Being poor costs a lot of money. This is as true for state and municipal governments as it is for individuals. On July 18, 2013, the city of Detroit filed for bankrupty at great expense. Litigation with creditors alone cost tens of millions, not to mention it had been borrowing money at interest rates over 10%. The city’s infrastructure, museums and parks were put on the table for sale, beggaring its quality of life. Even before its bankruptcy, public service budgets were decimated, prompting those who could afford it to move, thus depleting its tax base and exacerbating the crisis. At a time when the Federal Reserve was throwing money at any bank that asked for it, there was no bailout for Detroit through the purchase and retirement of municipal bonds. However, could Detroit have generated its own bailout? I think so.

Operationally, the US government has an unlimited budget because they can print the dollar. The interest rate on a US treasury is called the “risk-free rate” because the US treasury bill literallly has no operational default risk. (Politicians choosing to default by refusing to increase the “debt” limit is a different issue.) A helpful analogy is to think of the US government as Madonna. As long as Madonna is alive, there is nothing that can operationally prevent her from giving out her signatures. Whether she should do so, depends on the circumstance. And if Madonna dies, well….if the US government “dies” we’ll all be screwed, so treasury bonds will be the least of our worries.

Unlike the Federal government, state and local governments that operate within the “dollar-zone,” however, need to budget their expenditure. Traditionally states and cities fund schools, police and fire departments, homeless shelters, and other public services through a combination of taxes and bond sales. Leading up to 2013, neither of these was a viable option for Detroit. The country was in a recession and the city had lost too many people to effectively increase taxes, and creditors were charging a very high interest rate for bonds.

So what could Detroit have done leading up to 2013 to fund its homeless shelters and police departments? It could have funded public services by issuing dollar-denominated property tax receipts. Like Madonna has unlimited signatures, Detroit has the power to issue an unlimited number of property tax receipts. Specifically, its important that they be property tax vouchers because every household and business in Detroit needs to pay property taxes independent of income or revenue. So shops, restaurants, and individual employees would have all accepted dollar dollar-denominated tax receipts as payment, thereby immediately increasing liquidity in the city and allowing the city to properly fund itself. An organic, free-range, locally-grown bailout.

This idea can be applied to states and cities outside of Detroit too. It might prove to be a useful tool in solving the homelessness crisis in California. It is not a fairy tale solution however, and it should only be used very very carefully, especially if enacted in small localities. On a state-wide scale, it would be much more robust.

Here are some of the caveats. Property tax receipts are only worth something if you need to pay those property taxes. If the city of Detroit had needed to purchase something from a company in Texas, it might still need to fund the purchase in USD. Issue too many property tax receipts, and the city or state’s dollar income might drop, hurting it in the long run. The tax receipts might also get securitized and traded on secondary markets which are open to speculation.

Despite many of the downsides, I think this is a useful tool available to all local governments, and can be very effective if used properly and carefully. Local property tax vouchers should not be used as a replacement to collecting taxes in USD or issuing bonds, but used in conjunction with the two.