Slow Strangulation: MI Cities Trapped by State Law
January 20, 2017
Cities, and only cities, offer:
- Large public libraries.
- Grand museums and other cultural venues for art, music and theater.
- Major sports teams and sporting events.
- Good daily newspapers (but fewer every week).
- Television stations with their own news operations.
- Employment opportunities for those with education or training.
- Good hospitals and physicians.
- The opportunity to meet , work and socialize with people from diverse backgrounds, broadening the perspectives of all involved.
Perhaps most important of all, cities bring together smart, entrepreneurial people in proximity to sources of investment capital, resulting in the creation of whole new industries that ultimately reach far beyond their place of origin.
And, contrary to conventional wisdom, there is evidence that cities are relatively friendly to the environment. In a new book, The Environmental Advantages of Cities (M.I.T. Press, 2016), Colgate University geographer William Meyer musters hard data to show that if we compare the environmental impact of urban versus rural dwellers, urban residents do better than their country cousins by a number of measures.
The urban residents consume less resources per person (for example energy and water), because these resources are set up much more efficiently. Urban dwellers have less children and thus reduce the population explosion more. This is so even though their death rates are lower. Cities produce clean water and other public health measures which reduce waterborne diseases. And surprisingly, they pollute the air less, because rural dwellers, particularly in developing countries, burn much more biomass per person.
In a recent interview, Meyer summarized some of the overlooked positive environmental impacts:
“Cities can provide cleaner water, and they do. Waterborne diseases are less common even in developing countries in urban areas than in rural ones, because cities can protect water sources and provide cleaner water, whereas in rural areas the sources are probably unprotected, and they’re contaminated with human and other waste. And cities in general can clean up pollution simply because they’re concentrated. Again, the density, the concentration, makes it possible to collect, treat pollutants and also, of course, to recycle them. So to turn a pollutant or a waste product into an actually valuable resource, it’s much easier with higher densities, with higher degrees of urbanness.”
Cities cannot succeed without effective public services—services that only governments can provide, either directly or through regulated businesses:
- Effective police and fire departments,
- Well maintained streets,
- Effective public transportation,
- Waste disposal.
- Public health measures like Clean water and sewer hookup
It is self-evident that to perform these services costs money. But when it comes to raising revenue, Michigan cities do not control their own destinies. Their governmental powers are created entirely by state law, and what the state giveth it can also withold.
Under a 1964 state law, cities may only raise revenue on their own via the property tax, unless expressly authorized by the legislature to use other means.
In 1994 the voters approved a constitutional amendment that was sold as major tax reform – “Proposal A”. That amendment authorized an increase in the state sales tax to 6% (from the existing 4%) and provided that 15% of the first 4% of the sales tax would go to cities. That was some good news for cities. But the amendment also contained bad news: It prohibited any rise in local property tax revenues of more than 5% , or the rate of inflation (whichever was lower), during the year in question.
The housing crash of 2008 plunged the value of taxable property in cities by more than 18% in four years. Mayors and city Council members watched helplessly as property tax collections fell by over 9%. In a 2016 report (“Michigan’s Great Disinvestment”) the Great Lakes Economic Consulting (“GLEC”) organization found that Proposal A’s “cap” has seriously handicapped municipalities:
“Although housing values are recovering from the sharp decline, it will take most cities a number of years to recover their lost tax base. Why? Michigan places a constitutional cap on the annual increase in taxable value, which constrains cities’ ability to return to financial health. For example, taxable value in Farmington Hills fell 30.2 percent from 2008 to 2012. Assuming an annual increase of 3 percent (an estimate that is optimistic given recent inflation trends), it will take 13 years for taxable value to return to the 2008 level. Adjusted for inflation, however, taxable value may never return to the 2008 level in Farmington Hills and many other Michigan cities.”
Under the 1964 statute and Proposal A, a city’s only other financial option for funding was to get money from the state: Revenue sharing*. But that wasn’t so simple. The portion of Proposal A’s sales tax that was to go to cities was itself divided into two parts. One part, today known as “constitutional” revenue-sharing, is done automatically, under Proposal A’s constitutional formula (i.e. 15% of the first 4% of the sales tax ).
But nobody believed that would be enough, so a deal was cut to create an additional annual revenue sharing appropriation,with a specific formula enacted in 1998: 21.3% of the first 4% of the State’s sales tax proceeds was to be contributed to the state’s municipalities (Michigan Municipal League Fact Sheet).
However, succeeding Legislatures never interpreted this formula as being a mandate. Instead, they appear to have viewed it as a ceiling. In only one fiscal year has it ever been fully funded. Per the GLEC report:
“Since 2002, Michigan has led the nation in cuts to municipalities. The Census of Governments, published every five years by the U.S. Census Bureau, reported that from 2002 to 2012, municipal revenue from state sources increased in 45 states and the average increase was 48.1 percent. In Michigan, municipal revenue from state sources declined 56.9 percent from 2002 to 2012. During this same period, total state revenue for Michigan increased by 29.3 percent.” [emphasis added]
In a 2015 report (“Reforming StatutoryState Revenue Sharing”), the widely respected Citizens Research Council found that:
“Michigan municipalities were affected significantly by the drastic reductions in state revenue sharing caused by the state’s diversion of those funds to other state purposes. From FY2001 to the present, the state diverted more than $5 billion away from statutory state revenue sharing to help the state appropriate funding for other purposes. This shifted the financial pain of the recession away from the state and down to local governments.” [emphasis added]
What is to be done? There is no shortage of thoughtful proposals, many of them made by groups quoted above. The “shortage” is of legislative support. And there is no sign that the legislature will change course any time soon, until multiple municipal bankruptcies get their attention.
* Twenty-two cities have been allowed to levy income taxes, but they cannot come close to replacing State revenue sharing.
is the author of Wounded Warrior, a recently published biography of former governor and Supreme Court justice John Swainson. He is also a retired Ingham County Circuit Court Judge and former legal advisor to Gov. James J. Blanchard.