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Jun 16

A Taxing Idea

Comments (0) 12:00 AM posted by admin |

It was surely predestined that the day I wig out, some of Ypsilanti’s biggest celebrities would read this stuff. I would like to reassure you that regardless of what people might email you, I’m not nuts.

Let’s be honest, the Blue Ribbon Commission on City Finances decision to hire Plante & Moran of Ann Arbor to do an evaluation on the feasibility and revenue potential of a City income tax was really a study on how best to propose an income tax. I think we all know that in forty-five days, the BRCCF is going to recommend some sort of income tax coupled with an offset in property taxes. City Council will then pass a resolution supporting this recommendation. And all of this will be put to a vote as part of some kind of Special Election. You can judge for yourself as to whether or not Plante & Moran fulfilled the terms of the RFP after reading their official report. You can then decide whether or not sufficient information exists to put a measure like this on the ballot some day.

I’ve gotten some email regarding my critique of an income tax proposal. More specifically, if I’m so damn smart, how would I save the City? Just because somebody comes up with a bad idea and I don’t come up with a bad idea of my own doesn’t necessarily mean that you have to make a choice. Admittedly anything I’d propose would be stuff like farming out some of the duties done on the third floor of City Hall to the County, eliminating redundancy in Building Inspection / Ordinance Enforcement, and questioning what the DDA has done for us lately. The latest City budget had each department make steep cuts with the exception of City Council. Even if you questioned what value the City gets from paying dues and belonging to organizations like the Michigan Municipal League, they probably couldn’t shave too much from their budget. Regardless, I’m not in a position to find the City $4M in revenue that an income tax might. So if you’re looking for quantity, I’m beat.

But just because an income tax is the only thing on the table doesn’t mean that it makes sense. Desperate times may call for desperate measures, but that doesn’t mean you do something stupid and short-sighted. The biggest concerns with an income tax are what impact it would have on businesses looking to relocate to the City, the impact on existing businesses within City Limits, the shift of the tax burden to lower-income families, how this would impact population growth or a person’s decision to take employment in the Ypsilanti, and whether or not this additional revenue can right the City.

At last night’s meeting there was a lot of talk about the impact an income tax might have on businesses decision to move out of a taxing municipality. One of the many Ypsi Greens present said he was asked by his management to look for an exit strategy should Ann Arbor enact an income tax. He even mentioned some statistics from some business journal that said eighty percent of businesses would consider leaving a city that imposed an income tax. The Ann Arbor Chamber of Commerce did a similar study and sixty-one percent of those surveyed would consider leaving town if an income tax was levied to shore up finances. Seventy-eight percent said they would pass the costs on to their customers. Maybe this would happen. Nobody knows for sure. Mr. Rujan from Plante & Moran has a point when he says the data doesn’t exist to suggest one way or the other. Eastern Michigan University isn’t going to leave. Ameritech, Bortz Health Care, Forest Health Medical Center, the County, the Ypsilanti Schools, and Marsh Plating aren’t leaving either. Considering leaving and actually calling the moving trucks are two different things.

Lansing has an income tax, but that doesn’t stop all the law firms from locating there. Even when Detroit was taxing residents at 4% in the early 80s, GM built the Poletown plant. GM bought the RenCen in 1996 and moved 6,000 employees into the building. EDS moved 1,500 people into the RenCen as well. Compuware built their headquarters there which resulted in another 3,000 jobs moving into Detroit. Take that for what it’s worth.

The shifting tax burden is even fuzzier. It’s probably very safe to assume that an income tax could only be sold with a corresponding offset in property taxes. The BRCCF will have to make a spreadsheet to find out where that balance is, but for our purposes, we can plug in our own numbers. To make the math simple, let’s compare the “typical” Ypsilanti resident who makes $28,610 and has two dependents with a hypothetical homeowner that makes $100K, has no dependents, and lives in house that is assessed at $75K. Assuming a $1000 exemption, the renter would pay $256.10 a year or 0.895% of his income to the City. If the City were to knock 1.0 mills off of the current rate of 28.2820, this hypothetical homeowner would pay $990 in income tax and save $75 in property taxes. The result would be 0.915% of his income. For every mill that gets knocked off one’s property taxes, the savings is $75 on a house with an SEV of $75K. This means 2.0 mills results in 0.84% of our homeowner’s income that gets paid to the City in the form of an income tax. Taking 3.0 mills off results in 0.765%. Taking 4.0 mills off gives you 0.69%. Taking 5.0 mills off is 0.615%. And 6.0 mills is 0.54%. You can see that as soon as the property tax offset becomes greater than 1.27 mills, the tax become regressive. Pretty sweet, huh? Now that’s only for those specific inputs. You can make your own spreadsheet to determine the overall impact for any scenario, or you can pay me twenty-two grand and I’ll do it for you.

Anecdotally speaking, I bought a house in Ypsilanti knowing full well that the property taxes were the highest in the county, but I wasn’t deterred. There are departments within City Staff that are working on ways to attract people to Ypsi with projects like the Cool Cities initiative and possibly Water Street one day. You have wonder what type of input they have given the BRFC. You probably won’t find a banner hanging from a light post in the near future that exclaims “Ypsilanti: Come for the history, stay for the taxation.” Additionally, if you’re some guy from Milan who’s offered a $75K gig at EMU, are you going to turn it down because you’ll have to pay $370 a year in city income taxes? I wouldn’t, but that’s not a very comprehensive analysis.

Finally, as part of Plante & Moran’s presentation, it was noted that of the twenty-two cities with an income tax, five or six went into receivership. There were probably other mitigating factors to cause that, but the income generated by a tax like this didn’t prevent them from going into receivership. Before the Michigan Legislature allowed cities to enact income taxes in the early 60s, these cities had budget problems. They still had budget problems even after passing the tax. You have to understand what the root cause of your problems are before you can fix them.

The Cato Institute did a study of America’s governors in 2002. They reported that state spending doubled between 1990 and 2000. Federal spending increased 19% between 1996 and 2001, but state spending increased by 39%. In 2002, the 50 state fiscal deficit was $40B or 10% of general-fund expenditures. Former-Governor Engler was elected as a tax cutter, but embraced higher spending and ultimately put the State in the position it is today. Now Ypsilanti isn’t properly funded by the state and its expenses are expected to rise 4% this fiscal year. It’s a never-ending cycle.

People laughed at me when I talked about the East Side seceding from the rest of Ypsilanti. It doesn’t look so crazy now does it? Okay. It’s still crazy, but no crazier than an income tax.

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