When Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), they set aside $150 billion to reimburse state and local governments for increased expenses related to the COVID-19 pandemic. While it is uncertain how much of the nearly $4 billion set aside for Michigan will make its way down to counties, cities, villages, and townships in the state, one thing is certain – these federal funds will not compensate local governments for lost revenues associated with COVID-19.
When looking at how local governments in Michigan will see their revenues impacted, we need to consider different timeframes. In some cases, revenues were impacted the day Governor Whitmer issued the stay-at-home orders. In other cases, impacts could occur in the coming weeks or even months. Finally, there are potential impacts that won’t materialize for at least a year.
Immediate Impacts
The most likely immediate impacts are associated with pay-for-service programs run by local governments. Child-care services, fee-based recreation programs, and building rentals are examples. Building departments are closed down and not seeing any revenue; however, these may see a bounce effect when builders rush to get projects going once the stay-at-home order expires. Some communities have unique revenue sources that may be impacted. The City of Detroit, for example, is experiencing lost revenue from the closed casinos, which could cost the city almost a million dollars a day.
Any community that has established an income tax will be seeing an immediate hit, with different impacts coming at different times. If an employer is not paying wages, they will not be remitting city income taxes. If the employee is working from home outside of the city that levies the tax, they would not owe city income taxes for those wages. Depending on how sophisticated the taxpayer is will determine if they make use of this tax deduction next year. The governor’s order allowing people to delay filing their state and local incomes taxes will also have an impact. Finally, depending on how the job market rebounds once we reopen for business will determine the long-term revenue from the tax. Of course, this discussion has similar implications for the state and federal budgets.
Intermediate Impacts
Impacts in this timeframe have a lot to do with decisions made at the federal – and especially – state levels. Constitutional revenue-sharing payments will undoubtedly take a hit because of the economic shutdown. These bimonthly payments are based on the previous two months’ sales tax collections. March and April are going to see serious hits compared to original projections. As for what happens after April, that is uncertain, but it is unlikely that consumer spending will immediately return to previous levels.
Most communities in the SEMCOG region also receive revenue sharing that is completely dependent on state appropriations. Over the past two decades, the so called “statutory revenue sharing” has been decimated by the state. However weakened, this program still distributes significant revenues to counties, cities, villages, and some townships. The state budget is going to be significantly impacted by the COVID-19 pandemic – in both the current fiscal year and next year. Historically, revenue sharing always seems to pop to the top of the list of programs where the state can save money, which means potential revenue loss to local governments. Once the legislature returns to finish its work on the budget or, more likely, throw out the old work and start over, revenue sharing will need to be closely monitored, along with any other state programs that fund local governments.
Another issue a bit more subtle is related to property-tax collections. Homeowners who are not working are having trouble making mortgage payments. The federal government is working to assist homeowners with programs to allow people to miss making their monthly mortgage payment. However, for many people, that monthly payment also includes escrow amounts to pay for property taxes. The unanswered question? Will this program to assist homeowners impact property-tax payments coming from mortgage companies? At worst, this would potentially be a cash-flow issue and Michigan’s system, whereby county treasurers cover any unpaid taxes, would keep local governments whole in the long run. But it is an excellent example of good intentions having possible trickle-down impacts.
Long-Term Impacts: Property Taxes
It is far too early to know how this pandemic will impact the housing market in the long run, but it is not too early to consider the possibilities. Outside some of the issues noted earlier, the property-tax system does not respond quickly to economic changes. Assessed values have now been set for this year with the close of the local Boards of Review. Even if housing values are eventually impacted by a deteriorating economy, they would much more likely impact the sales studies for 2022 as opposed to 2021. What we do know is that, if something is coming, there will be a long lead time to adjust budgets for declining property-tax revenue.
Proposal A Impact in a Declining Housing Market
SEMCOG has just completed a review of the ratio of State Equalized Values compared to Taxable Values in Southeast Michigan. What the study shows is that the percentage of property value that is untaxed due to the Proposal A cap is almost exactly the same as it was prior to the Great Recession – 22 percent of our property value is untaxed because of the Proposal A cap.
While most local government officials would like to blot out the memories of dealing with the property-tax losses during the Great Recession, it does give us important lessons on what might happen should we see a COVID recession impacting the real estate market. The SEMCOG region was one of the national epicenters of the housing market collapse. During the Great Recession collectively, Macomb, Oakland, and Wayne Counties lost approximately 35 percent of their SEV and 25 percent of their Taxable Value.
The fact that the gap between SEV and Taxable Value has been reestablished will play an important role if we see another downturn in the real estate market. What many local government officials in our region may not know is that there were significant parts of our state where property-tax collections did not fall during the Great Recession. In fact, most local governments in the northern half of the state saw continuous growth in their property taxes during the Great Recession. One notable exception was many cities and villages.
Why were local governments in the north seeing property-tax growth while communities in the south saw large losses? The answer is found in Proposal A, particularly in response to a question that was being asked extensively in 2007 and 2008: “How can my property taxes go up when the value of my property goes down?” If the COVID-19 pandemic does result in declining home values, this does not necessarily mean that property-tax collections will see actual declines. An individual homeowner will not see a decline in the amount they owe in property taxes until the SEV of their home falls below the previous year’s Taxable Value. For many homes, it would take a decrease in valuation of more than 20 percent before that occurs as noted in the above chart. It took the unprecedented collapse of the housing market in the Great Recession to create large-enough declines to impact property-tax collections. The more modest declines seen in property values in the northern part of the state allowed total property-tax revenues to grow in that region at a very small rate.
If the COVID-19 pandemic results in a moderate reduction in property values, most property owners would still see inflationary increases in their yearly property tax bills. At some point, property values could go down enough to cause property-tax revenues to decline, but the Proposal A effect would buffer the magnitude of the revenue loss associated with an economic downturn.
Of course, we would still have the issue that remains unresolved from the Great Recession – once the values go down, Headlee prohibits local governments from benefiting from any market recovery above inflation without the approval of the community’s voters.
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