[APRIL 1, 1998] Michigan’s revenue-sharing program began in the early 1930s and through numerous changes has evolved into the current system.
In the 1930s the state began taxing enterprises holding licenses to sell alcoholic beverages; 85 percent of the revenue was returned to cities, villages, and townships. Later a portion of the intangibles tax revenue was added to the revenue-sharing pot.
In 1946 a portion of the state sales tax revenue also was earmarked (dedicated) for local government.
The 1963 state constitution (Article IX, section 10) expanded the locals’ share of state sales tax revenue, dedicating one-eighth of it to cities, villages, and townships.
In 1967 the state income tax was enacted and 11.5 percent of the gross receipts allocated to local governments: 50 percent to county governments (the first significant unrestricted state aid to counties) and 50 percent to cities, villages, and townships. This and all the above were distributed on a per capita basis.
In the 1970s there were several substantial changes, and the system took the form that existed until 1996. The most significant revision occurred in 1972 with Public Act 212, which, for the first time tied cities’, villages’, and townships’ share of state income tax revenue to their relative tax effort (RTE). A unit’s RTE is measured by comparing its property, income, and excise taxes to the statewide average of all local units. The rationale for this formula is that tax effort better measures local need than does population alone. Local governments have different needs for public services and different revenue-raising ability not directly related to population. (For example, Detroit has a higher crime rate than Troy, and therefore, has a greater need for police services; but to raise the same revenue per capita as Troy, Detroit also must levy higher tax rates because Detroit’s property values are much lower than Troy’s.)
In 1974, following voter approval of the food/drugs exemption from the sales tax, the state constitution was amended, increasing the tax revenue earmarked for revenue sharing from one-eighth to one-fifth (raising the percentage of total sales tax revenue allocated to locals from 12 percent to 15 percent).
In 1975 the single business tax (SBT) was enacted and part of the revenue directed into revenue sharing; a portion of the new revenue-sharing payments was based on RTE and, because one levy that the SBT replaced was the personal property tax on inventories (a local government revenue source), a portion of it was based on the inventory taxes collected that year by local government. Also in 1975 the percentage distribution of the income tax revenue to (1) counties and (2) cities, villages, and townships was changed from 50-50 to 35-65; the adjustment reflected state takeover of county welfare costs.
In the 1980s and early 1990s there were periodic reductions in payments to deal with short-term state budget problems, and there were adjustments (to reflect changes in tax rates) in the percentage of the sales, income, and SBT tax revenue shared with local governments.
In 1996 there were two major changes in state revenue sharing—one having to do with the basis on which the funds are distributed and the other with the source of the funds.
In Michigan, revenue sharing is unrestricted—that is, the state imposes no constraints on how it is spent by the local government that receives it. The amount of unrestricted money that states share with local units varies widely nationwide, and Michigan is more generous than most. Michigan’s unrestricted aid
as a share of state General Fund expenditures is 4.4 percent (the national average is 2.6 percent); and
as a share of total intergovernment aid (includes school aid and certain other payments) is 13.5 percent (the national average is 7.8 percent).
Most states, including Michigan, earmark revenue from a specific tax (most frequently, income and sales taxes) for revenue-sharing payments; a few also make General Fund appropriations.
The basis on which revenue-sharing is distributed also varies widely among the states, but the formulae fall roughly into four categories: property tax reimbursement, population, tax effort, and origin.
Population Funds are awarded on a per capita basis: e.g., number of people, per capita income, or urban population.
Tax effort Help is given to those that help themselves. The state funding that a local receives is based on how much the local is taxing itself; this approach is used in many states.
Property tax reimbursement (or payment in lieu of taxes) Funds are given to local governments to reimburse them for local tax revenue they have lost due to state legislation. For example, in Michigan the state reimburses locals for revenue they lost when the state repealed the personal property tax on inventory.
Origin Funds are awarded in proportion to a local’s contribution to state government revenue from a particular tax.
In FY 1994–95, before the major changes of 1996, Michigan distributed 53 percent of revenue sharing on the basis of population, 38 percent on tax effort, and 9 percent on the property tax reimbursement. Origin is not used in Michigan.
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