Ann Arbor City Council work session (Aug. 13, 2009): Towards the end of the city council’s Thursday evening work session on a possible city income tax, city administrator Roger Fraser asked the council for some direction. Here’s what he wanted to know: Should city staff place an item on the council’s Aug. 17 agenda that would allow the council to put the tax before the voters in November?
In response to Fraser, Marcia Higgins (Ward 4) said she wanted more dialogue on the exact percentage of the tax to be levied, even if the ballot language specified “up to 1%.” Carsten Hohnke (Ward 5) followed by saying it was clear that his colleague, Sandi Smith (Ward 1) had requested additional case-study scenarios for individuals and that he himself had wanted some cross-checking of commuter numbers with the city’s transportation staff. “We don’t do the community any favors by taking the conversation to the next level without more information,” Hohnke said. Sabra Briere (Ward 1) then advised that she thought an emotional reaction could be addressed, if people first became more knowledgeable – she herself had had problems correctly interpreting the charts in the city income tax study.
Finally, Tony Derezinski (Ward 2) declared, “Let’s cut to the chase. I think there’s a consensus we should not have it before us on Monday.” And no one disagreed with him.
Barring surprise, then, the Aug. 17 council meeting will end without the council authorizing the placement of a city income tax on the November ballot. That will be the last opportunity council has to make such a decision. It’s therefore almost certain that the ballot in November will not include a question on a city income tax for Ann Arbor. Based on council discussion during the work session, a city income tax will, however, eventually be given serious consideration as a May 2010 ballot issue.
In light of the prospect of a May 2010 ballot question, it’s worth noting the kinds of issues councilmembers raised with Fraser and the city’s CFO, Tom Crawford. We’ve also folded into this report an account of a recent meeting sponsored by the Ann Arbor Area Chamber of Commerce about the proposed tax.
Rather than portray the content of the work session chronologically, we’ve grouped topics thematically, and included the issues that councilmembers raised with city staff.
What’s Behind Consideration of Alternative Funding?
Fraser sketched out briefly the rationale behind holding the work session about the possibility of a city income tax. Sabra Briere (Ward 1) had indicated her concern, Fraser said, that the council had not had a chance to talk amongst themselves about the implications for such a tax.
The current conversation about such a tax, Fraser said, could be traced back to at least December of 2008 when the city staff had indicated that they felt there were serious implications in the second year (FY 2011) of the two-year budget cycle they were planning at that time. The challenge they faced back in late 2008 and early 2009 was to trim 10% of expenditures over the course of two years. That strategy already included such measures as the closing of the senior center, the closing of Mack pool, and the elimination of 14 firefighters.
“We owe it to the community to describe what we’re facing,” Fraser said. The choice, Fraser continued, was to “live with these changes, or pony up more.”
When Would a City Income Tax Start to Help?
In light of the dire forecast for FY 2010, which Crawford had given at the council’s last meeting, Sabra Briere (Ward 1) wanted to know what kind of projection Crawford could make about when the implementation of an income tax would have an impact.
After implementing a city income tax, Crawford said, he estimated something like 70% compliance in its first year. It might take two, three, or even four years to achieve full compliance – that would depend on the effectiveness of the system. When could it be implemented, assuming it were on the ballot and passed in November 2009? Not until January 2011, said Crawford, which is already into FY 2012, leaving the projected hole in the budget for FY 2011 unaddressed. Briere suggested that this meant that passage of a city income tax in November 2009 would have no impact on the elimination of the senior center, closing of Mack Pool, or the reduction of the firefighting force by 14 people.
While Crawford agreed with Briere’s characterization of how the timing of additional revenue would work, he said that the anticipation of revenue could have an impact on how they treated the FY 2011 budget. Staff would not necessarily recommend cuts that could easily be undone the next year.
Leigh Greden (Ward 3) asked whether the implementation of a city income tax would have an impact on plans to lay off 14 firefighters. Was this a means to fill that gap in a short time? Crawford stressed that the point of his presentation to council at its previous meeting was to make clear that even after eliminating firefighter positions, there’d be a new problem to deal with.
Crawford stressed that an income tax is a tool to fix a hole, not a means to get revenue to undertake new things.
Fraser added that there was nothing on the horizon to give them optimism, and that the city needed to plan for something it could live with for the next 3-5 years.
Alternative for Raising Revenue: Headlee Override
The Headlee Amendment limits how fast property tax revenue can rise to no more than the rate of inflation. The effect is that even though a millage rate of N might be authorized, only some percentage of N is actually collected. It’s possible to override the Headlee Amendment and restore the full millage rate of N. In Ann Arbor’s case, the authorized millage is 7.5 mills, but Headlee has reduced this to around 6.8 6.1682 mills.
Sandi Smith (Ward 1) confirmed with Crawford that the Headlee override, if passed in November 2009, would be effective July 2010. Crawford pointed out that even if the Headlee override were passed, revenue would remain subject to the same state laws and would thus consistently go down. He characterized a Headlee override as doing more of the same thing that they were already doing. On the other hand, an income tax, said Crawford, would stabilize things. Fraser added that the greatest benefit to an income tax is the redistribution of the burden, with the achievement of the greatest chance that revenues would keep pace with inflation.
However, along with the possibility of implementing a city income tax, Fraser said, it was also fair to contemplate asking voters to override the Headlee Amendment. That would restore the millage rate collected for general operating expenses to the full 7.5 mills specified by the charter.
Smith wanted to know how much additional revenue a Headlee override would mean for the city. Answer: $6 million.
General Constraints on Revenue Generation
The city is also constrained – like all other municipalities in Michigan – by state law, which prohibits the city from enacting anything other than property or income taxes. People often suggest, said Crawford, that the city apply a tax to University of Michigan football tickets – but state law would prohibit the application of such an entertainment tax. The replacement of a portion of the property tax with a city income tax, Crawford said, would mean a re-balancing of the tax burden – away from property owners.
Comparison to Other Communities
Sandi Smith (Ward 1) requested a comparison for similar cities like Madison, Wisc. and Austin, Texas, both for individuals and small/medium-sized companies on the overall tax burden. With respect to individuals, Crawford said that there’d been a 10-city comparison for individuals – including Chapel Hill, N.C., Boulder, Colo. and Madison, and that Ann Arbor was somewhere right in the middle with respect to disposable income and property tax burden.
In response to a question from Tony Derezinski (Ward 2) about what Ann Arbor might learn from a comparable city like Lansing, Crawford said that Lansing had been particularly useful in benchmarking the cost of administering the income tax. According to the city’s income tax study, the estimated cost of administering the city income tax would be around 7.5% of receipts.
In response to questions from Margie Teall (Ward 4) and Derezinski, Fraser and Crawford explained that it was difficult to benchmark – even against similar communities. Fraser said that Wisconsin works out support services for communities like Madison in a way that Michigan did not. Asked whether Madison had a city income tax, Crawford was not sure.
[When The Chronicle followed up by phone with the Madison city clerk's office, we learned that Madison does not levy a city income tax – it's precluded by state law. Wisconsin cities do, however, have the ability to increase the state sales tax for their benefit.]
University of Michigan’s Role
Crawford gave a quick overview at the start of the work session before fielding questions from council members. One highlight was the fact that 40% of the land inside the city is not subject to property tax. That 40% is owned either by the University of Michigan or the city itself.
Tony Derezinski (Ward 2) did a quick ballpark calculation on the $12 million to $14 million expected to be generated by collecting an income tax from non-residents: roughly 1/3 of those non-residents were UM employees, so that meant roughly $4 million to $5 million in additional revenue would be attributable to UM. Derezinski wanted to know from Crawford how that stacked up against the projected revenue loss as a result of the Pfizer property sale to UM, which took it off the tax rolls. Answer: Around $2 million per year was lost by the city of Ann Arbor with that sale.
Fraser emphasized that UM is an asset to the community – its main economic and cultural strength. UM generates around 1,600 to 2,000 new jobs every year, he said, adding that a city income tax could take advantage of that job growth.
Stephen Rapundalo (Ward 2) wanted to know what kind of fluctuations in revenue from a city income tax there’d been in communities without as strong a university presence as Ann Arbor. Crawford pointed to the stabilizing effect of not just UM, but also the fact that Ann Arbor was the county seat. Crawford said that they’d focused just on Ann Arbor, and looked at tax return data in Ann Arbor from 2001 through 2007, the last year data was available. There’d been a steady 1-2% taxable income increase each year, Crawford said. That did not take into account the impact of the Pfizer departure, which happened after the last year when data was available.
Crawford also explained with respect to Pfizer’s departure that private activity on the property, which now belongs to UM, could not have a property tax applied. That was different, Crawford said, from a situation in which the city of Ann Arbor leased property to a private enterprise – that private activity would be subject to property tax. But personal property that a company might bring into the former Pfizer space – if they were renting it from UM – would be subject to personal property tax.
City Income Tax from Different Groups’ Perspectives
Tony Derezinski (Ward 2) focused Crawford’s attention on the non-resident scenario on page 53 of the city income tax study, which indicated that between $12.4 million to $14.8 million would be collected from the 75,000 commuters who come to Ann Arbor to work – 21,000 of them at the University of Michigan and 54,000 at other workplaces. Derezinski noted that the other 22 cities in Michigan who taxed city income levied the tax on non-residents as well. [It's not required that a city income tax be applied to non-residents.] Derezinski said that he’d worked in two other cities where he’d not lived at the time: Lansing (living in Ann Arbor) and Grand Rapids (living in Muskegon).
Crawford said Ann Arbor was a good candidate for an income tax because of the number of commuters.
Carsten Hohnke (Ward 5) also focused in on Derezinski’s point of asking commuters to contribute to fund services in the city where they work, but do not live. If that was a rationale, then accuracy of information about the number of commuters is important, Hohnke said.
So Hohnke wanted to know how confident Crawford was in the estimate that there were 75,000 commuters. Crawford explained that the consultant on the study started with census data from the year 2000 and used formulas for inflows and outflows.
Hohnke pointed out that the number of commuters is also a statistic that comes up often in connection with transportation planning, so he wanted to know if the figure of 75,000 had been synched up with the transportation numbers for a reality check. Crawford indicated that this comparison hadn’t been done, but that he’d make a note to do it.
Seniors and Students
Leigh Greden (Ward 3) asked for clarification about what income is subject to a city income tax. Specifically, Greden was interested in understanding whether pension and retirement benefits would be subject to the tax. Crawford began his response by emphasizing that the city does not give tax advice to individuals. The basic picture, said Crawford, was that all salary, bonuses, wages, and commissions would be subject to a city income tax. That would not, Crawford said, include pensions.
Greden asked for clarification about whether this applied to private as well as public pensions or Social Security benefits. Crawford said he’d follow up on getting specific answers to Greden’s question as well as one from Sabra Briere (Ward 1) that came right on its heels: Are Pell Grants and other student loans subject to the tax? Crawford will be checking into that.
A rule of thumb on what tax was owed, Fraser said, was that whatever income is taxable for federal income tax purposes would also be taxable for a city income tax.
Sandi Smith (Ward 1) also wanted to know if residency for purposes of paying a city income tax was determined by where you vote. Crawford explained there were two basic ways of determining residency: (i) voter registration, and (ii) whether a homestead exemption for state taxes was claimed.
Smith explored with Crawford the possibility that a city income tax might encourage students not to register to vote.
Crawford said that with respect to students, who might not necessarily be earning large amounts of money, their income might not rise above whatever minimum threshold was established above which taxes would be owed – especially in light of the application of exemptions. Smith requested that another scenario be developed by Crawford for a student who was just on the edge of the income threshold.
Greden confirmed with Crawford that for seniors who were disabled, there could possibly be a double-exemption that applied.
Other Government Agencies: DDA and LDFA
Sandi Smith (Ward 1) asked about the effect on two entities that rely on the capture of tax-increment financing – the Downtown Development Authority (DDA) and the Local Development Finance Authority (LDFA). Crawford said that an income tax would mean about $700,000 less for the DDA, but that the LDFA would not be affected – they don’t capture any of the general operating millage levied by the city of Ann Arbor. Crawford added that there is no automatic provision for reimbursement of money to the DDA.
Stephen Rapundalo (Ward 2) focused on the 54,000 commuters out of the total of the estimated 75,000 who are not UM workers. He acknowledged that for those businesses there existed the possibility that they might be scared away from locating within the city. They might choose instead to set up just across the line and still enjoy the cachet of an Ann Arbor mailing address. In response to Rapundalo’s request for an assessment of that kind of impact, Crawford characterized the issue as a difficult topic to get into, because there was no definitive data. Take Grand Rapids, Crawford said, which is “a lively city,” where there was no “donut effect” of businesses locating outside the city boundaries. For some businesses, Crawford said, an income tax would be beneficial – if the business owns its own building.
The question of whether a city income tax would force employers to increase wages was somewhat parallel, Crawford said, to the question of whether a property owner would lower rents when the general operating millage part of the property tax was eliminated. In the specific scenario involving a renter, which is laid out in the city’s 2009 income tax report, an estimated 50% of the property tax savings enjoyed by landlords would be passed along to renters due to market forces. The 50% estimate reflects an approach of “minimizing the maximum error.”
Sandi Smith (Ward 1) elicited from Crawford the clarification that personal property taxes pay into the general operating millage, and that this kind of tax on corporate entities would also be reduced. Asked whether this contributed to a burden shift away from corporations, Crawford allowed “That’s fair to say.” But Crawford stressed that any change in burden occurs because the same rules apply to everyone.
Mike Anglin (Ward 5) asked Crawford to lay out the corporate tax changes. Answer: Corporations would pay a 1% tax on earnings for business that occurs inside the city. Fraser added that businesses are free to define what business occurs in the city. He also pointed out that for businesses that own property in the city, it’s a benefit – their property taxes would decrease in the same way as those of individuals.
Carsten Hohnke (Ward 5) focused on the roughly $6 million currently contributed by corporations to the city’s general operations fund through property tax, which was estimated to drop to $3 million in the chart on page 36. Crawford stressed that the situation for every corporation would be different – corporate entities that owned their own buildings would benefit by not having to pay the general operating property tax millage, but those that did not wouldn’t necessarily benefit.
It is residents, said Crawford, that are the interesting category – it includes both renters and homeowners as well as landlords of residential property. Note: In terms of direct payment of taxes, the property-tax bar (blue) for “Residential” includes property taxes paid by people who live in their own homes and by landlords of residential properties in the city. The income-tax bar (yellow) for “Residential” includes income taxes paid by people who live in their own homes in the city, and by people who rent their homes in the city.
Hohnke returned Crawford’s focus to the burden-shift issue: “Is there not a net decrease in burden to corporations [that aren't in the business of providing housing]?”
Crawford explained how the projections of income tax that corporations would pay are just an estimate – to which Hohnke responded, “I understand it’s an estimate.”
Hohnke confirmed with Crawford that given the parameters that could be changed under Michigan’s Uniform City Income Tax Ordinance, there was a lack in flexibility to dial the burden up and down across various categories – residents, non-residents, and corporations.
Constraints on Mechanics of City Income Tax Implementation
What Are the Parameters?
With respect to how the income tax would be implemented, Crawford reiterated a couple of times during the session that there was a limited set of choices to make: (i) exemption rates, (ii) the minimum level of income above which the tax would be applied, and (iii) the rate of taxation – which is prescribed by state law at a maximum of 1% for residents and 0.5% for non-residents.
Tony Derezinski (Ward 2) wanted to know why some of the other Michigan cities on page 16 of the city’s income tax study were levying rates greater than 1%. Crawford explained that those rates had been grandfathered in when the state law had changed to limit the rate to 1%. From the report:
2008 Tax Rates ADOPTED RES CORP NON EXEMPT Albion 1972 1.00 1.00 0.500 $ 600 Battle Creek 1967 1.00 1.00 0.500 $ 750 Big Rapids 1970 1.00 1.00 0.500 $ 600 Detroit 1962 2.05 0.20 1.025 $ 600 Flint 1965 1.00 1.00 0.500 $ 600 Grand Rapids 1967 1.30 1.30 0.650 $ 750 Grayling 1972 1.00 1.00 0.500 $ 3,000 Hamtramck 1962 1.00 1.00 0.500 $ 600 Highland Park 1966 2.00 2.00 1.000 $ 600 Hudson 1971 1.00 1.00 0.500 $ 1,000 Ionia 1994 1.00 1.00 0.500 $ 700 Jackson 1970 1.00 1.00 0.500 $ 600 Lansing 1968 1.00 1.00 0.500 $ 600 Lapeer 1967 1.00 1.00 0.500 $ 600 Muskegon 1993 1.00 1.00 0.500 $ 600 Muskegon Heights 1990 1.00 1.00 0.500 $ 600 Pontiac 1968 1.00 1.00 0.500 $ 600 Port Huron 1969 1.00 1.00 0.500 $ 1,200 Portland 1969 1.00 1.00 0.500 $ 1,000 Saginaw 1965 1.50 1.50 0.750 $ 750 Springfield 1989 1.00 1.00 0.500 $ 1,500 Walker 1988 1.00 1.00 0.500 $ 750
Which Constraints Are Specified in the Ballot Question?
Stephen Rapundalo (Ward 2) wanted to know which of the three parameters had to be specified in the ballot language. Fraser explained that the ballot language would simply ask the community whether it wanted to implement an income tax of up to 1%, which would be augmented by some additional language to the effect that the implementation of the income tax would thereby eliminate the general operating millage. The three choices, Fraser said, would not typically be ballot items.
Asked by Margie Teall (Ward 4) if they could not put the exemption levels in the ballot language, Fraser said that he was not sure, but that generally it’s not done.
Putting the Income Tax on the Ballot: If and When
Tony Derezinski (Ward 2) pointed out there were two questions concerning whether to put the city income tax on the ballot: If and when.
Should the Question Be Put on the Ballot?
Stephen Rapundalo (Ward 2) said that implementation of a city income tax would reflect “a fundamental shift in how we do business.” He contrasted the greater importance of that shift with the importance of one-time major capital expenditures, which were already sufficiently difficult and complex that it was crucial to study all of the facts and information surrounding them.
He concluded that it was important to get the information out in front of the residents – even though the question on the ballot would be simple, the implications would be complex. “We owe it to the public to put it out there,” he concluded.
There seemed to be a general sentiment in the room that the question should be put before voters.
When Should the Question Be Put on the Ballot?
Tony Derezinski (Ward 2) got clarification from Crawford that the soonest a city income tax could be placed on the ballot would be November 2009, when another tax proposal – the Washtenaw Intermediate School District (WISD) millage – would also be voted on.
The first date that such an income tax could be implemented is January of 2011 – which is the 2012 fiscal year. Implementation in January 2011 assumes that the ballot question would appear for the November 2009 election. In response to questions from Margie Teall (Ward 4), Crawford clarified that a January 2011 implementation date would also be consistent with passage of an income tax measure at the May 2010 election as well. The reason that some amount of time was required between passage of the measure by the voters and implementation, said Crawford, is that there is currently no system in place for actually collecting the tax.
Derezinski characterized the “when” question as a matter of choosing between November 2009 and May 2010. May 2010 would be “tight but doable” as far as implementing in January 2011, Derezinski said.
Derezinski said he thought that the more people looked at the numbers, the more support there’d be for the proposal and that it would “sell itself.” Derezinski said he thought it would have less chance of passing in November due to the short time frame for making the case for the tax, as well as the fact that there was already a tax proposal on the ballot for November – the WISD millage. So it was in part a strategic consideration, he said.
Teall clarified what impact a positive May 2010 vote would have on the implementation of a city income tax. Could it still be implemented in January 2011? Crawford said that it would still be possible. Missing a January 2011 implementation, he clarified for Teall, would mean that the next opportunity would be in January 2012 – it’s an annually collected tax.
Marcia Higgins (Ward 4) noted that there needed to be a decision Monday, but she did not think they had a consensus about what the correct percentage should be that would be specified on the ballot. Fraser pointed out that the ballot language would simply specify “up to 1%.”
Meta-Talk about Council’s Work Session
Christopher Taylor (Ward 3) and Mayor John Hieftje did not attend the work session.
In Hieftje’s absence, Marcia Higgins (Ward 4) chaired the meeting as mayor pro tem. Prompted by a question from an attendee in the audience about whether the meeting had been publicized, Higgins opened the meeting by asking city administrator Roger Fraser whether it had been posted. Frazier indicated that the meeting had been noticed on the board downstairs in the lobby as well as published on AnnArbor.com and the city’s website. A voice from the audience cheerfully reported: “I saw it on the web this afternoon!”
Ann Arbor Area Chamber of Commerce
Earlier this week, the Ann Arbor Area Chamber of Commerce held two information sessions about the city income tax, inviting local CPAs to explain how it would work and to field questions from chamber members. The Chronicle attended a session on Tuesday, where the half-dozen people who showed up expressed concerns about the tax.
Brad Smith, an attorney with the Ann Arbor office of Brinks Hofer Gilson & Lione, said he was shocked at how candid the feasibility study was about the goal of “sticking it to commuters.” His office employs between 30-35 people – most of them commute, he said, so they would pay the tax and not get any benefit from a property tax break.
Eric Sosenko, another attorney with Brinks Hofer, noted that their business wouldn’t get a break either – they rent their office on South Main, so they wouldn’t see a savings in property taxes to offset the income tax. They love being downtown, he said, but if the tax is passed, they’ll take a serious look outside the city as they grow and require larger space.
Some people at the chamber session expressed skepticism that landlords would pass along their property tax savings to tenants, which they said seems to be an assumption in the feasibility study. However, Ron Dankert, president of Swisher Commercial, said it’s possible the income tax would dampen downtown office rates for a different reason. If the tax prompted tenants to consider moving, he said, landlords might respond by lowering rents.
Several people commented on the administrative fee mentioned in the feasibility study, saying that it seemed like a large percentage and wondering why it was so high. Sue Biondi of Wright Griffin Davis and Co., who gave Tuesday’s presentation to chamber members, agreed that the fee seemed significant, and didn’t know what would account for that.
When the chamber meetings took place, the organization was still gathering feedback through an online survey sent to its members. Late in the week, the chamber announced some of the survey results: About 300 members took the survey, and 57% said that a city income tax would affect their decision to work at a place of employment in Ann Arbor. Of the respondents, 62% said that such a tax would affect their decision to operate or expand their business in Ann Arbor. On the question of whether they’d support a city income tax, 74% of respondents indicated that they would not.
Kyle Mazurek, the group’s vice president of government affairs, said that if city council votes to put the tax on the November ballot, the chamber’s public policy committee would weigh in on whether to support or oppose it. The chamber did not endorse city income tax proposals that were floated in 1997 and 2004.