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

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.