A source of extra revenue for Michigan cities

November 4, 2015

Home
Directory

 

 

My wife and I are retirees living in Lansing. Our income for 2014 consisted of the following:

 

Pensions

$45,608

 

Social security

$33,790

 

IRA distribution

$5,225

 

Interest

$235

 

Total:    

$84,858

 

 

If we had paid city income tax at the 1% rate on all of that, our tax would be $848.58. Instead, we paid nothing. The reason is that Lansing does not tax the following types of income (this comes directly from the instructions):

  1. Social security, pensions and annuities (including disability pensions), Individual Retirement Account (IRA) distributions received after reaching age 59.

  2. Proceeds of insurance where the taxpayer paid policy premiums. (Payments from a health and accident policy paid by an employer are taxed the same as under the Internal Revenue Code).

  3. Welfare relief, unemployment compensation and supplemental unemployment benefits.

  4. Interest from obligations of the United States, the states or subordinate units of government of the states and gains or losses on the sales of obligations of the United States.

  5. Military pay of members of the armed forces of the United States, including Reserve and National Guard pay.

  6. Michigan Lottery prizes won on or before December 30, 1988. (Michigan lottery prizes won after December 30, 1988 are taxable.)

  7. Sub-chapter S corporation dividends.

  8. City, state and federal refunds.

The reason I bring this up is that Lansing's Financial Health Team has been hard at work for 3 years trying to figure out how to come up with the $600 million or so needed to fill the shortfall in the city's pension and retiree health care fund. Now the city is giving the Financial Health Team $100,000 to hire an outside firm to study the problem. (Lansing State Journal, 10/23/15)

 

I suggest that we lobby the Michigan Legislature to change the City Income Tax Act so that Lansing and other cities can tax the same types of income as the state does with its Individual Income Tax. In other words, broaden the tax base.

 

The City Income Tax Act, Act 284 of 1964, allows cities to impose - with voter approval - an income tax on its citizens and anyone who works in the city. The rate cannot exceed 1% for residents and .5% for non-residents, with higher rates allowed for big cities. Here is a 2011 "memorandum" discussing the tax on the site of the Citizens Research Council of Michigan. And below is a chart I found on the City of Grand Rapids' website. I added the Pension Funding column, and the percents there are current. Several of the cities with income taxes are members of Municipal Employees Retirement System (MERS), and I obtained their pension funding ratio from the 2014 MERS-wide actuarial report. The actuarial accrued liability chart starts on page 11 of Appendix B. I calculated Lansing's funding ratio from the City's latest actuary valuations.

 

City Income Tax

Exemption Amount and Tax Rates for Tax Year 2009

 

City

Effective Date of Ordinance

Exemption

Amount

Resident

Non-

Resident

Pension
Funding

Albion

1/1/1972

600

1.00%

0.50%

109.7%

Battle Creek

7/1/1967

750

1.00%

0.50%

66.6%

Big Rapids

1/1/1970

600

1.00%

0.50%

65.4%

Detroit

7/1/1962

600

2.50%

1.25%

 

Flint

7/1/1964

600

1.00%

0.50%

48.0%

Grand Rapids

7/1/1967

750

1.30%

0.65%

 

Grayling

1/1/1972

3,000

1.00%

0.50%

63.5%

Hamtramck

7/1/1962

600

1.00%

0.50%

51.7%

Highland Park

7/1/1965

600

2.00%

1.00%

 

Hudson

1/1/1971

1,000

1.00%

0.50%

 

Ionia

1/1/1994

700

1.00%

0.50%

50.2%

Jackson

1/1/1970

600

1.00%

0.50%

 

Lansing

7/1/1968

600

1.00%

0.50%

64.5%

Lapeer

1/1/1967

600

1.00%

0.50%

71.6%

Muskegon

7/1/1993

600

1.00%

0.50%

88.3%

Muskegon Heights

1/1/1989

600

1.00%

0.50%

72.2%

Pontiac

1/1/1968

600

1.00%

0.50%

 

Port Huron

1/1/1969

1,200

1.00%

0.50%

62.7%

Portland

1/1/1984

1,000

1.00%

0.50%

65.2%

Saginaw

7/1/1965

750

1.50%

0.75%

48.7%

Springfield

1/1/1989

750

1.00%

0.50%

77.7%

Walker

1/1/1988

750

1.00%

0.50%

57.7%

*This is pensions only; doesn't include retiree health care.

 

In 2011, the Legislature enacted several changes to the state income tax. One was that seniors no longer get an extra $2,400 special exemption. Another was that exemptions for pensions, dividends, interest and capital gains are available only for older retirees. (source, page 92) The Legislature apparently forgot all about the City Income Tax, which until then mirrored the state tax in regard to exemptions. Cities are still allowed to give an extra exemption to people over 65 - Lansing offers the minimum $600 - and are prohibited from taxing proceeds of insurance, annuities, pensions and retirement benefits. They also cannot tax welfare relief, unemployment benefits including supplemental unemployment benefits, and workmen's compensation.

 

By amending the City Income Tax to take away the exemptions that are not allowed for the state income tax, the Legislature would provide a sorely needed source of revenue for our financially strapped cities. (The Legislature could also increase - or eliminate - the limits on tax rates.)

 

To estimate how much additional revenue Lansing would get, I obtained some "individual income and tax data" for Michigan for tax year 2013 from a table on this IRS site. From the table - a downloaded Excel file - I calculated total income from 3 sources for taxpayers with adjusted gross incomes above $25,000:

 

Taxable pensions and annuities in AGI $14,938,883,000
Individual retirement arrangement payments 373,965,000
Unemployment compensation
1,035,465,000

Total:   

$16,348,313,000

Lansing's population is 114,297, about 1.15% of Michigan's 9.91 million. 1.15% of $16,348,313,000 is $188,005,599, the amount added to Lansing's tax base. 1% of that is $1,880,056. A bit more would come from the .5% tax on income of non-Lansing residents who work in the city; however, if they are working, they are not likely to have income from the above 3 sources. And a little bit more would come from elimination of the $600 special exemption for seniors. (Lansing should really consider increasing that $600 exemption amount; the state personal exemption is $4,000, and it still is not enough to protect incomes below the poverty line.)

In 2015, Lansing's payment on its unfunded pension liability was $14,817,523. My estimate of $1,880,056 to be gained by broadening the City Income Tax base won't cover it, but every little bit helps.

(My estimate of the revenue to be gained by taxing pensions and annuities is going to be too high if, as with the state income tax, older retirees are protected.)

At the October 22 meeting of the Financial Health Team, an "Analysis of Recent Benefit Changes" was handed out. Prepared by the City's actuary, it estimates the effect on pension and retiree health care funding of recent contract negotiations with City employee unions. The unions did make concessions that will reduce costs, but many of the changes apply only to new employees and won't affect liabilities for many years. The analysis includes 2 summaries of contract changes, one for pensions and one for OPEB (other post-employment benefits; in other words, retiree health care). The full 11-page analysis handed out at the meeting was a poor photocopy, so I won't attempt to present it here, and it is not available on the City's website. A presentation to the new City Council and other interested parties by the actuary seems to be in order.

See Beyond State Takeovers: Reconsidering the Role of State Government in Local Financial Distress, with Important Lessons for Michigan and its Embattled Cities, an MSU Extension white paper. Also, Ted Roelofs' story in Bridge Magazine.

Send comments, questions and tips to stevenrharry@gmail.com. If you'd like to be notified by email when I post a new story, let me know.

 

Previous stories