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Revenue sharing boosts Michigan communities

Gary Wolfram

Thomas Jefferson made clear that much of our governance should come at the local level. As he put it in 1816 in his letter to Joseph Cabell:

“It is by dividing and subdividing these republics from the great national one down through all its subordinations, until it ends in the administration of every man’s farm by himself; by placing under everyone what his own eye may superintend, that all will be done for the best.”

Michigan has a long history of declaring the importance of local government. The Home Rule City Act of 1909 precluded the state government from dissolving a city without a vote of the local residents. Section 34 of Article VII of the 1963 Constitution requires that provisions of the constitution concerning cities “shall be liberally construed in their favor.” One way of acknowledging the importance of local units of government was the establishment of revenue sharing, whereby the state government collects revenue statewide and returns the revenue to cities, villages, and townships.

Unfortunately, since the Great Recession, local units of government have been hit with three major blows, all of which involve the state government. The first, is the major decline in revenue sharing as the state struggled to balance its budget during the recession of 2007-2009.

Statutory revenue sharing, including EVIP and now CVTRS payments, declined from a peak of $684 million in FY 2001 to $210 million in FY 2012 and only recovered to $249 million in FY 2016. Total revenue sharing which fell from a peak of $1.326 billion in FY 2001 has only recovered to $998 million in FY 2016. These figures are in nominal dollars. Imagine what the fiscal situation of cities would be if there had been an additional $400 million in revenue sharing each year.

The second problem is the decline in Act 51 revenues. As the House Fiscal Agency noted in its report last month, road funding has stagnated. “Some local road agencies received a smaller distribution in FY 2012-13 than they did in FY 1997-98.” There is expected to be some increase in funding due to the recent transportation package, however, funding for local roads will still be well below in nominal dollars what it was a decade ago.

The third problem is the unintended consequences of Proposal A’s limit on the increase in taxable value of property. In 1993 it was not expected you would get a severe decline in property values. In retrospect, the language should have allowed taxable values to return to their prior level at the market rate in the case of a downturn. Instead, the taxable value can only go up by 5 percent or the rate of inflation whichever is smaller. This has resulted in a significant decline in property taxes in the local units.

Taxable valuations statewide fell by $48 billion from 2008 to 2013, from $363 billion to $315 billion, and have only recovered to $327 billion for 2015 (latest figures available from the Department of Treasury Ad Valorem Property Tax Report). As a consequence property taxes collected by Michigan cities declined by more than $139 million from 2008 to 2015.

A top priority in the state budget should be a return of statutory revenue sharing to at least its 2008 level. The combination of these three threats to local government finances have left some cities under emergency management, and many cities with lessened police and fire protection. Road and other infrastructure maintenance has been delayed with the result that many local roads are in disrepair.

Restoring revenue sharing will lead to less state spending on bailouts of cities and result in more secure local government services and in a tax cut for Michiganians as their local governments will be able to reduce property tax rates.

Gary Wolfram is the William Simon professor of economics and public policy director of economics at Hillsdale College.