Guest column: Communities should find tax-spend 'niche'

By Mark Skidmore/Michigan State University

Consumers instinctively look for bargains -- quality products at a good price. We purchase the items that offer the right combination of price and quality we desire. This principle also hold true when we look for a place to live. Potential residents “shop” for the right mix of quality and quantity of local public services at the right price.

In conjunction with myMichiganStateUniversitycolleague Laura Reese and our graduate student, Sung Kang, I have been studying local government competition in Southeast Michigan, specifically the importance of changes in tax and spending policies to property value growth in all 152 communities in Macomb, Monroe, Oakland, Washtenaw and Wayne counties. What we found, roughly, is that communities that make decisions within the mainstream -- eschewing the extremes -- appear to do better than "competitors" that tax too much or those that provide little in the way of services.

To illustrate, suppose a community reduces taxes and is able to do so without compromising public service delivery (e.g., intergovernmental cooperation reduces public service costs). Our research shows that the community experiences an improvement in property value growth due to its own policy change, but the effect is twice as large when competitor communities fail to also reduce their taxes. The effects are reversed when a community raises taxes with no accompanying improvement in public services (e.g., the community increases taxes to cover legacy costs associated with underfunded retiree pensions).

Take the experiences of Bloomfield Hills and Belleville, examples of a wealthy community and a poor community, respectively, that experienced significant changes in taxes and school spending as a result of state imposed changes to school finance brought on by Proposal A in 1994. Bloomfield Hills had relatively small tax rate reductions and school spending increases relative to its competitors. On the other hand, Belleville had relatively dramatic reductions in tax rates and increases in school spendingrelative to its competitors. As a result, Belleville experienced higher rates of property value growth for several years, whereas Bloomfield Hills experienced lower rates of property value growth over the same period.

One key to success we found is discovering a niche and doing that well. Some communities offer low taxes and a basic level of public services, whereas others offer relatively higher taxes, but also offer a greater level of public services. Though the details are very different, both are examples of getting a good deal, be it via lower costs or improved services.

By contrast, communities struggle when taxes are relatively high, but services are provided ineffectively. Communities position themselves for growth by offering a niche level of public services at the lowest possible cost, keeping in mind the actions of competitors.

From a state-level perspective, policies aimed at regionalizing public services that provide broader benefits to an entire region also make good economic sense.

We learn two lessons by examining these past experiences.

First, as the region recovers from the real estate bust, local leaders do well to consider the importance of regional competition. Any proposed tax increases should be clearly linked to the quality of public services offered. Conversely, cities with relatively high tax rates and with no clear evidence of higher quality public services should consider ways to deliver services more effectively and at a lower cost.

Second, regionalizing some public services and the taxes that pay for them (e.g., regional zoos, libraries, and the like) provides a more efficient and equitable local public service delivery system. Struggling cities, which have relatively high tax rates (without higher quality services), are at a competitive disadvantage.

For a copy of the complete study, please contact Mark Skidmore at [email protected].