Honor the Spirit of Revenue Sharing

 

MML Revenue Sharing Graph    State Initiative 2

In Michigan, state shared revenue with municipalities began in 1933 as a sort of quid pro quo when the state legislature began addition restrictions on the ways local governments could levy taxes. For example, Lansing removed intangible property tax from the local tax base and collected, instead, by the state. To make up for the lost revenue, they then established a “sharing” formula to return some of it to the local units.

If that sounds vaguely familiar, it’s similar to what happened in 2013 with personal property tax. A tax collected and used only by local governments, the state said, “sorry, you can’t have that any more. But we’ll give some of it back to you.”

In 1946 revenue sharing was written into the state constitution, and made up for it with a share of. To make up for it, they shared a portion of the then-new liquor-license tax with local governments.

When the state income tax was enacted in 1967, it was done with 11.5 percent of it designated for local sharing – half to counties, half to local units.

This was a typical pattern. Every few years, the state would change tax policy to remove another revenue tool from the local government. And each time, it was done with a pledge to make up for it through revenue sharing.

It happened in 1996, when sharing from the single business tax and income tax was shifted. “We’re going to drop your shared portion of those,” the legislature said, “but we’re going to more than make up for it.” And this led to new formulas for statutory revenue sharing.

Of course, that didn’t last long, largely because of that key word, “statutory.” Sharing has had, since it was written into the constitution, two parts. One is constitutional sharing, which is a formula that is fixed and makes up about a quarter of the revenue shared. The other is statutory; it was to be an allocation made each year by the legislature, according to a formula.

Among the stupidest things Michigan voters have done to its constitution was, in 1992, to enact legislative term limits: three two-year terms in the House, two four-year terms in the Senate.

Which pretty much guaranteed that the spirit of legislation, and the deals and promises that went with it, would soon be forgotten by the people who vote on them. And there is no better example of this than revenue sharing to local governments.

Of course, I’m giving legislators the benefit of the doubt in attributing what happened to the loss of institutional memory. But the alternative is too frightening to consider. Because starting in 2001-2002, Lansing looked at that pot of money to be “shared,” decided those formulas were just “suggestions” and began to treat local government shared revenue as its own piggy bank.

Since 2002, the state has shortchanged local governments of money they were, in fact, promised, by $4.2 billion. Yes, that’s a “b.”

All the while, many (particularly those from suburban districts) have bloviated on the inability of local governments (particularly urban ones, who took the largest cuts in revenue sharing) to manage their money.

So imagine if you’re a teen whose parents have promised to pay you a $10-per-week allowance … and have paid it for several years. But suddenly mom and dad find it impossible – or, more likely, unpalatable – to live within their own means. So they start dipping into your allowance.

Pretty soon, you’re down to $6 a week, which makes it tough to pay your bills. But if that weren’t bad enough, Dad’s got the chutzpah to come into your room every night and lecture you on how poorly you manage that $6 you’re down to.

Saginaw Revenue Table

Gov. Snyder has followed that paternalistic logic, creating the Economic Vitality Incentive Program. It was his way of saying: if you want your allowance, you have to earn it.

As if delivering police, firefighting, streets, water, sewer and other essential services to the citizens of Michigan weren’t enough to earn it, there were new rules to follow, as well.  One of the most important of those rules was moves to consolidate services.

The governor believes – as do I – that we have too much duplication of both services and administrative overhead at the local level. But using EVIP to create more intergovernmental cooperation and/or consolidation is not only a terribly passive-aggressive approach, it’s doomed to failure. More on that in a later post.

Gov. Snyder’s institution of EVIP is representative of the sense in both the executive and legislative branches of Michigan’s state government that state shared revenue to municipalities is some sort of largesse – a gift given to local governments (and since 1994, school districts) that should be subject to the exigencies of the state’s budget and, perhaps, the zeitgeist.

But it’s not. State shared revenues – and the formulas that went with them – were a covenant. They were a guarantee from the state legislature that said, even though we’re changing the way you collect the revenue necessary for operations – and, in some cases, the amount you can collect – we will make sure you have the revenue you need to operate by sending a percentage of sales taxes collected in your municipality back to you.

It has not been treated that way, and it’s not entirely a partisan issue. State shared revenues for local government have been raped and pillaged by the Engler, Granholm and Snyder administrations and by both Democratic and Republican majorities in the Michigan House.

It’s time for the rape and pillaging to stop. Or to do away with the system entirely and remove the state’s shackles from local tax revenue collection and let local voters decide.

 

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Replace the Property Tax System

Taxable Values TableStatewide Initiative 1

In nearly every state in the U.S., municipalities rely, to some degree, on the same funding mechanism: property taxes. Property tax is one of those things that we should put in the category of “it seemed like a good idea at the time.”

In Michigan, “the time” was 1893. Municipalities were charged by law to provide three specific services: elections; assessment and equalization; collecting taxes for the county. So the Michigan General Property Tax Act was put in place, and it provided the funding mechanism for all three levels of government: local, county and state.

By the 1930s, as cities grew and began to offer more services to meet that growth, they were running out of money. So was the state, which finally decided: “This really isn’t working for us; you can have it.” Michigan went to a series of special revenue taxes – liquor, tobacco, sales and eventually income, and left the cities with property tax.

But it wasn’t good enough for the cities, either, who started running out of money. For years, they begged the state legislature to allow them to implement their own local sales taxes – which 35 other states allow. They begged the state to allow them to impose their own local income taxes. 

In 1966, the state relented on the income tax, but set a cap on the rate that a municipality can collect. That cap was later revised.

The state refused to budge on the sales tax issue, though, but finally compromised. “We won’t let you enact your own sales tax,” the state said. “But we’ll raise the state sales tax, and we’ll give you a cut of it. Part of that cut will be built into the state constitution; the other part will be allocated each year by the legislature.”

That is, until the state legislature gets in a crunch and decides that it needs it more. Or the governor decides that you shouldn’t just automatically get it any more, but compete for it. But we’ll come back to revenue sharing later, too.

Property taxes have declined from the sole source of municipal tax revenue when they were enacted to, in many Michigan cities, as little as 20 to 30 percent. 

That’s because the very idea behind property tax has an inherent – and fatal – flaw. It punishes the taxpayer for doing the very thing the municipality wants him to do. Not only is it all stick and no carrot, it makes the taxpayer wield the stick himself. 

As a municipal official, I want homeowners, landlords and the owners of commercial and industrial properties to invest. I want them to improve their properties, grow their businesses, maintain their homes. Increased property values make for a more attractive and economically vibrant city.

While that attractiveness and vibrancy has a benefit for those property owners – and while increased property value is an increase in their net worth – the benefit is disproportionate to the hard dollar cost of increased taxes.

Worse, even if I don’t improve my property, but merely keep it up, increased values around me cause my value to increase. And with it, my taxes.

Income tax has a bit of a carrot. While I pay more tax as my income increases, the fact that my income has increased offers a comfort equal to, if not greater than, the pain of the stick. Sales tax is a stick, as well, but at least I’m getting something of value with my purchase. And I can control, to some degree, how much I pay through how much I consume.

Property tax, on the other hand, is largely out of our control. Value drives what I pay; the real estate market drives value. All I can do to mitigate increases is to let my property go downhill. 

Or enact a referendum that limits property tax increases. 

Which is exactly how cities, at least in michigan, got into this mess. They were dependent, under state law, on a tax structure that offers no benefits to, and in effect punishes, the taxpayer. So it was understandable that the taxpayers would eventually revolt.

In Saginaw, they revolted even more, by enacting an absolute dollar cap as well as a mill cap … which is why Saginaw’s property tax collection makes up only about a tenth of its general fund budget today. The Headlee Amendment and Proposal A similarly imposed limitations on a city’s ability to increase property taxes. 

The net result? In 2008, some Michigan cities saw their taxable values collapse, almost overnight, to anywhere from 30 to 40 percent of their pre-recession highs. Which meant property tax revenues collapsed almost as far.

Even if a miracle occurred, and property values rocketed overnight to their pre-recession levels, it wouldn’t do Michigan cities a bit of good. Because Headlee and Prop A limit the increase in taxable value from year to year to five percent or the rate of inflation – whichever is less. At three percent per year, it will take decades for those cities to get taxable values – and, therefore, the revenue they need to operate – back to 2007 levels.

It’s like telling someone who’s almost starved to death, who’s lost nearly half his body weight, that we’re still going to keep him on a 1,200-calorie diet. Because he needs to learn to better manage his weight.

It is time for Michigan cities – if not cities throughout the U.S. – to abandon a hopelessly obsolete system. Its replacement could be:

  • Eliminate most local taxes, increase the sales tax, income tax or other state taxes and fees – or some combination thereof – and disburse funds back to the cities. However, it only works if the legislation safeguards the money so state legislators don’t use it, as they have revenue sharing, as their own reserve fund or pork barrel.
  • A modified “property tax,” in which a flat rate is calculated based on the square footage of the land and buildings – rather than the number of improvements on them
  • Municipal sales tax – available in 37 states, but not in Michigan
  • Municipal income tax with fewer restrictions on the local government’s ability to set rates

As we see more and more Michigan school districts  joining municipalities on the endangered species list, it’s not hard to see a pattern: with the passage of Headlee, Prop A and shared revenue from state sales tax collections, the state has assumed more and more control – and placed more and more restrictions – on local government and school district revenue. I don’t think it’s a coincidence that we’re seeing more and more local governments and school districts struggling financially.

The more the state has tinkered with the systems, the more dysfunctional they’ve become. So the ultimate change would be for this current Republican governor and Republican-majority legislature to act like, well, Republicans – and start eliminating the burden of complex regulations and multiple layers of government. 

Of course, that would mean loosening their control, both financial and regulatory, of local government and school districts. It would mean coming up with a straight-up, no-legislative-discretionary formula for shared revenues – or simply dropping the state sales tax a few points and allowing municipalities to levy their own. It would mean repealing Headlee and Prop A, and forcing local voters to actually be accountable for their mistakes in local elections and turn the levying and distribution of money for local schools back over to the communities they serve. 

There are many ways we can change the way municipalities get their funding. But any way is better than the one we have now, and cities – in Michigan in particular – will continue to struggle until we do.

Eight Initiatives to Help Save America’s Cities

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Introduction

When Jane Jacobs published her landmark book The Death and Life of Great American Cities in 1961, she specifically noted that, by “great,” she was referring to large cities. Her book, which analyzed the qualities that make cities work, was concerned with cities on a New York, Boston, Chicago or Los Angeles scale.

But one could certainly argue that, in 1961, America’s cities were all “great” in another sense. It was when they had reached their zenith – in population, in economic strength, in quality of life and services.

For most American cities, particularly those in the Northeast and Midwest that grew with American industry throughout the first half of the 20th century, it’s pretty much been all downhill from there.

The cities that helped make America an economic power have lost much of their population. They have higher-than-average rates of poverty and unemployment. They have taken the brunt of the nation’s surplus of housing stock, leading to high rates of vacancy and blight. Crime is high; hope is low.

The decline of our cities cannot be tied to any one single factor. It is the culmination of more than a half-century of well-intended policy decisions – at the local, state and federal levels – that had disastrous effects on the American urban landscape. Which did the most damage is a subject that’s hotly debated, but largely academic. The only two questions that are important today are:

1. Are America’s cities worth saving?

2. If so, how can we save them?

There are those who would argue that, no, our cities are not worth saving. Perhaps some are not. But as we enter a third generation of Americans with a majority born and raised outside the urban environment, it’s important to remember what our cities are: the hubs of our financial, technological, cultural and governmental systems.

Michigan is typical of the states that have suffered from the shift from urban to suburban development and the changing landscape of industrial America. Yet Michigan’s 14 urban core cities are still home to more than 80 percent of the state’s population – and, even more importantly, nearly 90 percent of its GDP.

I will leave the argument about the value of cities to others; those who are most likely to argue against their value don’t live in them and don’t – or, more importantly, won’t – recognize the importance of their health. Without the core cities that anchor our metropolitan areas, we lose the critical mass that brings us key utility, transportation, telecommunications, entertainment and cultural, educational, financial and economic assets. For a variety of reasons, we assume here that the answer to question one is “yes.”

Which makes us move on to the next question: How do we save them?

Michigan has lost millions of auto manufacturing jobs, even as suburbs spread like purple loosestrife. We have chronically been the nation’s leader in unemployment. Detroit, Flint, Pontiac and Saginaw are among the nation’s most violent cities.

Since its heyday in the 1960s, Saginaw has seen its population decline by just under one-half. Our median home value is well under half that of Michigan, and more than one-third of our housing units are vacant. Our median household income is just over one-half the statewide median, while our unemployment rate is nearly twice the state’s. A third of our families live below the poverty line – including 45 percent of our families with children under age 18. A staggering 65 percent of our children are born to unmarried women. More than 60 percent of families headed by a single mother are in poverty, and in almost 13 percent of our households, grandparents are legally responsible for children under 18. Black infant mortality is twice that of whites.

Having lived in Saginaw my whole 57 years, I’ve been able to watch the rise and fall. In 2005 I was elected to Saginaw’s City Council; in 2009 I was elected to the first of two terms as Mayor in our Council-Manager government. So I have seen first-hand the difficulties faced by our cities in a time of declining revenues and increasing legacy costs. My work with mayors of Michigan’s other urban centers has shown me that our problems are not unique to Saginaw.

More importantly I learned that the problems experienced by Saginaw, Flint, Detroit, Pontiac and other Michigan cities cannot be solved entirely – or even mostly – at the local level.

Too many parts of the system are broken – not just at the local level, but at the state and federal levels as well.

This is not to say that cities should throw up their hands and say, “there’s nothing we can do.” There is much individual municipalities can and should do – and are doing – to turn themselves around.

But those things are highly individualized and vary from city to city. There are common themes – streamlining and consolidation of services, reduction of legacy costs, diversifying revenue streams – and these must be practiced.

However, many cities can do all those things – some have – and it still won’t be enough. The playing field has become so far out of balance that without significant intervention, many cities will only continue to decline.

My experiences in Saginaw, my discussions with other elected and appointed officials, businesspeople, citizens, educators and many others, lead me to recommend eight initiatives that will help reverse the downward slide of our cities, help put them back on the path to prosperity and improve quality of life in them.

Not doing them means more of the same. Not doing them means we will continue to throw billions of dollars worth of misdirected state and federal money into increasingly deeper holes. Not doing them means many of our cities will continue to slide toward third-world standards of living.

The initiatives follow in subsequent posts … which will eventually all be linked:

Michigan Statewide Initiatives

  1. Replace the Property Tax System
  2. Honor the Spirit of Revenue Sharing
  3. Stop Me-Too-ing Urban Incentive Programs
  4. Introduce Municipal Fiefdoms to the 21st Century
  5. Educate Better, More Prepared Citizens

Nationwide Initiatives

  1. Stop Subsidizing Surplus Construction
  2. Untie Poverty from “Community Development” Funds
  3. Invest More Wisely in Children