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Opinion | Michigan may soon be forced to pay cities under Headlee

John Mogk

The Michigan Court of Appeals is poised to decide the case known as Taxpayers for Michigan Constitutional Government v. State of Michigan, brought in September 2016, which claims that the state is shorting local governments billions of dollars annually in state revenue required to be paid under the Headlee Amendment to the Michigan Constitution.

The cumulative effect of this shortfall has created a financial crisis for many local governments.  In some cases, it may have accelerated the appointment of emergency managers.

The Headlee Amendment was part of a nationwide property tax revolt in the 1970s. In adopting the Amendment in 1978, the people of Michigan established a balanced fiscal framework for local governments. It capped property taxes that support local services, but required the state to maintain its payment of state revenue in the form of aid to local governments as the proportion in that year, originally set at 41.6 percent. 

The proportion was reset in 1989 to 48.97 percent when the Michigan Court of Appeals held that mental health payments made to counties were payments to satisfy a state obligation and were not eligible to be counted as payments in the form of aid to local governments.  

Taxpayers and local governments maintain there are other improper proportion calculations being made by the state. These include counting state payments to local governments resulting from a "tax shift" prohibited by the Amendment; additional payments made to local governments that are not in the form of aid, and payments to local agencies that are not local governments.  Including ineligible payments in the proportion calculation allows the state to keep revenues otherwise payable to local governments.

Violations of Headlee   

In 1993, the state legislature sparked a crisis in public school funding by repealing the power of local school districts to levy property taxes for public school operations. That eliminated roughly $6.4 billion in local school funding, leaving Michigan public schools insolvent. To solve the problem, the people of Michigan adopted Proposal A in 1994, amending the Constitution and lifting the state constitutional limit on the sales tax by 2 percent, imposing other taxes and requiring that the increased revenues be paid to local school districts.  

As a result, local taxpayers rather than paying school taxes to their local school districts pay school taxes to the state that are transferred to local districts to replace local taxes. The state then included these payments in the 48.97 percent local government proportion of state revenue, thereby reducing other state revenues previously paid to local governments that supported essential local services, especially for cities, villages, townships and counties.  These revenues are kept and used for state purposes.

This tax shift placed a tax burden on local governments prohibited by the Headlee Amendment, resulting in reduced local services or increased taxes on local residents.  

Also In 1994, the state created Public School Academies, commonly known as charter schools, to compete with traditional local school districts. Charter schools are nonprofit corporations with private boards meeting none of the criteria of local governments that require accountability to the voters, governmental powers and authority to act on behalf of residents within limited geographic boundaries. Nonetheless, payments made to charter schools are included by the state in the calculation of the proportion of state revenue paid to local governments.      

Throughout this period, the state has imposed obligations upon local governments that the Headlee Amendment requires be paid by the state. These payments are improperly included in the proportion as payments to local governments in the form of aid. They are not payments in the form of aid in any sense of the term, but constitutionally required payments to fulfill State imposed mandates.           

The shortfall in state payments to local governments resulting from these three improper calculations has been extreme in some years. As an example, by not counting Proposal A monies alone for the year 2013, the shortfall in payments to local governments was an estimated $2.5 billion.

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