New report shows state funding for local governments has declined by up to one-third over 22 years, forcing budget cuts, diminished services and bad policies

LANSING—As local governments seek to address the COVID-19 crisis and address calls to reevaluate local spending and its impact on racial equity, a new report, Building Equitable Communities: More Funding Needed for Local Governments, looks at the role that revenue sharing declines are playing in these decisions. 

The research from the Michigan League for Public Policy shows that local revenue sharing payments—state funding that’s distributed to local governments—have declined 35.4% for cities, villages and townships and 25.4% for counties between 1997 and 2019. In addition to the report, related fact sheets offer an overview of the decline in state revenue sharing and a timeline of important policy decisions that have affected local government funding.

“I have served on the Huntington Woods City Commission and in the Michigan Legislature, so I have seen both sides of the revenue sharing equation and know how vital a fair deal from the state is to our local governments,” said Gilda Z. Jacobs, President and CEO of the Michigan League for Public Policy. “Local government spending touches our daily lives just as much as state spending, from the local health departments making important decisions right now, the emergency services we depend on in a crisis, the roads we drive on, the parks our kids play in and more, and for the past two decades, our state government’s commitment to our counties, cities, villages and townships has dwindled. COVID-19 has amplified the importance of our local governments and their funding needs, but equitable revenue sharing should be a part of every single state budget.”

The report reveals that local governments have been getting hit on both sides as far as their budget funding goes. In addition to state revenue sharing declines, property tax collections have also diminished. When adjusted for inflation, property tax collections in 2019 were 8.7% below collections in 2017 and only 11% above the trough in property tax collections brought on by the 2008-2009 foreclosure crisis. In 2019, real Michigan property tax collections were on par with collections in 2004. 

These trends in property tax collections are the product of two intertwined constitutional limitations: the Headlee Amendment and Proposal A. The passage of Proposal A had some unintended consequences when combined with the Headlee Amendment, and the report explores those policy changes and their impact in greater detail.

Increasing local revenues is a racial justice issue. To achieve the vision of racial equity, economic prosperity, and social justice, the people, organizations, and governments that support those goals need resources. With more flexible spending power, local units of government can target resources to programs and services as needed.

“Racial equity is an important concern in every policy decision, as they have both intended and unintended consequences, and revenue sharing is no different,” Jacobs said. “The continued fight against police brutality toward Black and Brown people has also raised important questions about local government spending, and with more resources from the state in revenue sharing, greater investments can be made in the areas that promote racial equity and economic security for all. And as state lawmakers tackle a variety of criminal justice reforms, including revisiting court fines and fees, they must also acknowledge that revenue sharing declines have pushed local governments to rely more on court fines and fees.”

The League’s analysis points out that local units of government are seeking to recoup declining revenues in increasingly inequitable and unpopular ways, including a growing reliance on fine and fee collection to pay for city services. The white supremacist system on which modern policing is built and longstanding racially biased policing in Michigan have created a system where Black and Brown people in Michigan are systematically targeted by police. As such, a heavy reliance on fines and fees is disproportionately affecting Black and Brown communities.

In addition, the movement to defund police is pushing for the reinvestment of revenues from policing into racially equitable systems that target and preempt the root causes of crime. To do this, local units of government are going to need funding to reinvigorate opportunities in communities of color to reduce income and wealth inequality. Funding a completely new vision of public safety will require injections of money from the state to help fund the mental health services, youth programs and social safety net that will achieve that vision.

The League’s report outlines the following recommendations to address local governments’ funding needs, improving racial equity in the process:

• Significantly increasing statutory revenue sharing to counties and cities, villages and townships to at least match what is called for under the statutory formula from Public Act 532 of 1998;
• Creating new formulas for the distribution of statutory revenue sharing to send more resources to communities with low housing wealth;
• Expanding the Homestead Property Tax Credit; and
• Authorizing more tax options for local units of government, including motor vehicle taxes and registration fees, and alcohol, tobacco and cannabis taxes, and taxes on entertainment and amusement.

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The Michigan League for Public Policy, www.mlpp.org, is a nonprofit policy institute focused on economic opportunity for all. It is the only state-level organization that addresses poverty in a comprehensive way.