Regional Tax Authority in the State of Michigan

Transcription

1 CLOSUP Student Working Paper Series Number 15 November 2016 Regional Tax Authority in the State of Michigan Karen Seo, University of Michigan This paper is available online at Papers in the CLOSUP Student Working Paper Series are written by students at the University of Michigan. This paper was submitted as part of the Fall 2016 course Public Policy 475: Michigan Politics and Policy, made possible through funding provided by the University of Michigan Third Century Initiative. Any opinions, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the view of the Center for Local, State, and Urban Policy or any sponsoring agency Center for Local, State, and Urban Policy Gerald R. Ford School of Public Policy University of Michigan

2 Karen Seo PUBPOL 475 Debra Horner 30 November 2016 Regional Tax Authority in the State of Michigan Michigan, like many other states, holds final authority over tax policy in the state. In Michigan, the authority to levy local taxes is granted by the State. The State defines a set of regulations and restrictions that local municipalities must follow in their execution of tax collection. The State defines the base upon which the tax is levied, the maximum tax rate, and the types of local governments that may actually levy tax. In some cases, the State even 1 determines what the tax revenues must be used for.regional tax authority is not permitted by the State constitution. Regional taxes are taxes, fees, assessments that apply uniformly across a membership of local municipalities. If a region, which is a collective group of multiple jurisdictions, of the state is granted regional tax authority, it may implement its own structure of tax policy unique to other regions or. In many cases, regional taxation is utilized to fund some kind of widescope public good or service. Michigan has a history of struggling with the formulation and execution of tax policy, but granting local jurisdictions with regional tax authority will help spur greater economic development and fiscal equity in Michigan. Why do we want to improve tax structure? Tax policy in the state should be reviewed and revised as needed consistently and comprehensively. The purpose of improving tax policy is to improve equity and stability of tax base and revenue structure. A stable tax base is imperative in 1 Lupher, Eric. "Michigan's Shrinking Property Tax Base." Michigan Association of Counties 2016 Conference. 29 Nov Lecture. 1

3 the provision of public services and governmental efficiency. Also, tax policy that embodies fiscal equity promotes social equity between the involved municipalities. Successful tax policy can diminish social gaps between relatively poor and relatively wealthy jurisdictions. Finally, state revenues provide relief for local property tax burdens. Currently, the state and its local 2 municipalities rely heavily on property taxes. A reformed tax structure will release some of the choking constraints on property tax growth. Then, what is good tax policy? Good tax policy is characterized by stability, equity, administration, and appropriate limitations. The policy must be stable and predictable. Individuals and businesses who pay taxes must be able to predict what the tax policy may incur for the future so that they may prepare financially and economically. Unstable policy will create resilience from taxpayers and cause fluctuations in revenue. The policy must also be equitable. 3 According to Douglas Drake s Michigan Tax Policy Review, there are two key components of equity in tax policy: horizontal equity and vertical equity. Horizontal equity calls for equal treatments amongst those who have equal or similar circumstances. Vertical equity calls for different treatment between those who differ significantly in circumstance. For a policy to be comprehensive and successful, it must consider both of these components. Administration costs are also very imperative to the execution of tax collection. There are administrative costs that the government is responsible for when implementing tax policy and obvious payment costs for taxpayers who are actually paying the taxes associated with the policy. For the policy to be 2 Lupher, Eric. "History of State Revenue Sharing." EMU Urban Planning Studio. 29 Nov Lecture. 3 Drake, Douglas C. Michigan's Tax Policies: Wrong Turns on the Path to Prosperity. Michigan Government. N.p., Apr Web. 29 Nov

4 sound, it should not incite costs greater than the benefits. Finally, there should be appropriate limitations when involving the private sector. There should be very minimal, if any at all, affects on the private sector and how it allocates its resources. Tax policy is intended to stimulate public growth and not to alter private business. How has tax policy been historically in Michigan? Michigan has always been accused of being a high tax state regardless of the numerous tax cuts that have been implemented within the past several years. Under the administration of previous Governor Jennifer Granholm and the current Governor Rick Snyder, there have been many policy reforms to cut taxes within the state. Proposal A, for example, was a key policy that started the tax cutting movement implemented in Michigan to cut the state s overall tax burden. In between 1994 to 2013, the cuts summed up to about $51.1 billion, reducing the quality and amount of public service provisions with K-12 education taking the biggest blow of a $38.3 billion reduction in funds. Michigan public education relies heavily on property taxes, greater than the national average for reliance on property taxes. Taxable property exempts intangible assets such as stocks, bonds and certificates, inventory property such as items on shelves held by retailers, and personal property such as furniture and equipment. One of the intentions of Proposal A was to decrease reliance on property taxes to fund K-12 education and instead have the State collect a mix of portions from various taxes. This proposal however limited the ability of schools to increase property tax millages for school operating purposes. While the decrease in reliance on property taxes did contribute to the leveling out of relatively poor and relatively wealthy school districts, unfortunately the gap is still very significant. The cost of constraining property tax growth is far greater than the magnitude in which the disparities between school districts has diminished. 3

5 Since 2000, the tax cutting strategy has also cut state revenue sharing to cities leading to layoffs of public service officers like the police and the fire departments. Due to significant decreases in state revenue, higher education has been demoted from being a top priority of Michigan to being a responsibility of families and households. Furthermore, the roads and driving conditions of Michigan are in terrible condition as local officials are failing to acknowledge the effect of the 4 revenue reductions on the infrastructure of the state. Obviously, the low tax strategy is not working. The cuts in state revenue have resulted in reductions in public service-- negatively impacting the taxpayers of Michigan. The current tax policies within the state have failed to promote equity between municipalities while the costs are still greater than the benefits. How have other states dealt with similar problems? Of course, Michigan is not the only state with fiscal distress and difficult tax policy efforts. A number of other states have implemented unique tax structures to foster economic and public service development. Each of these structures can be viewed as examples or tests for the State of Michigan as new tax policies are considered. There are of course benefits and challenges to each of these structures, but they are worth considering when examining methods of reform for Michigan. Some of these regions participate in regional tax authority constituted by home-rule regulations. Others participate in regional tax base sharing. Regional tax base sharing is different from normal regional taxation as it is a collective effort of a group of local jurisdictions. These participating member municipalities contribute a predetermined ratio of tax revenue to a shared pool which is then distributed by a formula to the municipalities according to their respective fiscal needs. 4 Drake, Douglas C. Michigan's Tax Policies: Wrong Turns on the Path to Prosperity. Michigan Government. N.p., Apr Web. 29 Nov

6 In Ohio, there is an administrative entity that oversees and executes the income tax ordinance of any Ohio municipality that joins the agency through the Regional Council of Governments. The entity is known as the Regional Income Tax Agency (RITA). Not every Ohio municipality has membership on the council, but many do-- over 250 utilize RITA to handle municipal income tax collection and enforcement efforts. RITA, is not a tax on its own-- it is simply an agency that manages tax collection and enforcement. In the United States, Ohio is the only state that allows each individual municipality to set its own tax rates-- an example of regional tax authority. Additionally, the State of Ohio allows each county to determine its own sales tax while each suburb in northeast Ohio has its own real estate tax. Administration becomes slightly complicated because many individuals in Ohio live in one municipality and work in another. However, the system is understandable because individuals always owe income tax to the municipality in which they work but they may or may not owe income tax to the municipality in which they live. The municipality of residence has the right to determine whether or not they 5 will grant residence tax credit to individuals. The fiscal status of Ohio, relative to other states, is 6 above average, according to the Mercatus Research Center at George Mason University. The scoring is determined by Ohio s cash, budget, long-term spending solvency, public service, and trust fund solvency. Ohio is not free of fiscal stress but is relatively successful fiscally. It is reasonable to conclude that a contributing factor to this flourishing is due to a regional tax structure that allows local governments to create and administer unique tax rates according to their respective fiscal needs. Citizen responses to the agency, however, is interesting. Many are 5 "About RITA." Regional Income Tax Agency. N.p., n.d. Web. 29 Nov "Ranking the States by Fiscal Condition 2016 Edition." Mercatus Center. George Mason University, Mar Web. 29 Nov

7 complaining about the lack of notice and information given to taxpayers. For example, for those who move to different cities or counties within Ohio are unaware of what tax consequences they may face. Thus, in order for this type of regional tax policy to be efficient, there must be a greater spread of information and a simpler method of collection. Taxpayers need an ease of both understanding and payment in order to carry out the tax policy appropriately. Another case is represented in Minnesota. The first fiscal disparities program in this state was enacted in 1971 for the seven counties in the metropolitan Twin Cities area. The second was enacted in 1975 for the Iron Range in northeastern Minnesota. The program creates a platform where participating member municipalities contribute 40 percent of the growth in its commercial/industrial tax base into a pool. The funds in the pool are then distributed to the municipalities according to a formula based on the area s population and its relative property tax base wealth. As mentioned previously, this is known as regional tax base sharing. In 2016, the program shared $561 million in tax revenue. The goals of this program are to: 1) spur economic development- revenue sharing disperses benefits of business developments by regional facilities such as airports, freeways, and stadiums; 2) diminish fiscal resource disparities between communities- tax base sharing narrows the gap between communities with the highest and lowest commercial, industrial, and public utility property tax base per person; 3) reduce competition for commercial-industrial development- tax-base sharing reduces damaging competition between communities who are fighting for higher-benefit C/I properties at the cost 7 of their fiscal health. Arguments against this type of regional tax authority springs from the unwillingness of those who have to share with those who do not have. In the short run, a 7 Hinz, Steve. Rep. House Research Department, Minnesota House of Representatives. N.p.: n.p., n.d. Print. 6

8 relatively wealthy community may be contributing more to the pool than receiving. However, in the long run, the components vital to economic prosperity constitute for a more well-off fiscal status of all communities. More specifically, the dispersal of benefits from regional facilities will reach all contributing municipalities and thus in the long run, regional tax-base sharing will improve the fiscal health of those participating. In Monroe County, New York, the Morin-Ryan Act of 1985 was passed to bring change to the distribution of funds to municipalities. In New York, sales taxes are levied by counties and then distributed to jurisdictions based on the area s population. This act intended to bring in more revenue for the city of Rochester. A 1% increase in the local sales tax allowed the city to receive a greater share of sales tax revenues to address its public service and educational funding needs. Approximately 50% of the total tax revenue goes to the city of Rochester while 25% goes to Monroe County and the remaining 25% is distributed to the smaller municipalities within the county. This reduces the fiscal disparities between the inner city and the surrounding communities. Additionally, the extra funding for the city helped finance the provision of essential public services while facilitating a more equal distribution of these services. As exemplified with Monroe County, regional tax authority allows individual regions with different needs to implement unique tax structures to pursue optimal fiscal status and public service provisions. Hackensack Meadowlands in New Jersey also uses a tax-base sharing method similar to that of Twin Cities, Minnesota. Like the Twin Cities Metro model, each municipality contributes 40 percent ot a pool. The distribution is slightly different however in that there are two payments. The first distributes funds to municipalities according to a per pupil basis that measures the 7

9 incremental increase in students since the base year. The second payment is divided to compensate all 14 participating municipalities based on their proportion of the total land area in Meadowlands. The goals of the regional policy are also different from those of Minnesota in that they are aimed to compensate municipalities for impacts on land use decisions. The Meadowlands developed a set of zoning regulations by which certain areas within the district specialize in distinct land uses. Certain areas were zoned for commercial, industrial, residential, and infrastructural use. The regional tax-base sharing program allowed all participating communities to benefit equally from the property taxes regardless of where the development was located. In this manner, the potential for economic development disparities is significantly decreased. Regional tax authority has the potential to benefit regions within Michigan to spur significant fiscal growth. However, the reluctance of local officials and the dissonance between policymakers and taxpayers exist as crucial reasons for the absence of regional tax authority in Michigan. 8

10 9

11 The Michigan Public Policy Survey data shows that a majority of local officials either do not believe or do not know if policies of regional taxation need significant reform. It is important to note, however, that at least 42 percent of local officials believe that it is somewhat or very important. 42 percent is certainly not the majority, but does represent almost half of the respondents. The majority of the respondents who believe that regional taxation reform is at least somewhat important represents local officials from city and village jurisdictions. This perhaps represents a lack of revenue flow to the cities and villages. These areas lack crucial fiscal funds needed to execute public services for their large populations. In fact, the data explicitly shows greater support for regional taxation reform in areas with greater populations. It is also 10

12 interesting to see that a large proportion of the officials who do envision regional taxation reform have jurisdiction on the southeast lower peninsula. The southeast lower peninsula consists of heavily-populated metro districts such as Detroit and Ann Arbor. The significant number of local officials opposed to change in regional tax systems can be accredited to the common preconceived notion that taxpayer are always against higher/more taxes. This is a reasonable assumption because of the inherent negative connotation that comes with the concept of taxes, but officials will be surprised to see that taxpayer responses say otherwise. In 2012, the same year that the survey was taken, 805 millages were proposed in 8 Michigan s 83 counties and 90 percent of them were passed. This shows that taxpayers approve of tax increases that promise public return. Most millage requests came from townships because townships do not receive a great amount of funds. By approving these requests, taxpayers were supporting the sustenance and growth of public services like police, fire protection, and road measures. In fact, millage requests for public safety departments passed at a 96 percent success rate. Residents of local jurisdictions are willing to approve higher or additional taxes if the return to the public could be deemed as beneficial. The Detroit News recently surveyed the different counties of Michigan to analyze the amount of support for millage renewals that would continue the operations of local governments. For example, in Dearborn, when residents were asked if the city should levy 3.5 mills for five 8 Kanclerz, Jacob. Votes Sign Off on 90 Percent of Millage Requests. Bridge: News and Analysis from the Center for Michigan, 16 Aug. 2012, off-on- 90-percent- of-millage- requests. Accessed 10 October

13 years to avoid reduction in programs and services, 81 percent voted yes while only 19 percent 9 voted no. There is strong evidence that residents are willing to participate in fiscal action, even if that means higher taxes, to sustain or pursue a higher quality of living within a jurisdiction. Earlier in 2016, a 10-year millage renewal for the Detroit Zoo has been approved with 10 overwhelming support from voters. About a third of the zoo s annual costs are covered by the millage tax revenues. According to the Detroit Free Press, Oakland County Treasurer Andy Meisner claimed that the millage request approval will benefit the entire region paying the zoo tax. The zoo is known to have a positive image in Michigan as it is has a significant economic impact in the region of about $100 million annually. Voters, through this passage, have expressed their high support for one of the most valued public venues in the state. These cases provide a connection between citizen response and regional tax authority. Regional taxation instills greater power to the local municipalities and many times entails higher or additional tax rates. The goals of regional tax authority differ by the region that is implementing such a system, but a central theme amongst all regional tax systems is to improve public services either by increasing funds for provisions or by reducing disparities between local governments. These goals are similar to the goals of millage requests as millages are used to continue or begin fiscal support through taxation for public services. Regional tax authority is indeed a policy method constructed by policymakers but yet depends greatly on the cooperation and understanding of taxpayers. The evidence of high success rates for millage requests supports the claim that regional tax authority will be successful in Michigan. 9 Metro Detroit Election Results for Mobile Devices- The Detroit News. The Detroit News. The Detroit News, n.d. Web. 10 Oct Martindale, Mike. "Detroit Zoo Asks Voters to Renew 10-year Metro Millage." Detroit News. Detroit News, 26 July Web. 29 Nov

14 In Michigan, specifically, regional taxation could encourage suburbs and inner cities to compromise and work together to foster fair and healthy economic growth for the entire region. This kind of cooperation could greatly encourage fiscal equality and balance between downtown Detroit and the suburbs that surround it. Currently there are many pressing differences between the city and its suburbs. Macomb County, for example, is doing well with the entrance of many booming businesses, rising populations, and affordable housing. Detroit, however, is still in a state of economic recovery. Mark Hackel, the executive director for Macomb County, expresses what many other Detroit suburbs are thinking: there are limits to what [counties] are willing to 11 invest towards a healthier central city. Regional tax authority, if granted to regions by the state, will lead to equitable distributions of tax burdens and revenues. There are three distinct policy recommendations that the State should consider. 1) No change. In all policy reform conversations, legislators must consider the option of status quo. Like 29 percent of the surveyed local officials, many may believe that Michigan is not in need of change in tax policy. This option would sustain the current law of state authority over taxes. The state government holds final jurisdiction over any tax implementations and collections for local municipalities. 2) Regional tax authority by jurisdiction. Michigan could grant the smaller governments regional tax authority by which multiple municipalities would group into regions to construct a tax structure that would best cater to the region s fiscal needs. This method would allow Michigan local governments 11 "City Versus Suburb A Longstanding Divide In Detroit." NPR Michigan Radio. NPR, 9 Mar Web. 29 Nov

15 (counties, cities, villages, and townships) to increase or decrease taxes like sales taxes within their jurisdictions. The state would not have final authority over these policy proposals. 3) Shared regional tax base. Similar to the models of Twin Cities Metro and Hackensack Meadowlands, the state could allow regional tax authority in the form of a revenue sharing structure. This could allow metro areas like Detroit and its suburbs to contribute their respective tax revenues to a common pool. The proportion to be contributed will be set with regulation and uniform for all participating municipalities. Funds will be distributed by a formula that will involve a municipality s population density, student ratio, and annual property tax revenue. Funds will not be equally divided due to the personalization of the formula. I believe that the State of Michigan should approach recommendation #3. A regional tax base is more efficient in that the system would be more organized and specialized to address pressing social issues within regions. The tax base sharing system prevents dramatic fiscal consequences from the beginning unlike a regional taxation system wherein smaller municipalities are allowed to reign full authority over taxes-- an appealing, but dangerous power. The latter system could result in unfair tax burdens on those living/working in certain areas and worsen fiscal conditions in that jurisdiction. A tax base sharing system however, combines the efforts of all municipalities in one region to provide public service opportunities fairly and sufficiently. 14