Detroit Must Cut Income Taxes, Worsening Crumbling Tax Base

Detroit's Dire Money Problems May Worsen With Tax-Cut Mandate

Detroit, already hurting for revenue, must cut personal income taxes by July 1 to comply with Michigan law, according to a report released Friday by the Citizens Research Council of Michigan, a non-partisan think tank.

Under an agreement more than a decade old with the state of Michigan, Public Act 500 of 1998, Detroit must reduce income taxes each year for both residents and non-residents unless the city meets criteria for financial distress, which it has done every year since 2003.

The city stands to lose an estimated $8.5 million from the cuts, which would reduce the resident income tax rate from 2.5 percent to 2.4 percent and non-resident from 1.25 percent to 1.2 percent.

Tenths of a percentage point may seem minor in a $1.2 billion budget, but the loss of millions in tax revenue would be nearly impossible to make up and may further damage Detroit's efforts to avoid a takeover by a state-appointed emergency manager.

"It does add to the current fiscal challenges facing the city," the Citizens Research Council of Michigan report says dryly.

The city asked the state in December to waive the rollback, but was denied. Mayor Dave Bing told the Detroit Free Press on Tuesday that he will make a legislative appeal to avoid the cuts.

Bing said in November the city will likely run out of cash by April without significant financial reforms. Gov. Rick Snyder appointed a financial review board to look into the city's finances and determine whether the state should take further action.

City officials have asked for massive concessions from city employees and are considering privatizing the city lighting and transportation departments to save money. But the root of many of Detroit's problems is the simple lack of revenue.

In a recent essay on the political website 24/7 Wall St., author and publisher Douglas A. McIntyre argued Detroit's biggest economic problem is its weak tax base, pointing to the city's reliance on tax-exempt government and non-profit health care institutions as major employers.

Government bodies, educational institutions and health care providers are eight of the city's 10 biggest employers, employing a total of 70,000 people, according to data from Crain's Detroit.

"In all other cities among the top 20 in population, most of the primary employers pay taxes to the city," McIntyre wrote.

Only two of Detroit's top 10 employers, Chrysler and DTE Energy, pay business taxes to the city. McIntyre noted that only 10 percent of Detroit's workforce is employed by private businesses.

Thomas Sugrue, a University of Pennsylvania professor of history and sociology and a specialist on Detroit's economic decline, agreed the city lacks a strong business tax base. But the deterioration of Detroit's tax base has plagued the city for nearly a half-century, he said.

"The city has steadily lost jobs and population since the 1950s," Sugrue said. "Its infrastructure has grown older and is costly to maintain. Its tax base has plummeted."

Population loss has had an enormous impact on Detroit's revenue. Census data shows the city has shed more than half its population in 60 years, from 1.85 million in 1950 to 713,777 in 2010.

Those who remain are "disproportionately poor," Sugrue said. A third of city residents live under the poverty line, according the the Census.

That means personal income tax contributes less to public coffers than it would in city of similar size. Income tax revenue from residents and non-residents was $216 million in fiscal 2010, according to city data -- less than 9 percent of total city revenue that year.

Property tax revenues are similarly small, and the financial and housing industry collapses have hastened their decline.

The Citizens Research Council estimates the share of vacant housing units in Detroit rose to nearly 28 percent in 2008, from 22 percent before the recession. The city collected $218 million in property taxes in fiscal 2010, but budgeted for $245 million.

Faced with shrinking revenue and mounting deficits, Bing has proposed a reorganization of neighborhoods and infrastructure under a plan called Detroit Works. He is also looking to increase the city's business tax 0.9 percentage points, from 1 percent to 1.9 percent.

Meanwhile, Bing and Detroit City Council are engaged in financial brinksmanship with the governor and state Treasurer Andy Dillon, whose financial review team is currently examining the city's books. If the review finds significant financial distress, Snyder will likely appoint an emergency manager to run Detroit.

Michigan's Public Act 4 grants an emergency manager nearly unlimited authority to run a city, including the power to sell off city assets and renegotiate labor contracts. An emergency manager cannot, however, raise taxes.

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