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Stephen Henderson: Help Detroit break its high-tax habit

Like an addict who can't see that the drug will eventually kill him, the City of Detroit needs an intervention to jar it from a destructive reliance on excessive taxes.

When the city's low census numbers made it legally impossible to maintain the state's highest income tax rate and a unique tax on utility bills, Mayor Dave Bing did the equivalent of going to the pusher for just one more fix.

The city couldn't survive without the money, the mayor told the Legislature. The 2.5% the city takes from residents' paychecks, the 1.25% it extracts from those of nonresidents, and the 5% it tacks onto gas and electric bills amount to a quarter of a billion dollars, with a good slice of it coming from some of Michigan's poorest residents.

Last week, the state House indulged, and lowered population thresholds for levying such taxes.

At the 2011 Mackinac Policy Conference, Mayor Bing referred to this as a budget win.

Hooray! We get to keep our destructive habit.

But the Senate, which must concur in the House action, should act instead to wean the city from its habit -- but without the shock of instant withdrawal.

Vince Keenan, a good friend and founder of the Detroit voter-education organization publius.org, makes the sensible suggestion that the Senate should put an expiration date on these taxes and lower them annually between then and now.

First, start to cut the income tax rate for residents to bring it into parity with the rate for nonresidents. Then roll them both back, over time, to nothing. The utility tax could be reduced by one percentage point per year until it's gone.

Such actions could literally save Detroit's fiscal life -- and make it a place that's free of an ugly disincentive that is driving residents and businesses away.

The sad truth is that in seeking to renew the taxes, Bing missed a great opportunity to begin a meaningful conversation about the city's polluted tax environment.

It's a given that going cold turkey on the taxes would be catastrophic. But managing them down over time is not just possible, it's mandatory if Detroit is going to build on its momentum for revitalization.

When you add up all the taxes city residents pay, it equates to 99 mills -- more than triple the average homestead levy in the state. (For businesses, it's double the tax burden in other cities.)

Detroit taxes are high enough to give any family good reason to live elsewhere, especially since city services are hardly equivalent to other cities with lower taxes.

The net effect is scarily similar to a drug habit.

As residents leave, the taxes generate less revenue, which makes the city, always scrimping and scraping for every dollar, even more dependent on them.

And the more the city needs the money just to get by, the less likely its leadership is to initiate any substantive talk about getting rid of them.

But Bing really has no choice. Just 10 years ago, the income tax yielded nearly $400 million; today, it is projected to bring in just more than $200 million. And those projections are probably rosy; population loss could take those revenues even lower.

Thus the taxes, which are helping to kill the city, are also killing themselves.

Bing needs to manage the inevitable decline, and begin talking about the structural changes that will be necessary to accommodate a loss of tax revenues.

Without a doubt, he has already mulled reforms. Some of it is just common sense, stuff that has been discussed over and over: Getting the city out of non-core services. Renegotiating contracts and reconfiguring future pension obligations into a 401(k)-style plan. Regionalizing transit. Paring back on employees in a city that still has more per resident than most similarly sized places do.

I understand the mayor's yearly focus on patching a budget that has persistent holes, and he usually discusses the need for structural reform in that context. But he should also be talking about achieving those reforms to help ameliorate the city's crushing tax burden.

Of the city's many levies, the income tax and the utility tax are the easiest to just get rid of, given the constraints on property tax rates. (Even if the mayor decided to lower them, other taxing authorities assess their own mills on city dwellers.)

The census drop was an opportunity for Bing. He missed it.

The Senate can help him, and city residents can start kicking their high-tax habit.