Time to Change Michigan's Revenue Sharing Program

"One for me, one for you. One for me, one for you." We learned to divide things like coins or bottle caps this way when we were children. Now suppose we had said, "Six for me, one for you. Six for me, one for you." The other person would surely resent this unfairness.

Resentment about who gets how much has been building over Michigan’s revenue sharing program since it was enacted by the legislature in 1971. The revenue sharing fund is a pot of over one billion dollars of revenue from the state’s six-percent sales tax. This fund grows by about three to five percent annually. The pot is divided among cities, villages, townships, and counties partly on a straight per-capita basis and partly on what is called "relative tax effort"—a formula which compares how high local government taxes are compared to average taxes.

Most older big cities tend to tax a declining tax base at high levels. Far and away the biggest winner under the relative tax effort formula is Detroit. At 3 percent, Detroit has the highest city income tax in Michigan and the state’s only municipal utility excise tax. It levies some of the state’s highest property taxes on property values that are less than a fourth of the state’s per capita average. Based on the 1990 U. S. Census, Detroit will get $331 million this year, or about $323 per resident and nearly a quarter of all revenue sharing payments.

Compare Detroit to Grand Rapids, the state’s second largest city. Grand Rapids has a 1.33 percent city income tax and among the lowest property taxes of any Michigan city. Its property values are still below the state average, even though they grew more than three times faster than Detroit’s during the last 10 years. Grand Rapids’s revenue sharing take will be about $122 per resident this year.

As dramatic as the difference is between the ways Detroit and Grand Rapids are treated, most Michigan townships wish they did as well as Grand Rapids. With no local income taxes, a strict limit on property tax rates, and exploding populations and property tax values, townships get crumbs compared to cities.

A 1996 amendment to state law chartered a bipartisan legislative task force to consider a new distribution formula this year. Townships and villages favor a straight per-capita distribution formula, but cities are big losers under per-capita distribution. For example, Detroit would lose nearly 58 percent of its shared revenues. That’s why cities favor continuing the current relative tax effort formula. Rep. Morris Hood (D-Detroit), chairman of the House Appropriations Committee, has introduced a measure to enshrine the current formula in the State Constitution.

To resolve this conflict, Senator Glen Steil (R-Grand Rapids) has proposed replacing relative tax effort with "tax capacity." The Steil plan would phase in a formula to pay more to local governments with property values below the state average and reduce payment to very rich districts. Payments would also be adjusted by population size. It would fracture the city coalition by giving increases to most cities except Detroit, which would suffer a 21 percent loss.

One drawback of the Steil plan is it also gives large increases to local units who have property values higher than the state average. These are typically fast-growing and wealthy suburbs. For example, Oakland County’s Bloomfield Township, with property values per capita more than twice the state average, would get a 15-percent increase.

The objective of state revenue sharing was to break the vicious cycle between local tax increases and declining property values, helping cash-strapped local governments diversify their revenue sources. Twenty-seven years of experience demonstrate the Law of Unintended Consequences: The relative tax effort formula penalizes low tax, pro-growth areas and rewards high tax, negative growth areas, sheltering local politicians who vote for irresponsible spending and tax policies from their actions. In effect, Michigan taxpayers as a whole are subsidizing cities that impose ever- higher taxes while penalizing those that keep their taxes down. Whether the Steil plan is the best solution or not, a healthy dialogue has begun about Michigan’s revenue sharing and some sort of adjustment seems to be both desirable and likely.

If talk about changing the revenue sharing formula were a sign of regional rivalry and prejudice, it would be unfounded and unfortunate. Some may still seek to cast the discussion in that negative light. But good public policy and simple fairness are strong reasons for change all by themselves.