Local option revenue streams can help Michigan cities become less dependent on property taxes, according to a report from the Citizens Research Council of Michigan.

The not-for-profit public affairs research organization says Michigan's local governments need to think of new ways to fund themselves because state revenue sharing has significantly dropped over the years and there is little prospect it will return to the previous levels.

Eric Lupher president of Citizens Research Council Michigan
Eric Lupher, president of president of the Citizens Research Council of Michigan, says cities need to look beyond property taxes. Amy Gillespie

“Growth in property taxes is constrained so it doesn’t reflect the fact that the local economies are doing well -- businesses are prospering, there is development going in in places like Detroit and other downtown areas seem to be doing well but the problem is the local governments don’t benefit from it because of the limitations that are in our constitution,” Eric Lupher, president of the Citizens Research Council, said in a telephone interview.

Lupher said that local governments, which have traditionally tapped property tax revenue streams to make up for the shortfall in state money, need to consider a variety of tax options ranging from general and selective sales, income, transportation, tourism and other taxes to capture economic activity and to create diverse revenue streams.

The Center for Local, State, and Urban Policy at the University of Michigan found in its Michigan Public Policy Survey that over 60% of local officials in Michigan governments with populations over 10,000 residents supported raising revenues through increased local option taxes.

The survey did not find consensus on which revenue options local officials prefer.

Local option taxes require a cumbersome process with several obstacles.

A local government must first get Michigan lawmakers to enact a law authorizing it. If a state law is passed, then the legislative body of the local unit must pass a resolution or ordinance to levy the tax at whatever rate is desired by the local unit and allowed for in state law. The tax is also subject to local voter approval, Lupher said.

Lupher said 23 out of the state’s 279 cities levy a city income tax, with Benton Harbor being the last city to adopt the tax in 2017.

Benton Harbor’s city income tax was approved by voters Nov. 7. It requires city residents to pay 1% on their income, with non-residents who work in the city paying a 0.5% tax on the portion of their income they earn in the city. Businesses are required to pay 1% on the business they do in the city even if they aren’t located in the city.

The income tax revenue will be used to repair the streets, alleys and sidewalks, and also for emergencies, as decided by the mayor and City Commission.

Lupher said that more cities could use the option but don’t because “it just doesn’t play very well politically.”

“We have an income tax available to local governments in the state but it's only available to our cities. We have 23 cities levying that tax.

“It’s bad optics, that is the biggest issue,” Lupher said. “The cities levying it are imposing an additional cost on the residents that are there but also on non-residents that work in those cities.”

In Benton Harbor opposition to the income tax rested on concerns that the increase in costs would drive businesses and residents elsewhere.

That’s why the Citizens Research Council says it’s crucial to look at how those new tax revenue streams are administered.

“Other states that offer income tax or sales tax are usually administered at the county level or some sort of regional entity has authority to levy that tax and it’s harder to escape it by choosing not to work in that city or abandoning city and moving out,” Lupher said.

The challenge in Michigan is that most services are provided at the most local level and authorizing county-level taxes won’t help the governments that are providing the most basic services.

Lupher suggests that Michigan governments rethink how local services are provided more services.

“Things done at township level should be done by the counties,” he said. “This new income tax revenue source would help the counties to provide those services and alleviate burden on cities and townships that can then focus on providing quality of life services that make their communities more attractive to live and work.”

Cities levying income tax fall into two buckets, according to Lupher. There are cities like Detroit and Flint that have struggled and have turned to this revenue source as a sort of last resort because the property tax was unable to sustain the services needed to keep a city operational.

The second bucket of cities is made up of those that host to universities or major employment centers; tapping into income tax is a way for those cities to reflect the economic activity that they wouldn’t otherwise benefit from.

Citizens Research Council’s report found that for the cities levying income tax, on average about 56% of their tax revenue came from income tax revenue and approximately 44% from property tax revenue.

Still, local income tax revenues haven’t experienced the level of growth from fiscal 2005 to fiscal 2016 that state income tax revenue and median household income experienced. City income tax revenue declined in actual dollar amount some years, but grew approximately 7% overall from FY 2005 to FY2 016. In contrast, state personal income tax revenue grew 52% and median household income in Michigan grew 24% over the same time period.

“The slow growth of city income tax revenue may reflect the makeup of the larger cities that levy this tax; several of the cities in the state that are suffering the greatest economic decline levy city income taxes. Both state and city income taxes reflect economic fluctuations, but the city income tax revenue also reflect the out-migration and loss of income in the state’s largest core cities,” according to the report.

The report found that three-quarters of the states authorize local governments to levy sales taxes. Adding this option to the local tax menu would allow local governments to benefit from economic activity in downtown areas, suburban shopping malls, and the tourist destinations of west Michigan and up north.

Three-quarters of the states authorize transportation taxes -- which include motor fuel, registration, tire taxes -- that would allow communities to fund roads and transit without relying on the state for funding. Lupher said that if Michigan’s local governments could levy alcohol taxes like those in eight states, they could benefit from the state’s robust restaurant scenes.

Other states allow local governments to levy taxes on utility services, tobacco, marijuana, tourism services such as hotels and rental cars, entertainment and amusement services like sporting events and movies, and new "sharing economy" players like Uber and Airbnb.

There’s a push now to look beyond the state’s coffers to address road funding at the local level. The Legislature last week approved $175 million of spending on road and transportation projects. The plan allocates an extra $38.2 million to cities and villages, $68.4 million to county road commissions and $68.4 million to the state.

Local leaders say that having a local option for road funding could reduce dependence on state dollars that some critics say is too little and comes too late to repair local infrastructure needs.

"This $175 million is a good thing, but you’re just moving it from one year to the next and you’re not fooling the people back home," said House Minority Leader Sam Singh, D-East Lansing.

Melissa Roy, executive director of Advancing Macomb, a business group in the county north of Detroit, said it's time to revisit the way local roads are funded and give voters in Southeast Michigan more local options besides countywide property taxes. Locally generated money could be applied differently by different communities — even to expand public transportation, she has said.

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