Michigan cities seek more tax revenue to avoid 'dire' consequences of pandemic

Beth LeBlanc
The Detroit News

Several leaders of Michigan cities are urging for a loosening of the state's tax laws to generate more tax revenue for communities so they can fend off substantial financial harm from the COVID-19 pandemic.

Without changes, they said, damage to municipal budgets could rival what was seen during the Great Recession.

Officials urged state lawmakers to pass legislation before the end of the year that would allow them to capture more tax revenue so they could continue essential services and stabilize their budgets, which are expected to take a hit next year and beyond with expected dips in income tax and property tax revenues. 

The solutions, they argued, wouldn't necessarily require short-term federal relief, but a one-time exception to Michigan's city income tax laws and long-needed, permanent changes to Michigan's property tax caps under Proposal A.

"Unless the Michigan Legislature acts quickly to pass a community stabilization plan, local government will soon be unable to conduct business and revenue losses will result in drastic cuts to public safety, infrastructure, parks and other vital services," Westland Mayor Bill Wild said.

Westland Mayor Bill Wild

Wild was among three mayors and a municipal finance expert who took part in a Michigan Municipal League press conference on Monday that warned of "dire" consequences if the state doesn't act to stabilize local budgets.

The press conference occurred days after Democratic Gov. Gretchen Whitmer asked the Republican-controlled Legislature for a state-based stimulus plan of up to $100 million. The state faces an up-to-$1 billion shortfall next year, but higher-than-expected state revenue could narrow that financial gap in the coming months. 

Besides the tax and meeting changes requested by communities Monday, Democratic officials also have called for the consideration of expanded unemployment aid legislation during a pandemic-themed lame duck, the session days between Election Day and Jan. 1 when the Legislature passes the last of its bills before new lawmakers are sworn in.

The lame-duck session will be one of "needs not wants," with a primary focus on the impact of COVID-19 on Michigan residents, said Amber McCann, a spokeswoman for Senate Majority Leader Mike Shirkey, R-Clarklake. 

"The Senate has been working on ways to get dollars into the hands of workers and businesses adversely impacted by shut down orders," McCann said. "Sen. Shirkey has received many requests to move items during lame duck, and he is evaluating the feasibility of each request."

Among the lame-duck policy suggestions presented Monday, the Michigan Municipal League urged changes to 1994's controversial Proposal A that would allow cities some flexibility with tax rates and revenue as well as changes to income tax laws to accommodate revenue losses as more people work from home. The league also urged the Legislature to allow for virtual government meetings after the New Year.

The state House is expected to consider legislation as early as Tuesday allowing for continued use of virtual public meetings.

Proposal A limited taxable value growth on a parcel to the rate of inflation or 5%, whichever is lesser, and reset the taxable value to the state equalized value or half of the cash value whenever a property is sold. 

But Proposal A, combined with the Headlee Amendment of 1978, had the unintended consequence of forcing communities with increasing taxable values to roll back their millage rates and preventing them from rolling back up when growth on the value of housing was less than inflation, according to a 2016 analysis by Michigan State University Extension specialist Eric Walcott.

Those consequences, which kept property tax revenue low even as the state rebounded from the recession, have been a source of frustration for cities across the state. 

Cities entered the pandemic in less than ideal shape after the Great Recession but were able to make it through 2020 in large part due to federal aid. Communities tend to suffer from economic strains and the worst of the pandemic's impacts likely won't materialize until 2021 or 2022, said Michigan State University Professor Eric Scorsone, a municipal finance expert who has worked closely with Flint, Detroit and Lansing.

For example, he said, many communities didn't start wrestling with the effects of the 2008 recession until 2010 or later. Detroit didn't declare bankruptcy until 2013. 

"I think 2021 and 2022 are going to be some of the toughest times facing municipal governments certainly since the Great Recession, perhaps even worse, because there are long-term implications from this pandemic that we're only now beginning to understand," Scorsone said.

During the housing collapse in 2008, property values in the seven-county area fell nearly 20%, according to a Southeast Michigan Council of Governments report at the time. Nearly 75% of all municipal revenue came from residential property taxes then. As result, communities with newer housing stock faced the steepest municipal cuts during the recession.

Democratic Attorney General Dana Nessel on Monday joined a bipartisan group of attorneys general asking the federal government to pass a CARES Act funding package. But community leaders on Monday noted CARES Act money distributed earlier this year was filtered through the state and reached only the largest cities in Michigan.

Additionally, federal help, such as CARES Act funding, is only a short-term fix that fails to address some of the structural municipal finance issues that have long been a problem but have become more pressing during times of financial stress.

"We cannot depend on the federal government to help us out of this," said Pauline Repp, mayor for Port Huron, where about 25% of the $26 million general fund budget comes from income tax revenue. "If we wait for the federal government, we’re going to be in dire straits.”

Some communities have hiring freezes in place that have helped to stave off layoffs but without stable revenue moving forward communities will likely have to turn to cuts in the largest departments, public safety and parks, said Grand Rapids Mayor Rosalynn Bliss.

"The scope and scale of the deficit is still yet to be determined," Bliss said. 

Detroit Mayor Mike Duggan in September estimated the city would lose $410 million in revenue in the 16 months since the start of the pandemic. The three-week "pause" alone implemented by Whitmer this month is expected to cost the city about $10 million in additional revenue.

The downturn includes job losses, stoppages to operations at Detroit's three casinos and income tax collection. 

Nonresidents make up half of the city's income tax revenue. If they're working remotely, the city loses out on those income tax dollars. 

In September, the city expected to cover most of the shortfall with federal funding and fund balances but acknowledged some other adjustments in staffing might be needed.

Battle Creek officials announced this month they had eliminated 26 positions "as city leaders work through the ongoing budget challenges caused by the COVID-19 pandemic." The city also plans to use more than $500,000 in its rainy-day fund to meet budget pressures. 

Instead of entering the pandemic with a "blank slate," many communities like Detroit are carrying a decade or decades of staff and budget reductions, Scorsone said.

"It’s going to mean serious reductions in services because there’s no fat to cut," he said. 

The Michigan Municipal League is asking the Legislature to temper the negative impact on property tax revenue that has been created by more people working from home instead of commercial office spaces.

The solution, they've proposed, is to allow millage rates to move up and down with growth but never higher than the rate of inflation, flexibility that is currently prohibited by the interplay between the Headlee Amendment of 1978 and Proposal A of 1994, said Anthony Minghine, chief operating officer for the Michigan Municipal League. 

The league also is proposing changes that would direct additional revenue from increased taxable value at sale to be distributed more directly to cities and schools. 

With the current uncertainty surrounding the pandemic, Proposal A needs "to have some flexibility and an ability to work better than it does now," Minghine said. 

The league also noted that Michigan's 24 communities relying on a local income tax could face decreased revenue because cities cannot collect local income taxes from workers on days they're not working in an employer's physical location. The communities also aren't able to collect income tax from unemployment checks. The treasury department estimates the 24 communities will lose $250 million in revenue this year once people start filing returns in January.

The Michigan Municipal League's plan would allow cities a one-time opportunity next year to collect local income taxes as if the pandemic never happened and employees were still working from their city-based businesses.

Finally, the group asked the Legislature to extend past Dec. 31 an amendment to the Open Meetings Act that allows government bodies to meet virtually. 

On Monday, Democratic Reps. Donna Lasinski of Scio Township and Terry Sabo of Muskegon also urged Republican legislative leaders to adopt permanent expansions to the state's unemployment system during lame-duck session. 

During the pandemic, temporary provisions increased weekly unemployment benefits by about $600 in federal dollars and increased extended unemployment eligibility to 26 weeks. 

With those temporary increases now finished, Sabo and Lasinski, who will serve as House Democratic leader next year, pushed to extend unemployment permanently from 20 weeks to the federal limit of 26 weeks and to increase the average weekly benefit to 58% of the average weekly wage. 

The state's current $362 cap on unemployment is less than 40% of the average weekly wage. Lasinski estimated the 58% cap, which was last in place in 1993, would increase weekly benefits by about $180.

"We need to be able to make sure Michigan families can keep their heads above water in this very difficult economic period," Lasinski said. "One of the ways to do that is to have my Republican colleagues give these bills a fair hearing."