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Do high-tax cities in Michigan perform as well as low-tax cities?
The evidence of the 1980s offers some remarkable contrasts with far-reaching implications for local fiscal policy.
Eleven cities in Michigan have populations in excess of 75,000. A recent Mackinac Center for Public Policy report used an Economic Performance Index (EPI) to determine if those cities grew or declined over the last decade. The index registered such factors as the poverty rate, change in population, job growth and per capita income.
Six of the 11 cities-Ann Arbor, Grand Rapids, Livonia, Sterling Heights, Warren and Westland-showed positive EPI scores, which meant that they were "growth cities" in the 1980s. Five of the 11-- Dearborn, Detroit, Flint, Kalamazoo, and Lansing-turned in negative EPI scores and could be said to have been "declining cities."
Undoubtedly, many forces were at work in the 1980s to affect each city's economic health, but the Mackinac report strongly suggests that relative tax burdens were crucial: Every one of the five declining cities ranked near the top in taxes!
In fact, tax revenues averaged $711 per person in the declining cities versus just $434 in the growing cities-a difference of 64 percent. For the typical family of four, that amounted to a difference of just over $1,100 per year in taxes.
The reason that taxes were so much higher in the declining cities was that, as one might expect, expenditures were much higher. Even after excluding outlays for welfare, health, and education, the declining cities had per capita municipal expenditures that were a substantial 75 percent greater than the growth cities. They also tended to receive much more state and federal financial aid than the other cities.
The growth cities were without exception the ones which taxed and spent the least; the declining cities were the very ones which taxed and spent the most. In specific measures, the six low tax and spend cities significantly outpaced the unfortunate five: no population loss as opposed to an average loss of 6 percent; more than two times the rate of job growth; and half the rate of increase in the poverty rate. Furthermore, after adjusting for inflation, per capita income rose by an average of 9 percent in the low tax cities in contrast to an actual reduction of 5 percent in the high tax cities.
Of the 11 cities studied, Sterling Heights grew the most in the 1980s while Flint and Detroit declined the most. Not by coincidence, their fiscal policies are as distinct as night and day. For instance, Sterling Heights actually experienced a real decrease in tax burden and its per capita expenditures (excluding welfare, health and education) were just 59 percent of the national average. Detroit's tax burden, meanwhile, rose by 6 percent and its expenditures were 170 percent of the national average.
Interestingly, while spending for city government administration- expressed on a per person basis-was about even with the national average in Sterling Heights, in Detroit it was nearly twice as much. Bureaucracy is expensive, and Sterling Heights very deliberately keeps its workforce lean and mean.
The citizens of Detroit must contend with a total tax burden that is about seven times higher than the average Michigan municipality. They pay a personal income tax of 3 percent (nonresidents who work in Detroit pay 1.5 percent) and a corporate income tax of 2 percent, a 5 percent utility users excise tax and one of the highest property tax burdens of any major city in America.
If high-tax, high-spend, low-growth cities want to turn their economies around, they should work to bring their costs in line with those in the communities they compete with for jobs, people and businesses. That spells tax cuts, frugal spending habits, a downsized bureaucracy, and privatization of services. Growth doesn't simply "happen" regardless of the policies cities might pursue.
The numbers reaffirm the old saying, "If you encourage something, you get more of it; if you discourage something, you get less of it."
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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