Detroit Must Cut Income Taxes, Worsening Crumbling Tax Base

In a twist of irony, the city of Detroit is required to reduce its income tax rate because it no longer meets state-set criteria for financial distress (it met those criteria from 2003-2007 and 2009-11, they were waived by the state legislature for 2008 and 2009). Although the loss in revenue represents a small part of Detroit’s budget, it highlights the complicated relationship between the city and the state.

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 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.

And over all this hangs the specter of state takeover of the city:

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.

Read: Detroit Must Cut Income Taxes, Worsening Crumbling Tax Base.

What does it mean when a city is broke enough to merit the dissolution of its government, but not broke enough to stave off a tax decrease? The Citizens Research Council published an article listing the four conditions and stating that Detroit will not meet them this year:

  • Two consecutive years of withdrawals from the city’s budget stabilization fund or exhaustion of the fund balance;
  • A year-to-year decline in income tax revenue, after adjusting for inflation, of more than 5%;
  • A city unemployment rate of 10% or higher; or
  • A provision which compares the growth ratio of the city’s taxable value with the comparable statewide figure and computes a ratio which must fall below .80.