Many options, factors to consider as commissioners hear results of income tax study
City commissioners heard the results of the study on the feasibility of an income tax for Mount Pleasant at a work session on Monday night.
John Kaczor, founder and principal consultant of Municipal Analytics, presented the data his company collected and discussed the limits and guidelines to implementing an income tax.
Kaczor said an income tax has to be approved by the commission, who would draft an ordinance to be put on the ballot for a vote.
“The voters are a big hurdle to implementing an income tax, which might explain why there are only 22 cities in Michigan that have one at this time, although a number of cities are looking at the option now,” Kaczor said.
The city has done three studies on income tax in the last 20 years, all resulting in the commission voting down the option to draft an ordinance.
Michigan’s City Income Tax Act limits the rate a city can levy a resident at 1 percent tax and a 0.5 percent tax on non-residents. Corporations and partnerships pay the resident rate, Kaczor said.
The income tax must be withheld by the employers in the city, with salaries, bonuses and other forms of income qualifying to be subject to the tax. Certain incomes are exempt from taxation, such as unemployment, military pay, pensions and retirement benefits, public assistance and more.
Tax must be withheld by employers for salaries, bonuses, wages and more.
Based on the 2010 numbers, the city would make about $2.7 million in revenue from an income tax, but there is a cost associated with implementation.
“Also based on the 2010 surveys of other communities, we’re looking at about $240,000 to $250,000 in income tax administration, which leaves the city about $2.5 million in revenue from an income tax at the 1 percent rate, using the $1,000 exemption,” Kaczor said.
In the first year, the city was estimated to receive 50 percent of what was estimated in the revenue stream, which totaled about $1.1 million. In the second year, Mount Pleasant would collect about 75 percent, or $1.9 million, because more people would understand and be aware of the tax, Kaczor said.
Kaczor said in the third year of implementation, everything stabilizes and that’s when the city would generate the $2.7 million by that time, though technically that’s not 100 percent of what is owed.
“We’ve assumed just for conservative purposes that you’ll (only) collect 85 percent. If you look at a 95 percent collection, you’d generate another half a million a year,” Kaczor said. “This is why a lot of tax administrators say there is a lot of value in doing compliance work to actually get as many people paying as you can.”
In the questions and comments section of the presentation, Commissioner Jim Holton was curious of how to address people not paying the tax.
“Who goes after the corporation or individuals that don’t pay?” he said. “Is it the city?”
Kaczor explained there are numerous options depending on implementation, but the city is one option to go after delinquents.
Mount Pleasant could also do a revenue neutral stream, which would mean replacing the property tax with an income tax so it generates the same revenue as now.
In this case, the millage could be reduced by about 5.8 mills off the nearly 12.2 mill that goes to the general fund specifically, Kaczor said.
Right now, residents pay 54 percent of the total property tax, while businesses make up the other 46 percent. Under an income tax, that would be shifting to residents paying about the same, non-residents picking up about 15 percent and corporations going down to covering 29 percent, Kaczor said.
For implementation of an income tax, the city would need to consider tribal members, college students, the elderly and disabled and other populations, Kaczor said.
In response to another question from Holton, Kaczor discussed other cities that have failed to pass an income tax.
Misinformation and opposition were two reasons the measure failed to pass in Ypsilanti, Kaczor said.
“The alternative for us is to either cut things or start raising the millage,” Holton said.
If the city does decide to draft an ordinance for an income tax, Municipal Analytics has put together an income tax calculator that could be on the city’s website so people can calculate the individual impact.
There is no set deadline for when the commission will vote on drafting an income tax to be voted on. However, City Manager Kathie Grinzinger told commissioners on Oct. 8 at a work session for the 2013 budget that they should figure it out “as soon as possible” to plan accordingly going into the next fiscal year.
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