In a Nutshell:

• An MEDC-commissioned study shows that its place-based economic development programs are paying dividends with increased property values and occupancy rates near investment sites.
• State-sponsored economic development programs such as these are intended to grow the state’s tax base as well as benefiting the constituent local governments by strengthening their tax bases and their ability to fund services.
• Michigan’s property tax limitations keep these public investments from bolstering property tax receipts and helping the local governments fund the services — public safety, safe parks, libraries, refuse collection, etc. — that also contribute to the quality of life and attractiveness of the places

The Michigan Economic Development Corporation (MEDC), the state’s lead agency for economic development, recently commissioned a study of four place-based economic development programs. According to the analysis, “… statistically significant and measurable placemaking effects result from [the MEDC’s] sustained place-based investments over time. These are reflected by increased property values and occupancy rates near MEDC investment sites.” 

Sounds good, right?

While these results are generally positive for the state government and its tax base, the investments have negligible effects on the property tax revenues of the communities where these investments are made. This is due to the functioning and interplay of Michigan’s two primary property tax limitations.

A Role for Economic Development

Reasonable minds can disagree on the role of government in economic development, but given that Michigan and every other state are engaged in economic development activities, the current question is not if governments should engage in these activities but how and to what end. 

One broad purpose of a state’s economic development efforts is to enhance its tax base to better enable it to fund services. While pursuing this objective, it is also hoped that state-sponsored programs will benefit the constituent local governments by strengthening their tax bases and their ability to fund services. Local governments provide the lion’s share of services that contribute to a state being a quality place to live and do business.

The State of Michigan’s economic development efforts has changed significantly in recent decades. Earlier programs were very self-serving to the state government’s revenue structure, focusing on attracting business development that would improve the state’s tax revenues. For example, tax credits offered under the Single Business Tax, and later the Michigan Business Tax, allowed businesses to reduce their corporate tax burden with the goal of increasing individual income and other tax revenue. The state also benefited from the income tax levied on the business’ workers, fuel taxes as those workers went to and from work and supplies were brought to the business and final goods sent to market, and other taxes. 

These economic development efforts were often criticized because the approach was perceived as the state government picking winners and losers when deciding which companies to grant tax credits.

Michigan’s targeted approach to economic development took a turn when the state adopted a  Corporate Income Tax, replacing the Michigan Business Tax and ending most of its tax credit programs (the state has honored credits granted). 

Placemaking Economic Development

The state’s economic development emphasis became focused on “placemaking”, a concept defined by the Michigan Municipal League as, “The process of creating places that people care about and where they want to spend time.  These high-quality places are active, unique locations that are interesting and visually attractive, people-friendly, safe, walkable and bikeable, provide mixed uses of businesses and housing, and offer creative amenities and experiences.”

Recently, the MEDC examined four of its place-based economic development incentive programs: the Michigan Community Revitalization Program, the Brownfield Tax Increment Financing Program, the non-entitlement Community Development Block Grant program, and the Public Spaces Community Places Program. The MEDC says that the goals of these “… place-based economic development programs include the betterment of neighborhoods and commercial corridors to attract occupancy and investment.” 

From a state perspective, the analysis surely suggests that these programs are meeting their goals. Their analysis of more than $625 million in MEDC investments across 176 deals in six cities that leveraged more than $2.6 billion in private investments from 2008 to 2019 found that:

“1. MEDC [Community Development Incentives] CDI deals increased occupancy rates in all residential and commercial buildings within 1,000 feet of MEDC investment sites by approximately 3%.

2. Every $1.00 invested by MEDC in the six cities created $5.13 in nearby commercial property value and $1.05 in nearby residential property value for a total of $6.18 in nearby property value.

3. Every $1.00 invested in CDI Deals (MEDC + Private investment) in the six cities created $0.99 in nearby commercial property value and $0.20 in nearby residential property value for a total of $1.19 in nearby property value.”

Not Achieving the Intended Purpose

Here’s the rub with these economic development numbers from a local government perspective — while they are designed to improve the quality of life and grow the tax base in and around the investment areas, in reality, they do little to improve the property tax base. As we identified in our recent analysis of Michigan’s overlapping tax limitations, local governments only benefit if the state programs lead to new development. 

Michigan has two constitutional tax limitations. The Headlee Amendment, adopted in 1978, among other things, limits property tax revenue growth of local governments by requiring that they reduce — or rollback — their maximum authorized tax rate if their tax base increases faster than inflation. 

While this limitation helped, it failed to protect individual taxpayers from large yearly increases in their property tax bills. Its unit-wide application meant that some tax bills could grow faster than inflation if they were offset by decreases for other taxpayers.

Dissatisfaction with the Headlee Amendment limitation led to the inclusion of a new assessment limit as part of the 1994 Proposal A school finance reform. A new tax base was created, called taxable value, and the measure capped the annual growth of taxable value to the lesser of five percent or inflation, excluding the value of new construction. Taxable value is reset (“uncapped”) back to market value when ownership of property changes.

The taxable value that governments levy property taxes on, is able to grow in one of three ways: 1) appreciation of the existing property, 2) uncapping taxable value when properties are sold, and 3) new construction. Proposal A protects individual taxpayers from substantial yearly increases in their property tax bills, but the Headlee Amendment takes it a step further by requiring millage rate rollbacks when properties are sold and revert back to market value. This uncapping of taxable value when properties are sold triggers a tax rate rollback for the local government.

So what happens when the MEDC’s place-based investments are successful? 

The investments are occurring in built-out urban areas, so rather than leading to new developments, they’re usually funding the redevelopment of existing properties. The investment in the area may lead to renewed interest in homeownership in and around the investment. The private investment in those properties causes the assessed value to revert to an amount roughly one-half of their market values. This contributes to the tax base of the local government growing faster than the rate of inflation and a Headlee Amendment tax rate rollback so the net result is an inflationary increase in property tax revenues for the local government. 

The MEDC report documents that the place-based investments increased property values and occupancy rates near the MEDC investment sites. Because of the taxable value system created by Proposal A, the amounts on which the tax rates are applied to these industrial, commercial, and residential properties experiencing the appreciation of their property values will only increase by the rate of inflation every year (inflation has not exceeded five percent in the 26 years Michigan has operated with the taxable value system).

It may lead to new development on some occasions, which improves the local governments’ tax bases, but land is finite and developable land in cities is scarce. Local governments cannot expect to sustain themselves with an economic development strategy predicated on creating new development.

So while the MEDC is employing an economic development strategy that does not pick winners and losers and is targeted to places in Michigan that need a helping hand, it is still the state that is the primary beneficiary of these efforts. Clearly, our communities are better off with these placemaking efforts than they would be without them. They contribute to the quality of life and attractiveness of the places that make people want to be in Michigan and in those communities. But they are doing little to bolster property tax receipts and help the local governments fund the services — public safety, safe parks, libraries, refuse collection, etc. — that also contribute to the quality of life and attractiveness of the places. 

The MEDC’s placemaking economic development strategy is an even-handed approach to helping businesses and bettering the communities where people live, do business, and enjoy arts and culture activities. Without Michigan’s tax limitations, this strategy would be paying great dividends for the local governments, as witnessed by the estimates of increases in property values and occupancy rates near the MEDC investment sites. But Michigan’s tax limitations result in these place-making efforts helping the targeted areas without doing much to help the local governments maintain their service capacity.