By Jeff Guilfoyle/Citizens Research Council
With Michigan’s largest city now under the direction of an emergency manager, statewide attention has focused on the city of Detroit’s finances. The Citizens Research Council, a nonpartisan, nonprofit research firm, has published an analysis of the city’s fiscal structure and trends -- Detroit City Government Revenues. This report attempts to address a number of important questions to help readers be better able to develop and assess proposed policy solutions for Detroit’s fiscal crisis (a study of Detroit’s expenditures will be published by CRC shortly).
Some of the key questions addressed by this report are summarized below:
Q: How do Detroit revenues compare to other cities in Michigan?
A: On a per capita basis, Detroit revenues are much higher than those of any other large city in Michigan. In fiscal year 2010, Detroit raised $1,289 per capita from taxes and state revenue sharing. This ranks first among Michigan cities with a population greater than 50,000 -- and was 50 percent higher than Dearborn, which ranked second.
Q: How have Detroit’s revenues changed over time?
A: Detroit’s revenues have been falling. In FY 2012, revenues from major taxes and state revenue sharing totaled $1,523.6 million, down $400 million (22 percent) from FY 2002.
Q: Has the state government contributed to the city’s budget problems?
A: The state has significantly cut revenue sharing payments to the city. In FY 2013, Detroit will receive $171.8 million in state revenue sharing payments, down $162 million, or 48 percent, from the level it received in FY 2002. There is no question that the sharp reduction in revenue sharing payments is a significant contributor to Detroit’s budget problems.
However, Detroit is not unique in facing cuts. As Bob Emerson recently stated in Bridge Magazine: “Detroit has a legitimate beef, but so does every city, village, and township that had its revenue sharing cut.”
On a per capita basis, the state’s revenue sharing program favors Detroit. In FY 2010, Detroit received revenue sharing payments of $353 per capita, by far the highest total of any large city in Michigan. Pontiac, which ranked second, received just $176 per capita.
The state also required Detroit to cut its income tax rate. As a result of PA 500 of 1998 and subsequent legislation, Detroit’s income tax rate for residents was reduced from 3.0 percent to 2.4 percent (and the nonresident rate went from 1.5 percent to 1.2 percent). These cuts further exacerbated Detroit budget problems.
Q: How do Detroit’s taxes and tax burden compare to other cities?
A: Detroit has a more diversified tax structure than other local governments in Michigan. Detroit levies a property tax, as do almost all local governments in Michigan, and an income tax, which only 22 cities in Michigan do. Detroit also receives almost $150 million per year from its casino wagering tax, a revenue source not available to other cities in Michigan (although some cities receive some revenues from tribal casinos). And Detroit is also the only city in Michigan to levy a 5 percent utility user excise tax.
Tax rates in Detroit are high. The city’s property tax rate of 19.9520 mills is very close to the statutory maximum of 20 mills. Detroit residents also pay 9.6136 mills to support the city’s general obligation debt. Residents also pay property taxes to other entities such as Wayne County and Detroit Public Schools.
While Detroit’s residents do not face the highest property tax burden in the state, the burden of 67.3 mills for homeowners is the highest rate among cities with a population over 50,000. Detroit also levies the highest income tax rate of any city. Detroit’s resident income tax rate is 2.4 percent, Highland Park’s rate is 2.0 percent and all other Michigan cities are below 2.0 percent, with most at 1.0 percent.
Q: Finally, does Detroit have “special service needs” that necessitate higher revenues than other local governments in Michigan?
A: This report is on revenues, not expenditures (an expenditure paper will be published soon) so this question is not directly addressed. However, some comments about Detroit can be made.
Detroit has the second-lowest average household income among Michigan’s 24 largest cities. Low-income residents may look to the city for enhanced public services for things such as public transportation, while there may be less demand for these services in higher income areas. In addition, Detroit has a high crime rate and public safety is a key city responsibility.
Detroit’s population has been falling. Detroit had 1.8 million people in 1950 and just over 700,000 in 2010. Costs do not always fall commensurately with population. For example, the population decline has resulted in many vacant structures, which must still be protected from fires.
Detroit also faces significant challenges relating to its legacy costs (Detroit’s legacy costs are discussed in CRC Report 373: Legacy Costs and Indebtedness of the City of Detroit.) Detroit’s legacy costs include general obligation debt, pension obligation certificates and retiree health-care payments. Some of Detroit’s legacy costs relate to several hundred million dollars of debt issued in recent years for deficit financing.
When current residents pay taxes that are used to address legacy costs, they are paying taxes now for services consumed in the past, creating a disconnect between taxes paid and services received. Detroit’s accumulated legacy costs amount to thousands of dollars per resident.
When residents move from the city, they do not take a share of these accumulated costs with them. Instead, the burden on the remaining residents grows, increasing the incentive for the remaining residents to leave the city.
The ability to potentially shed some legacy costs is one of the reasons that some are advocating that Detroit consider filing for bankruptcy. However, legacy costs represent promises made by the city to bond holders, current or former employees, or some other party. Breaking such promises should not be done lightly. Defaulting on bonds could make access to credit markets more difficult not just for Detroit, but for other entities in Michigan. And retired city workers often worked their entire career with the understanding that retiree benefits were part of their compensation package and have made life decisions accordingly.
Emergency managers in Michigan now have a greater ability to address financial emergencies due to the powers granted to them under Public Act 436 of 2012. Successful resolution of Detroit’s fiscal problems would be of tremendous benefit to the residents of Detroit, businesses operating in the city and the state of Michigan as a whole.