Reforming Statutory State Revenue Sharing
Report 387, February 2015

Summary

The State of Michigan runs a program that is somewhat unique — distributing a portion of state-collected tax revenues to local governments for their unrestricted use. The restricted revenue sharing programs operated in Michigan — sending state-collected funds to local governments to fund programs such as education, highway construction and maintenance, court funding, liquor enforcement, and mental health care, etc. — can be found in most states. Programs in which the state collects taxes and sends the revenues to local governments for them to use at their discretion are not as common.

Michigan’s unrestricted state revenue sharing program is now 75 years old. For the first 30 years of its history, it served solely to send funding to all local governments. That purpose is currently served by the constitutional revenue sharing program that shares funding with local governments through a per capita distribution. Since 1971, the state has attempted to give revenue sharing greater purpose by directing funding in the statutory revenue sharing program to local governments with the greatest needs — defined at various times as the demand for expanded menus of services and the lack of capacity to fund services from locally-collected revenue sources.

The last effort to define the goals of the statutory unrestricted state revenue sharing program — to supplement the revenue raising capabilities of local governments with less property tax capacity — were never fully implemented. Only about one-quarter of the local governments eligible for funding continue to receive statutory state revenue sharing funding today, and the methodology for determining the levels of funding distributed to each of those governments has more to do with the levels of funding in prior years than any measure of current needs.