Did Michigan kill Detroit?

March 19, 2014

After studying Detroit’s wrecked finances for several years, it was never clear if the city has been collecting the taxes it was entitled to within the law. Now a new report from the Michigan Municipal League suggests that the state gobbled up a portion of Detroit’s share of the state sales tax, adding severe stress to an already weak budget.

I wrote last year:

Detroit has no local sales tax, according to the Michigan state website. Michigan has no city, local, or county sales tax. The state sales tax rate is 6 percent.

The state collects a sales tax of 6 percent and sends it back to the city. For 2012, the state passed $172 million in sales taxes to Detroit, or 11.4 percent of general and governmental funds of $1.5 billion (page 47).

It’s not clear how much of the sales tax revenues that the state is keeping for itself. The federal government appears to have given Detroit more in grants ($253 million) last year than [they received] in sales tax revenue.

Now a new study from the Michigan Municipal League suggests that the state has short-changed Detroit over $700 million in its state sales tax share over the last 10 years. MLive writes:

Michigan communities have missed out on some $6.2 billion in statutory revenue sharing payments over the past decade as lawmakers and governors diverted funds to fill holes in the state budget, according to a new report from the Michigan Municipal League highlighting losses by community.

Detroit, the state’s largest city, lost out on $732 million in revenue sharing between 2003 and 2013, according to the report. Twenty two other cities — from Grand Rapids to Wyandotte — saw the state divert at least $10 million in sales tax revenue that local leaders believe they should have been entitled to.

I don’t know how the Michigan Municipal League is discounting the various revenue-sharing frameworks that the Michigan State Legislature used to short-change $6 billion over the last ten years. But Michigan cities as a whole are on their knees. Moody’s published this table last month after Michigan Governor Rick Snyder proposed increasing the state revenue share to cities:

Moody’s analyst David Levett wrote about Snyder proposing a greater revenue share:

After years of cuts, the governor proposed a 15 percent increase in revenue sharing under the Economic Vitality Incentive Program (EVIP), which provides state aid to municipalities. The EVIP increase primarily comes in the form of a population-based supplemental payment with adjustments to deliver funding to distressed municipalities and reward those that meet a certain standard of best practices.

Municipalities whose unemployment rates or violent crime rates are within the state’s top 25 percent, or communities that have a state-approved deficit elimination plan, would receive proportionately greater aid. Greater aid would also be provided for complying with new best practices standards, which would reward the strongest municipalities meeting criteria such as a credit ratings of Aa3 or higher, maintenance of minimum reserves and low-unfunded liabilities.

It’s not within the scope of this blog post to determine if Michigan sped up Detroit’s demise by walking down its share of state sales tax. Those with better access to legislative documents and timelines would be better positioned to review this. Detroit has an estimated $380 million budget deficit and the alleged loss of $700 million of state revenue share.

Although Detroit’s liabilities are crushing, its bankruptcy petition was filed because the city did not have sufficient cash to meet current liabilities. The loss of cash flow from state revenue sharing should be examined.


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