05 January 2008|
A City in Turmoil
The perennially-stalled Motor City & its lessons for American policy
By Eric Plourde
In addition to all of the chaos this country is involved in internationally, America"s economy is also beginning to slow down. Meanwhile, the governments of some states continuously combat progress with heavy taxation and the implementation of policies that do much to suppress the expansion of business.
Michigan is a prime example of this. Most Americans are well aware of the troubles that face Detroit, including poverty, crime, and unemployment. What they do not know is that while politicians in both Lansing and Detroit continue their “Detroit will rise from the ashes” rhetoric, they continue to support policies that are destroying the city"s chances. Unemployment in metro Detroit was recently measured at nearly 7% while the state budget deficit looms somewhere around $800 million. People are leaving the state in droves looking for meaningful work as the auto companies continue to cut workers and wages. A recent poll revealed that 76% of the state"s citizens believe that Michigan is moving in the wrong direction, and for many it is hard to believe that a large percentage of the marvelous buildings seen cascading among the famous Detroit skyline are completely abandoned.
So why should the rest of the country pay attention to Michigan"s troubles? Because this state and its largest city are prime examples of the consequences of popular economic policies that are well intentioned yet bound to fail when implemented. A built-in obsolescence if you will. For both Detroit and Michigan, there are a few obvious hurdles standing in between the region and progress.
Most importantly, the elected officials of Detroit and Michigan continue to support a crippling taxation policy and a general philosophy of tax and spend. When these politicians explain their plans for tackling the deficit, there is little (if any) talk of eliminating wasteful spending, only ideas concerning what types of new taxes they can slip by the public to increase revenue. Among other regulations, residents and businesses of Michigan are subject to a state income tax around 4% (depending on earnings), a state sales tax of 6%, and a “windfall profit tax” on things like gasoline, along with a Detroit income tax around 1%, a Detroit tax on the three newly developed casinos, and an absolutely devastating statewide single business tax which takes about $2 billion additional dollars out of the hands of Michigan businesses every year.
To make matters worse, Detroit also has some of the highest property taxes in the country, and in hopes of combating the budget deficit, even more absurd tax plans are being introduced. One proposal by Detroit mayor Kwame Kilpatrick was a “fast food tax” of 2% for any food ordered from a fast food restaurant in the city. Not surprisingly, many residents have simply threatened to order food elsewhere. The latest proposal is a 6% “ticket tax” that would be applied to virtually anything having to do with entertainment. This includes tickets to major sporting events, concert tickets, movie tickets, and even things like health club memberships, golf outings, and bowling. That"s not all though, the plan also points out that “taxing cable television could bring in another $52 million”, according to the Michigan Department of Treasury. The idea of a new luxury tax is also being tossed around. Is the Michigan congressional library filled with copies of Das Kapital or something?
But wait, there's more. According to the Kalamazoo Gazette, Governor [Comrade?] Jennifer Granholm “has endorsed both an income tax increase and an extension of the sales tax to some consumer amenities. She wants lawmakers to act in the next few weeks”, probably to support the fact that her new education budget will need an additional $570 million in new revenue compared with 2007.
What's most distressing about all of this is that even in the shadow of these types of fiscal policies the leaders in this state legislature still can"t seem to figure out why college graduates, fresh out of school and ready to enter the labor force, continue to flee the state upon graduation. But the answer is obvious to even a member of the proletariat like myself. Why would anyone want to stay in an area where their government is not committed to allowing workers to keep more of their wages or removing government barriers to free enterprise to promote economic growth? State politicians talk endlessly about how citizens should be willing to pay their “fair share” to get Michigan back on its feet, not recognizing the obvious fact that people will leave in a hurry if their fair share somewhere else will be less.
There is only one method that the state can use to regain its Piston-esque swagger, and that is to give itself more of a competitive advantage. First, eliminate the single business tax (along with lowering other existing corporate taxes) to lure businesses to the region and encourage entrepreneurship. Lower or eliminate both the Detroit and Michigan state income taxes to attract new skilled workers to the region, or consider a negative income tax system to give the many poor in Detroit and Michigan a ticket out of poverty. Say no to ridiculous new proposals such as the “ticket tax” or taxes on cable TV that suck all of the money out of some of the few truly flourishing businesses in the state and punishes them for being successful. Lower property taxes to a reasonable level so that it becomes easier to afford a nice home in the state. Reform (but don"t eliminate) the welfare system to discourage freeloading and lower cost. And finally, decrease government spending dramatically to balance the annual budget to correspond with the large reduction in tax revenue.
Some would argue that there are other cities that thrive despite high taxes, such as New York, Chicago, or Los Angeles, and that if these cities can prosper under their tax policies, so can Detroit. In response I would like to make a couple of points. First, though these cities are doing extremely well, I do not doubt that they would be even more economically prosperous by also adopting some of the policies outlined above. Second, these cities already have the infrastructure, population, and investment necessary to perform well. Detroit, which has seen its population decrease from nearly 2 million to fewer than 900,000 over the past 50 years, does not have these luxuries, and needs to be willing to offer something that these other major cities do not have. A distinctly business friendly atmosphere could be just that.
Despite its problems, there are some signs of life in the city. Downtown, new Ernst and Young and Compuware buildings have helped to revitalize the center of the city. Comerica Park and Ford Field, two state of the art professional sports venues recently built next door to each other, bring thousands of fans down to Detroit every year, pumping considerable amounts of money into the city (though the “ticket tax” would do nothing to encourage this). The CEOs and owners behind these new developments, however, were all given large tax breaks to help sway their decision about whether or not to build in Detroit. Perhaps if all businesses had similar incentives through a lower tax burden, instead of a select few, the city wouldn"t have to actively seek out new businesses and propose a tax break package. The businesses would come on their own in hopes of improving their bottom line, knowing that there is a friendly business atmosphere, not to mention that it would be much easier to start new businesses, encouraging entrepreneurship among the city"s citizens.
Michigan (and especially Detroit) has a long way to go before the economic tide can turn, but as long as businesses see that it will be difficult for them to survive under a heavy tax burden in Michigan, they will not bring new jobs to the area. As long as skilled workers know that their well-deserved earnings will be more heavily taxed here than elsewhere, they will pass up Michigan for more tax-friendly states, even *gasp* Ohio. And as long as the elected officials of the state fail to realize that their big government policies are the reasons for the state"s economic troubles, nothing can successfully be done to fix them.
The Downtown Business Improvement District
Los Angeles, CA
One striking paradigm for how a city like Detroit should arrange its affairs is Downtown Los Angeles. Creating a special district in the long-abandoned, crime-infested, and universally-avoided Downtown area, community property owners combined their voluntary efforts to attract business and visitors to the area. Through providing local community services, promoting development to outside businesses, and several other methods, the Downtown Improvement District shows how local autonomy and investment promotion can do wonders for a depressed area. Within a few short years, the Downtown region has been transformed. With a brand new Nokia Theatre, Ritz Carlton Residences, ESPN Zone, scores of abandoned factories converted to fashionable lofts, and a plummeting crime rate, Downtown is a great example of the kind of independent development that Detroit should be pursuing.