Michigan's cities can lure businesses and people back by changing the composition of taxes.
Reviving Michigan's depressed cities will require
implementation of a growth-oriented agenda on the part of the state government,
mayors, and city councils. The primary goal of such a strategy must be to
provide incentives for people, businesses, and capital to return to the five
cities identified in this study as "in decline."
The central argument of this study is that the key to
restoring economic vitality and capital investment to Michigan's declining
cities is to reduce the costs of providing municipal services and then slash the
heavy tax burdens that are required to pay for them. That can be done. For no
justifiable reason, unit service costs are substantially higher in large cities
than in small cities – whether the service is education, bus service, street
cleaning, park maintenance, garbage collection, or police protection.
Labor costs appear to explain much of the inefficiency. Our
earlier national study found that salaries of government workers in suburbs
average $2,150 a month compared to $2,700 a month in cities with populations
over 500,000. If benefits were added to the calculations, the disparities
would be much wider. Large cities also pay their employees substantially more
than comparably skilled private-sector workers receive, and the disparities are
Those considerations suggest that if Michigan's cities had
the political will to cut ser-vice costs and taxes, they could do so without
sacrificing vital services. One way to begin is to competitively contract for
services. Smaller cities routinely contract out municipal services; large
unionized cities seldom do. Indeed, some cities, such as La Mirada, California,
contract out almost all their services and thus have tiny city bureaucracies.
One Michigan city, Ecorse, erased a deficit via privatization. Several dozen
studies verify that by contracting out to the private sector, unit costs are
reduced by at least 20 per-cent and sometimes as much as 50 percent.
Moreover, the quality of contracted-out services is rated higher than that of
services offered in-house.
Nevertheless, public employee unions are so powerful in
large cities such as Detroit that not only is contracting out effectively
prohibited, but private-sector competition with the government monopoly service
provider is forbidden or greatly hindered by regulation. That action is contrary
to the interests of residents and area workers. City provisions that inhibit
private competition with the government should be ended.
There are diseconomies of scale in municipal services. Some
cities, such as Detroit or New York, have such powerful special-interest lobbies
and such entrenched bureaucracies that it has become politically impossible to
cut service costs, even in times of severe crisis.
If the provision of services and the levying of taxes were
privatized or at least closer to home-owners and businesses, taxpayers would
have greater influence on decisions about which services they need and which
they do not. They could also place greater pressure on the government to reduce
costs by diluting the influence of special-interest groups. While some urban
advocates – including HUD Secretary Henry Cisneros – think that centralized,
regional governance is the solution to the problems of the inner cities, the
answer is just the opposite, decentralized governments that are closer to the
Michigan's cities can lure businesses and people back by
changing the composition of taxes. Ours and other studies show that city income
taxes, business taxes, and property taxes have a devastating effect on economic
growth. If Michigan's cities partially or substantially replaced their
business and property taxes with sales taxes and user fees, they could
dramatically improve the business climate within the state's borders. Business
taxes are defended by local officials as "fair" because they fall primarily on
upper income individuals and big corporations. In practice, those taxes are paid
by the working poor who are left behind in Michigan's declining cities.