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