Guy Gordon (00:01.166)
Hello once again and welcome to the In the Weeds podcast. A deeper dive into the issues of the day and policy priorities brought to you by the Citizens Research Council of Michigan. Passionately dedicated the idea that your facts should be objective and that facts should drive policy, not politics. I’m joined today by Eric Loufer, president of the Citizens Research Council of Michigan, to discuss what is a thorny topic for a lot of municipalities, townships.

anybody that is not the state of Michigan, local unit of government. And that is the idea of local option revenue generating and how it cannot happen without state legislative approval. Eric, good day to you. And just kind of give us a quick thumbnail on what local communities can’t do and how it’s left them kind of short.

So we did a report a few years ago. We’ve done a series of reports over the years, but this one looked specifically at local option taxes in Michigan. And we found that Michigan is in the company of very few states in that most states provide to their local governments, multiple means of raising revenue.

So in Michigan, we have the property tax, cities, villages, townships, counties, school districts, community colleges, special authorities, even the state of Michigan levies a property tax. have a city income tax at only 24 cities, levy. have some minor county taxes and Detroit has like the casino tax and utilities, but it’s very, very limited relative to other states. And what, why does that matter? Well,

Currently there’s petitions being circulated in the state, an effort called Ask My Tax, to do away with the property tax. And this is like the most radical form of saying, our property taxes have grown too much, our governments, our local governments have grown so much, we just need to pull the chair out from under them and undo their means of funding government and just hit the reset button.

Eric Lupher (02:11.756)
It’s really an indictment that we have put so much pressure on the property tax that it’s become a disincentive to be in the state. have one of the highest property tax burdens in the nation. And it’s not so much that we’ve just let it grow willy nilly without any control. We have also some of the tightest property tax limitations of any state in the nation. The problem is we rely on it for everything we’re doing with local government.

And what we tried to raise awareness of is that if there were alternatives available to local government, that would reduce the burden on the property tax and make it more feasible to live and own your property, to rent and have part of your rent going for property taxes. The issue is your, your introduction referred Michigan purports to be a home rule state.

Which means in simple terms that cities and villages should have the ability to determine how they want to operate. How many city council people there should be, whether they should elect the clerk or appoint the clerk or all kinds of niceties and state and city operations. But these cities cannot choose to levy an alternative tax. They’re at the mercy of the state. Our state constitution.

in 1963 was enacted by the people and granted those home rule powers and said that cities should have the authority to levy taxes beyond the property tax. But the ink wasn’t even dry on the constitution. The legislature jumped in and said, wait a second, you can’t do that unless we say you can do it.

Was that more about a power grab? I mean, we’re going back 60 years now. Or was it a statement that we really don’t trust, for instance, the city of Detroit or Flint or a lot of these big cities to be responsible in how they levy these taxes?

Eric Lupher (04:13.664)
Yeah, that’s not an or. It was both a power grab and a putting the foot on the local governments. Just three years before that, Detroit was the first city to levy a local income tax. It didn’t need at that time, nor did it ask authority from the state to do that. So I think state legislators were a little gun shy, right? If Detroit is going down this path, what other cities are going to follow?

nanny state kind of

Eric Lupher (04:42.41)
And if the income taxes first, what will follow after that? So yes, it was a power grab, right? Yes, it was even back then the idea of limiting taxation, but it was also a way to tell local governments, your creatures of the state and we, the state will decide how much power you should have.

political playing field is at least today. The same people that are promoting acts by tax will probably not be very warm to the idea of giving local governments more control to levy more revenue generating options.

Yeah, clearly it is a small government effort to constrain the resources of local government, but we don’t foreclose on people if they don’t pay the sales tax. And we don’t foreclose on them if they don’t pay their income tax. Right. We might penalize them in other ways, but the property tax has a big burden attached to it, right? Two times a year, some places one time a year, you’re writing a pretty big check for that.

property tax burden you pay and the failure to pay comes with it, the threat of being displaced from your property and the government foreclosing on that.

thought there was a very, very interesting clause in your analysis of this. And it was in the amusement tax analysis that you did. And you basically said, local communities lack ways to benefit from tourism, commerce, and other activities that lead to increased economic activity within their boundaries because they require increased expenditures by local governments. But Michigan’s tax laws do not provide ways for those governments to benefit from these activities in order to fund the necessary increase in expenditures.

Guy Gordon (06:30.446)
They’re in a really wicked catch-20 in terms of maximizing their potential economically.

Yeah, we can look at Detroit. We can look at a lot of other cities that you might want to go into in the evening and have dinner with friends and walk around a little bit, enjoy the nice evening. And you assume in doing so that your participation, you’re coming in is benefiting that city. Now you clearly that restaurant is paying property taxes and the fact that you patronize it helps them to stay in operation, pay the property tax.

But there’s a whole lot of vibrancy to a city with businesses, stores, storefronts and restaurants and everything that you assume, hey, they’re doing great. That city must really be benefiting from this, but they’re not because they don’t benefit from that consumption. They get really wonky since we’re talking about being in the weeds. often talk about, we often talk about tax policy, good tax policy being a three-legged stool.

here for.

Eric Lupher (07:34.606)
And it’s the different elements of economic activity. Property ownership is one, income, and then consumption. Well, in Michigan, that three-legged stool is very uneven. The property tax leg of the stool is very, very long because we rely on it so heavy. We have income tax and 24 cities are loving that. So it provides a little bit of a…

very short relative to that property tax, but that sales tax leg is almost non-existent. So it makes it hard to sit on. And what we’re arguing is if you could even out those legs a little bit, let’s shorten that property tax leg and lengthen the other two. Now you have an even burden and you’re not taxing anybody so much as to be intrusive, but you’re providing the resources local governments need to provide those vibrant places where people want to live and work.

and shop and dine.

As you look at this in your analysis, how much of an outlier are we here in Michigan with this legislative, this very tight legislative authorization mandate? When you compare us to surrounding states and especially Great Lakes states, are our municipalities and local units of government more handcuffed and more shortchanged than others? Are they at a competitive disadvantage?

Yeah. When you compare us to our surrounding states, yes, we, our local governments are disadvantaged. Um, 38 other states levy off of the rights or local governments to have local option sales taxes. Um, most other states have some authority for local option income taxes, local option cigarette or gasoline or vehicle.

Eric Lupher (09:31.426)
registration. There’s a long list of those types of things. not every state has, you your question was sort of not only the, we shortchanging them and the authority to love you these, also that legislative requirement to do this. Now, Michigan is a home rule state that you would think on the face would provide that authority. Not every state provides home rule authority to their local government. So if you compare us to Nebraska, that is not a home rule state. Yes, they have to go to the legislature to

get that authority, but they have to go to the legislature to do just about anything, changing the city charter, changing how the length of term of a mayor of some city in Nebraska, everything has to go through the legislature for something like that. Michigan, we don’t have that except for tax policy.

So in terms of these local communities being disadvantaged, how does that disadvantage manifest itself? Is it in bumpier roads? Is it in schools that may not be as well funded? If they’re being shortchanged in their ability to generate revenue, how would we know that they see that disadvantage?

schools are completely separate because we have state funding for schools and the local share is just part of the overall pie. But as we think about

Local government generally, cities, counties, villages, townships.

Eric Lupher (10:58.936)
They have the property tax in little else. And since the, what we call the great recession 15 years ago, they have been on a pace to increase the tax rates. So first of all, it’s creating a greater, greater burden on we, taxpayers while our tax, the value of our property is not increasing more than the rate of inflation. Those tax rates are taking a bigger and bigger chunk out of our wallets to pay those.

Plus during the recession, those property values contracted, and then you put a governor on their ability to expand, as you say, rate of inflation or less.

Yeah.

So local governments generally, I paint with a broad bush here, but it’s not applying to every local government mission. They’re feeling fiscal constraint. And given that they have the property tax and little else, they are doing everything at sort of a scaled back level of what they could do if they had the resources they needed. We’re using property taxes to fund roads.

That’s the local share that they’re coming up with. If it were a fuel tax or something like that, you could have more resources to fund those. If you had the consumption taxes, you think about the West side of the state, all the tourists either coming from Southeast Michigan up to up North or people coming around the lake from Illinois and Indiana into Michigan.

Eric Lupher (12:34.378)
we would be able to export the tax in some way to those people coming into our state. Exactly. type of thing. You know, Frankenmuth and Mackinac City and Sagatuck and Douglas, a lot of other places are so consumption based, but we don’t allow them to prosper based on the economic activity that they’re hosting.

They can’t really leverage their own success or leverage their own ability to cover the costs of having these massive amounts of visitors.

And it’s not saying we need this tax on top of everything. I think as we talked about with the admissions tax, there can be tax relief associated with this, right? If we authorize a local option sales tax, perhaps we say, as we did in 1994 with the school finance reform, we call proposal A, perhaps there’s tax property tax relief associated.

But again, we’re evening out those legs on the stool so it’s a little more comfortable to sit on, a little more comfortable to be in Michigan.

In terms of these local option taxes, do they make you more vulnerable in an economic downturn? Are they more dependent on economic activities or are they a little less, for lack of better term, reliable?

Eric Lupher (13:48.91)
Yeah. So that’s a good question. The property tax almost always is a very stable tax. Right. The way we assess the value when those taxes are applied, it takes a prolonged period of downturn before you feel what the property tax. But we saw in 2007, eight, nine, when it does happen, it hurts a lot.

those local governments, some of them lost as much as half of their value that they’re trying to fund their services on.

And it takes them a long time to catch up when everything’s capped.

Right. Because of the caps. So the idea with diversification is you’re not putting so much burden in one place while the sales tax might go down or the income tax might go down for a short period of time. It’s also going to increase faster during the better times. So it takes some better budgeting practices, some putting money in the piggy bank waiting. Okay. So that money is there when you need it, but diversification is good generally.

benefiting from different elements of economic activity, benefiting from the highs and lows in different parts of the economy.

Guy Gordon (15:05.42)
And while that revenue stream may be a little bit more vulnerable in a downturn, you have the virtue of bouncing back faster.

You do. Yes. The property tax to borrow another metaphor, it’s the tortoise, right? The sales or the income are the hare racing ahead. Right. The property tax is the tortoise, slow and steady, but always reliable.

again rewarding you for doing a good job for the level of economic activity in your area. That would seem to be a pretty good selling point. There’s the notion of a good tax versus a bad tax that some taxes are more equitable, neutral, balanced, efficient. Our local option taxes do most of them fall under the heading of a not necessarily a good tax. I don’t know that there are folks out there that don’t believe that any tax is good but

a less bad tax out

That’s bad. Yeah. I wouldn’t say all are some of what you just ticked off there, right? We don’t want a tax that causes taxpayers of seemingly equal ability to pay to have different burdens. We see that right now with the property tax because of the cap on assessed values, two houses that are, that would sell for the same amount of proper, same amount of value. One gets taxed different based on how long the owners have lived there.

Eric Lupher (16:27.958)
We don’t want a tax that causes changes in economic behavior. If you have a gas tax on one side of the street and not on the other, people might choose always to go to the gas station where the tax is not applied. So that suggests a bigger geographic area when you’re doing this type of thing. We want to worry about the regressive nature of a tax. We want to worry about the administrative burden.

A property tax is a lot of administrative burden for the government because they have to assess the value and apply the rates to it. A sales tax is very light for the government. They just rely on the stores to collect the tax and send it back into them. There’s a lot of different factors to what go into good or bad, and you try to weigh those against each other and see what suits your needs.

So assuming that whether it’s the Axe, my tax folks or others that they wanted to embrace this idea of maybe taking the yoke of the legislative authorization off the backs of local municipalities. How would you go about it? You call a constitutional convention. Do you seek amendments to the constitution? What would have to happen?

Again, the constitution said that local government should have this authority to levy different taxes. It’s the legislature immediately after that that passed a law tapping the brakes on that.

So we would need to amend that 1964, I think it’s 64, you said the 1964 legislation, you need to amend or repeal.

Eric Lupher (18:06.166)
It’s a statutory change to that law.

is, mean, just as an observer of this, how far has this discussion gone? Maybe beyond the inner sanctum of the Michigan municipal league or elsewhere. How much passion is there for embracing this idea of making things a little easier for these municipalities?

I think we hear discussion of different tax alternatives as the admissions tax that we talked about with the prior podcast, sort of a one-off address, the ability to do that type of thing. I don’t hear a lot of discussion of let’s just repeal that 1964 law and make it an open playing field for every local government to decide what they want to do.

an amusement tag.

Guy Gordon (18:53.336)
But this is something that one of your lead researchers for infrastructure, Eric Paul Dennis, brought up that the legislative authorization really does handcuff and in some ways creates a lot of inequities for local units of government when it comes to their roads, especially those that are in heavy manufacturing areas that see a lot of damage on their local roads don’t have the economic vehicle to repair.

Yeah, as we sit here today, the legislature is at a standstill on trying to adopt a budget for fiscal year 2020. Roads are the key issue. How much money should be either raised with new taxes or set aside in the current resources to fund roads. the, from my point of view, thinking about this tax policy, a lot of it goes back to the idea that the local governments don’t have authority to raise

taxes on their own to fund their roads. So they come to the state with hand open, just like my daughter, you know, wants to go out to the store to buy something. I need more. need more. Well, why is it the state’s responsibility to fund your local subdivision road or the collector that attaches it to the highway? If it’s a local road serving local needs, why aren’t the local people?

asked to fund that need, well, they don’t have the ability to do it.

right they have the ability to sell bonds of the go to debt but there are more efficient ways perhaps a funding that project in that

Eric Lupher (20:27.968)
more efficient and less costly, yes, because you’re going to pay interest on those bonds.

anything else before we extract ourselves from the weeds.

No, you know, this is really big picture. Some of the issues that have kept Michigan down, think about trying to grow the population and create vibrant communities. And it’s sort of very much in the weeds, perfect for a discussion like this, but it doesn’t get the attention that I think it needs to on empowering our local governments to succeed.

Well, in terms of your analysis, mean, if you were saying, well, it’s the conservatives holding us back on that, you know, there are conservative states like Indiana and Ohio that have embraced this idea of giving local communities more options to package revenue enhancers in a way that is less property tax dominant.

There’s some very conservative states, Ohio and Texas have a lot of latitude, their local governments and other conservative or you might say more liberal that still lean very heavily on the property tax. The ideology is not a determinant of this.

Guy Gordon (21:41.462)
It shouldn’t be, but we have seen kind of a change with conservatives in terms of when it comes to local control, not a lot of things. And that’s kind of been a bit of a sea change ideologically within that party that we’ve witnessed. Eric Lufer, it’s always a pleasure being in the weeds with you. And we invite anybody, by the way, we talked a little bit, we touched on the fact that the amusement tax in Detroit, we’ve got a separate podcast on that, Facts Matter, and you can subscribe to any of these podcasts.

by checking out hashtag facts matter at apple, youtube, spotify, whatever friendly local podcast store you may shop in. We also invite you to help us with our mission here at the Citizens Research Council by going to crcmish.org and perhaps dropping a few coins in the kettle because we are completely donor based. No lobby money, no government money. We are here to serve you, the voter.

and help you be more informed. And if you appreciate that, sure appreciate your support. Until next time, I’m Guy Gordon. Take care.