Building, Money and Power
Let’s take a tour through a prototypical first-tier suburb.
About twenty thousand people live here. They’re among the most
socially active people in the state; they lead nonprofits, donate to
political candidates and volunteer for community events. They own and
work in the downtown businesses and they shop locally, intentionally.
Community is essential to them, and the neighborhood is more than just
a safe place to park the car at night.
Their city is an orderly reflection of the design dreams of its
founders. Two or three commercial corridors stand out as major
transportation arteries – wide roads of three to nine lanes. On one
side the community is bounded by a highway; the others blend somewhat
seamlessly into the neighboring city. Neighborhoods are defined by
streets too. Square blocks of residential streets, mostly obscured by
mature hardwoods, are hemmed in by wider two and three lane roads. Here
and there a clear space of parkland or school yard breaks up a
comfortably dense aggregation of houses. Main Street comprises an
eclectic collection of shops and restaurants, government buildings and
second story offices. Sidewalks are ubiquitous although generous
percentages of land are given up to parking.
All but hidden from view is the enormous stress that this community
is under. The people who live here are generally ready to tax
themselves to maintain a high quality of life and sustain the character
of their city, but the legacies of a shifting economy and investments
in urban sprawl infrastructure and policy engines are taking their
toll. The streets aren’t as smooth as they might be. Vacated industrial
buildings await transformation to modern uses. Subtle reductions in
services (city parks get mowed every other week now and there are a few
less firefighters on the job) are starting to show through the veneer
of a once-prized and fought over community.
This scenario is common throughout metro Detroit, from Warren to
Roseville, Hazel Park to Farmington Hills, Inkster to Taylor to
Dearborn Heights. These communities encompass the variety of southeast
Michigan. They are growing and shrinking, racially mixed and
monochromatic, well-to-do and economically struggling. The crisis they
face is unique and structural... just like the solutions we need to
adopt to overcome it.
Michigan’s cities are slowly dying, starving for resources to
deliver high quality services and maintain existing infrastructure. At
some level, it’s all about money. To understand the difficulty of the
fiscal challenge cities face, you have to understand the interaction
between two complex finance policies that are part of the state
Constitution: 1978’s Headlee Amendment and 1994’s Proposal A.
Headlee essentially limits the growth in local property taxes to the
rate of inflation. Two things are at play here: the tax rate (i.e.,
the percent of a property’s value that an owner must pay each year) and
the tax base (i.e., the value of the property itself). If market forces
increase the tax base higher than the rate of inflation, then Headlee
forces cities to reduce the tax rate appropriately. The example below
shows how an increase in the market value of property greater than the
rate of inflation forces the city to reduce its tax rate.
| |
Taxable Value |
Tax Rate (Mills) |
Tax Collections |
| Base Year |
$1,000,000,000 |
10.000 |
$ 10,000,000 |
| 3% Inflation |
$1,030,000,000 |
10.000 |
$ 10,300,000 |
| 5% Market Increase |
$1,070,000,000 |
10.000 |
$ 10,700,000 |
| Headlee Rollback |
$1,070,000,000 |
9.626 |
$ 10,300,000 |
Proposal
A provides a similar tax shelter for individual property owners. It
limits the increase in taxable value on each individual parcel to the
rate of inflation (or five percent, whichever is less). When property
is sold or transferred, its taxable value is adjusted to its current
value. The example below shows how the taxable value “pops-up” when a
property is sold. Notice that the new owners are paying taxes on more
than $5,000 of additional value that the previous owners avoided.
| |
Market Value |
Taxable Value |
Inflation Rate |
Market Increase |
| Base Year |
$ 100,000 |
$ 50,000 |
2.50% |
5% |
| Year 2 |
$ 105,000 |
$ 51,250 |
2.50% |
5% |
| Year 3 |
$ 110,250 |
$ 52,531 |
2.50% |
5% |
| Year 4 (Sale) |
$ 115,763 |
$ 57,881 |
2.50% |
5% |
Each
of these policies serves to balance growth and taxation, and each has
its benefits. Proposal A, for example, provides a buffer against the
effects of gentrification in cities by protecting existing homeowners
from being forced out of their neighborhoods by rampant tax increases
due to growth in market value. A significant problem arises, however,
from the interaction of these two policies.
Did you notice that the Proposal A “pop-up” resulted in an
increase of taxable value of 10 percent on the one property? If this
happens across many properties in one year – or if the pop-ups are even
higher (imagine a property that changed hands after 15 years) – it can
force an even more significant Headlee rollback. This is somewhat
artificial because the full effect of the pop-up is felt in one year,
rather than averaged out across the years that growth was held in check
by Proposal A.
The end result is that the Headlee rollback caused by Proposal A
pop-ups reduces the overall tax rate in a city so much that tax
collections grow slower than the rate of inflation. With health care
costs increasing at seven percent annually, retirement obligations
growing and public safety costs eating up around half of a city’s
budget, revenue growth this slow is a recipe for financial ruin. In
fact, some estimate that as many as 70 Michigan cities sit on the brink
of bankruptcy because of this policy problem.
Under Michigan’s current systems of municipal finance and urban
investment, there are only a handful of strategies local leaders can
use to combat this phenomenon. They can promote redevelopment, which
doesn’t count in the Headlee calculation. They can collaborate with
neighboring communities to provide services, which shares the cost
burden (sometimes) and can result in more effective delivery
(sometimes). And, they can beg for structural reforms from the State.
As wonderful as it is to see old buildings rejuvenated,
redevelopment cannot save any city from this fiscal predicament, no
matter how vibrant the market. Our hypothetical city above would have
to generate $40-$80 million in new development every year to keep up
with costs. In communities like Michigan’s inner-ring suburbs, which
are 90 to 100 percent built out, this is an unlikely proposition.
Since we can’t build our way out of this problem, it is up to the
Legislature to make the fix. The Michigan Municipal League articulated
the Headlee/Prop A dilemma nearly four years ago, but lawmakers have
continuously failed to acknowledge the ravaging impacts it has on our
cities. In fact, a proposal passed this month by the
Democrat-controlled Michigan House of Representatives would place a
moratorium on the pop-up, further depressing revenue and shunting urban
interests just as their Republican predecessors have done.
Michigan’s cities will not dig their way out of this hole without
structural reforms to the state’s local government finance system. It
will be tragic if one of them has to fall into bankruptcy to convince
our lawmakers of the seriousness of this issue.