Property taxes and the city budget

Previously I tried to summarize two legal limits on the growth of property tax millages; roughly:

1. Proposition A limits the annual growth in the taxable value of your house. The increase in your taxable value is limited to inflation (plus the value of any improvements you made in that year).
2. The Headlee Amendment automatically decreases millage rates each year to limit the annual growth in the total revenue collected by the city. Total revenue collected by a given millage is limited to inflation (plus the value of any new construction completed in that year).

The Headlee Amendment especially can create interesting problems for local budgets.

At first glance it makes sense: generally it should cost about the same to deliver a given service from one year to the next. Unless your city's growing, but in that case you get new revenue from new construction.

However, there are some problems here:

1. Inflation is a tricky thing. Not all prices increase at the same rate. For example, maybe a large part of your budget is made up of something that's increasing faster than inflation (say, your employees' health care costs).
2. The Headlee Amendment automatically decreases millage rates when taxable value goes up, but it doesn't *increase* millage rates again when taxable values go back down. So in a recession, millage revenue can decrease; after recovery, it will be allowed to increase only by inflation. Another way to think of this: in inflation-adjusted dollars, millage revenue can only stay the same or (when there's a downturn) decrease; it never increases.

There are a number of ways cities might try to cope with this without cutting services:

1. They can put a measure on a ballot asking voters to approve returning the millage to its original value (a "Headlee override").
2. They may be able to find ways to be a little more efficient each year and deliver the same services for less money. (Ann Arbor, for example, cut its staff from a high of 1,005 to a low of 685 between 2001 and 2013).
3. They can take advantage of the exception for new construction.

That last option can have a big impact. New construction brings new costs too, but city services often have large economies of scale, especially if the new construction is in existing neighborhoods--if you double the number of people living on a given block, you add additional wear and tear to the roads, for example, but the maintenance cost probably doesn't *double*--so the cost per residents goes down.

Property tax isn't the city's only source of income. Your water bills, for example, also go to the city (though the city is legally required to spend that money on water service.) The state also sends some portion of sales tax collected back to the city (though this has declined over the years). More details on all this in Tom Crawford's presentation.