Detroiters already pay one of the highest tax rates in the state.
Is the city ready for another tax hike?
A new analysis from the Citizens Research Council of Michigan examined the potential impact of a 1% sales and use tax in Detroit and found that the revenue may be too limited to justify the steps needed to adopt it.
The tax could generate between $42 and $72 million a year, but that is only 5% or less of the city’s budget, the report states.
The 59-page report, “Evaluating a Local-Option Sales Tax Policy for Detroit,” was produced at the request of the Detroit City Council’s Legislative Policy Division, which asked the nonpartisan research group to examine “innovative ways to increase city revenues” without “placing an undue burden on its residents.”
The Citizens Research Council says the revenue from a local tax would be limited, and the barriers to adopt it would be significant.
“While the path to adopting a local sales tax option for Michigan’s local governments is daunting,” the report argues that broader access to local taxes could improve the fiscal health of large cities and counties.
Detroit already has multiple local taxes, including a city income tax, casino wagering taxes, and utility surcharges, in addition to county and state levies.
“Because of the layering of all these taxes, many of which are levied at the highest (or among the highest) rates in the state, Detroit residents are among the highest taxed in the state,” the report states.
Even estimating what Detroit could raise is complicated, the report says, because Michigan does not track sales tax collections by city and because visitor spending is hard to measure.
The Citizens Research Council used two main approaches. One relies on household retail spending estimates. Detroiters spend $16,727 per household on retail goods, which would translate to about $167 per household under a 1% tax. Multiplied across 253,207 households, that comes to $42.4 million annually.
The other approach attempts to capture a wider range of taxable activity beyond retail goods. Under that approach, the Citizens Research Council estimates that a local sales tax of 1% could raise nearly $72 million annually.
Even if Detroit’s leaders decided the money is worth it, the report says a local sales tax would require major state action first.
“Authorizing a local sales tax in Michigan will require amending the state Constitution, adopting state statutes authorizing local sales and use taxes, the local governing body to enact an ordinance, and voter approval of a new tax,” the report states.
Because so many purchases now happen online, the report says a local sales tax would probably need to be collected and managed at the state level.
Madhu Anderson, the report’s author and a senior research associate for local affairs at the Citizens Research Council, said that the path of adopting a local sales tax “is daunting” and that the research suggests it “may be better suited to be levied at the county or regional levels to maximize potential revenue and minimize potential economic disruptions.”
The report says the city is working to raise service levels in the years following bankruptcy, while also planning for major obligations ahead.
“The City of Detroit is reviewing potential local option taxes to raise city revenues to improve city services and address needs it anticipates in the future,” the report states, citing efforts to put services “on par with surrounding communities,” make pension payments that are again “a city responsibility after a 10-year hiatus,” and “capture economic benefits from growth in visitor activity downtown.”
The Citizens Research Council notes that the state’s municipal finance structure relies heavily on property taxes that are limited by state law. The report points out that local governments in Michigan have “few options to levy local taxes,” which can be especially punishing in communities with weaker tax bases.
For now, the report does not urge Detroit to race toward a ballot proposal to raise the sales tax. It leaves city and state leaders to decide whether an additional $42 million to $72 million a year is worth pursuing a constitutional amendment, new statutes, a local ordinance, and a citywide vote, while also trying to avoid pushing residents and shoppers to lower tax areas.