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CRC Column

The right to criticize government is also an obligation to know what you are talking about. 
-Lent Upson, 1st Executive Director of CRC  

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Local-Option City Income Taxation in Michigan
January 2011
Memorandum 1103

Michiganís prolonged economic recession is creating fiscal stress for many local governments and causing city government officials to seek alternative revenue sources. Revenues from the two current primary sources, property taxes and unrestricted state revenue sharing, have fallen sharply in recent years. Some might prefer a local-option sales tax, but the state Constitution dictates the maximum sales tax rate and the dedication of sales tax revenues. Without the ability to go above the current six percent rate, it is not likely that a local-option sales tax could be authorized without the state ceding some of the tax it currently levies or a constitutional amendment, which would require voter approval in a statewide election. The local option income tax, therefore, is the revenue option immediately available to cities.

Since 1964, Michigan law has authorized cities to impose local-option income taxes as an alternative, or supplement, to property taxes. At present, only 22 cities levy an income tax. The following will explain how city income taxes work, analyze the history of the cities levying this tax, and investigate the incentives and disincentives municipal policy makers may wish to consider relative to imposition of this tax.

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Why Now?

Lost revenues are a major problem for communities in Michiganís urban areas. Declines in property values were among the causes of the recession and are among the leading causes of the fiscal distress for local governments. Resources earmarked for unrestricted state revenue sharing have been diverted for funding of other state functions. Local governments have made drastic cuts in many service areas and without alternative or new revenues, additional cuts will be necessary.

The decline of property tax values was both a cause and a symptom of the 2008 recession. Michiganís economic decline has caused an exodus from the state resulting in depressed demand for housing and declining property values. The nationwide bursting of the housing bubble and the foreclosure crisis exacerbated the depression of property values. Michigan has ranked near the top among states in the number of properties subject to foreclosure throughout this crisis.

Total state equalized value, a measure of the cash value of real and personal property, fell 15 percent from 2007 to 2010 for the state as a whole. Statewide taxable value, the base to which tax rates are applied, was down six percent in this period. In many Michigan cities, which are heavily reliant on residential, commercial, and industrial properties, the declines in property tax bases and tax revenues were even starker. The Southeast Michigan Council of Governments (SEMCOG) projects taxable values will decline 32 percent between 2007 and 2013 in the seven-county Southeast region, the part of the state hardest hit by the loss of manufacturing jobs.

While townships have not been immune to the economic declines, the problems have been largely concentrated in Michiganís cities and charter townships. General law townships, in particular, have fared well because the value of agricultural property, rarely found in Michigan cities but common in townships, has suffered little from the decline in property values. Charter townships, which are usually located in urban areas, have suffered many of the same problems as cities during this prolonged recession.

Unrestricted state revenue sharing, another significant source of local revenue, has dropped 31 percent since 2000, a cumulative reduction of $4 billion. Efforts to deal with the stateís structural budget deficit led state policy makers to retain funds that previously would have been allocated to statutory state revenue sharing in order to finance other state General Fund programs.

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