When my husband and I started the process of buying a house nearly a decade ago, we couldn’t agree on the house but did agree on what we were looking for in a community. We wanted a safe, walkable neighborhood with good public schools nearby. We also wanted easy access to entertainment and public transit. The fact that there was a small park with a playground in our neighborhood clinched it for us—we knew we were home.
Lately though, our home has been under attack. Many of the amenities we deemed necessary are at risk due to budget constraints, and the problem isn’t that the community is “over-spending,” it’s that it’s been left with too few options.
In Michigan, we have some of the strictest state limits on property taxes in the nation, which has hamstrung local communities’ abilities to provide services, according to a recent report by the Center on Budget and Policy Priorities. Constitutional limits on property taxes put in place in 1978 (the Headlee Amendment) and 1994 (Proposal A) both came about during periods of increasing taxes. But while each served a purpose at that time, both may have outgrown their usefulness and should be reviewed.
The Headlee Amendment was implemented to deal with unfunded mandates. Prior to 1978, the state was pushing services down to local communities, and communities would then have to raise local taxes in order to provide them. The idea was that if the state wanted to require a local community to provide something, the state would then have to pay for it. However, in practice, it hasn’t worked out that way. Instead, due to shrinking state government, services are still routinely pushed down to the local level without adequate funding. And statutory revenue sharing, last fully funded in 2001, steadily declined during the great recession and has not rebounded even as the economy improved. This requires communities to do more with less, which generally results in important services being cut.
Compounding this is Proposal A, which capped property tax increases to the rate of inflation or 5%, whichever is less, to deal with wildly fluctuating property taxes and unequal school funding. The problem is that since Proposal A’s enactment, inflationary adjustments for property tax purposes have never reached or surpassed 5%. In fact, for the most part, inflation has been well below 5% for the last two and a half decades. The decade-long recession at the start of this century really highlights the issue. Property values—and taxes—fell due to the economy, but taxable values haven’t been allowed to rebound even as the economy improved. As the report notes, “This ‘ratchet’ effect makes it nearly impossible for local revenues to recover even as the economy improves, putting serious strain on local budgets.”
And because property taxes and revenue sharing make up most of a local community’s revenues, we are starting to see tightened budget.
So with capped property taxes and stagnating revenue sharing, local communities must have other options, right?
Not so fast.
Michigan doesn’t allow many local taxes (communities are arguably constitutionally prohibited from levying local sales taxes). Only cities are allowed to levy income taxes—and only with voter approval through a ballot measure. Only 23 cities have been able to avail themselves of this option. The failure of the City of East Lansing to pass a local income tax in 2017, for example, shows how this is often an uphill battle.
It’s time to take a look at these property tax limits to see if they are still really working. In Michigan, that’ll likely be a long discussion given the fact that these are included in our constitution. In the meantime, we can make it easier for communities to raise the revenues necessary to provide the police and fire protection, keep our street lights on, make our roads drivable and safe, and maintain our parks and recreation areas.