Report 394, December 2016
The financial plight of the Michigan state government during the first decade of this century (hereafter referred to as “Michigan’s single state recession”) has been well documented. Reduced economic activity coupled with state policies resulted in reduced revenues and subsequently reductions in appropriations to a number of functions. Since the end of the national recession that began in late 2007 (hereafter referred to as the “Great Recession”) there has been growth in the economic activities that make up the state’s tax bases. State tax revenues have rebounded and expenditures have enjoyed moderate growth.
Local governments were affected by Michigan’s single-state recession that began in 2001 because the state diverted for other purposes funding statutorily earmarked for state revenue sharing and because the out-migration of families seeking employment depressed the demand for housing. The economic woes of local governments were exacerbated by the 2007 housing market crash and the Great Recession, which caused significant declines in the tax bases of many local governments.
Government employment is the only sector that has not grown since the end of the Great Recession. While private sector employment has rebounded since bottoming out in 2009, local government employment is down 20 percent when compared to 2000 employment levels and has not shown signs of recovery.
Some may look at the loss of tax base, and therefore the reduction in local government tax revenues, as a positive phenomenon because it results in less taxes and less government. Before dismissing the significance of the lost tax base it must be recognized that local government employment made up nine percent of the total state workforce and play a role in the contributing to economic growth. Furthermore, it must be recognized that the tax base that funds local government services also serves as the tax base for state and local taxes that make up part of school funding and as the funding source for the many multi-jurisdictional special authorities created to provide regional services. Finally, local government services, funded from local government property taxes, play a role in economic development. Businesses that state officials and regional economic development agencies recruit to the state will compare the quality of the infrastructure, the public safety services, the school systems, and the services to the residences of their workers to the quality of those amenities in other states. An inadequately funded network of local governments may result in less economic development, which in turn hurts the state’s sales and income tax bases.
Property values have been on the upswing since the end of the Great Recession. After declining by 31.2 percent from 2007 to 2013, statewide property values have increased 10.6 percent in the years since. But taxable values, the applicable values upon which tax rates are applied have only grown 1.6 during this period of recovery.
The constraint on growth of taxable values is the modified acquisition value method of determining the taxable value of property created by the statewide ballot Proposal A of 1994 that was superimposed upon the existing property assessment system. For property assessments on or after December 31, 1994, annual increases in the taxable value of individual parcels of existing property are limited to the lesser of either five percent or the rate of inflation. When ownership of a parcel of property is transferred as defined by law, the parcel is reassessed “at the applicable proportion of current true cash value,” which typically results in a one-time jump (commonly referred to as a “pop-up”) in the property’s taxable value. Additions and modifications to existing property and new property are placed on the tax rolls at 50 percent of current true cash value. Assessors continue to record, and the state computes, the SEV of each parcel of property for purposes of assigning a taxable value upon transfer equal to 50 percent of the true cash value.
Michigan categorizes real property into six classes; residential, agricultural, commercial, industrial, developmental, and timber cut-over. The value of property in each of these classes grew until the Great Recession. Since then, the classes have suffered different fates.
The taxable value of residential property declined 20.5 percent from 2007 to 2012, but has recovered some value so that 2016 statewide residential taxable value was only 17.3 percent lower than the 2007 value. Total residential taxable value in 2016 was 12.7 percent above what it was in 2000 in real terms.
Gains of $14 billion in inflation-adjusted taxable value of commercial property between 2000 and 2009 were mostly lost over the next seven years, resulting in the current value of $46.8 billion. Total commercial property taxable value in 2016 was 9.7 percent above that in 2000 in real terms.
In contrast to the other classes of property, the value of industrial property did not grow as much before the Great Recession and fell much further as a result of the Great Recession. Gains of $14 billion in inflation-adjusted taxable value between 2000 and 2009 were mostly lost over the next seven years, resulting in the current value of $46.8 billion. Total commercial property taxable value in 2016 was 9.7 percent above that in 2000 in real terms.
The value of the individual tax bases has not moved in lockstep, and so there are many stories to tell of how Michigan’s single state recession and the Great Recession have affected local government taxable values. A few local governments have seen their tax bases grow consistently over the past 16 years. A very large majority have seen their tax bases decline since the values peaked around the Great Recession. Almost half of the local governments experienced such severe declines in their tax bases that their current values are less than the values those units possessed in 2000.
2016 Compared to Peak Levels
A total of 1,295 local governments (271 cities and 1,023 townships), 85.0 percent of these local units, have 2016 taxable values below what they had in at their peaks. The majority of the state population (94.7 percent) resides in a city or township that had a 2016 taxable value that was below the unit’s peak level.
These 1,295 local governments as a group have inflation-adjusted taxable values that are $84.2 billion (21.9 percent) below their cumulative peak values. Collectively, they lost 11.9 percent ($17.3 billion) of the residential taxable value that they had at their peak values; 10.0 percent ($3.2 billion) of the cumulative commercial taxable value; and 41.9 percent ($6.4 billion) of the cumulative industrial taxable value.
Sixty-eight of Michigan’s 83 counties have at least 80 percent of the cities and townships with less taxable value in 2016 than they did at their peaks. As seen in Map A, 72 of the 83 counties have 2016 taxable values that are below their inflation adjusted 2000 taxable values. Wayne and Genesee counties (-33 percent) are the furthest below their peak values, followed by Macomb (-28 percent), Oakland (-26 percent), and Midland (-25 percent).
Among the 69 Lower Peninsula counties, only five counties (Alger, Cass, Mason, Missaukee, and Leelanau) had 2016 taxable values that exceed their inflation adjusted peak values. The other 64 counties below the bridge have not rebounded to their peak values. For the most part, counties on the east side of the Lower Peninsula are further below their peak values than counties on the west side, and the whole Lower Peninsula lost more taxable value than the Upper Peninsula.
2016 Compared to Pre-Single State Recession Levels
Within those 1,295 local governments there is a sub-group of cities and townships that were more severely impacted by property tax base loss. Out of a total of 1,515 cities and townships that were incorporated as of 2000, 248 (16.4 percent) had inflation-adjusted taxable values in 2016 that were below their respective 2000 taxable values. This group included 169 cities and 79 townships, located in every region and in 64 of the 83 counties (see Appendix B). Almost half (48 percent) of the state population resides in a city or township that had a 2016 taxable value that was below the unit’s 2000 level.
These 248 local governments as a group have inflation-adjusted taxable values that are $33.5 billion (21.8 percent) below their 2000 values. Collectively, they lost 20.3 percent (13.8 billion) of the residential taxable value that they had in 2000; 7.9 percent ($1.6 billion) of the commercial taxable value; and 51.1 percent ($5.6 billion) of the industrial taxable value.
One half of the 248 local governments are located in nine counties – Bay, Genesee, Macomb, Midland, Monroe, Oakland, Saginaw, St. Clair, and Wayne. Wayne, Oakland, and Macomb Counties are home to 37 percent of the 248 local governments.
The predominance of cities and townships with tax bases below their inflation-adjusted 2000 taxable values varies in these nine counties. A large number of units in Genesee (53.6 percent), Macomb (58.3), Oakland (52.9 percent), St. Clair (44.8 percent), and Wayne (83.3 percent) Counties are in this condition.
Alternatively, the large loss of taxable value in the City of Midland relative to the overall tax bases of Bay and Midland Counties (the City of Midland straddles both counties) puts these counties below their 2000 levels. Monroe County is below its 2000 taxable value predominantly because the City of Monroe and Frenchtown Township lost so much tax base. Lost tax base in the City of Saginaw is the biggest factor contributing to Saginaw County’s overall loss.
It should be noted that many of the cities and townships that have taxable values below their inflation-adjusted 2000 values are also the governments that have suffered the most by the state diverting funds from statutory state revenue sharing to other state purposes.
The amount of lost taxable value is very severe in 40 local governments – 31 cities and 9 townships – that had taxable values in 2016 that are 30 percent or more below their inflation-adjusted taxable values in 2000 (see Appendix C). These local governments are home to 16.5 percent of the entire state population (1.64 million residents).
The loss of inflation-adjusted taxable value relative 2000 values is concentrated primarily in Southeast Michigan and along the I-75 corridor. In addition to Wayne, Oakland, and Macomb counties, six other counties remain below their inflation adjusted 2000 values – Bay, Genesee, Midland, Monroe, Saginaw, and St. Clair. The 2016 taxable values in Genesee, with Flint constituting a large part of its tax base, and Wayne, with several municipalities experiencing significant losses of their tax base, are the farthest below their 2000 values. Significant losses in inflation-adjusted taxable values were also experienced in Oakland, Macomb, Midland, and Saginaw counties. Another nine counties are above their inflation adjusted 2000 taxable values, but by less than 10 percent.
Several of these counties have historically served as economic engines for the state. In 2000, these nine counties accounted for 53.6 percent of the statewide total taxable value, including 52.8 percent of all residential taxable value, 56.0 percent of all commercial taxable value, and 63.2 percent of all industrial taxable value in the state. Over the period from 2000 to 2016, these counties collectively lost 17.1 percent of their total taxable value, including 9.9 percent of their residential taxable value, 6.8 percent of their commercial taxable value, and 41.2 percent of their industrial taxable value.
The Implications of the Data
The decrease in tax bases of so many local governments poses significant consequences to their ability to provide the services their residents expect of them because property taxes are a primary source of revenues for local governments. The limitations on the tax base and tax revenues restrict growth even as the market values of properties appreciate. Absent the location of new residential, commercial, or industrial real property within the boundaries of a jurisdiction, the property tax base, and thus the property tax revenues can be expected to grow at the rate of inflation.
Governments with the ability to levy additional taxes are able to sustain the diminishment of tax base for a single revenue source. Michigan’s property taxes do not respond to post-recession expansion of the economy because of the tax base limitations established in law.
In light of the diminished tax bases, Michigan’s local governments are left to choose among the following broad areas to deliver public services to their constituents:
Growing the Tax Base
With the property tax base and revenue limitations, the only way local governments can grow their tax bases – and the counties, cities, and townships can recover to the levels from before the Great Recession – is by adding new property to their tax rolls.
There are multiple problems with this necessity. First, it is not sustainable. Second, and most pertinent to many of the governments that suffered the greatest declines in taxable values during the Great Recession, such a system favors rural and suburban communities with land available for new development. It would also seem to favor several of Michigan’s hardest hit cities that have been beset by abandonment and have ample land available for re-development. Inner ring suburbs and other developed communities that were and are hosts for industrial property are often close to being built out, with little available land for new development.
Finally, with all of Michigan’s local governments dependent on property tax revenues in some form, an inter-jurisdictional competition for economic development projects exists. The tools most frequently employed by local governments to attract new development requires them to forego some or all of their property tax revenue that would otherwise result from the new development.
Diminished Service Levels The costs of labor, contracted services, and other materials needed to provide government services continued to rise as the tax bases of Michigan’s local governments deteriorated during the Great Recession. Local governments across the state have taken efforts to adjust the types and levels of services provided to reflect the resources available. The new normal will have many local governments providing less government services. This may be acceptable or even desirous to some people, but it should be recognized that this will affect the quality of life in those jurisdictions.
Alternatives The decrease in taxable values was caused by real estate market conditions. Michigan has long tied assessments to market conditions for property tax purposes and that should not be changed. However, some policy changes could help alleviate the fiscal stress many local governments are experiencing. The alternatives identified here are not fully explored, but are given as examples of what policy changes might be pursued to address the recent experience with taxable value deterioration and fiscal challenge.
Levying Taxes at Higher Rates Almost all statutes that authorize the levy of a property tax provide for a limit on the rate that may be applied. Those tax rate limits were originally designed as a percentage of the taxable value of the real and personal property in the jurisdiction. Proposal A of 1994 changed the tax base from state equalized value, which is based on the value of property, to taxable value, which is based on the value of the property at the outset but then assumes an artificial nature thereafter. It is arguable that the tax rate limits have lost some of their connection to economic factors. One option is to allow local governments that have suffered diminished tax bases to be granted increased tax capacity.
Eliminate Tax Rate Roll-backs The Headlee Amendment was intended to provide protection to individual property owners against unexpected and aggravated increases in property taxes by controlling revenue increases from the property tax within specific communities. This was accomplished by limiting year-to-year increases in property tax revenue that a local government could collect to the rate of inflation. In the event that a local government’s revenues exceed this amount, a Headlee rollback is triggered, which readjusts the millage rate on the tax base to bring revenues down to the ceiling. With the advent of Proposal A, the protections became more robust for individual property owners by placing caps on the growth of the taxable value of individual properties rather than just on unit-wide revenue. The Proposal A changes rendered portions of the Headlee Amendment (e.g., individual property owner protections) irrelevant and the interaction of these two pieces of legislation have had compounding consequences for local government finances. In light of the Proposal A tax base growth limitation and its well-established taxpayer protections, it may be appropriate to amend Article IX, Section 31 to remove the provisions for tax rate rollbacks that occur on a unit-wide basis.
Even-Out Taxable Value Decreases While Proposal A limits the rate of taxable value increases at the individual parcel level, it does not address the rate of taxable value decreases; declines are not limited. As opposed to the year-over-year calculations that are currently used to control increases, a rolling average over a number of years would provide greater stability in the change in taxable value. This would have the added benefit of minimizing the fiscal impact that governments experience as a result of significant declines in taxable values.
Tax Rate Roll-ups Losses in taxable value in the magnitude experienced as a result of the Great Recession have proven to be a generational event. The last time losses this large were experienced was as a result of the Great Depression in the 1930s. Still, market values will fluctuate and a significant reduction in taxable values is likely to occur again sometime in the future.
The implementation of the Headlee Amendment’s property tax limitations originally contained provisions for tax rates to roll up in the event that a jurisdiction’s tax base increased by less than the rate of inflation or decreased. The tax rate could only increase in this way until it returned to the previously authorized tax rates before roll backs occurred. However, these provisions were removed with implementation of Proposal A.
Address the Service Delivery Model The loss in taxable value has been widespread among local governments. More than 200 cities and townships had 2016 taxable values below their 2000 inflation-adjusted levels and all of those jurisdictions had taxable values below their peak values reached between 2007 and 2009.
Losses have been experienced at the county level as well, but not to the extent experienced by the cities and townships within them. Several services provided at the county level in other states are provided by cities and townships in Michigan. By consolidating service provision to the county level, these services could benefit from economies of scale and relieve the cities and townships of the responsibility for their provision.
Diversify Local Government Revenue Sources One thing that has become clear in light of the Great Recession, is the over-dependence of local governments on the property tax. In order to be more resilient during periods of economic volatility, local governments could benefit from a more diverse pool of financial resources. The questions when considering tax diversification are what type of tax and what level of government should be authorized to levy the tax. Local-option income taxes currently are authorized only to Michigan cities. Other states authorize local option motor fuel, motor vehicle registration, alcoholic beverage, tobacco, and utility users taxes. The local-option sales tax is also commonly authorized in other states.
Reform Statutory Revenue Sharing Michigan’s revenue sharing program, which distributes a portion of state-collected tax revenues to local governments for their unrestricted use, has been a significant source of local government revenue. Historically, it has been shown that whatever revenue is received from statutory revenue sharing is not a dependable source of income for local governments during economic downturns when the state is pressured to balance its own budget. 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.
Michigan’s history of sharing revenues has created a dependence from which local governments will not easily be weaned. At the same time, state revenue sharing also serves to diversify the revenue structure of local governments. The circumstances of the past decade have left Michigan with a state revenue sharing program that bears little resemblance to its prior self. There is little rhyme or reason to the methodologies used to distribute statutory state revenue sharing to local governments, nor to the amounts that they receive. The effective use of public resources in such a program depends not only on a sound formula for getting funding to the governments with the greatest needs, but also on a level of funding sufficient to make a difference. Considering the revenue-raising constraints with which local governments are being confronted, a revenue sharing program that meets both criteria may prove crucial to the vitality of Michigan’s local governments.
Conclusion A significant number of Michigan local governments and counties find themselves with less tax base upon which they can levy property taxes than they did prior to the Great Recession. The hardest hit local governments even have less tax base than they did before Michigan’s single state recession began in 2001. These tax base losses have not been limited to Michigan’s most economically challenged local governments.
The reductions in tax base will be fixed over time for some local governments with new development that makes up for the losses. For a large number of local governments, especially the hardest hit local governments that tend to be the ones serving large percentages of the state’s population and businesses, constitutional tax limitations will impede the ability to recover from these losses for some time. Absent new development, limitations on the growth of taxable value on a parcel by parcel basis and on the growth of property tax revenues on a jurisdiction wide basis have a compounding affect to keep growth in tax bases at or near inflation and growth in property tax revenues at or below inflation.
In a fiscal vacuum, this may be a burden that could be overcome for most governments. But the property tax system does not operate in a vacuum. State revenue sharing, which is the other major source of funding for most local governments is also down significantly. The combination of lost property tax base and reduced state revenue sharing leaves many local governments and counties struggling to maintain the levels of services expected of them by the state and by their residents.
Policy changes could make incremental improvements to the system, but that will have minimal impact on the hardest hit local governments. In order to get past this difficult period, state policymakers must engage in an exercise to evaluate the services funded by property tax revenues, the level of government responsible for providing services, and alternative revenue sources that might be employed to supplement the property tax. The state must also reexamine the role it plays in funding local governments through state revenue sharing.