For more than a decade we have argued that the strategy for producing better economic outcomes that Michigan has adopted is not smart. Basically lower taxes and smaller government as the recipe for economic growth. As lower taxes produced less state revenue that meant big cuts in higher education and support for local government. And smaller and smaller investments in infrastructure. This in an economy that is increasing rewarding states and regions with the greatest concentrations of talent. Not smart indeed!
In this post I want to concentrate on the consequences of state cuts in revenue sharing. In our placemaking agenda we wrote:
Something needs to replace the decade of cuts to revenue sharing. The state has historically helped fund the provision of local services. The combination of stricter and stricter limits on local government’s taxing power and revenue sharing and transportation funding cuts results in even the best managed cities unable to provide the basic services and amenities needed to retain and attract residents. If the state will not reinvest in cities, then there needs to be some new system of municipal finance put in place. Best done at the regional level. The current system leaves cities without the tax base to fund the services that are needed.
Bridge Magazine has been running a terrific series on the consequences of Michigan’s dysfunctional system of municipal finance. A great overview article can be found here and articles on how Ohio and Pennsylvania do it better can be found here and here. The Bridge articles make clear that local governments are having trouble providing basic services and the amenities that retain and attract residents in large part because of state policy. Revenue sharing cuts combined with strict limitations on the ability for cities to raise revenue (in part due to voter adoption of the Headlee Amendment and Proposal A).
Minnesota, as we documented in our State Policies Matters report, has taken the opposite path. The Citizen’s Research Council report that we reviewed in a our Low Taxes and Low Prosperity post lists Minnesota as a top ten state in both state and local taxes per capita and in state and local taxes as a proportion of personal income. Michigan is low taxes/low prosperity. Minnesota––with the Great Lakes best economic outcomes––is high taxes/high prosperity. Their economic growth strategy emphasizes public investments in education, quality of place and transportation over lower taxes.
Rick Haglund wrote in our Minnesota report:
The state’s tax and spending policy framework was set in the early 1970s. It’s called the “Minnesota Miracle.” The core of the strategy is shifting more of the burden of financing schools and local government—primarily cities—from escalating local property taxes to the state income and sales taxes. Many in the state see the Minnesota Miracle as setting the stage for investment in education, communities and transportation that created a climate for strong economic growth.
Rick found that in 2014 Minnesota spent $468 per capita in state support of local governments compared to $132 in Michigan.
Its far past the time for Michigan to redo its municipal finance system. This is far more that just keeping more and more cities out of fiscal distress––although that alone is worth doing––but also putting Michigan back on the path to prosperity. What Minnesota policymakers understood decades ago––and Michigan policymakers need to understand now––is that having cities that provide high quality basic services and amenities is key to retaining and attracting mobile talent. And concentrated talent is the key to prosperity.