Repeal the City Income Tax Act


I wrote a letter to the editor of the Lansing State Journal that was printed on April 3, 2008:

Tax is full of holes

The city of Lansing could increase revenue simply by applying its income tax fairly.

The city doesn't tax pensions, IRA distributions, annuities or Social Security benefits, all of which are considered taxable income by the IRS.

I am over 65, and I see no reason seniors should be considered needier or more deserving of a tax break than younger people.

My income for federal tax purposes in 2006 was $45,631. Subtracting $1,200 for two exemptions leaves $44,431. If my income had been from wages, my city tax would have been $444.31 (1 percent). But, since $516 was interest and the rest was Social Security and pensions, I paid no tax at all.

Looking into the matter further, however, I found that the city's hands are tied. The provisions of the city tax are for the most part dictated by state law - Public Act 284 of 1964. For Lansing, the rate cannot exceed 1%. Higher rates are allowed for Detroit, Highland Park, Saginaw, and Grand Rapids. The following types of income are not subject to the tax:

  • Proceeds of insurance, annuities, pensions and retirement benefits
  • Social security benefits
  • Welfare relief, unemployment benefits including supplemental unemployment benefits, and workmen's compensation
  • Compensation received for service in the armed forces

The state law requires a minimum $600 exemption for each person qualifying as a federal income tax exemption and allows the city to provide additional exemptions for persons who are over 65, blind, deaf or disabled.

More on the city income tax can be found here on the Citizens Research Council website.

Free to Tax

I see no reason why the state should limit a city's right to impose taxes. A city is no less a democracy than the state. If its citizens want to tax themselves to pay for city services, why should the state interfere? State law limits Lansing's tax rate to 1% for residents and .5% for non-residents. Those amounts are neat and simple, but why should they be assumed to be adequate for all time?

My initial concern was that the tax was unevenly applied. Nearly all types of income received by seniors are excluded. The state income tax - which was enacted in 1967, three years after the city income tax - has many, but not all, of the same exclusions.  State and city tax exclusions are compared in the following table. You would expect uniformity, but that is not the case.

Income Type State Income Tax City Income Tax
Military pay Excluded Excluded
Retirement or pension benefits Excluded, with limits on private pensions Excluded
Dividends, interest and capital gains Excluded for seniors, with limits Taxable
Social Security benefits Excluded Excluded
Gifts and bequests Taxable Excluded
IRA distributions Excluded Taxable
Proceeds from insurance Taxable Excluded
Annuities Excluded Excluded
Welfare relief Taxable Excluded
Unemployment benefits Taxable* Excluded
Worker's compensation Taxable Excluded

* An additional $2,200 exemption is allowed if UCBs are 50% or more of Adjusted Gross Income

Michigan cities should be free to tax income at any rate their citizens agree to. And they should not be restricted in the types of income they tax. For example, if they want their tax base to be the Adjusted Gross Income from the federal return, they should be allowed to do so. The solution? Repeal Act 284 of 1964, the City Income Tax Act, and let cities tax as they please.