Editorial: Get Michigan cities back on their feet
Along with the high-profile cases like Detroit and Flint, many smaller cities across Michigan are struggling with eroding tax bases and state tax policies that limit their ability to raise revenue. That, along with soaring legacy costs, explains most of the reason why local services are constantly being cut.
It’s a problem not unique to Michigan. Other Rust Belt states have also struggled with the outsourcing of their industrial bases and financial distress of the Great Recession. But Michigan does seem to be unique in its inability to rebound from those challenges.
Something’s gotta give.
As lawmakers and business and community leaders head to the Detroit Regional Chamber’s Mackinac Policy Conference this week with many weighty issues on their mind, re-establishing a rational funding model for Michigan cities is a top priority.
These underfunded localities — and the political fights that ensue over whether they will receive emergency management — can’t continue to be a focal point. Lawmakers must develop a suitable solution.
Municipal revenues throughout the state have fallen dramatically, not just since the auto bailouts and Great Recession, but since the mid-1990s, when several policy changes were enacted that caused grief during the downturns.
An inconvenient nexus of Proposal A, the Headlee Amendment and changes to how the state disperses revenue sharing funds has stunted localities.
Proposal A, which caps the taxable value of properties at 5 percent or the rate of inflation — whichever is less — has caused massive problems, especially considering that Michigan’s housing market plunged rapidly between 2008 and 2010, taking tax revenue with it. Prop A limits to the rate of inflation the recovery of those revenues once the market rebounds.
The 2016 inflation rate is 0.3 percent. At that pace, it will take years to bring taxable value to pre-2008 levels.
But that’s not the only problem.
With the recession, Michigan’s sales tax base was also eroded, affecting the constitutional amount the state gave out to each city. Lawmakers then also lessened how much they gave in statutory revenue sharing.
Since 1994, reductions to the sales tax base reduced constitutional revenue sharing by a cumulative $181.2 million, $27.3 million in fiscal year 2014 alone.
The discretionary revenue sharing is below the full funding dedicated to it because the state’s bills continue to mount. Since 1994, the cumulative amount of cuts to statutory revenue sharing is estimated to be more than $5.5 billion.
The Headlee Amendment, passed in the 1970s, limits local property tax revenue by providing rollbacks of millages if revenue from existing property grows by more than the rate of inflation, unless voters override the rollback. Among other things, it also says the state will reimburse new costs resulting from mandates from state law.
But many state mandates have been labeled “optional,” though in reality they aren’t, and the state hasn’t provided adequate funding to cover their costs.
To recoup these losses, localities increase millage rates, which encourages businesses and residents to move elsewhere. But not providing basic government services also pushes people out.
None of these problems can be resolved quickly or easily, but it would be better for localities to have more control over how they tax their residents and businesses. The state has enough on its plate, and doesn’t need to be the middleman dispersing revenue sharing funds.