There's a ton of useful information in today's Daily Detroit, and you'll walk away with a better understanding of how our state works.
I’m joined by longtime budget expert Steve Watson of Watson & Yates to unpack Michigan’s new state budget and what it actually means for our lives.
We get into why “flat” funding can feel like a cut once inflation hits, what’s in the budget for schools and public transit, and a handful of key earmarks here in Detroit — from the Auto Show to free bus rides for students and Right to Counsel.
We also talk about new and renewed tools to keep people in their homes, including the Pay As You Stay program and a state-level low-income housing tax credit.
Then, our conversation turns to economic development and the transformational brownfield deal that could help reshape the Renaissance Center. Plus, why development math is getting harder to make work, and the hard financial truth about why housing here requires state and local subsidies and incentives to get done.
Finally, Steve and I dig into what real, practical reform around property taxes could look like in the years ahead to help get Michigan's residents back on economic track.
There's a lightly edited transcript below.
As always, check out his Substack: https://watsonyates.substack.com/
And of course, follow Daily Detroit on Apple Podcasts, Spotify, or wherever you get shows.
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Episode Transcript
Lightly edited for clarity. Please reference the original audio when quoting.
Jer: Your Substack, The Balanced Sheet, is quickly becoming the de facto publication to figure out what is actually happening with this stuff. I really appreciate all your work.
Steve: Thank you. It’s been a great opportunity to explain some of these complicated subjects to a broader audience.
Jer: For sure. Let’s get into this FY ’27 state budget for Michigan. What’s the top line we need to know — the “what’s the facts, man” perspective?
Steve: Late last week, in an overnight session that went on for 23 hours, July 2 into July 3 right before the holiday weekend, lawmakers in Lansing passed an annual state budget on paper totaling 75 billion dollars for all state and federal funds. But it also includes authorization for an additional 11 billion dollars in spending.
So when some lawmakers say that they actually cut the budget, that’s not exactly accurate, because cutting state spending is very hard. This budget represents a compromise among Democrats and Republicans in the legislature. Republicans control the House, Democrats control the Senate.
Jer: And this is a much better process than it was last year. Much improved.
Steve: That’s right. Last year, the legislature didn’t adopt a budget until after October 1. The state fiscal year begins October 1, and last year the legislature had to pass a very rare temporary stopgap measure to keep the lights on until they could pass a budget.
This year, they had a much more orderly process. The House and Senate each passed budgets and then adopted the final budget shortly after July 1. State law sets a deadline of July 1, which they only missed by a couple of days, so not too bad.
July 1 is really important for school districts, whose fiscal year begins that day and who get almost all their money from the state. They had a bit of uncertainty for a couple days there, but now it’s settled.
Jer: Why don’t we start with education? Because it’s so important.
Steve: When you ask what the state spends a lot of its money on, the answer is education and supporting K–12 school districts, as well as universities and community colleges. This budget includes a 2.5% per-pupil increase for school districts, costing about 320 million dollars.
The budget also creates a new weighted student funding formula, which has long been a priority of Governor Whitmer and Democrats in the Senate. It’s a great way for her to wrap up her final budget in her final year.
What that means is that at-risk or economically disadvantaged students, as well as English-language learner students, will now get an extra boost in per-pupil funding automatically, reflecting the additional costs for their school districts. Before that, there were separate grants provided, but there wasn’t that automatic tie-in.
Jer: There are a lot of little details with this. You say it’s so hard to make cuts, and going through your post, it seems like a lot of things stayed flat.
Steve: For the most part, there are definitely some highlights in the budget, but overall it was pretty status quo. Funding for local governments — municipalities and counties — was flat.
Funding for public transit got a 33 million dollar increase, which was 10 million less than the governor and Senate had wanted, but 15 million more than the House had proposed. Even though that’s an increase, it doesn’t quite keep up with inflation, so local transit agencies will again have close to status quo funding, but no transformational new funding like we saw last year with the road deal.
Jer: This leads me to a deeper question. If the budget is flat, due to inflation, in a way it’s a cut.
Steve: That’s exactly right, and that’s something local governments in particular have felt for 10 to 15 years as funding hasn’t kept up with inflation.
Jer: Let’s talk about specific things for communities. I read a top-line number of about four billion dollars in earmarks that were suggested, but that’s not what happened.
Steve: Correct. This year was the first full year of a new transparency process the legislature passed into law last year, where 4 billion dollars of earmarks were requested and posted online on the legislature’s website for people to review. They held hearings on them, very similar to the process Congress adopted a number of years ago.
Given that there wasn’t an extra 4 billion to spend, the legislature only authorized 125 million dollars for such projects out of the 4 billion requested. These are things important to local communities that individual legislators can bring back home to their districts: unmet needs for water and sewer infrastructure, certain road projects, and even programs right here in Detroit.
Jer: What are some of those local highlights?
Steve: In the budget for Detroit, in the earmark section, there’s 2 million dollars for the Detroit Auto Show, 1.25 million for the Right to Counsel program, which is a big priority of Mayor Sheffield, 1 million to support the mayor’s program providing free bus service to Detroit public school students, and 1 million dollars to support Life Remodeled’s Anchor Detroit project on the east side.
Jer: I was talking to some listeners who came here from other cities. They were surprised that just recently we enabled those free rides for students. But in a large way, that’s because we needed to have the money to do that; the money had to come from somewhere.
I think people sometimes need to get their head around the scale of our budgets. Big cities dominate the conversation on social media or if you moved here from another place, but the scale of things is a little different here, and you really have to be specific about finding money.
Steve: Even though it’s a 75 billion dollar budget and that one item is just a million dollars, so much of the budget-building process for a local or state government every year is continuing what was done in the prior year. Really, all you usually have to work with is whatever little bit of incremental revenue growth there might be, or any new efficiencies you can squeeze out.
Right now at the state level, revenues aren’t growing like they were coming out of the pandemic, just like at a lot of local government levels. Things are getting a bit more squeezed.
Jer: There’s also some stuff in here for low-income individuals and homeowners, which I think is important to our audience.
Steve: As part of the budget process — but not directly in the budget itself — the legislature passed over 60 other pieces of legislation. The budget has to pass every year; it’s required, and it provides an opportunity for lawmakers to get other priorities passed alongside it as part of the negotiation process. To get their support on a specific part of the budget or the budget overall, they want another piece of legislation passed.
What happened last week may be the most legislation that passes all year, as lawmakers now turn their attention to the election and the end of the current session. Among the things that passed was a new state-level low-income housing tax credit to pair with the federal credit, which will provide additional subsidy to enable affordable housing development in Detroit and across the state.
Jer: And then there’s also the Pay As You Stay program.
Steve: About six years ago, the legislature authorized a program called Pay As You Stay, or PAYS, which is a delinquent tax forgiveness and repayment program that counties can opt into. Wayne County has been using this for the past several years.
If someone owes tax debts — they went delinquent on their taxes when they were due — but were otherwise eligible for the poverty exemption, which in Detroit is also called the HOPE exemption, that program says that if, by reason of poverty, you don’t owe property taxes.
So if someone hadn’t enrolled before, their taxes went delinquent, and they were at risk of losing their home, this program they can enroll in will cap the amount of tax debt at 10% of the taxable value of their property and allow them to pay it off in manageable monthly payments over three years.
The Gilbert Foundation has partnered with a lot of these homeowners to pay off their tax debts even faster, make them tax-debt-free, get them enrolled in the poverty exemption going forward so they won’t accrue new tax debts, and ultimately prevent foreclosures. That program was set to sunset on June 30 of this year, and now it’s reauthorized permanently.
Jer: Wow. I think that’s going to be so important. It’s not just Detroiters, right? It’s statewide.
Steve: Counties can opt into it. It’s available statewide, and again, it’s been a huge source of foreclosure prevention here in Detroit and in Wayne County.
Jer: Let’s get into economic development a little bit — something we cover a lot here on Daily Detroit. There was a lot passed around that, right?
Steve: As listeners will remember, the deal to transform the Renaissance Center was always contingent on some additional tax incentives through the transformational brownfield program that needed to be reauthorized and have its cap raised. They’ve been negotiating that for years, and finally, as part of this budget deal, that legislation passed.
The cap for transformational brownfields statewide was doubled to 3.2 billion dollars. That will open the door for Bedrock and GM to apply for this incentive for the Renaissance Center. It will also be available for other projects statewide. That cap had been reached in recent years, so no new transformational brownfield projects were able to happen until this legislation passed.
Jer: For somebody who is new to following this, why don’t we unpack what a transformational brownfield credit is and why it’s so important, especially in Detroit and other economically challenged areas?
Steve: As you’ve said many times on the show before, this is not the state writing anyone a check. It is a capture of growth in tax revenue to partially help support the financing of the project.
Jer: So capturing money that wouldn’t otherwise be there if not for the project.
Steve: Correct.
In total, the Renaissance Center proposal is estimated at 1.6 billion dollars, and this transformational brownfield would probably cover about 250 to 300 million dollars of that.
Normally you think of tax capture as being a property tax thing, but property tax growth can only get you so far. What this transformational brownfield does that’s different is it also allows for the capture of state income taxes and sales taxes on construction to help support the project. It unlocks more revenue sources to make the project viable.
Jer: I want to circle back to that in a second, but before we wrap up the state budget conversation: how are you feeling about this as a professional and somebody who’s spent years doing this? You work with the city of Detroit, you work with a number of clients. How are you feeling about it overall?
Steve: Overall, like I said at the top, it’s a pretty status quo budget. There wasn’t anything too negative about it, and it doesn’t create any new risks for local communities. Yes, local units would have preferred to get more funding, of course, but sometimes as revenues get tighter and squeezed, you focus more on what was protected and safeguarded.
You even saw in a lot of press releases from Governor Whitmer, a lot of bullet points that said, “We’re continuing to provide the same level of funding; we didn’t have to cut it; we preserved; we protected.” That phrasing might seem a little quaint, but it is really important that these programs aren’t cut.
If you go back to the Great Recession and the years after that, a lot of things were cut. The fact that we can actually hold the line on these investments is really important. Things like continuing universal free school breakfast and lunch — that’s been discussed every year: can we continue this investment or not? Now it’s become so regularized that it should stick in the budget indefinitely.
Jer: And having to be in this protection mode — is this a mirror reflection of the economic situation out there? You collect more taxes when people make more money and are doing well. It feels like after the pandemic we’ve been in more of a stasis mode.
Steve: Coming right out of the pandemic, there was a fair amount of revenue growth just because of inflation. People make more money, and the state collects more in income taxes. But it also costs the state more to deliver services, so in some ways that can be a wash.
Since then, as the economy has stabilized, we’re not seeing the same level of growth we saw in years past. The budget process might seem a little less exciting because there aren’t new transformational investments, but continuing to pay for what everyone’s expecting from a service level is itself a good thing.
Jer: Before I let you go, I want to talk about a piece a number of listeners forwarded to me, and I think it ties into a lot of these budget things — specifically the transformational brownfield credit and some of the other credits and programs.
There was a piece in Crain’s Detroit Business late in June that said Detroit housing experts are concerned a “day of reckoning” is near. We’ve had some conversations on the show about it, but basically people are saying the math is starting to not work for them as far as getting developments done or keeping them going. There’s a lot of concern in putting these projects forward.
Meanwhile, with a lot of the public, they’re going, “These folks are wealthy. How can this not work? This is supposed to work. This is a beautiful building. How can this not make money?” Can you help unpack what’s going on out there right now? Some of this is Detroit-specific, some of it is a national situation too. Can you unpack that?
Steve: The cost of construction and renovations has gone up tremendously in the last six years. People’s willingness to spend — whether buying or renting a home — hasn’t kept up with that. That creates a mismatch between what it costs for new housing construction and redevelopment and what buyers or tenants are willing to pay.
Until that math comes back into alignment, it makes doing these projects really hard. One way it can come into alignment is if rents and home prices rise to meet the costs, or alternatively, as you’re seeing with a lot of these tax credit programs and incentives, there’s more public subsidy.
Whether it’s the transformational brownfield program or some of the lower-key tax incentive programs that have been on the books for years, many of those were also set to sunset and were extended as part of this package. Those are the tax abatements you see very routinely on city council agendas and similar places. They had been held up since December, and now they’ve been reauthorized as well.
Jer: Critics will say these are giveaways. Do you see them as giveaways, or do you see them as necessary?
Steve: I see them as necessary. There’s a strict underwriting process that economic development agencies do before authorizing these incentives. The gold standard is that a development wouldn’t happen “but for” this incentive.
Again, they’re temporary incentives, so the local unit of government will ultimately see the gain in tax revenue once the incentive plays out.
But the other side of this development quandary we’re in, especially in Detroit, is our very high property tax rate and the process in Michigan where taxes are initially capped, but then if you sell the property they uncap to market value. That makes it very challenging for folks to get their money back out of a project because they can’t sell the property without losing that property tax benefit.
In this budget deal, one of the things Speaker Hall wanted to do was comprehensive property tax reform. That did not happen, and that debate will continue in the months ahead. It will probably be an election issue. His proposal to cut property taxes by 4 to 6 billion dollars, depending on how you count it, and offset that with a new sales tax on services has not advanced.
Jer: I’ve dealt with this on a couple of levels from listeners. Some listeners who have moved here say their realtors didn’t necessarily tell them taxes were going to pop up like that with a new purchase. They find themselves spending hundreds of dollars more a month in some cases on property tax than they expected, and that’s very difficult.
I also talk to people on the commercial side who have found that it depresses property prices and makes it hard for people to be a new steward of a building. It’s not normal — yes, of course there are legacy owners in the commercial space, but most of the time, after 10 or 12 years you sell it, move on, and do another thing. You need that economic activity. With the pop-up, it makes it almost impossible to make that happen, and that ends up delaying a lot of investments and slowing things down.
Steve: It completely distorts what would be ordinary economic decision-making, whether that’s how you invest in commercial redevelopment or what kind of home a person chooses to live in that best meets their needs over time. Those needs evolve.
When folks have kids, they might need a certain sized home. When the kids move out, they might want a different sized home in a different setup or even a different city or location. Right now, a lot of people feel trapped by this artificial tax benefit we have in Michigan, which feels great when you’re benefiting from it — your taxes are capped at inflation — but when you want to make a new decision, it becomes an anchor. Kind of like everyone who is locked in right now on their low mortgage interest rates.
Jer: This passed in the ’90s, right?
Steve: Yes. In 1994, it was called Proposal A. We’ve had it for over 30 years, and most other states don’t do it this way.
Jer: How do they do it? I’m curious.
Steve: It might seem pretty simple, but they base property taxes on the value of the property. Here in Michigan, we start with that, but then we cap it at the general inflation rate until you sell the property.
That’s one way to provide property tax relief, and it feels really great when you have it. But there are lots of other policy tools you could use to provide more targeted property tax relief, such as Michigan’s homestead property tax credit on the income tax.
Right now in Michigan, we cap all property until it changes hands, which creates an incentive to sit on property when maybe you could sell it to someone who could redevelop it. It becomes an anchor keeping you in a home that isn’t the best fit anymore, because you can’t take that benefit with you to the new home.
Jer: Because I’m a veteran young guy, I remember people talking about this in the early 2000s when I worked in TV. The big selling point, at least as I remember it, was, “We did a great thing for seniors.”
How would you address the senior issue — the idea being that if I’m retired, 65 or 70 years old, I’m here, I’m not going to make more money, and I need certainty on my costs?
Steve: The common refrain was, “We don’t want to tax seniors out of their home.” They’re living on a fixed income; they can only afford so much in property taxes. I totally understand that. This program made property taxes predictable and capped at inflation.
Unfortunately, it also had the unintended consequence of locking them in place even if they don’t want to be. A lot of seniors — my own parents included — needed and wanted to move into a single-floor home as they aged. When they did that, they were in a home that cost substantially more in property taxes.
The better way to provide relief to seniors is through, for example, the refundable homestead property tax credit, where you could target it specifically to seniors with an enhanced benefit to offset property taxes. You could also target it based on income levels. These solutions don’t cost as much as the current system we have and don’t cost local governments anything because it’s all coming out of the state income tax.
Governor Whitmer and Senator Sarah Anthony actually proposed expanding that credit as part of the property tax reform debate. That hasn’t passed yet either, but it could be in the mix in the future.
Jer: Are there common-sense ways to transition this system? People fear change. They say, “I’ve had it this way for so long.” Are there ways to do this so people don’t feel as much immediate pain? How would that work?
Steve: If we went back to a purely market-based system for property taxes, one tool again would be that homestead credit to provide an offset for people who need it most. If we broadened the tax base by making it all market-based, you could also have — and even require — local governments to reduce tax rates.
That doesn’t keep it neutral on a case-by-case basis, but it’s another counterbalancing factor.
Jer: Do local governments create higher taxes to try to get more money when that uncapping does pop up? You don’t know when things are going to sell.
Steve: Detroit is a classic example of having a very high property tax rate because it’s applied to such a low taxable value base. Some of that comes from the history of declining property values in the city, but those have substantially recovered in the last 10 years.
Detroit doesn’t immediately get the benefit of that new revenue because of the cap. We continue to levy a very high rate because the base remains artificially depressed.
Jer: Do you think there’s a chance for some of this reform with new leadership? We’re coming up on an election, and there’s going to be turnover — there has to be, with term limits. Is this something that could be reopened?
Steve: If we were to reform Proposal A, it would need a constitutional amendment, because that’s how it was implemented in the first place in 1994. That’s always a hard sell because you’d be going back to voters asking effectively to uncap their taxes, which can and will sound like a tax increase.
If such a proposal ever happened, it would undoubtedly have to be paired with some sort of guarantee of offsetting tax relief, maybe more targeted. It would be part of a big grand bargain around property tax reform.
Speaker Hall’s proposal to offset property tax reductions with a new sales tax on luxury services could be compelling. It also means that replacement tax revenue for schools and local governments would probably be more volatile, too. One of the bedrock principles of property taxes is that they’re very stable; you don’t see wild fluctuations year-to-year based on the economy, short of something like the Great Recession, which directly impacted property values.
Jer: So to make a dent in this in Michigan, there would have to be a pretty creative solution, because a constitutional amendment — it’s been a long time since we’ve done something like that.
Steve: It could be part of a broader rethinking of how we want to fund local government and local government infrastructure, both of which are substantially underinvested in. Local governments right now — specifically cities, townships, counties — don’t have a lot of revenue sources available to them other than property taxes and whatever the state gives them through the budget every year. As I said earlier, that funding was held flat this year.
Jer: There’s a lot ahead in the coming years. I really appreciate you giving clarity around what’s happening and explaining how these things work, because I think a lot of people live their lives and then bump up against one of the things you’re talking about. This has been an issue the whole time, and if more people are aware of how it actually works, maybe there could be more public effort to make something that everybody could agree on that works for them.
Steve: Absolutely. We’re going to have an election this year, a new governor, a new legislature — we’ll see what comes next. I don’t expect the next state budget process to be any easier in terms of funding new initiatives. Revenues aren’t expected to return to substantial growth in the future.
Jer: I don’t know if you know this, but I’ve got 10 billion dollars hidden underneath the podcast table in stacks of 100 dollar bills.
Steve: Fezzy keeps it well guarded.
Jer: Yes, exactly.
Steve Watson of Watson & Yates — make sure you check out his Substack at watsonyates.substack.com and all the things he does with The Balance Sheet. Thank you so much for your time. I really appreciate you.
Steve: Thanks, Jer. It was great to be here.
