been reducing service levels, but this diminishes the attractiveness of their communities; or

  • They can seek alternative methods of delivering the services their residents’ desire, but this requires statutory authorization.

Across the state, affected local governments have responded by engaging in efforts to balance and prioritize their citizens’ service demands with the amount of available public resources. Local government workforces have been downsized considerably and is the only sector that has not grown since the end of the Great Recession. Without the recovery from the 2008 national recession, local government employment has continued the slide that began with the state’s single-state recession (down 20 percent when compared to 2000 employment levels).

Meanwhile, local officials are left to ponder whether a full recovery of lost tax bases will ever materialize.

The reality of how Michigan’s local property taxing system works is that reductions in tax base will be fixed over time for some local governments with new development making up for the losses. However, for a large number of local governments, especially the hardest hit local governments that tend to be the ones serving large percentages of the state’s population and businesses, constitutional tax limitations will impede the ability to recover from these losses for some time. These limitations effectively keep growth in tax bases at or near inflation and growth in property tax revenues at or below inflation.

While many of the policy options may not be politically attractive, they must be considered. One path of alternatives would look for ways to make the property tax more robust. This path would consider amending state statutes to allow local governments to levy taxes at higher rates, eliminate tax rate rollbacks that were part of the Headlee Amendment, or allow for tax rate rollups during recessionary times when the tax base is not growing.

A second path would consider alternative local-option taxes. Local governments in very few other states are as dependent on property tax revenues as are the local governments in Michigan. Other states have local-option income, sales, motor fuel, alcohol, tobacco, and public utilities taxes available.

A third path would have state and local policymakers consider the local government service delivery model. Inefficiencies are built into the model with Michigan’s cities and townships responsible for providing most services. How can efficiencies and economies be achieved through regionalizing service delivery?

In a fiscal vacuum, the lost property values may be a burden that could be overcome for most governments. But local government finance does not operate in a vacuum. State revenue sharing, which is the other major source of funding for most local governments is also down significantly. This “one-two punch” leaves many local governments struggling to maintain the levels of services expected of them by the state and by their residents. Policy changes could make incremental improvements to the system, but that will have minimal impact on the hardest hit local governments.

In order to get past this difficult period, state policymakers must engage in an exercise to evaluate the services funded by property tax revenues, the level of government responsible for providing services, and the revenue generating abilities of local government. The state must also reexamine the role it plays in funding local governments through state revenue sharing.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Comments

Kevin Grand
Thu, 03/23/2017 - 8:56am

Is it necessary to remind everyone that Detroit tried the "revenue enhancement" solution already?

Residents couldn't leave fast enough. This along with the poor leadership in local government who didn't want to adapt, inevitability led to a collapse in their revenue model and the city eventually went bankrupt. If anyone is interested in seeing how things are still faring "post-bankruptcy", I'd highly advise taking a trip away from the downtown area and drive up Gratiot, Woodward, Grand River or Michigan.

And given the fact that Michigan Families have had the stuffing kicked out of their own family budgets, why is it that the policy wonks always invariably ignore that troubling detail?

How Michigan Families are even making what they were pre-recession?

How Michigan Families have given up looking for work altogether (U-6 numbers NOT the often cited U-3)?

And how many Michigan Families have lost their homes in the past decade?

WE have had to adapt to this new normal, why shouldn't government?

I think what needs be asked here is should the focus be on maintaining the status quo of local governments (more importantly to the promises made to their employees they knew they couldn't keep), or the residents they purportedly serve?

Diana Menhennick
Thu, 03/23/2017 - 2:04pm

Everyone has been impacted by the Great Recession. The landscape of public policy and service provision is chaotic and strained. The industrial model of financing no longer works in this post great recession environment. Add in the dark store issue and the the equation becomes for complex. The answer is not simple not is it black and white. We need to have a serious discussion. This article supports the complexity of public service delivery and financing those services.

Kevin Grand
Fri, 03/24/2017 - 7:53am

I would strong disagree, Ms. Menhennick.

The answer is very simple. As a matter of fact, it is a lesson that they were teaching in my niece's class in grade school recently; you cannot spend more money than you take in.

This fiscal "crisis" was recognized early in the previous decade (i.e. then-potential underwater housing values negatively affecting local income).

How many local units of government addressed their spending on services? Employee benefits/agreements? How many had a "Come to Jesus" meeting with former Gov. Engler or Gov. Granholm on what using SSR to shore up their favorite pet programs within the state budget would do to their own budgets?

How long did it take local units of government to address this issue post-housing collapse?

Being a leaders means to make rational decisions with the limited resources available.

Sure, someone can issue a paper making the claim that if we just taxed a little bit more, then all of the problems would just go away.

I have yet to see even one of these very same authors address how that would affect those with little disposable income left.

All those authors are recommending is just shifting the problem to make the job of a government official easier.

And last time I checked, no one was ever forced to run for public office.

Warren Cook
Thu, 03/23/2017 - 11:59am

Mr. Grand's thoughts analysis prompted an attempt to envision a strategy that builds govt services (boundaries) from personal disposable incomes levels.
If base fire, police, sewer, water, roads, recreation and education expectations can be agreed to, corresponding expenses should be identifiable. Disposable income concentrations applied geographically could yield revised govt boundaries for some of the core services. Such logic would also require agreements among state, regional and county govts on roles and participation levels.
Of course this ignores most of the current operating realities, but it is intriguing.

Matt
Thu, 03/23/2017 - 7:05pm

How about rethinking Michigan's bloated number of political units? Most of which were designed to accommodate horse drawn transportation. The tax revenues sucked up by all the crazy number of townships and villages among many others across the state could be redirected to far better uses.
Second basing property taxes on something as subjective and volatile as real estate prices is nuts and kicks off many other bad unintended consequences. Change to system based on square footage.

Roger Gienapp
Sat, 03/25/2017 - 7:04pm

I think the real issue is that local taxes are based on the real estate market value. As we learned when values fall because of a general recession , tax revenues fall and cities must cut services. Further, because of the disastrous Headlea amendment even when the economy recovers those real estate values cannot increase more that a set percentage so cities cannot recover lost revenue for at least a decade.
I think the answer is a new kind of property tax......one that is based on land use and one that is calculated on the basis of how much land area that use occupies. The cost of providing municipal services is a function of how the land is used and not on the "value" of the building that sits on that land. It doesn't cost more to provide streets, public lighting, police, fire department, garbage collection to an expensive house than it does to provide that same services to a less expensive house yet that is how municipal taxes are calculated. A Land Use tax accounts for the cost of services that are related directly to how that land is USED, not the estimated real estate value of the building on that land. Likewise, the larger the area that a particular use occupies the more it costs to deliver those services. A tax that is calculated on the use and the area would not be affected by the swings in the real estate market and provide a stead and predictable revenue stream for cities.

Matt
Sun, 03/26/2017 - 12:03pm

Why not a formula based on use and square footage? With aim of more alignment with the actual costs/services required.