Without more state revenue, cities can’t thrive, talent won’t stay
For more than two decades, Michigan has made lower taxes and smaller government its primary recipe for improving economic outcomes.
As lower taxes produced less state revenue, that meant big cuts in higher education and support for local government, and smaller and smaller investments in infrastructure. In an economy that is increasingly rewarding states and regions with the greatest concentrations of talent, this recipe is highly unlikely to return Michigan to high prosperity.
In this column I want to concentrate on the consequences of state cuts in revenue sharing. In a previous column I wrote:
“Something needs to replace the decade of cuts to revenue sharing. The state has historically helped fund the provision of local services. The combination of stricter and stricter limits on local governments’ taxing power, and revenue sharing and transportation funding cuts, results in even the best-managed cities unable to provide the basic services and amenities needed to retain and attract residents. If the state will not reinvest in cities, then there needs to be some new system of municipal finance put in place, best done at the regional level. The current system leaves cities without the tax base to fund the services that are needed.”
In a report for the Michigan Municipal League entitled “Michigan’s Great Disinvestment,” Great Lakes Economic Consulting details the effects of far lower state revenue sharing and strict revenue limitations on the ability of Michigan local governments to provide services. Using Census Bureau data, they found that between 2002-12, state revenue sharing to local governments in Michigan declined by nearly 57 percent compared to an average increase of 48 percent nationally. The report continues:
“We only have numbers for Michigan through the current budget year so we cannot do a multi-state comparison past 2012, but from 2002 to 2016 as enacted, Michigan’s statutory revenue sharing has declined 61 percent. As other states are increasing municipal revenues, Michigan continues to reduce funding for municipalities, and a comparison of all 50 states from 2002 to 2016 would likely show an even greater relative decline for Michigan.”
Bridge Magazine published a terrific series on the consequences of Michigan's dysfunctional system of municipal finance. The overview article is entitled “Fewer cops, abandoned parks, and why more cities will crumble unless Michigan changes.”
The series includes articles on how Ohio and Pennsylvania do it better.
The Bridge articles make clear that local governments are having trouble providing basic services and the amenities that retain and attract residents in large part because of state policy. Revenue sharing cuts combine with strict limitations on the ability of cities to raise revenue (in part due to voter adoption of the Headlee Amendment and Proposal A).
Minnesota, as the think tank I lead documented in our State Policies Matters report, has taken the opposite path. The Citizens Research Council in its recently released “2013 Tax Revenue Comparisons: Michigan and the U.S. Average” reports that Michigan ranked 35th in state and local tax revenue per capita and 36th in state and local tax revenue as a portion of personal income. Minnesota is a top-10 state in both.
Michigan is low taxes/low prosperity. Minnesota — with the Great Lakes’ best economic outcomes — is high taxes/high prosperity. Their economic growth strategy emphasizes public investments in education, quality of place and transportation over lower taxes.
Rick Haglund wrote in our Minnesota report: “The state’s tax and spending policy framework was set in the early 1970s. It’s called the ‘Minnesota Miracle.’ The core of the strategy is shifting more of the burden of financing schools and local government — primarily cities — from escalating local property taxes to the state income and sales taxes. Many in the state see the Minnesota Miracle as setting the stage for investment in education, communities and transportation that created a climate for strong economic growth.”
Haglund found that in 2014, Minnesota spent $468 per capita in state support of local governments compared with $132 in Michigan.
It’s far past the time for Michigan to redo its municipal finance system. This is far more than just keeping more and more cities out of fiscal distress — although that alone is worth doing — but also putting Michigan back on the path to prosperity. What Minnesota policymakers understood decades ago and Michigan policymakers need to understand now is that having cities that provide high-quality basic services and amenities is key to retaining and attracting mobile talent. And concentrated talent is the key to prosperity.
Lou Glazer is president of Michigan Future Inc.