Ann Arbor City Income Tax Study

Was this provided by the city voluntarily or was a FOIA needed? I thank you for posting this as well as all of the other government articles / posts. Great work!

If there is a city income tax I may have to move. I already find it hard to justify the property taxes.

I compared the 2004 and 2009 projections using the 3,000 personal exemption calculation (single person would pay 1% on all income above 3,000).

It costs money to get more money through an income tax. The cost to administer the tax went from about 1.5 million in the 2004 study to about 3 million in the 2009 study. The cost increase was because cities reported higher administration fees in the latest survey. $3 million would pay for the 25 police officers the city lost from the early retirement program.

From a tax policy perspective, income tax is a less stable form of revenue. The 2004 study projects $45.6 million in income tax revenue in 2009. The 2009 study projects $36.8 million in income tax revenue in 2011. Projected property tax revenues are $30.6 million and $28 million, respectively.

If an income tax is passed, the city charter requires that the 6.1682 operating millage be eliminated. For homestead properties, this is 37% of total taxes paid to the city. Based on the 2008 millages published in the 2008 audit, the operating millage is about 13% of the total tax bill (city, county, schools, etc). Ann Arbor taxpayers would still pay the special millages for employee benefits, streets, parks, transit, solid waste and debt service.

One other issue Karen. Did you notice the drop/shift in the share paid for by business property owners? It’s a major decrease as well, while the share paid for by resident property owners actually increases under the income tax plan.

It would be more accurate to say that the burden shifts to individuals residing in Ann Arbor, vs. corporations (not necessarily property owners) based in Ann Arbor. From the report:

“Under the current property tax system, non-residents do not have a share of the burden, while individuals and corporations share the burden at 54% ($15,124,000) and 46% ($ 12,884,000),respectively.”

“Under an income tax system, the burden would be shifted to approximately 60.3%($27,605,000), 32.4% ($14,818,000), and 7.3% ($3,340,000) for residents, non-residents, and corporations, respectively.”

I suspect that some of this shift in burden is because non-property-owning residents would be paying taxes directly to the city for the first time. Of course renters pay indirectly through their rent, but market forces may keep the rent from reflecting that cost (if increased or decreased) in perfect proportion.

Re: [4] “… while the share paid for by resident property owners actually increases under the income tax plan”

Alan, I’m not sure if you’re referring to the numbered page 23 with the bar chart, but assuming you are, it shows clearly that it’s “residents” per se whose share increases, but doesn’t break down how that share is distributed among resident property owners and resident renters.

For residents, the * on the figure for the revenue under an income tax keys to “Includes many additional taxpayers,” which I take to be renters. It could well be that not all of the increase depicted there for residents is accounted for by adding in resident renters … but based on that chart it could go the other way, too, right? That is, it’s possible that the increased burden to residents is actually borne more by renters than by property owners.

Apologies in advance if that’s not the page you intended.

I always thought that if we had to have taxes, the fairest model is a sales tax. If we kill all property and income taxes and only assess sales tax, the number one priority of the city government will be to ensure that the city has active commerce. From restaurants to stores to production, if the city isn’t fostering a climate for business, then the city doesn’t get money. An income tax model while the state of Michigan continues to lead the nation in unemployment is a ridiculous idea and any money going into the study or administration of an income tax during this time is irresponsible. Additionally, I question job growth projections at a time when jobs are being lost and businesses are closing.

Re: [7] Fred, welcome to Michigan! We’ve got exactly four sources of possible revenue: (i) property tax (ii) income tax (iii) fees for services (iv) state revenue sharing — in the form of a statutory amount and a constitutional amount.

So we couldn’t implement a city-wide sales tax even if we wanted to.

Can cities in Florida (where I think you’re from originally?) levy a city sales tax?

Kirk Profit used to explain to us when I was on the Board of Commissioners that the state revenue-sharing was put in place to compensate municipalities for the loss of local taxing authority. There are so many opportunities denied to us. (A surcharge on UM football tickets, for example.) Unfortunately, a lot less revenue has been “shared” over the last 8 years.

Dave,

In Florida the counties can add to the state sales tax upon approval of voters. The state sales tax is 6%, but many counties have added on it (most of the counties that impose the surtax are at 1%, but many are just .25 or .5%… the range allowed is .25 – 1.5%). It’s a decent way of collecting additional revenue and both allows the counties to work towards bringing in more sales as well as keeping Florida without income tax. So, a city cannot levy it, but the county can. Some other taxes have been gas tax (a few cents a gallon) and others. The state voted very strongly to not increase property tax and income tax is prohibited.

Spending a lot of time in Gainesville (similar to Ann Arbor in terms of big college town) was that the property tax increases were unfair to residents, as a tremendous amount of resources went to assist entities that did not pay property tax (ie State buildings, etc.). For example, the loss of Pfizer to public hands takes away a good amount of money from the county, and yet the toll on streets, etc. will be a heavier burden on the city/county as traffic and use increases. For that reason, I’ve always been in support of taxes (that is when you need tax, as I’m very anti-tax). I see it as more of a reasonable way of garnering use compared to residency. For example, out of state students will spend a great amount of money in the county and yet won’t be subject to property or income tax. Visitors coming to UM, dining downtown, or shopping here will help the community and the number one focus of the government can be to bring more people to help the economy. In football games alone, instead of just the State gaining sales tax, the county itself will benefit greatly from hotel visits, liquor purchases, and everything else bought and sold locally during the season. And that small percentage can grow very quickly.

Fred–I like your ideas. Sound smart. But if Dave is right in quoting the options, it ain’t got much of a chance to meet our short term needs. Got any ideas for getting from here to there?

Dave, you are right. I stand corrected. But the shift is away is away from corporations unto individuals, both residents and non.

An city income tax is, generally speaking, a sign of a community in decline. This is because its selling point is that it can tax people who do not choose to live in the central city (i.e., Ann Arbor).

An income tax tells us that many people believe that the services received by central city residents is not worth the taxes they would have to pay if they either 1) moved in to the current city boundaries, or 2) were annexed into the city in their current homes.

The longer we choose not to examine the mix of services received vs taxes paid, the more current residents will choose to leave the central city (Ann Arbor) for Scio, Pittsfield, Ann Arbor, or Ypsi townships, and the more that newcomers will choose to locate in one of these townships. The attempt to tax others so that we do not have to look at ourselves will only exacerbate our current fiscal problems.

Fred, have you ever thought about running for election? We could use someone who is willing to do exactly what you have said here.

The last time I checked (1986). Amm Arbor was the only major city in Michigan without an income tax. Many very high income people live just outside Ann Arbor and use our facilities every day while working here. Why shouldn’t they share a small part of the burden for providing those facilities? We cannot tax the University but its employees could be taxed a small percentage if we had a city income tax.

This is from the state’s website:

Individual Income Tax

What cities impose an income tax?

Answer:
For 2008 the following Michigan cities levy an income tax of 1% on residents and 0.5% on nonresidents.

Albion, Battle Creek, Big Rapids, Flint, Grayling, Hamtramck, Hudson, Ionia, Jackson, Lansing,

Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Springfield and Walker.

The exceptions to the above rates are as follows:

City Residents Nonresidents
Detroit 2.5% 1.25%
Grand Rapids 1.3% 0.65%
Highland Park 2% 1%
Saginaw 1.5% 0.75%

Not exactly a list of places that have seen big time economic growth since 1986.

Mr. Felt,

My point is that when people find that services delivered are not worth taxes paid, they move out of the city. Chasing people with higher rates for services they no longer use is part of what contributes to sprawl. The long-term effects of a city income tax are to drive jobs out of the taxing city, so as to avoid the tax altogether. Look at the cities that charge an income tax: Detroit, Flint, etc.

If people in the townships believed that Ann Arbor offered a good basket of services for the taxes it collects, they would be asking to be annexed. Do you know of anyone in Scio who wants to be annexed into Ann Arbor? This is the real issue at hand. Chasing people with taxes is an attempt to avoid looking at why they don’t want to be part of our town.

John–I’ll be a data point. I work in Ann Arbor (at the U) and live in Scio, and wouldn’t be opposed to paying a modest income tax to support my impact on Ann Arbor. The main concern I have is the added complexity, not the added cost. (I doubt my employer will be moving, by the way.)

Here in the libertarian paradise that is Scio we have very low taxes and as a result even our ridiculously inadequate package of services is probably unsustainable. Taxes are something no one loves, but living in a place without adequate funds to pay for police, fire, parks and road repairs is even worse.

So–I look enviously on the services Ann Arbor is offered, but that doesn’t mean I want to be annexed. I just want Scio to be less irresponsible.

1) I agree that non-rural living does not come cheap, and so I am happy that you are eager to subsidize my city services. Thank you, the streets near me need repaving! But seriously, folks… it may well be that there are dieticians in Whitmore Lake and x-ray techs in Milan who agree with you.
2) I share your suspicion that taxes will rise to provide greater services in the townships inside the Ann Arbor Schools boundary. My point is that many people share your aversion to Ann Arbor taxes in exchange Ann Arbor services, and that we in the city need to pay attention to this. People don’t think our services, however much they may like them, are worth our taxes – that’s why they don’t want to be annexed. If we ignore this, we will become just another failed American central city, instead of a vital center of innovation, based on high quality of city life. As seductive as it is to tax you to pave my street, what will really be paved is the road to civic perdition.
3) I agree, the U’s outpatient surgery center east of town, on Plymouth Rd., not withstanding, it is hard to imagine many existing university jobs immediately relocating outside the city. I find it easier to imagine new jobs from say, engineering service companies, locating outside of town. State Road comes to mind.
4) I am curious, what exactly is your impact on Ann Arbor that causes you guilt? Are you robbing banks, vandalizing parks, starting fires, driving the heavy trucks that crush the roads, picking bar fights? This is mostly tongue-in-cheek, but I do want to know what you imagine your impact to be on the city budget.

Like Rodii, I live in Scio just outside of Ann Arbor, and like Rodii, the majority of my discretionary time is spent within Ann Arbor. Unlike Rodii, I do not work in Ann Arbor, so a change from a property tax to an income tax will not affect how I pay for Ann Arbor City services. The only way Ann Arbor really “gets” me is in the fee differential between residents and non-residents for city sponsored programs. What about a city consumption tax as an alternative to a city income tax?

An income tax for the pleasure of working or living in Ann Arbor is a reason to no longer live or work in Ann Arbor. One of my heros is Ben Franklin, and honestly I wonder how he would feel about imposing an income tax on the people who don’t live, but only choose to work in Ann Arbor. This tax for non-residents provides income to the government from people who cannot vote on any issue before the city. Taxing in this manner provides the government the ability to levy fees on person who will have no direct representation on the body governing and collecting those fees. Sound familiar? A catalyst to the forming of this country was the very same action and resulted in the saying “Taxation without Representation is Tyranny.” It also led to a revolution.

Feeling guilty about your impact on Ann Arbor is exactly what the government wants you to believe. Now think of this… What if your impact was actually positive? What if the whole reason Ann Arbor provides jobs and businesses can be traced to people like you that come into the city, purchase anything from gas to lunch, and then leave? You are exactly what works great for the city. You provide revenue to businesses who pay taxes, you don’t consume needs for most city run services, and yet they have you convinced that you should do more. Your employer even has it’s own police department and provides localized services on campus that do not need city involvement. And unlike other employers, they do not pay taxes. Recently your employer even took away revenue by purchasing property.

There is no reason for you to feel guilty about your impact on Ann Arbor. Without people like you commuting here, businesses would close, Ann Arbor would lose more revenue, and people would lose jobs. Instead of you feeling guilty, you should feel pride. And you should also feel that taxation without representation is tyranny.

Guilt? Huh? Discussions generally go better if you don’t caricature the opinions of the people you’re talking with.

I add to congestion. I use the parks. I took up the valuable time of that nice police officer who ticketed me on Plymouth last spring :). I use the sidewalks. More diffusely, I benefit from the overall quality of life that living near a decently well-run city provides. This isn’t about guilt, it’s just about being willing (not eager, just willing) to pay for the amenities I use.

By the way, I live in a state whose government, in which I am represented by elected officials, explicitly allows local governments to oppose an income tax. So I think it’s an overstatement to claim that this is taxation without representation.

Look, I’m not lying on my back and offering my belly in submission to Ann Arbor. I’m simply saying that as one individual with interests in the city, I’m not troubled by the idea of a modest tax. There’s a big gray area between simply handing over my wallet and waving the Live Free or Die flag. If, as a non-resident making under $100K a year, I have to pay under $500 to the city in return for parks that are mowed and beat cops on the streets downtown, I can do a simple cost-benefit assessment and say “OK, that’s worth it to me.” You have a point about the larger systemic consequences and they should be weighed carefully and realistically. Dragging out poor old Ben Franklin isn’t that. (I confess also not always being early to bed and early to rise, so I’m sure Ben would already be unhappy with me.)

(Er, propose, not oppose.)

It is great that people who don’t live in Ann Arbor but work or party here desire to support us who do live here.

Many (most?) people who work or party here, and who identify with the city as “theirs” in some fashion, but live outside city limits, do not want to actually be part of the city. This is – or should be – a red flag. “Nice place to work and visit, wouldn’t want to live there” tells us that what is going on with taxes and services in Ann Arbor is not viable.

The point is not that some great people are happy to chip in to support us, like a worthy charitable cause. The point is that when push comes to shove, they don’t want to be under the tax authority and political jurisdiction of Ann Arbor. Ann Arbor ignores this warning at its peril.

Actually, it’s not the taxes and services. It’s the price of the type of house that we want. Single family newer construction with attached 2 car garage and 0.5 acres under $500,000 is hard to find, unless you go to Foxfire in NE Ann Arbor; in which case you might as well be living in the townships, since it’s so far from highways and/or stores.

Fair enough, John.

I think Plante & Moran gets paid a bunch of money to come up with these studies and I would like to see actual data on how this stuff works out in the long run for the residents in the cities who have gone this way.

I do give them credit, they have come up with a political argument (blame it on those who party/work here but don’t live here) but I don’t think I will end up saving a dime in the long run. I certainly don’t think this city /government/administration has the fiscal discipline to truly reduce costs and effectively provide services.

I look at the new facilities being built and money spent on making them pretty and I am unimpressed with the results.

I look at the emails about our dim lights and I think we have personally ambitious people running scripted games for public view and something else going on behind the scenes. All this while I drag my city assigned trash can down the block over the snow the city plowed onto my side walk and then put the darn thing back in its spot that is patrolled by the city and I think wow – maybe this city “governs” too much and provides too little in actual results.

I thought of it recently when my sidewalk was torn up for the repair the city demanded but inspection didn’t happen on time because of “art fair?”.

So, I don’t think a new rubric for taxing me should start with a program that costs nearly 1/2 as much money as it raises and taxes my time and effort on top of some percentage of my income.

No, this is a bad idea that has found a good political argument and in the long term it is just an additional tendril in my pocketbook from the city. Another way to tax and raise taxes.

No thank you.

JCP2,

I understand that the housing you desire is not now in Ann Arbor city limits. My point is that people in the townships, especially those inside the AA school district, do not want their current homes to be annexed by the city, because they do not view the city’s mix of services to be worth the taxes they would pay if they were taken into the city. This, I suggest, is the warning the city needs to take seriously. Instead of taking this warning seriously, and reconsidering both the services that are delivered, and the taxes residents have to pay for them, the city proposes to tax people outside its borders without granting them representation on council. I believe this to be a problem on practical, as well as philosophical grounds.

Mr. Johnson,

Thank you.

I’m curious about how/if renters will be protected here. When the landlord’s property taxes go away, I don’t anticipate landlords will lower rents, so the consequences for renters seem uniformly negative. Anyone have a rough idea of what an average student ghetto house costs in property taxes?

John,
What services are you thinking that the city needs to reconsider?

(By the way, John (and please call me Rod) I live in Scio because the type of housing (a cohousing community) I live in would simply have been impossible to build in the city. It was hard enough in Scio to build anything but a McMansion. I would very much like to have been able to do it downtown or at least in town, but the complexities of that process, not to mention the cost of real estate, made it unthinkable. So maybe my willingness to be taxed goes hand in hand with my atypical-for-Scio desire to live in the city.)

It is worth repeating the data suplied by homeowner. Eighteen Michigan cities charge an income tax of 1% on residents and 0.5% on non residents. Four more charge even higher rates. Why shouldn’t Ann Arbor use the same system to help lower its property taxes and shift a small part of our operational burden to those who use our services but don’t live here? Is Ann Arbor so special that it can’t behave with a little economic rationality like most other Michigan cities?

An lets not forget all those industries have stayed in Ann Arbor because we did not charge an Income Tax: King Seeley, Argus Camera, Pfeizer, and how many other former Ann Arbor employers?

Given that the university is the city’s largest employer, a city income tax would be a lovely way to “make up for” the property taxes not collected on the enormous amount of land owned by umich. Sort of a backhanded PILOT (payment in lieu of taxes) program in which the university feels no real pain – unless a city income tax would translate into an offsetting wage increase for umich employees (I don’t think so!).

If non-residents should pay a city income tax, why must city residents who work outside Ann Arbor pay 1%? The services delivered by the city cost far more than surrounding communities. We will move outside the city to avoid paying the income tax. Why does the City need additional revenue? Our police no longer patrol U-M property. Think of all the speed traps and no left turn signs with police just waiting to write tickets for revenue. Is this how the police serve and protect us? The city still has many pet programs (non-profit contracts)of Council members that far exceed what other communities spend. I think you should read the City’s labor agreements and find out more about excessive employee salaries, benefits, and retirement packages. Why raise more money for an overpaid organization that is not performing?

Why does the city need additional revenue? Good question. According to information in the latest audit reports published on the state website, combined per capita property taxes and income taxes (for cities with an income tax) are $703 for Ann Arbor, $359 for Kalamazoo, $633 for Lansing, $502 for Grand Rapids and $447 for Sterling Heights.

City finances are controlled by the 5 member Council Budget and Labor Committee (Hieftje, Greden, Higgins, Teall, Rapundalo). They have failed to effectively address the most significant financial issue facing the city, which is retiree health care. The eligibility age to receive retiree health care (currently age 50) should have been raised years ago for the 20% of the work force that is non union. Instead, these 5 members of council allowed continuation of the practice of giving management the same benefits as management negotiated with the unions.

The Budget and Labor committee also failed to follow through on the 2005 recommendations of the Mayor’s Blue Ribbon Committee. This committee recommended placing a charter amendment before voters that would change the membership of the retirement plan boards so that they would no longer be controlled by employees. Several months ago, this employee/retiree controlled board voted to give a benefit increase, despite the fact that the city pension plan had lost $100 million in the market. Now city taxpayers have to pay for the $100 million loss plus the benefit increase. And let’s not forget the cost of the early retirement program for police which will show up in the next actuarial calculation.