Taxes and the Local Government Quandary

Got vision? Our City Councilmembers do.  But that takes money.  Can we talk taxes?

Why do people run for office in local government? Various reasons, including personal (political) ambition, an enjoyment of politics as a practice (it has its obsessive qualities and you meet people), sometimes useful connections that might help you in your day job.  But I believe that a common characteristic in budding politicians is that they want to DO SOMETHING.  The aspirational impulse may go many directions.  With me it was land use. (So, immediately, all the BOC of my day was able to deal with was homelessness.)  We have local politicians who have emphasized economic development, transit, and development for population density.  Lately, the attention has turned to economic equity and affordable (i.e., subsidized) housing, and now there is a strong interest rising in solar power as a method of attacking climate change.

The Michigan Difference

It is frustrating, from the viewpoint of a Michigan municipal official, to read about advances in other states.  Here a transit program, there a measure to provide affordable housing, often paid for by a special sales tax, hotel tax, or even ticket surcharge (think UM football games) levied by a city or a county.  Not here. There are only two ways a local government in Michigan can tax its residents and businesses.  One is a tax on real property (real estate) and “personal property” which despite the confusing name is really business property.  However, that tax is slowly being eliminated.

The other option (available only to cities) is a city income tax. According to the Ann Arbor News,  the City Council is considering that again.  If the Council decides to go ahead with this oft-considered option, they will have to put a charter amendment on the ballot.  If the tax is enacted, it will mean that City residents will pay a 1% tax on income (this is rents and retail proceeds as well as wages) and non-residents will pay 0.5%.  In return, property owners will not be obliged to pay the general operating millage (for FY2018, that is 6.0343 mills).  Whether one comes off ahead on this personally depends on personal circumstances. (My best understanding is that retirement income is now taxable, so seniors are not as advantaged as in the past.)  The advantage to the City, and perhaps to many taxpayers, is that we are able to tap the incomes of UM employees and others who live elsewhere and work or do business in Ann Arbor.

Because of limitations in the Michigan constitution, it is very difficult for local government to raise property taxes.  We reviewed that in this post from 2011, which also walks you through details of when and how assessments for property tax are done.  Because of the Headlee Amendment and some other constitutional restrictions, governments are limited as to the total millage they can impose and must go to a vote of the people (a ballot question) to raise a new millage. Tax expenditures become (by design) a zero-sum game.  So local governments are always starved for revenue, especially if they are ambitious.

Invitation to a fundraiser that was posted to Facebook in July 2017

In the face of this frustration, some of our County Commissioners and City Councilmembers have gotten creative.  As we described in Hair on Fire in Ann Arbor, the BOC has established a millage ballot proposal that offers to give certain local governments a “rebate”, to be spent as wished.  This has entered into Ann Arbor City Council politics, with the incumbents who sponsored the resolution that assigned these tax goodies to favored uses (pedestrian safety, affordable housing, and climate change) running for office as the “Sustainable Ann Arbor”, “Progressive” slate on the strength of that resolution.  This device is obviously a response to frustration over the inability to use local tax dollars as they would like.  But in my opinion, both the BOC and these Councilmembers are not just misusing the ballot initiative system, but are being insensitive to the way ordinary taxpayers view local taxes and how they are used.  To be successful, they will have to persuade a majority of Washtenaw County voters that paying an additional 1.0 mill tax is to their benefit.

Taxes are Taxing

Ann Arbor homeowners are very conscious of our local tax system in July. This is the month the big property tax bill is due. To many of us, this is the make-or-break moment. Writing that check by the end of the month (and Ann Arbor has a very big stick to make sure that you do) is a big stress point.  Of course, no one loves taxes, but this is your HOUSE.  And every year, the total goes up.

Most of the property taxes we pay are for local government.  Across the County, the actual rate and amount paid varies widely, especially because of overlapping school districts, library districts, transit authority district, and other authorities. The greatest difference is in the millage that each municipality imposes on its own behalf.  That is the operating millage together with any special millages that voters have approved.  These can be seen by referring to the Apportionment Report from the County Equalization Department. (All figures cited in this post are from County Equalization.) Washtenaw County is really the essential level of government in Michigan, because many programs based on Michigan and even Federal law are delegated to the County to enact (these are called mandated services).  Taxpayers in all of our local units pay the same County millage (currently 6.2432).

Property taxes collected in Washtenaw County as shown in the Apportionment Report (2016). The smaller pie chart is County taxes and is detail of the pink wedge. Note that schools are the largest tax target. AAATA and DDAs are in the “local government” wedge.

Questions About Equity

There are several questions that occur to the taxpayer. One is, “what am I getting for this tax payment“?  That depends. The general expectation for local taxes is that the tax is collected by government so that it can carry out the services we need. Washtenaw County has 27 cities, villages, and townships.  Taxpayers in each of these may live in different school districts, library districts, etc.  In some, voters have chosen a high-service, high-tax government. Many townships are run on a bare-bones model.   So service levels differ, and so do local tax rates.  City residents usually go with the high-cost option. When we want special services (parks, local buses, better roads, etc.) we vote in special millages. In some townships, it is very difficult to pass a library millage or an increase in the township general operating millage.  Cities have a solid waste millage and provide trash pickup; most townships leave it up to the occupant to contract for trash removal.  Cities typically have water utilities (sewer, drinking water). Townships mostly leave it up to occupants to have a well and a septic tank. There are exceptions; the more urban townships like Ypsilanti and Pittsfield contract with the Detroit water authority, and portions of Scio Township and Ann Arbor Township have contracts with the City of Ann Arbor.  In general “you get what you pay for” is the rule. But to feel that you are taxed fairly, you want to see that you get the services you have opted for.

Is It Fair?

The wish to be treated fairly is baked into our bones.  (Experiments with monkeys show they resent being treated less well than the next monkey; they’ll refuse to do the trick if the other monkey gets a grape and they only get a cucumber.)  But part of that is your expectation of the “service” that you are buying.  I want my trash picked up and my drinking water to be clean and readily available.  I’m not fond of potholes either. But I also want to know that my community is being administered rationally and compassionately by officials who have the correct expertise.  In the example of the County, I want to know that public health, environmental health, and mental health are all being tended to by people who know what they are doing, and public safety (policing and judicial system) is important to me even if I never get robbed or a ticket.  So those are “services” I will happily purchase.   I’ll vote for school taxes even though I never had children.  But what really irritates me is if I do my part and others don’t. That is where we come down to the question of an even treatment of taxation.

Local Differences in Taxation

Because voters in local municipalities (that includes cities, villages, and townships) all choose different “packages” and also because the economic picture in each locality differs, there are major differences across the county in how much tax revenue is collected and what individual taxpayers have to pay. The fortunes of each government (and the burden on taxpayers) are determined by two different factors: the millage rate and the taxable value (properly called the ad-valorem) available.  In order to keep local assessors from under-assessing the value of property, the County Equalization Department conducts a detailed study each year and publishes a complete snapshot of local government assessment and taxation.  (All figures we cite here are from the Equalization Report or the Apportionment Report.)  The fortunes of each government depend heavily on the ad-valorem (hence the constant attention to “tax base”).

Let’s stop right here and acknowledge that there are different kinds of taxpayers, including owners of agricultural, industrial, and commercial property.  These are very important to a locality’s tax base but our discussion here focuses mostly on residential taxpayers.  For the taxpayer, the assessed value (SEV) of their house is determined each year by the assessor (assumed to be half the market value), and the taxable value (TV) is determined by a complex formula (see Proposal A) that works to hold down TV for long-term property owners.  For most, it is much lower than the SEV.  The tax due is calculated in this way:

Some localities have such high-value property that they can afford to keep millage rates relatively low and still provide quality services.  Others, with low real estate values, strain to cover all the bases with high millage rates.  This creates a good deal of inequity on a social level across the county.

Tax profiles for three different municipalities. Local millages (including operating and special millages) are shown. Tax calculated on total homestead millage is for house of market value $200,000, assuming TV is exactly half that.

In this example, the owner of a new house of $200,000 market value (TV of $100,000) would pay a drastically different tax bill.  Because it has such a low tax base, the City of Ypsilanti is taxing its residents at the very maximum that its charter allows.  Because most real estate in Ypsilanti is often at a lower valuation, many may not pay that.  However, this tax rate will obviously depress real estate value.

Back to the fairness question: presumably since each of us has chosen to live in a particular community (a free will theory of taxation), the tax assessed there is “fair”. But what about when the tax is being collected for services used by a different locality?  As we explained in our post Regionalism Reconsidered, Michigan has a strong home-rule tradition and culture.  When we pay County taxes, we are paying for a regional benefit.  We must accept that services delivered to our entire region (county) are on our own behalf.  But what few of us expect is that the County will collect taxes specifically to donate to a different municipality.

In the case of the proposed “mental health and public safety” millage, that was a decision made on the floor during debate on the ballot language. In the final language, a change was made so that the “rebate” to municipalities with their own police forces would be made proportionately on the basis of population, not on taxable value.

shall the limitations on the total amount of taxes which may be levied against taxable property within Washtenaw County, Michigan, as provided for by Section 6 of Article IX of the Michigan Constitution of 1963, be increased up to the amount of $1.00 per thousand dollars of taxable valuation (1.0 mills) for a period of eight years, beginning with the December 1, 2018 levy and extending through the 2025 levy, which shall raise in the first year an estimated $15,433,608.00 to be used as follows: 38% shall be allocated to Washtenaw County’s Community Mental Health Department for mental health crisis, stabilization and prevention, and to meet mental health needs in an appropriate setting, thus reducing the burden on the jail and improving care; 38% shall be allocated to the Washtenaw County Sheriff’s Office to ensure continued operations and increased collaboration with the mental health community; and 24% shall be allocated to jurisdictions in the County which maintain their own police force (currently Ann Arbor, Chelsea, Milan, Saline, Ypsilanti, Pittsfield Township and Northfield Township) in proportion to their respective 2016 population values?

(The change was made in order to benefit the City of Ypsilanti.) This has the effect of redistributing County taxes from one municipality to another.  As is seen in the table, most other cities and townships are essentially donating their own tax base (accepting the logic that this is a repayment for local taxes already collected) to others.  For the complete calculations, refer to this spreadsheet.

“Rebate” in first year based on taxable value vs. population.

But the tax is also a redistribution from all the other municipalities in the County to these units receiving a rebate.  Recall that the more rural townships have chosen to tax themselves at very low rates and then offer very minimal services.  For example, Bridgewater Township has a local millage rate of 0.8233. Freedom Township is 0.9501.  The proposed new County millage of 1.0 mills is higher than they choose to tax themselves for all services.  And part of that tax is going to be redistributed to the urban communities.  This may be why (as reported by the Ann Arbor News) the vote to approve the millage was 5-4, with the “out-county” commissioners voting against it.

There was some discussion that this redistribution in favor of the City of Ypsilanti was for “equity” and that small city does indeed have its problems, as shown with the tax situation. Perhaps we need to consider what “equity” means in distributing taxes among County communities, especially if the purpose is not truly regional in nature.  Should the farmers of Bridgewater Township be paying for pedestrian safety in Ann Arbor?  Should Saline and Chelsea be donating tax receipts to Ypsilanti and Northfield Township?  The rebates are not going to individual taxpayers in those different jurisdictions, but rather to their elected bodies, to spend on whatever priorities they determine. Is that fair?

The Muddle

County voters have shown that they are willing to pay taxes for a truly regional service.  For example, in November 2016, the County roads millage passed by 70.94% and the millage to support indigent veterans passed by 73.18%.  But because of this muddle, it will be hard to make the case that this is truly a regional service for parts of the County. Perhaps the votes in the urbanized parts of the County will be enough to pull it off.  But I wish that the BOC had offered us a clean choice with two pared-down millages, one for mental health services and one for the Sheriff.  It should have been possible to make a good regional case for each of those.  This was a bad time to introduce political aims into the process.

Just to confuse things further, should the Ann Arbor City Council decide to place a ballot issue for a city income tax on the November ballot, Ann Arbor voters will be making two different decisions about their tax futures at the same time.  Wonder how that will work out?

ADDENDUM:  The City Administrator has prepared a memo recommending use of the county millage rebate as to how that extra tax revenue from the County millage might be used.  Here is the report by the Ann Arbor News.

UPDATE: The Ann Arbor News has an article about the city income tax that compares the UM position (not our business) with that of MSU re an East Lansing income tax (oppose it, offering a buyout).  According to the article, there will be a special work session of the City Council on September 11 to discuss the tax.

General note: I believe that it is probably too late to place a ballot item onto the November ballot.  (I am having difficulty in finding the due dates for a charter amendment to be placed on the ballot by the Council.)  That would indicate that the next opportunity for an election would be May 2018.  After that, August or November 2018.  There are potential political consequences for all these choices.

SECOND UPDATE: The City Council has now had a working session to discuss the possibility of a city income tax.  Here is the account by the Ann Arbor News.  Note that any appearance of this issue on the ballot will not be until after another study has been done, possibly November 2018.  The slide show for council had some eye-opening figures, in the slide showing future capital needs. (The Treeline project is said to begin at a floor of $55 million.)

 

Explore posts in the same categories: civic finance, politics, Regional

2 Comments on “Taxes and the Local Government Quandary”

  1. Jeff Hayner Says:

    Thanks again, always informative.

  2. Robert Frank Says:

    I wondered why this tax was so convoluted. Now I understand the reason better. Makes me lean towards a no vote


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