In a nutshell
- The Home Rule City Act sets the city tax rate limit at 20 mills, but allows for some dedicated millages and debt millages to be levied outside of that limit. In 2004, 25 cities levied 20 or more mills. By 2020, 55 cities levied at least 20 mills in property taxes to support general operations.
- While state law does not create a hard and fast limit of 20 mills and many cities have found ways to get around the limit and stay within the bounds of state law, tax rates cannot continue to grow unconstrained. Cities will reach their limits and may struggle to provide desired services if tax rate and base limits constrain revenues too much.
- Cities (and other local governments) need more diversity in their revenue sources so they have options beyond constantly increasing the property tax rate. This can be provided if state policymakers either allow local governments to levy more types of taxes or reform state revenue sharing to better share diverse state revenues or some combination of the two.
The Citizens Research Council recently released a report that examines how municipal property tax rates have changed from 2004 to 2020. Our analysis, a follow-up to a 2021 report on property tax base limitations, finds that local government officials have responded to tax limitations by seeking, and often receiving, rate increases. Over the period studied, rate increases happened across a variety of local government types – city, township, county, urban, and rural.
Tax rate increases occur for many reasons, not just a response to constraints in the tax base. Some governments likely sought authorization to levy higher rates to provide new or additional services. But, whatever the reason, local governments cannot perpetually increase tax rates; statutory caps and taxpayer patience create upper bounds. The solution to a constrained municipal finance system is not more property taxes, but providing cities (and other local governments) with more diverse revenue streams and coupling that with regional tax base sharing and regional service provision.
Let’s explore the extent to which local governments have approached and surpassed these tax rate limits.
Changes in city tax rates 2004 to 2020
Data from the Michigan Department of Treasury shows that the average city tax rate increased from 15.1 mills to 17.2 mills (14 percent) from 2004 to 2020 (a mill is $1 of tax for every $1,000 of taxable value). The Home Rule City Act, which was passed in 1909, sets the maximum city tax rate at 20 mills, but city charters may set lower maximum rates. The 20-mill limit is higher than that allowed for villages and townships to acknowledge that cities generally provide more services. It was set at a level believed to be sufficient, with tax base appreciation over time, to fund city services.
This rate limit does not include debt millages, as well as some dedicated millages. For example, home rule cities may levy, without voter approval, an additional three mills for garbage services, one mill for library services, one mill for services for older adults, and millages to fund police and fire pensions. Some cities are also authorized to levy ad valorem special assessments, which are technically not taxes, but are largely indistinguishable to taxpayers.
When we take a deep dive into the city tax rate data, we find that 25 (of 281) cities were levying 20 or more mills in operating taxes in 2004. Operating millages in these cities ranged from 36.7 mills in Hamtramck (Wayne County) to 20.0 mills in Oak Park (Oakland County).
By 2020, 55 cities were levying 20 or more mills; from 64.3 mills in Ecorse to 20.0 mills in Detroit (both in Wayne County). Not only did the number of units levying at the maximum rate grow, but the amount of mills levied by the highest tax cities grew as well. By 2020, six cities were levying more than 37 mills. Those cities are all in Wayne County: Ecorse (64.3 mills), Highland Park (47.8 mills), Melvindale (47.3 mills), Harper Woods (44.5 mills), River Rouge (44.2 mills), and Wayne (38.0 mills).
How city tax rates can exceed the 20-mill limit
First a caveat: Some cities may be levying even more mills because we removed debt millages from the equation. The 66 cities levying 20 or more mills in 2020 are also levying an average of 1.5 mills for debt. It is important to note that some cities do not have any debt millages and others are levying much more than 1.5 mills. Plus, if you live in one of these cities with high rates, you are also paying overlapping property taxes – county, schools, special districts – so your tax rate is higher than just your city rate.
All cities were levying a general operating millage of no more than 20 mills in 2004 and 2020. So, if a city’s rate is above the 20-mill limit, it is due to dedicated millages. Again, cities are allowed to levy some dedicated millages outside of the 20-mill rate limit. Some examples of the dedicated millages levied in 2020 include pension, library, garbage, roads, parks and recreation, public safety, promotion/advertising, civic center, transportation, seniors, cemetery, museum, sidewalks, and sewer/sanitation.
The rate data in our report also includes any ad valorem special assessments. The Department of Treasury collects this information separately from a city’s general operating millage. Only a handful of cities are authorized to levy ad valorem special assessments, but these levies can be substantial. In 2004, only two cities levying more than 20-plus mills also levied an ad valorem special assessment; Bangor (Van Buren County) levied an additional 5.3 mills and Newaygo (Newaygo County) levied an additional 0.9 mills.
By 2020, 11 cities in the group levying 20-plus mills also levied one or more ad valorem special assessments. Again, these assessments were substantial. The table below highlights the high-tax cities that also levied ad valorem special assessments in 2020.
Cities with High Tax Rates and Ad Valorem Special Assessments, 2020
(tax rates reported as mills)
|Operating Tax Rate||Ad Valorem Special Assessment Rate||Total Rate|
|Ecorse (Wayne County)||33.7||30.6||64.3|
|Melvindale (Wayne County)||37.3||10.0||47.3|
|Harper Woods (Wayne County)||24.5||20.0||44.5|
|River Rouge (Wayne County)||36.2||8.0||44.2|
|Fraser (Macomb County)||26.1||4.5||30.6|
|Bangor (Van Buren County)||17.7||7.8||25.5|
|Hazel Park (Oakland County)||20.9||2.8||23.7|
|Ferndale (Oakland County)||18.9||3.1||22.0|
|Gaastra (Iron County)||18.2||3.0||21.2|
|Gaylord (Otsego County)||16.3||3.5||19.8|
|Newaygo (Newaygo County)||17.8||1.9||19.7|
More cities approaching rate limits
As our data show, the number of cities at or above the 20-mill tax rate limit has more than doubled from 2004 to 2020. When we include cities levying 18 or more mills, the growth is even more substantial.
In 2004, 67 cities (23.8 percent) were levying 18 mills or more. By 2020, 110 cities (39.1 percent) were levying 18 mills or more. The chart below shows city tax rates in 2020 and how many cities were at or near the 20-mill limit. At some point this will become untenable. Cities will not be able to keep growing their tax rates.
City Tax Rates, 2020
While state law does not create a hard and fast limit of 20 mills and many cities have found ways to get around the limit and stay within the bounds of state law, tax rates cannot continue to grow unconstrained. Cities will reach their limits and may struggle to provide desired services if tax rate and base limits constrain revenues too much.
The solution to this dilemma is not more property taxes (or higher rate limits), but allowing cities and other local governments to have more diversity in their revenue structure. This can be achieved by the state providing local governments with the authority to diversify their revenue raising structures instead of forcing them to rely on the property tax to fund everything. It can be achieved through reforming state revenue sharing so that the state is required to share revenues from its diverse revenue stream. It can also be partnered with reforming local government service provision to allow for more regional services and service sharing to reduce costs where possible.
Revamping the local government finance system is ripe with possibilities. We just need state and local policymakers to start thinking beyond the local property tax.
Permission to reprint this blog post in whole or in part is hereby granted, provided that the Citizens Research Council of Michigan is properly cited.