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Oct 31

Q6

Comments (1) 11:59 PM posted by admin |

Q6: Does this tax, given the fact that it’s being coupled with a 2mil rollback on property taxes, disproportionably impact renters and the poor?

Flat taxes, by definition, are all regressive in nature. Payroll taxes, sales taxes, and property taxes are regressive too, but as luck would have it, Ypsilanti’s City Council has no say in the how those taxes are legislated. To truly discuss regressive taxes, we’d need to discuss income elasticity and effective tax rates, but even though that’s at the root of all this, it’s not what people are interested in.

City Council usually takes action via resolution. That is how policy is set and created. While City Council didn’t vote, per se, on what the City Income Tax ordinance would look like, we did go around the table with each Council member providing input.

At 7:30AM on Monday, June 4th of this year, Council had a special morning meeting to set the language that would be published as notification for an ordinance for the City Income Tax. I made the following recommendations:

  • I recommended a $3400 deduction. I did this because if we wanted to send a message to lower-income families about our dedication to them, it made the most sense to set the exemption as high as possible. Moreover, in order to have the least impact on college students attending Eastern Michigan University, a $3400 deduction would be most appropriate. The majority “voted” for a deduction of $1000.
  • I recommended adding partially and fully-disabled to this list of deductions that the City would allow. This recommendation was adopted to be part of the ordinance.
  • I also said that because Ypsilanti has so many residents and families living below the poverty level, we should exempt the first $15K of income. While this wouldn’t truly make the proposed tax any less regressive, it would exempt income for those who need it the most. Given the way the State’s Uniform City Income Tax ordinance is written, this would have been the most equitable solution. As you might have guessed by now, it was not adopted by the rest of Council.
  • Finally, I suggested the tax have no sunset provision. Future Councils have the ability to rescind the ordinance at any time. More to the point, the current Council has every intention of having residents vote on this proposal again in 2013 should it be adopted. Allowing a sunset provision is merely a hollow gesture to the people that would allow the pro-tax group to promote the CIT as a “temporary” tax. This suggestion was not adopted.

The 2 mill rollback is not part of the City Income Tax ordinance and may be eliminated at Council’s discretion.

When originally being promoted by the pro-tax group, they called for a 4 mill rollback. Any rollback has always been a ploy to try and curry favor with homeowners, but the suggestion of 4 mills was another extraordinary, hollow political gesture to the residents — residents in this case who owned property. One of my colleagues went so far as to say that homeowners are more invested in the City than renters.

Former mayor Dr. Farmer, the current mayor and both Council members Gawlas and Nickels initially supported this proposal, but it came crashing down on a special May 24th meeting of Council when I pointed out the mathematical flaws in their plan. Initially when all of this income tax discussion was happening, the bond payments due to the Water Street Project were not even factored into future expenditures. Of all the short-sighted things we’ve done as a Council, deciding to budget for the future by not taking all obligations into account was one of the worst.

The 4 mills was obviously a political ploy, but had we actually adopted this incentive, we would have run through all General Fund reserves faster than we’re already project to. Luckily, mathematics prevailed on this one.

By offering a rollback, we are actually costing the City of Ypsilanti money.

With the property tax credit, say for example, if property owners pay $10 to the City, they get a $10 credit from the State. So in this case, they pay no more money in tax but the city general fund gets the money, and the State returns to them an equivalent refund via the credit. But when you reduce the property tax, you take money away from the City General Fund and give it to the State because your household income increases as a result.

So for seniors and retirees that won’t pay the City Income Tax, the property millage reduction actually costs the City’s general fund $100,000s per year because it’s not replaced by anything because of the exemption seniors and retirees. Having no millage rollback and a lower tax rate of 0.8% generates the same amount of money for the city but leaves the rollback money in the City’s General Fund rather than giving it to the State.

Finally, there is the misconception about tax credits or deductions for a City Income Tax in the State of Michigan.

Both real estate and income taxes are treated the same on the federal level. They are deductible for taxpayers who itemize.

For state tax, there is a credit for taxes paid to cities on the state income tax return. Before you can determine that an income tax will result in a tax benefit at the state level, you must consider the Michigan property tax credit. If you are a taxpayer and property owner that gets a property credit and the city lowers the property tax rate, you will probably find that your property tax credit is lower than before. If that is the case, the city income tax credit on the state return is offset by a lower property tax credit. The property tax is also a refundable credit. That means you get a refund even if it is more than your state income tax liability. The city income tax credit is not refundable.

This is the one time that City Council had the opportunity to be fair to all groups, but we squandered that opportunity by granting special benefits to special interests — in this case, homeowners.

1 Comment »

  1. Comment by trusty getto
    November 1, 2007 @ 1:37 pm


    You have a lot of nerve burdening us with facts and analysis, Brian. I was actually hoping you would provide a conclusory, hyperbolic, patronizing and anonymous opinion statement.

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