Detroit Renaissance Zones (Detroit Planning and Development Department in The Detroit News 12.17.96) Sections Acres Residents Businesses Workers 1. Livernois/Intervale 73 0 27 186 2. Central City 68 20 14 121 3. Southwest/Delray 760 2102 145 1693 4. Lynch Road 116 824 15 376 5. I-94 Industrial Park 277 1161 53 611 6. Old Packard 71 0 17 115
These 'renaissance zones' are to be almost tax-free areas in which city officials hope some 14000 new jobs will be created over the next twelve years of the project. The largely Democrat city council was at first resistant to the plan, calling it 'corporate welfare,' but Mayor Archer worked to overcome that obstacle. Somehow, they had been less in opposition to a plan for 'Empowerment Zones' set up earlier in 1995 setting aside a much larger area as a special zone which would attempt to foster economic development largely through federal grants. The city only formally applied just before the deadline in October for participation in the renaissance zone project. It is said that the city will have to forego collection of some $2 million in proceeds from income tax, utility tax, and property tax receipts, but is expected to garner much greater revenue from the economic activity which will be generated. The state of Michigan is going to have to do without some $6 million from income taxes and including what it will have to reimburse school districts from lost property tax. Those in the zones will continue to pay state sales tax, sewer and water fees, and local bonding millages, and businesses will not have to pay single business tax, real estate and personal property tax, but will continue to pay into unemployment and workers' compensation funds. One problem with the concept may be the small geographical area involved because many businesses may be reluctant to move into areas which suffer from some of the problems areas like these must contend with. The renaissance zones, in any event, are a step in the right direction -- in stark contrast to the zones which Archer has sought to establish, the principle problem with which is the dependence they rest on of large infusion of federal funds. It is true that some may be less than enthused about operating in such places due to crime, services, and high insurance rates. On the other hand, the construction of casinos are scarcely of help at all. Indeed, they are more harmful than therapeutic. At the most basic level, they constitute a tax of the most regressive nature, and do little to create wealth, being almost exclusively wealth redistribution operations. They also carry risks of added problems -- compulsive behavior, increased crime, and the like. The new stadiums the city and the professional sports teams are set to begin to build may be less of a problem, but hardly can be termed wealth creation mechanisms. Detroit will require more radical measures. Multiplying the conceptualization of Engler's renaissance zones to another manifold is at the root of the transition required. We could begin by repealing the city income tax altogether. However, the resultant economic activity generated will not happen overnight, and simply repealing the tax would lead to a temporary, but prolonged, revenue shortfall for the city. In order to make the reform revenue neutral, the best approach probably would be a gradual phasing out of the tax. The most harmful, and inequitable, aspect of that tax, the penalty for working in Detroit, the non-resident tax, should be phased back simultaneously with the residence penalty for living in Detroit.
Schedule for Paring Back City Income Tax Non-Residence Tax Residence Tax Corporate Tax Initial Rate 1.5 % 3 % 2 % 1st Year 1.33 % 2.75% 1.75 % 2nd Year 1.25 % 2.5 % 1.5 % 3rd Year 1.125 % 2.25% 1.25 % 4th Year 1 % 2 % 1.00 % 5th Year .835 % 1.75 % .75 % 6th Year .75 % 1.5 % .50 % 7th Year .67 % 1.25 % .25 % 8th Year .5 % 1 % 0 9th Year .33 % .75 % 0 10th Year .25 % .5 % 0 11th Year .125 % .25 % 0 12th Year 0 0 0
The gradual phasing out of the tax would allow 'lost' revenue to be replaced by the inevitable resultant increase in property values and wealth creation which would make up for the losses. Were the increases in revenue to prove inadequate, which they unquestionably would not, action could be taken to compensate with other measures. Even without having to undertake such compensating measures, it would be wise to move toward a major reform of residual tax policies. The property tax could be gradually reformed and eventually replaced by a city sales tax. This might be accomplished by providing for a 1 % sales tax (replacing a diminishing property tax and the phased out income tax) for the first five years, a 2 % sales tax for the second five years, and a 3 % sales tax thereafter, with property tax eliminated by year fifteen. Among other positive achievements of such a method of consumption tax would be the encouragement of savings. Since some tax is undoubtedly mandatory, the choice must be to rely on the tax form with the least negative impact on the city's economy. Collection of the sales tax could be structured so as to permit its establishment through allowing the merchants and others collecting it to keep a portion of it as a collector's fee -- one half of one percent would probably suffice as such a mechanism. The state legislature should act to exempt such revenue from state income tax altogether. This plan does not have to mean that city government would have to take a back seat in the resurrection of the city. There are pro-active measures of market promotion which city hall could undertake. Rather than underwriting casinos or stadium construction -- these seem to be going to be instituted in any event, regrettably -- the city could structure bonded funding of a large revenue pool for venture capital and even more substantive financing of wealth creation projects. At what level this could be funded would depend greatly on the boldness of city leaders, and would be dependent upon their initiatives on the other tax reform measures suggested here. The 'investment' of such revenue should be prioritized according to the wealth generating capacity of projects funded, with top priority going to manufacturing plant and equipment. Lesser emphasis should be accorded to less productive of wealth enterprise, such as retail, wholesale, merchandising, and residential and multiple residential private housing. In no event can any of the investment be allowed to flow to mere redistributive or non-wealth creating economic activity, whether that be casinos or something else. City leaders should probably be thinking in terms of billions of dollars of bonded funding for such efforts, although it would not have to be collected in one fell swoop. Attempting to fund such endeavors at a level of $1 billion per year might be a good and reasonable place to start. Over a decade, this could allow ten billion dollars of such seed money to be raised and invested. The state could be a vital partner in all of these efforts. This would not be limited to the renaissance zone concept the Governor has initiated. The state of Michigan could serve as a partner in structuring the bonded funding pool. The entire state, and the state government, would benefit, and should have a formal role in the institutionalization of the governance of the investment incentive devices. Indeed, the state would be wise to consider a reformation of its tax policies along the lines suggested here. Some movement in this direction has been taken, but it would be well-advised to consider further efforts to replace property taxes with sales taxes altogether. It may want to consider a phasing out of the state income tax. An extension of tax immunity for any business locating in Detroit for a period of time would be a constructive initiative. In fact, there are parallels between the problems Detroit has encountered since it instituted its income tax and those the state has had since it enacted its income tax at approximately the same time. It was seen as a solution for a revenue crisis the state had been experiencing, but it has done much to make Michigan a less desirable place for business activity. Short of that, proceeds from investment in such bonding as proposed here should be made free of state income tax. These economic measures are not going to be sufficient in and of themselves alone. Unless the environment for business is improved, very little the city government does will generate interest in business operation in Detroit adequate to turn the city around. That will require a genuine effort to deal with the problem of crime. Not just police protection, but the entire operation of the criminal justice system will have to be improved. It is difficult to imagine that merely upgrading such things in limited areas would suffice -- a sort of 'Vietnamization' in isolated pockets of enforcement. The streets must literally be taken back from criminal elements. There can be nothing but zero tolerance for drug dealing and gang infestation. Crack houses now abound in the city, and the city seems to be completely unable to even attempt to eradicate the problem. Many of them operate openly, with the inevitable social consequences, with little or no governmental interference, and this is inexcusable. One positive result of handling of this problem of criminal activity would be to lessen the burden of insurance costs that businesses would have to bear, and this is one major cost of operation which has driven business out of the city and an albatross which keeps others from opening up in Detroit to begin with. Governmental subsidization of the costs of insurance would hardly do much to alter the poor environment for business, and therefore would not help the situation very much at all. In addition to this, the state of the city's school system is going to have to be dealt with. Detroit has some excellent educational facilities which would be invaluable in rendering necessary service for a real renaissance, but without a real improvement in the primary and secondary school systems, a population with the requisite skill level to man the new levels of business operation would not be available from the populations which need the employment opportunities the most. The state, under the leadership of Governor Engler has begun to explore some options which would be of assistance on this count. Creating competition for the public school system would be one such positive step. Competition would effect important upgrading of both new and public educational delivery systems. But educational reform has become a dire necessity across the nation, and the reforms that will be necessary are extensive. They are beyond the scope of the present consideration, in any event. But they are absolutely imperative. The schools are not adequately addressing the most basic problems of required levels of self-discipline without which a functional workforce cannot be structured. Economic development is essential if the city is going to continue on the road to recovery. Without it, the direction of the recent past, which some have described as turning the city into a third world status area, will continue. That may be a bit of an exaggeration, but the direction of the development has been beyond question. But economic development is no panacea, even though it is an absolute prerequisite for building Detroit out of the situation it has dug itself into. The city is as much a part of the foundation of modern industrial civilization as any other aspect of infrastructure, and it is a dire waste of human potential to permit the level of nondevelopment that has become rampant in our society. There are changes that are necessary which are beyond the power of city or even state government to address. They will require difficult efforts to alter the role and functioning of the federal government, the policies of which have aggravated if not caused the problems. But initiatives such as those posed here will address in important ways some of the causal factors which have led to the crisis that Detroit has put itself in. But they will require a political will that is going to be difficult to muster, against the backdrop of political forces which seemed committed to a continuation of the policies which are themselves the very problem which needs to be addressed. The conceptualizations which will be necessary for the theoretical breakthroughs are not going to be easily broached by such elements, but they are necessary nonetheless. They are not impossible to achieve. Many are still convinced, however, that, for example, the government can by fiat raise wages, such as with minimum wage laws. They even banty about ludicrous notions of a maximum wage. Such inept economic analysis has been very important in the creation of the very problem. A difficult realization for many is that businesses, despite theories of relative tax incidence, do not pay taxes. They are passed on to consumers directly, or short of that, impact on society as a whole through reduced economic activity as profits, investment, and the like consequently decline. However, the analysis presented here is demonstrative of the fact that there have been identifiable causes of the conditions, and that there are ways to deal with the problems, beginning with altering the policies which have led to the situation. Detroit, of course, is a unique situation. That is why a too simplistic approach would be inadequate. Comparing it to Chicago can only be carried so far. The problem in Detroit at base is inadequate capital formation and a lack of capital dedication to wealth creating enterprise, and such fundamental tax revision as considered here can reverse the city's decline by altering that equation. It is no simple panacea. Higher sales taxes could mean less business activity in the city by customers who simply cross the border to shop. That is why the changes cannot be made without other measures suggested here being undertaken in tandem with it. Even if the evaluation of tax structures is based on revenue generation or the equity of the schema, the revisions suggested here are going to fare much better on either score. Liberals will take the position that such criteria are perhaps just as important as anything else, while conservatives will be more in line with the analysis that such reformation of tax structure which promotes markets and economic development is preferable. Unless the approach taken is that taxation should be structured as a redistributive function, or unless the tax vehicle change results in reduction of public sector employment (of which no consideration has been suggested here despite the value of the idea), the revisions should meet with little opposition. Although it may be a hard sell, in fact the altered tax structure outlined here, in its generation of greater wealth creation through the production of employment with substantive income levels would help alleviate the problem of poverty and low paying jobs in favor of higher paying ones, effectively producing a tendency toward a 'leveling' of incomes. Capitalism has been the great leveler of human history, producing the highest standards of living for the greatest numbers, and its promotion in these ways will only effect more of that for Detroit. In actuality, the 'boom' in economic activity would result in a greater capacity of government to support public sector employment through higher tax revenues -- at reduced rates -- but that should not be a primary consideration in evaluating the ideas. For those who would be hard pressed to accept the dynamics of a tax system that produces more revenue at lower rates of taxation, the method of implementation advocated here should offer some solace since it is a phased in approach, with great possibility for 'escape' and correction if the desired results did not materialize. In addition, the proposal is not so much for lowered tax burdens, although that would certainly be a result. Instead, the direction of the methods described here is toward an alteration of tax burden to more productive and fairer taxation policy which simultaneously enhances economic activity, both in quantity and quality measures. It is not necessary to go back to John Kennedy for argument that 'a rising tide lifts all ships,' which was his rationale for the tax cuts he proposed -- both the income tax cut and the accelerated investment depreciation tax credit for business. Michigan, in fact, offers positive evidence of the wisdom of such approaches. The changes in the tax code enacted in the state in recent years have been a big factor in its economic strength. The state is in 1997 at 'full employment' in economists' terms. In many areas, the minimum wage law is a mute point because jobs in the current labor market are starting above that level. Unemployment at the end of 1996 had dipped to 4.6 % in the state. And even with only the first changes in the welfare system having been implemented, the economic conditions have effected large decreases in the state's welfare case load. The economic woes of the city of Detroit can be traced in great part to the implementation of the city income tax a third of a century ago. It is a condition that is not going to be cured overnight, but one which requires a purge of the culprit in the creating the mess. This will be a difficult sell. Revenue is a narcotic to government, and politicians hooked on it are not going to easily get along without their 'fix.' But unless city leaders come to realize their 'addiction' and have the wisdom and foresight to act to deal with it, the condition of the city is not going to appreciably improve. Detroit, to a great extent, remains an island of economic backwardness in a state surging ahead. And that is due precisely to the kinds of considerations addressed here as the problem and in terms of the way out of them. The agenda suggested would also provide the city with the opportunity to function as a genuine 'laboratory of democracy.' Leadership with the boldness and vision to proceed along such a course will set itself apart from the pack, and will deserve the acclaim it will receive. But it will have to overcome a great deal of populist and other similar baggage. One further point of importance. The 'supposed' economic 'miracle' of Arkansas under the Clinton regime was that that state had undergone tremendous strides in economic growth. While the 'miracle' there was something less than it was purported to have been, such as it was can be largely attributed to the phenomenon of enticement of business to leave behind less fertile fields in other states for the relatively greener pastures of Arkansas. It was not geared to the generation of new economic activity in anything like the manner the agenda proposed here is designed to effect. Among the criticisms of Engler's renaissance zones has been that they will lead to business moving literally across the street to obtain the tax and other advantages the zones offer. But to the extent that there may be any truth in that analysis, it is primarily due to the too limited scope of the endeavor. And that clearly is not the situation with these proposals entered here. As Detroit prepares to mark its three hundred year anniversary in 2001, it would be most appropriate for it to embark on a course of action which would make it a real Renaissance City. Indeed, the rebirth that could proceed along this agenda would make it even more a resurrection city than a revitalized one. Gentlemen, start your engines! Ron Ziegler 12/20/96 to the top Continue
