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MEMO TO:
Kathie Grinzinger
FROM:
Nancy Ridley
DATE:
February 3, 2012
SUBJECT:
Income Tax Background
As we prepare for the funding challenges we face in 2013 and beyond, one potential solution regularly mentioned is altemative funding sources. Unfortunately the state laws are quite limiting in the sources cities have available. Recently some City Commissioners requested some background information on an income tax as it is the only alternative taxing method available. The City of Mt. Pleasant has had outside firms study an income tax twice in the last 20+ years . In 1990 Stauder, Barch and Associates completed an analysis at a cost of $7,500 and in 2000 the Michigan Municipal League completed one for $18,000. In 1994 an intern updated the 1990 study with 1990 census data. The 1990 study primarily relied on data from the census to use to estimate the potential income tax revenue whereas the 2000 study relied more on data gathered from major employers within the City. Both studies estimated the revenue likely to be generated based on numerous assumptions. Both studies also analyzed what reduction could occur in the millage rate, presented charts to show the likely impact to individual taxpayers based on income and property values, the estimated cost to administer the new tax, and a multi-year projection of the expected City revenue. Any city income tax would be governed by Public Act 284 of 1964, as amended and can be found at the following link: http://www .Ieg is latu re .mi.gOYI (S (dbtvvvfotsgj4z55gp rt5 r55))1docu ments/mcl/pdf1mc l-act284-of-1964.pdf One often misunderstood piece of a city income tax is the tax rate. The current law allows the City to set the rate at anything !!Q to 1% for residents and the non-resident rate must be one-half of the City rate. In addition, an amendment in 1995 requires an approved vote of the qualified and registered electors of the City to implement such a tax and requires the adoption of a specific income tax ordinance in conformance with the law. A new alternative may be available for the administration of the tax if one were implemented. The EVIP grant program awarded Grand Rapids $550,000 to create an inter-local agreement with Flint and Lansing to combine their income tax processing and payment systems. It is expected to be in operation in 2012 and other cities may join the partnership. This alternative would need to be explored as an alternative to creating our own income tax department.
Attachment A provides a listing of the Michigan cities currently levying an income tax. Attachment B is the Executive Summary from the 2000 study. The following shows the timeline from the 2000 study to show the amount of time from starting the RFP process to a decision by the City Commission. May 2000 June 2000 January 2001 March 2001 April 2001 May 29, 2001
-
RFP released Contract awarded for study Study results received Various work sessions and educational materials generated Town Hall meeting City Commission voted to not pursue the issue of an income tax at this time and not place the question on the fall ballot
Our community and our economy has changed a lot since the last study in 2000. If we want to seriously consider the income. tax as an alternative revenue source I would recommend we again hire an outside firm to estimate the revenue and potential impacts so we are working from updated predictions. The scope of services I would recommend would be very similar to the 2000 study and would include the following: 1. The study must determine the potential revenue generated by an income tax and the concurrent reduction in the millage rate. 2. The study must rely on data other than census data. 3. The study must analyze the impacts of various income tax rates, exemption levels, and millage rates. 4. The study must detail the financial impact on various classes of taxpayers and determine any shift in overall tax burden, including, but not limited to: a. Resident b. Landlords c. Non-resident Homeowners d. Renters e. Businesses located within the City limits f. Businesses doing business in the City, but not located in the City g. Non-resident workers h. Senior Citizens i. CMU Students 5. The results of the study for individual classes of taxpayers must be summarized in a user friendly format to be easily understandable for public presentation. 6. The results of the study must be in such a form to allow the City to calculate additional scenarios with different exemption levels, income tax levels and millage rates. 7. The study must estimate the costs of administering such a tax. 8. The study must project income tax and property tax revenues for each of the next ten (10) years. 9. The study must include an evaluation of the potential impact on any other City revenue sources. 10. The firm shall present the study to the Executive Management Team and to the City Commission. It would be appropriate to allocate funds from the surplus savings account to pay for such an analysis.
Based on the amount of time to evaluate such a change in the tax structure, it would be important to make a decision soon if the external analysis is desired. If the City Commission is interested in starting the analysis, it would be appropriate to review the suggested scope of services and pass a motion to endorse an agreed upon scope. The budget amendment for funding the study would be presented after proposals are received and the actual amount is known. Please let me know if you need additional information
NJRljms Attachments
Page 1 of 1
- What cities impose an income tax?
Attachment A
Michigan Taxes Department of Treasury Taxes Home I FAQ I Online Services I Contact Treasury I Site Map I Forms
Michigan.gov Home
tel
Income Tax
..
!
Text Version
A+ Text Size
D Sh. re
Business One Stop • Departme nt s Agen cies
:
• Online Se r ul ce s
Business Infonnallon Sales and Use Tax
••
Printer Friendly
Single Business Tax Property Tax Fuel and Tobacco Tax -- -
Reference Library Treasury Home
.Surueys
What cities impose an income tax?
Answer:
•
Tax Practitioners
Individual Income Tax
For 2011 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 Detroit Grand Rapids Highland Park Saginaw
Residents
Nonresidents
2.5% 1.3%
1.25% 0.65%
2%
1%
1.5%
0.75%
FAQ Categories • Index of Tax FAa's • Individual Income Tax • Business Taxes " 1099-M ISC Filing Requirements • CollectionslDelinquent Accounts • Tax Inaement Financing • Service Fee/Pilot Housing • State Real Estate Transfer Tax • Native American • Michigan Business Tax • Status of Individual Refund • Industrial Facility Exemption • Energy Efficient Qualified Home Improvement Credit
Links to some Michigan cities are available on this web site. If the tax forms are not available on the website, you will need to contact the
city/county in question and they will mail you the required forms.
Michigan .gov Home I Contact Treasury I State Web Sites I FAQ I Sitemap I Privacy Po licy I Link Policy I Accessibility Policy I Security Policy I Michigan New s I Michigan.gov Survey Copyright © 2001 -2011 state of Michigan
http://www .michigan.gov/taxes/O,4676,7-238-437 15-153 95 5--F, 00 .hlml
112612012
Attachment B
n.
!.
CITY OF MOUNT PLEASANT INCOME TAX FEASIBILITY STUDY: EXECUTIVE SUMMARY January, 2001
MlUNICIPAL (CONSULTING ยงERVICES
Ill!
Olll
January 5, 2001
President CHARLES SMILEY Mayor, Burton
Vice President JEFFREY FITCH VlIIage President, Kalkaska
Trustees
il:
MARGARET 'PEGGI" ARNOLD
!]'
KENNETH BABICH
!]'
FRANKLIN L. CAMPBELL
Mayor, Manistique Mayor, Manette
Mayor and City Commission City of Mount Pleasant 401 North Main Street Mount Pleasant, MI 48858 Dear Mayor and Commissioners: We have completed our Income Tax Feasibility Study for the City of Mt. Pleasant. This letter and the attached exhibits summarize the findings of our analysis. The accompanying final report document provides additional detail related to the results of the project including estimating approaches, assumptions, projections and impacts.
Mayor, Hastings
C.D. "AL" CAPPUCCILLI Mayor, Monroe
HAROLD DRAKE Village President, Ravenna
MYRON FRASIER Council President, Southfield
FREMAN HENDRIX Deputy Mayor, Detroit
PATRICIA KILLINGBECK City Manager, AuGres
KURT KIMBALL City Manager, Grand Rapids
STUDY PURPOSE As a result of Proposal A, the Headlee Amendment and limited potential for development in the City, the City of Mount Pleasant may be unable to generate sufficient income from property taxes in future years to meet anticipated expenditures for municipal services. The City is exploring options for meeting future financial needs without substantially increasing the property tax millage rate. One option under consideration is the implementation of a city income tax. This study has been undertaken to determine the feasibility of an income tax in Mt. Pleasant including revenue potential, administrative costs and shifUn tax burden.
GEORGE KORTHAUER City Manager, Petoskey
ENABLING LEGISLATION
KATE LAWRENCE Mayor, Brighton
JAMES LEIDLEIN City Manager, Harper Woods
CAROL SHEETS Mayor Pro Tern, Wyoming
ROBERT SLATTERY, JR. Mayor, Mount Morris
JOEL THOMPSON Mayor, Otsego
Under the provisions of the Uniform City Income Tax Act of 1964 (UCITA), Michigan cities may levy an income tax on specific categories of income for city residents and on a limited scope of income earned in the city by non-residents. UCITA establishes a maximum tax rate of 1% on residents and corporations and partnerships within the city. The non-resident rate cannot exceed one-half of the resident rate. A personal exemption of not less than $600 is required by the Act, and employers within the city must withhold the income tax from employees' payroll. Currently, 22 Michigan cities of all sizes utilize an income tax for a variety of purposes.
MICHAEL USKIEWICZ City Manager, Escanaba
Executive Director GEORGE D. GOODMAN
A member of the National League of Cities Web Address
Headquarters Office
Lansing Office
Northern Field Office
www.mml.org
1675 Green Road, P.O. Box 1487 Ann Arbor, M148106-1487 Phone: 734-<362·3246 Fax: 734-<362·8083
320 N. Washington Square, Suite 110 Lansing. M148933·1288 Phone: 517485·1314 Fax: 517·372-7476
8925 Garden Road Garden, M149835·9270 Phone: 906-<344·2299 Fax: 906-<344·2298
PROJECT APPROACH
In conducting the study, we utilized demographic and economic data from a wide variety of sources to arrive at the estimates contained in this report. Estimations were developed using a computer spreadsheet-based model that incorporates all of the data components collected. Several estimating approaches were developed for each taxpayer group and the results of each approach were averaged to arrive at the estimates presented. The model will also allow the City to test alternative scenarios and update variables over tirne.
FINDINGS
Utilizing the data collected, we developed estimates of revenue, tax burden, administrative costs and millage irnpacts. Our findings are summarized below: Revenue Potential •
A Mt. Pleasant city incorne tax could generate $2.6 million dollars if irnplemented in fiscal year 2001
•
Income tax revenue is estimated to increase 3.3% per year, while taxable value of property is projected to increase only 2.7% per year
Impact on City Millage •
An incorne tax could allow the City to reduce the current rnillage from approximately 16 mills to approxirnately 8 mills, with no change in net revenue for the City's General Fund
Administrative Costs •
Costs to administer the income tax are estimated at $163,000 in the first year
Tax Burden •
The tax burden paid by Mt. Pleasant residents is estimated to decrease slightly under an incorne tax scenario (see Figure 1)
•
The tax burden for corporations and partnerships is estimated to decrease substantially under an income tax
•
Non-residents, including stUdents at Central Michigan University, could contribute approxirnately 25% of the City's general operating revenues under an income tax
•
Sorne individual residents could see ah increase in their tax burden, as sumrnarized in Table 1
Table 1: Net Increase (Decrease) in Tax Burden for Residents Under an Income Tax
Taxable Value
5,000
15,000
25,000
Adjusted Gross Income 35,000 45,000 55,000 65,000 75,000 85,000 95,000 100,000
$138 $338 0 $38 $238 $438 $638 $538 20,000 ($131 ) ($31) $69 $169 $469 $269 $369 40,000 . ($300) ($200) ($100) $0 $100 $300 $200 50,000 ($384) ($284) ($184) ($84) $16 $216 $116 60,000 ($269) ($469) ($369) ($169) ($69) $31 $131 70,000 ($553) ($453) ($353) ($253) ($153) $47 ($53) 80,000 ($638) ($538) ($438) ($338) ($238) ($138) ($38) 90,000 ($722) ($622) ($522) ($422) ($322) ($222) ($122) 100,000 ($807) ($707) ($607) ($507) ($407) ($307) ($207) 120,000 ($975) ($875) ($775) ($675) ($575) ($475) ($375) 150,000 ($1,229) ($1,129) ($1,029) ($929) ($829) ($729) ($629) 200,000 ($1,651 ) ($1,551 ) ($1,451 ) ($1,351) ($1,251 ) ($1,151) ($1,051)
$738 $569 $400 $316 $231 $147 $62 ($22) ($107)
$838 $938 $669 $769 $500 $600 $416 $516 $331 $431 $247 $347 $162 $262 $78 $178 ($7) $93 ($275) ($175) ($75) ($529) ($429) ($329) ($951) ($851) ($751)
$988 $819 $650 $566 $481 $397 $312 $228 $143 ($25) ($279) ($701)
Effect of Higher Exemption Levels •
Should the City desire to adopt a personal exemption level higher than the $600 minimum established by the Uniform City Income Tax Act, it would realize less income tax revenue and be required to levy a somewhat higher millage rate (see Table 2)
Table 2' Impact of Higher Exemption Levels Current Personal Exemption Level Property Tax $1,500 $600 $1,000 Income Tax Revenue $0 $2,453,703 $2,633,032 $2,553,512 City Millage Required 15.9500 7.5046 7.7684 8.0994 Resident Tax Burden 53.5% 52.5% 52.4% 52.2% Corporate Tax Burden 46.5% 21.8% 22.6% 23.7%
Additional Considerations •
Full implementation and revenue realization of a city income tax would require several years as the City educates employers and residents of the new tax and establishes administrative procedures for tax administration and compliance
•
The City may benefit from establishing withholding agreements with some ofthe larger employers located outside of the City who are not required by UCITA to withhold
Comparison with Prior Income Tax Studies in Mt. Pleasant •
Overall, findings are similar to those reported in the 1990 income tax study, although the current study reveals a more positive outcome for residents of the City, as illustrated in Table 3
Table 3: Comparison of Current Study with Prior Income Tax Studies in Mt. Pleasant
1990 Study Income tax revenue ($600 exemption) Population Non-resident employees Millage reduction Administrative costs Tax burden: Residents Non-residents Corporation/partnerships
$2,193,127 21,890 8,793 8.3 mills. $89,200 - $94,300 From: 53.75% 0.00% 46.25%
To: 53.87% 27.47% 18.70%
1994 Update
2000 Study
$2,242,736 23,285 9,989 8.3 mills $78,028 - $119,557
$2,638,704 24,003 12,473 (Incl. students) 8.4 mills $158,322 -$168,444
From: 60.37% 0.00% 39.63%
To: 53.73% 26.05% 22.66%
From: 53.50% 0.00% 46.50%
To: 52.50% 25.70% 21.80%
Each of these findings is discussed in more detail in the accompanying report. The spreadsheet model used to develop the estimates is also included in the final report.
CONCLUSIONS The City of Mt. Pleasant may be able to generate more revenue under an income tax than would be possible under a property tax only. The City's demographics, labor market and status as a primary business district in central Michigan make Mt. Pleasant a good candidate for a city income tax. Under an income tax scenario, City property tax payers could see as much as a 50% reduction in the millage rate and a reduction in total City taxes, while non-residents could contribute as much as 25% of the City's general operating revenues. ******************************
We have enjoyed working with the City on this important project, and we appreciate the time and input provided by City employees and the Mt. Pleasant community on this study. If you have questions related to this report, please do not hesitate to call me at 734-669-6327.
/2) ( ) L .
Very truly yours,
If ----. dr
J . n Kaczor Municipal Consulting Services
=
-
-
-
FIGURE 1 CITY OF MOUNT PLEASANT CITY INCOME TAX IMPACT ANALYSIS ESTIMATED CHANGE IN TAX BURDEN WITH AN INCOME TAX
60.0%
50.0%
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FY 2002
FY 2003
FY 2004
FY 2005
FY 2006
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FY 2010
o Residents (Status Quo)
53.5%
53.5%
53.5%
53.5%
53 .5%
53.5%
53.5%
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53.5%
53 .5%
• Residents (Income Tax)
52.5%
53.3%
53.2%
53.1%
53.1%
53.0%
52.9%
52.8%
52.7%
52 .7%
o Non-residents (Status Quo) o Non-residents (Income Tax) o Corporations (Status Quo)
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
o. 0%
25.7%
23.4%
23.6%
24.0%
24.3%
24.7%
25.1%
25.5%
25.9%
26 .3%
46.5%
46.5%
46.5%
46.5%
46.5%
46.5%
46.5%
46.5%
46.5%
46 .5%
I!!!I Corporations (Income Tax)
21.8%
23.3%
23.2%
22.9%
22.6%
22.3%
22.0%
21.7%
21.4%
21.1%