What's the matter with Michigan?
Rise and Collapse of an Economic Wonder
This 2008 article of December 27 puts the automobile phenomenon in a broader and deeper context. This writer is a professor of economics at the University of California at Riverside.
by Dr. Mason GaffneyMichigan’s “Big 3” auto firms have become beggars. The University of Michigan now charges the highest tuition of any public university in the nation. Michigan’s number of apportioned US Representatives has dropped from 19 in 1960 to 15 in 2000. What underlies the state’s decline, where industrial cities rot, unemployment soars, and youth flee.
A century ago the auto industry drew in people, but why in Detroit? It helped that Michigan had produced horse-drawn carriages from its hardwood lumber, but so had other places. It was not low wages, for Detroit paid better than most. It was not business-dominated politics, for Michigan was a Progressive state.
What was unique was that a century ago Governor Hazen Pingree pushed the single-tax principle. Pingree reformed assessments and raised property taxes. There were no sales taxes, business taxes, or income taxes.
Property taxes paid for schools, clinics, parks, water, sanitation, welfare, etc. These public services made a big city livable and its small industries viable. Detroit’s private sector was a big collection of small machine shops, little businesses and services providing a matrix for the famous innovators who were to spawn the auto industry. Pingree funded mass transit, enabling enabling residents to get to work in car factories. It is one of history’s ironies: trolley cars nursed the auto industry that was later to rise up and slay them.
The crash of 1893 hit Detroit soon after Pingree became Mayor. The City was riddled with holes held by land speculators. Pingree prevailed on them to let the unemployed plant vegetables there, and “Pingree’s Potato Patches” won national renown, and inspired other cities to do likewise.
Fast forward to the 1950s. Michigan still grew but slower than the national average, losing another Congressional seat. Detroit shrank by 10%, the first break in its sensational upward trajectory. What could the matter be? Not the end of the war; demand for autos and trucks was booming. What changed was taxation.
In 1953 Governor G. Mennen “Soapy” Williams got passed the Business Activities Tax (BAT), a kind of VAT. Meantime the property tax itself was degenerating, nationwide, into more of a tax on buildings, less on land, through confusion and corruption in the assessment process. Detroit was using assessments next to nil dating from the Great Depression. The Motor City was in a race to the bottom.
While Detroit hollowed out, its suburb Southfield boomed. From 1950-70 it more than tripled from 19,000 to 69,000 people. How? Landowners felt compelled to use land efficiently. The city kept raising land assessments and lowering building assessments. Southfield’s tax base rose by 20% per year.
In 1967, Michigan replaced “BAT” with a corporate income tax. Then in 1975 the state replaced that with its “Single Business Tax” (SBT), another variety of VAT, a tax on gross receipts less certain deductions. Michigan’s SBT has two especially bad features.
One, unincorporated businesses, mostly small, are as subject to the tax as corporations, some gigantic.
Two, real estate, including land, is deductible as a current expense. Yet buying land should not even be depreciable, since land does not wear out, and a fortiori should not be expensible in the year purchased. Imagine owners A and B selling a parcel of land to each other in alternate years, each buyer expensing it each time! It amounts to a great subsidy for holding land. At any rate, by 1980 Detroit had dropped another 20% of its people from 1970. No other state has adopted this kind of tax.
Trying to protect homeowners, in 1995 Governor John Engler took schools off the property tax, putting them on a State sales tax. Legislators shift taxes to business gross sales, and the result is loss of jobs, with homes dumped on the market for a big loss. Displaced workers emigrate with little cash, to start new lives at the bottom of the job ladder.
• Since June, 2000, Michigan has lost 300,000 jobs
• Michigan’s unemployment rate is at 7% and has been for 4 years. Only Mississippi is higher; the national average is 4.6%. Some Michigan counties are at 10%.
• Personal income per capita dropped below the national average in 2000 and has stayed below.
• 22,500 people aged 18-24 have left since 2000. Michigan’s rate of outmigration ranks among the US’s highest.
• As everywhere, home foreclosures are up, sales and prices are down.
As old industries leave, they are not being replaced. What is left behind then but idle land? Once again, Detroit is riddled with holes, and in another of history’s ironies people today are growing food in them to subsist -- “Pingree’s Potato Patches” again, 105 years later. Michigan leaders need to take a page from their own history to begin a new round of prosperity.
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