CHANGE REVENUE SHARING;

CUT DETROIT CITY INCOME TAX



House Bill 5391 as enrolled

Public Act 500 of 1998

Sponsor: Rep. Kirk A. Profit

House Committee: Tax Policy

Senate Committee: none


House Bill 5989 as enrolled

Public Act 532 of 1998

Sponsor: Rep. Nick Ciaramitaro

House Committee: Appropriations

Senate Committee: none



Second Analysis (12-15-98)




THE APPARENT PROBLEM:


Under both constitutional and statutory provisions, the state shares, or redistributes, revenue from various state tax sources to local units of government. About 40 percent of total revenue sharing payments to local units of government are paid from constitutionally dedicating a fixed amount of the sales tax (15 percent of gross sales tax collections at the 4 percent rate). This generates an estimated $558 million in fiscal year 1997-98, and is paid to cities, villages, and townships on a per capita basis. The remaining 60 percent of state revenue sharing (about $792 million in 1997-98) is distributed to cities, villages, townships, and counties through a statutory formula.


One component of this statutory revenue sharing formula has been the source of much controversy. Though revenue sharing was originally distributed on a per capita basis, the Revenue Sharing Act of 1971 instituted a relative tax effort formula for distributing most statutory revenue sharing funds. The formula is actually a weighted population distribution, in which a local unit's tax effort is measured by the amount of operating millage levied, plus revenues from local income taxes and utility taxes (where applicable). The resulting amount is converted into a millage rate, which is compared to the statewide average millage rate. The ratio is then multiplied by the local unit's population to arrive at a distribution factor for revenue sharing payments.

The relative tax effort formula was intended to recognize the variation in need for local public services, as well as the variation in ability to raise revenue at the local level. It was also acknowledged that this weighted formula would help offset the effects of population losses on urban centers. The result of this method of distribution is that the state's largest city, Detroit, receives what many consider to be a disproportionately large share of the state's revenue sharing money. There has been mounting pressure in recent years to shift revenue sharing funds towards a straight per capita distribution system, which is seen by many as a more equitable way to distribute the funds. Unable to resolve the conflict, the legislature in 1996 froze payments based on relative tax effort at fiscal year 1996-97 levels, and specified that any growth in revenue sharing would be distributed on a per capita basis. Further, the legislature took steps to simplify the revenue sharing program by consolidating the tax sources of revenue sharing funds, and created a House-Senate task force to consider broad-based reform of the revenue sharing system. The 1996 legislation further provides that all statutory revenue sharing payments will be frozen at 1997-98 levels. Efforts to produce an agreement on a new distribution formula by September 30, 1998 were unsuccessful, so all growth in revenue sharing funds for the current fiscal year is being placed into a special reserve account.


It is proposed that a new revenue sharing formula be enacted. The proposal, advocated by the governor as a compromise on the long-debated issue, would combine a revenue sharing freeze for the city of Detroit and gradual increases for other local units, and link that to a cut in the Detroit city income tax, which is the highest in the state and considered to be a major obstacle in efforts to revitalize the city.


THE CONTENT OF THE BILLS:


House Bill 5989 would amend the State Revenue Sharing Act to 1) freeze payments to the city of Detroit for 8 years at current levels; 2) place in statute a new formula, phased in over 8 years, that weights equally three components, including unit type and population, taxable property value per capita, and yield equalization; and 3) effectively sunset the statutory revenue sharing formula after June 30, 2007. The bill would also rename the act as the "Glenn Steil State Revenue Sharing Act".


Detroit provisions. The bill would specify that, for the period of October 1, 1998 through June 30, 2007, a city with a population of 750,000 or more (the city of Detroit) would receive $333.9 million in total (constitutional plus statutory) revenue sharing payments. Further, the bill specifies that if state sales tax collections decreased from one year to the next, Detroit's revenue sharing payment would also be reduced proportionately.


Counties. Currently, counties receive most of their revenue sharing payments on a per capita basis, and the balance is based on inventory reimbursement payments (based on the 1975 inventory tax base times the current millage rate). The bill would freeze the inventory reimbursement payments at 1997-98 levels and specify that future growth in available revenues would be distributed on a per capita basis. It would increase the current 24.5 percent share of statutory distributions that goes to counties (less inventory replacement payments) to 25.06 percent of the statutory distributions.


Cities, villages, and townships. Cities, villages and townships currently receive 75.5 percent of statutory distributions (less inventory replacement payments), allocated according to the relative tax effort formula. The bill would decrease the share paid to cities, villages, and townships to 74.94 percent of statutory distributions, and eliminate the inventory replacement component. It would replace the relative tax effort formula with a combination of three factors: taxable value per capita, unit type (city, village, or township) and population, and yield equalization. Each of these three components would be given equal weight in calculating a local unit's revenue sharing payment.