Local Government Fiscal Capacity and Tax Limitations

September 2001 - June 2006


Note: This project was active at CLOSUP from 2001 to 2006. The information below is for archival purposes.

Responding to taxpayer dissatisfaction over high property taxes, Michigan, like many other states, has passed legislation to restrict annual property tax increases. Beginning in 1978, the state's voters adopted the Headlee Amendment to the Michigan Constitution, limiting annual growth in property tax revenues to the lesser of 5 percent or the rate of inflation. In 1994, the voters passed Proposal A, restructuring school finance and placing a cap on annual increases in property value assessments. Many local units of government now feel the binding effects of these two policies. As the demand for and cost of public services have grown, so too have gaps between government revenues and expenditures in many communities. This study examines how municipalities in southeast Michigan have responded to these budgetary constraints. Have they reduced service provision? Have they raised revenue through other sources, such as user fees? Or have they sought efficiencies in service provision through collaboration with other municipalities or private contracting? Most other studies of tax and spending limitations have focused solely on changes in the levels of revenue raised; this study takes a more integrated view of the spending and revenue choices and constraints facing local governments.

This study also seeks to identify the factors that affect a municipality's likelihood of being constrained by these tax laws. For various reasons, some communities are in a better financial position than others. Newly developed property, for instance, is assessed at full value in its first year, before being capped in subsequent years. Therefore, municipalities that can encourage new growth can capture more tax revenue, both from adding newly developed property to the tax rolls, and from the fact that such property is fully assessed in its first year. On the other hand, older built-out communities have fewer opportunities for developing new (fully taxed) properties, even while they must maintain aging infrastructure and serve populations that often require high levels of public services.


To investigate the fiscal capacity of local governments in southeast Michigan, this study will use annual millage rate and tax levy data for each community in the seven-county metropolitan Detroit region, provided by the State Tax Commission, as well data on each community's economic, political and social characteristics, obtained from the US Census of Population and Census of Governments. 

This project will result in academic articles and policy reports that will be available to the public through CLOSUP's web site. A main project goal is to inform policymakers of the long-term effects, including unintended consequences, of both the Headlee Amendment and Proposal A, as they have played out over the years. Finally, as local governments respond to rising costs and state-imposed tax revenue constraints, this project will provide knowledge to help them understand the experiences of similar communities within their region.