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This month and next, the Tax Hound looks at Benton Harbor and Detroit, Michigan. How are two troubled cities using tax policy to sustain or revitalize themselves?
In an effort to attract desperately needed tourist dollars, Benton Harbor, Michigan, is home to an annual triathlon. But when my husband I were planning our trip there this summer (he’d compete, I’d watch) our neighbors had some advice: “When you go, don’t hang out in the actual city. Try St. Joseph,” the town next door.
Once there, I understood. Benton Harbor’s roads were in bad shape. Its sidewalks and green space suffered from neglect. There wasn’t much retail and few good hotels or restaurants. Race attendees parked in town and headed straight to the staging area. Once the race ended, many drove straight to St. Joseph to dine or relax on the beach.
Benton Harbor sits on Lake Michigan and on the St Joseph River. Despite those advantages, it is a classic case of a failing Midwestern industrial city. It has been in financial distress for years and is the poorest city in Michigan. Its population is down to 9,919 from a peak of over 19,136 in 1960. The median household income is about $18,000, and 50 percent of its residents live in poverty. An emergency financial manager controlled the city from 2010 to 2014.
Since 2015, Benton Harbor has received $1.6 million through Michigan’s “Financially Distressed Cities, Villages, and Townships” grant program. It has used the funds to improve its water and public safety systems, manage blight, and better appraise property.
Now, the Mayor and city council want to put a new local income tax on the November ballot, joining 22 other Michigan cities with a similar levy. The tax would augment those state grant dollars to improve city services and infrastructure. Residents and businesses would pay a 1 percent income tax. Non-residents would pay 0.5 percent tax on income they earn in the city. There are no studies to indicate how much revenue the tax would raise, though a town of similar population raised about $1 million from a comparable levy in 2015.
At first, I thought, “Great idea!” East Lansing voters will consider such a measure next month to help fund its public pensions. But an income tax needs a reliable tax base and willing payers. Does Benton Harbor have either?
In 2013, the city’s residents rejected a similar income tax proposal, 667 to 543. This year, a poll conducted by the local chamber of commerce finds that 89 percent of its members are opposed to the levy. Some say it will only drive the remaining business to neighboring cities that don’t tax income. Like, say, St. Joseph.
Case in point: Benton Harbor’s largest employer is the Whirlpool Corporation. It has been in town since 1911 and at its peak employed 2,400 people in the city. It has long since shuttered its manufacturing operations, but between 2010 and 2016 spent $155 million to renovate and build two facilities in Benton Harbor that are home to over 1,500 corporate and engineering employees. It also made a corporate donation of $3.8 million to support city services. (The emergency financial manager used the money to fund the police pension plan.)
In exchange, the city council, led by Mayor Marcus Muhammad, awarded the company a 12-year, $3.8 million property tax abatement. Whirlpool won’t pay Benton Harbor property taxes again until 2024.
Mayor Muhammad may be regretting that deal. In 2016, he said “If (Whirlpool) were paying taxes on all of their properties, that would feed the general fund and make the city itself more financially stable with more tax revenue to provide better city services.”
The new income tax would be an effort to make up some of that lost revenue. But unsurprisingly, Whirlpool is no fan. A corporate spokesman said that if the income tax passes, “We will certainly avoid creating any future jobs in Benton Harbor and instead focus on relocating jobs elsewhere in the area….”
So Benton Harbor may be damned if it does, and damned if it doesn’t. It needs revenue to support municipal services, but its shrinking tax base might get even smaller if an income tax passes. What it really needs is new businesses, not new taxes.
The dilemma illustrates, rather painfully, club theory in economics: There’s a point at which there are benefits to belonging to a club of a certain size. Benefits begin to diminish once club membership grows too large. Likewise, a member won’t see benefits until the club is large enough. Benton Harbor was a nicely sized club in 1960. Given today’s financial and demographic trends, it may be a club whose dues are just too high, even without a tax hike.
Could Benton Harbor consolidate with another jurisdiction? Perhaps, but would residents want to give up their local identity? Would another jurisdiction want to have Benton Harbor join its club?
These are tough questions to answer, let alone act on. They make completing a triathlon look easy.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment, or send an email.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Alessandro Trovati/AP Photo