The Property Tax Cut Debate

Almost everyone in Michigan has come around to the view that property taxes ought to be frozen, cut, or both. The statewide average is the highest in the Midwest and the fourth highest in the nation. Our inordinate property tax burden is driving people and businesses to other states.

At the center of the debate right now is Gov. John Engler's proposal to cut property taxes for schools by 20 percent over three years, with the state to reimburse local school districts for the lost revenue. That really translates into approximately a 13 percent reduction in the overall property tax burden, modest in comparison to more celebrated cuts in California and Massachusetts.

Proposition 13 reduced property taxes by 30 percent after it was passed in California in 1978. Two years later, Massachusetts voters approved Proposition 2 1/2, a whopping 41 percent slash. The effects of these measures were profound in both states: unemployment dropped dramatically as lower taxes stimulated economic growth rates well above the national average. Indeed, the boom was so substantial in Massachusetts as to give rise to a "Massachusetts Miracle," until subsequent tax hikes under Gov. Michael Dukakis wiped out the gains by the late 1980s.

In both states, long-overdue efforts by governments to economize and eliminate waste were initiated as a result of the tax cuts. From busing schoolchildren to operating wastewater treatment plants, many services were successfully privatized. Local governments can be creative and relatively efficient, especially if financial pressures make them so.

The California experience is also notable for the unwarranted scare talk which preceded Proposition 13's passage. Governor Jerry Brown warned, "If this passes, we're looking at several hundred thousand job losses in the public and private sectors." Commerce Department statistics show that in fact, job creation in the Golden State soared when the tax cut kicked in.

In the forefront of the opposition to Proposition 13 was The Los Angeles Times. But six months after passage and with the boom underway, the newspaper reconsidered its position: "We who thought that Proposition 13 could not, would not (perhaps must not) work were simply wrong. We public administrators, officials, those whose interests are closely tied to public spending--in short, we in the governing class--made a fundamental if all too human error of confusing our own convenience and welfare with the peoples interest."

Another economic fact which ought to be injected into the Michigan debate is this: within Michigan, variations in property taxes from one community to another are reflected in corresponding variations in economic growth. Based on 1988 numbers, eleven communities across the state levied more than 80 mills, a full 17 mills above the already-high statewide average.

Seven of those communities are in Wayne County and include the city of Detroit--one of the most economically depressed chunks of Michigan real estate. Benton Harbor stands out in the western part of the state as chronically depressed; not coincidentally, Benton Harbor is one of those eleven highest taxed municipalities.

The Huron River isn't the only thing that separates the counties of Monroe and Wayne. So does economic growth, of which there is visibly much more on the Monroe County side. That's because property tax millage rates in Monroe County are 20-25 mills lower than those in Wayne County.

Meanwhile, Indiana's property tax burden has been way down the national list at 17th highest, compared to Michigan's at 4th highest. Indiana's overall tax burden has been the lowest in the Midwest. No wonder residents of southwestern Michigan will tell you that traveling south, economic growth seems to begin as you cross the Indiana line.

Sometimes the rejoinder from leaders in the high-tax areas goes like this: "Our rates are high because our property values are low." In most cases, they have it precisely backwards. Property taxes are one cost of carrying an asset. The more it costs to carry that asset, the less people are willing to bid for it. The surest way to depress property values is to further hike property taxes, especially during a recession.

Whatever the outcome in Lansing, this much is clear: Michigan sorely needs property tax reduction. Reviving the state's sagging economy may well depend upon it.