More Money, Higher Taxes Not the Solution for Detroit

Left-leaning group wants state bailout, more revenue for city

A new report from Demos, a left-leaning think tank, blames Detroit's bankruptcy on Wall Street and calls for a state bailout. Its diagnosis is wrong and its prescription has already been tried.

Demos believes that the city's problems can be mostly linked to a loss of population and tax revenue and the state's "slashed" revenue-sharing, rather than costs for the city's pension and retiree health care benefits. It wants more money from the state and the ability for the city to raise more revenue.

But the state of Michigan has been bailing out Detroit for years and it's only delayed the problems. In fact, Detroit gets favors from the state of Michigan that no other city receives, and the state has made these rules to try to get the city more revenue to deal with its problems.

Detroit is the only city in Michigan that can assess a utility tax. It is added on top of monthly bills charged to residents and businesses. The tax expired in 1988 but was resurrected in 1990.

Detroit is the only city that assesses a wagering tax. The state rewrote its gambling laws in 1996 to allow for Detroit casinos and allowed the city to tax them directly. No other city has state-authorized casinos.

The Demos report is critical about the fact that Michigan's statutory revenue sharing has declined. Yet, Detroit still gets the majority of these contributions — 58 percent of the total, while Detroit's share of the population is less than 10 percent. And this proportion is up from 42 percent in fiscal year 2002. While municipal leaders have long bemoaned reductions in state revenue sharing, only Detroit is in bankruptcy.

A report from the Citizens Research Council shows that Detroit gets more total revenue than every other city in Michigan. Yes, this has declined over the years. But compared to the rest of the state's cities that provide largely the same services to its residents, the decline means that Detroit's gone from unheard-of levels of funding to extremely-high levels of funding.

One of the Demos recommendations is that the state help Detroit borrow $196 million. Except this already happened. Michigan rewrote its fiscal stabilization bonds for Detroit in 2010 and the city borrowed $250 million, secured by state revenue sharing. Indeed, in the five years before Detroit's consent agreement, the state helped the city borrow $610 million.

The most significant thing the report ignores is at the very heart of Detroit's problems: incentives.

The Demos solution is for the state to pump more money into the city and for Detroit to raise more revenue. But the city already has by far the highest tax-burden in Michigan and residents do not receive quality services in return. The report's solution doubles down on the problems that cause more people to leave resulting in less employment and revenue.

Detroit has suffered decades of bad policy coupled with mismanagement. Bankruptcy and emergency management may be the only things that can fix these problems. If state bail-outs were the answer, Detroit would have been thriving long ago.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.