Let's talk taxes.
Specifically, let's talk about how completely broken the state revenue sharing is, and what that means for city funding.
Many people think of city funding in terms of just property taxes and millages. It's not that simple though. We are also funded through revenue sharing.
What is State Revenue Sharing and How Does it Impact City Finances?
Revenue sharing was adopted after certain local taxes were discontinued or preempted by the state. Revenue sharing consists of both constitutional and statutory payments. Both are based on collected sales tax.
Constitutional payments: consist of 15% of gross collections from the 4% sales tax distributed to cities, villages, and townships based on their respective populations. This amount is set by the state constitution. The Legislature must appropriate whatever is calculated. It cannot reduce or increase the constitutional portion of revenue sharing. Constitutional payments to cities, villages, and townships grew by an average of only 1.27% per year from FY 2001/02 through FY 2017/18, less than the annual average inflation rate during the same period.
Statutory payments: have traditionally been distributed by a formula, rather than on a per capita basis. The formula is designed to compensate for the significant variation in local governments’ service delivery needs, infrastructure maintenance requirements, and capacity to generate local tax revenue. This statutory program calls for 21.3% of the 4% sales tax collections to be distributed in accordance with language set in Public Act 532 of 1998.
So here’s the rub: According to the 1998 statute, full funding would be 75.5% of 21.3% of the sales tax revenue collected at the 4% rate. However, that formula was never fully implemented, and less than half of cities receive this funding, and because of the way that cuts have been made, Detroit receives more than half of the total distribution. The revenue instead has been directed to finance other areas of the state budget.
Pictures and graphs tell the story far better than words though.
In the graph, the area shaded in blue is representative of what full funding would look like. You can see the steep and ongoing decline in state statutory revenue sharing, leaving a massive (and increasing) gap in municipal funding.
There is a lot of talk about decreasing statutory revenue sharing even further due to pressures on the state budget due to COVID. What's the state's consolation to cities in the face of a looming economic pinch? They encourage cities to apply for grants like the Financially Distressed Cities, Villages and Townships (FDCVT) Grant Program... paid for with statutory revenue, the same revenue that should be distributed to cities. If statutory revenue sharing was fixed, our cities would be in less financial distress, and likely wouldn't need 'grant' money in the first place.
Parkinson's law is the adage that "work expands so as to fill the time available for its completion".[1] People also relate it to finance, with adages like "the more money you make, the more money you spend". This same concept applies to budgets, at all levels of business and government.
Thoughts on the Headlee Override & Headlee Tax Protections
Which leaves us with today, and the reason I'm writing this. It's budget & personal tax season, and I'm acutely aware of the impact of taxes on our residents (myself included). In 2011, we Ferndale voters passed the Headlee Override in order to stay afloat when our property taxes plummeted during the Great Recession. It absolutely made sense to do it, as the severe impact of property tax declines left us with the stark reality of being unable to properly fund our essential services. The state’s Headlee Amendment of 1978 is a tax protection that requires cities to roll back their millage rates whenever property assessments exceed the rate of inflation. The override bumped up the city millage from 14.5 mills, up to the maximum allowable amount of 20 mills. The original override was set to expire in 2015, but was voted in again for another 10 years by a narrow margin- 55 votes, to be exact.
The Headlee Override was never meant to be permanent. But due to how broken the stat
e statutory revenue sharing is, and paired with Parkinson's law, we have come to rely on it.
Our property tax values are finally just above pre-recession levels, and I believe it's time to really start putting pressure on our legislators to fix the broken statutory revenue sharing to help fund our municipal services.
Our taxable values are at $698M, and pre-recession we were at 614M. Headlee rollbacks (which I'll talk about some other day) will continue to push our operating mills back, but if taxable value continues to increase and statutory revenue is corrected, that shouldn't be a problem.
Headlee Rollback:
• We’re assuming a Headlee rollback factor of .9709 annually
• = a loss of ~.5 a mill/year or ~$367,000
Taxable Value Projections
• We’re assuming a 5% increase in taxable value for FYE 2021; 4.5% thereafter
• More conservative than projections provided by Oakland County (-1.5% less)
We, as Michigan taxpayers, need to start putting pressure on our state elected officials to fix this system that denies our cities the revenue needed to maintain a high level of services. Play around with the tool in that link, and enter in any city- we're not alone in being impacted, and we shouldn't be alone in the fight.
Statutory payments are down from 2M in 2003, to 989K in 2017. Have we received better services from the state due to their appropriating that extra revenue?
I think it's time to take a hard look at where our money is being spent, and to talk to our state representatives about sharing the amount they agreed to back in 1998 rather than continuing to chip away at the portion they allocate to our cities.
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