Detroit should cut taxes.
More specifically, it should eliminate its income tax of 2.4 percent. As part of the city’s plan of adjustment, a formal outline for solvency that was submitted to the federal bankruptcy court in February, it appears the city has other ideas. Namely it intends to collect income taxes from residents known as reverse commuters – people who live in the city but work in other areas. Former Mayor Dave Bing estimated $142 million in income tax revenue went uncollected in 2009, and the city wants that money.
Normally this would make sense, because Detroit is owed those tax dollars, but these are not normal circumstances. The city is in bankruptcy, has lost most of its population over the decades and in order to stabilize itself it must become an attractive place to live – and currently it isn’t.
The crime rate and the unemployment rate aside, part of what has driven residents out and kept others from moving in is the tax rate. The Lincoln Institute of Land Policy, a research center located in Massachusetts, published a study in 2012 that showed Detroit has the top property tax rate in the country. On top of that financial burden on residents, the city collects an income tax.
To try and force residents, specifically those whose employment outside of the city already represents one foot out of the door, to pay more in taxes will only further entice them to walk out entirely.
Taxes must be commensurate to the services provided by the public entity which collects the levy. For example, New York City has high taxes, but it delivers many services. Houston, Texas in comparison has low taxes and provides few services – which is ok with residents in the Lone Star State who’ve come to expect less from government anyway. Detroit has high taxes, but lacks the transit system of Chicago, nor does it have a top-tier higher education system like New York City. Detroiters pay a lot of money for terrible services. There is no other way to describe the condition of a city unable to pay for parks and recreation, or whose police force is known for a 58 minute
response time.
A tax cut of this sort would also be much needed economic stimulus for a city with an unemployment rate of 9 percent. Contrary to the idea that tax cuts are completely ineffective, tax cuts focused on poorer to middle-income citizens, who spend most of their disposable income, can be very effective. And most of Detroit’s residents are poor. Per capita income in the city is $14,861 according to U.S. Census data.
N. Gregory Mankiw, an economist and former chairman of the Council of Economic Advisors wrote in a column for The New York Times titled “Tax Cuts Might Accomplish What Spending Hasn’t,” “Successful stimulus relies almost entirely on cuts in business and income taxes.”
In his column, Mankiw cites many economists, like Olivier Blanchard, chief economist for the International Monetary Fund, and the Organisation for Economic Co-operation and Development, but he also notably cites the work of economists Christina Romer and David Romer. Research conducted by the husband and wife showed “each dollar of tax cuts has historically raised GDP by about $3.” Christina Romer was formerly chairwoman of the Council of Economic Advisors in the Obama administration.
A cut in income taxes, which would mostly affect people of low incomes, would most likely have a similar effect as the cut in payroll taxes at the federal level did in 2012. Families saved money, and they spent that money. Money spent from the tax cut would likely be spent in the local economy, which would be exactly the kind of boost the city needs.
City coffers won’t be as desperate for revenue after the bankruptcy, when debts have been adjusted and interest payments no longer take up much of the budget. A tax cut would indeed be a sacrifice in money available for the city to use (and with Detroit’s dysfunctional city council, perhaps that is for the best). Most importantly, the city will make itself more attractive to people, which it needs more than the $142 million in uncollected taxes.
