Ann Arbor’s Budget: The Case for a City Income Tax
The second City Council budget retreat was held on January 8, 2011. It was painful, watching councilmembers’ bleak expressions as they took in yet another set of unappetizing choices for fixing the Ann Arbor financial problems. (Handouts from the December retreat are now available on the City Budget page; here is our summary of that meeting.) I still remember the unwelcome position in which I found myself on the Washtenaw County Board of Commissioners when the first state budget cuts started coming down and we were helpless to save many worthwhile programs. I personally voted to lay off at least 200 staff in one year. Trust me, if you run for office, choose a growth period to do it in.
But while I was cutting, for example, special assistance to mothers of newborns (the state withdrew support for that program), this Council is looking at choices like cutting fire and police protection below workable levels; stopping municipal trash collection; closing a pool, an ice rink, or a golf course; and many other choices (some reasonable proposals, some off the wall) that will get them into trouble with a significant number of constituents and change the kind of community we live in. At last, towards the end of the retreat, they slowly began to acknowledge that the City of Ann Arbor needs new sources of tax revenues. Reluctantly, they began to talk about the option of a city income tax.
Actually, the Council can’t impose an income tax, or any of many other tax options. They can only vote to put the option of an income tax on the ballot. I support putting the question of a City of Ann Arbor income tax to a popular vote on the November 2011 ballot.
Before you come after me or the councilmembers with a pitchfork, remember that this only gives voters a chance to decide whether they choose to be taxed in this way. It does not impose the tax on Ann Arbor voters (or at least, not the majority who vote for it, if it passes). Regardless, I know that many people have a visceral response (also known as a gut reaction) to the idea and many of the people whom I call friends seriously dislike it. But I’m calling for us to have that discussion.
Note that this question has come up a number of times; the last time that the Council came up to the edge and looked at it was 2009; see the excellent review of the question by the Ann Arbor Chronicle. Several studies have been done to examine the possible effects and outcomes of a city income tax. I was on the Budget Review Committee of 1995-96 that recommended a city income tax to resolve Ann Arbor’s structural tax problem: the fact that a large fraction of the city’s land mass (and potentially taxable property) is owned by the University of Michigan, which is constitutionally tax-exempt. Yet the UM is the city’s major employer. It made sense to us then to shift the tax base from solely property tax to partly based on income tax. (Only the city operating tax millage is at issue.) The Chronicle has made the study from that period (1997), as well as one from 2004 , and linked to the most recent study (2009), from the City’s website. (Note: we have linked to the Chronicle’s articles that discussed the two prior studies, since comments made there may be useful.) This blog post is not the time or place for an in-depth examination of these studies, but they should be useful in an ongoing discussion.
There are many wonky details to be explained in supporting a city income tax, and you will be hearing them again and again. But I’ll resist for now, just conveying a couple of useful numbers.
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Total Ann Arbor city Taxable Value (currently): $4.5 Billion. Tax revenues from 1 mill of property tax: $4.5 million. Rough estimate of additional revenue from a city income tax: $12 million.
Ann Arbor residents would be taxed at 1% of income (this includes rental and business income), after exemptions. Non-residents would be taxed at 0.5% of income. The Ann Arbor General Operating Millage (currently just over 6 mills) would be revoked. (City income taxes are offset by a partial credit on State of Michigan tax returns, even if you don’t itemize.)
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The Council has until August to take action to put the measure on the ballot, and if voted in on November 1, 2011, would not have immediate effect. This has to do with complicated timing whereby property taxes are paid for the prior year, not the current year; so property taxes paid in 2012 are actually in respect to 2011. So according to City Administrator Roger Fraser, the switch would happen from taxpayers’ perspectives in the calendar year 2013. In that year, the income tax would be applied and Ann Arbor taxpayers would be relieved of the city general operating millage (currently just over 6 mills) payment for 2013, but would begin paying income tax. But the city budget will be halfway through Fiscal Year 2014. (Council is now working on the FY 2012 budget, which takes effect July 1, 2011.) So in city terms, if we vote in an income tax this fall, it will be two years away from affecting the city budget. The time is now, folks.
This is really, really tough politics. Council has backed away from this action over and over again. I hope that they can summon the political courage to do this, regardless of their personal feelings about an income tax. (Councilmembers may put an item on the ballot and then fail to support its passage if they choose.) The income tax has been alleged to have had a role in the defeat of Leigh Greden in his 2009 bid for re-election, and the question has frequently been raised in election campaigns since then.
Here are just a few of the arguments I’ve heard against putting the income tax on the ballot and my responses.
1. The council is trying to tax us against our will.
Nope. Putting the measure on the ballot is exactly what many of us have been calling for: an opportunity for a vote of the people on important financial decisions. (Remember Ask Voters First?) Putting it on the ballot is only the first step in a vigorous debate and plenty of time for argumentation and fact-finding on all sides.
2. I don’t trust those people to spend the money correctly.
Well, you go with the council you’ve got. If you don’t trust them to spend more money properly, do you trust them to cut your services and sell off our city treasures? Individual bad ideas or wrong-headed votes should be dealt with as they come up.
3. It’s really about the employee benefits and overly generous pensions.
Council certainly needs to pay attention to pension finance issues, but they are helpless in some cases because of labor contract negotiations. Especially with “Act 312 employees” (police and fire personnel, whose contracts are subject to binding arbitration because of Michigan P.A. 312 – and cities usually lose), labor unions can hang tough and resist losing benefits, even when the alternative is losing jobs.
4. The city really has plenty of money if they would just manage it right.
I guess that this is a matter of faith to some extent, but I believe the budget projections. Even if they are not correct, the council and administrator will act as though they are and the character of our community is at stake.
5. Look at the really bad decisions they’ve taken in the past.
Although I’ll always join the Greek chorus of “I told you so” on the Police-Courts building (never was so ugly a building purchased for so much, or at least not lately), the past is the past and we have to deal with now. The thing to do is to hold individual councilmembers responsible for their actions rather than holding the whole city structure and budget in harm’s way to get even.
6. Look at all those favors to developers, the push to develop city property, etc.
One could argue that the lack of secure revenue has caused a warped policy in many cases. This includes cockamamie efforts to act as a venture capitalist using city property, and treating the DDA parking revenues like an ATM. Maybe we could get a kinder, gentler city government without those stresses.
7. It is unfair to renters since they don’t get out of property tax.
If we assume that many renters are lower-income, they are the ones who suffer most when user fees are increased and human services are cut. The exemption level should be carefully adjusted to exclude much impact on very low income persons. Many renters are UM students who are supported by their parents. Higher-income renters can afford a modest payment to the city. Rental rates might actually come down.
8. It will cause a mass exodus of business and people from the city.
That prediction should be part of the debate around whether to pass the measure, not about putting it on the ballot. We have lots of studies to study, lots of voices to hear, lots of numbers to crunch. If it is really a bad idea, there will be an opportunity to defeat it. Further, if people have any doubts, they’ll vote no. They always do. But if it is not on the ballot, we can’t have that discussion.
There will, of course, be winners and losers if the tax structure changes. We’ll each be evaluating its effect on our personal circumstances as we come to the ballot box. But if the current situation is allowed to continue, we all lose.
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January 9, 2011 at 10:52 pm
It’s great to hear that an Ann Arbor City Income Tax is gaining traction. After Ann Arborites pontificated and editorialized in the failed Ann Arbor News about how this abomination would be such a good idea for the City of Ypsilanti in 2005, 2006, and 2007 – but bad (at the time) for Ann Arbor – I’m glad to see this snake turn back on itself.
An Ann Arbor City Income Tax is exactly what Ypsilanti, Saline, Dexter, etc. need to jump start a local economic boom, as the smart folks and smart companies flee such a self-inflicted economic wound…..
January 10, 2011 at 12:52 am
Hi DC, welcome back.
Better hold the schadenfreude for a little while. We’ll see how it works out.
As for Ypsilanti, best wishes for our sister city and all our other Washtenaw County centers too. They need a healthy Ann Arbor as well. Look what a hollowed-out Detroit did for Southeast Michigan.
January 10, 2011 at 11:07 pm
Ypsilanti voters recently turned down a city income tax handily, now the city is struggling to keep the city afloat.
The failure to find additional revenue streams has led the Council to consider ridiculous plans such as charging exorbitant fees for festivals that use city parks, which would have likely driven Elvisfest and the Michigan Beer Festival out of the city (can you say “killing the goose that laid the golden egg”?).
We’re in a situation where we have to choose between bad options. State taxes have been going down for the past decade, and due to the Headlee/Prop A alchemy, so have local property taxes. That hasn’t saved our economy, much less rebuilt it.
I think our community needs to keep up its services to attract the talent and nurture the new businesses we need to rebuild the economy. That will mean finding more revenue.
I haven’t made up my mind on the city income tax to decide if I favor it. We probably need to have it on the ballot to provoke the in-depth discussion of it that Vivienne is asking for. Thanks for keeping the discussion going!
January 10, 2011 at 11:26 pm
Thanks, Chuck, I appreciate your adding your voice to the discussion.
January 12, 2011 at 1:05 pm
Vivienne, thank you for starting this discussion. I think you hit most of the political questions. I would add one more:
Should we shift the cost of government from property owners to employees? For example, fast food outlets will be relieved of the general operation millage, but their service sector employees will pay income taxes. Often, our service sector employs residents from more affordable communities.
That policy question raises a variety of structural issues. How much income will be exempt from the income tax? If we exempt enough to protect low wage employees, will the income tax generate enough to make the transition to it worthwhile?
I have opposed putting the issue on the ballot in the past because we lack hard data from which we can ascertain the net impact of a transition to an income tax. Personally, I would see a dramatic reduction in my City taxes because I work outside the City. But, that is not the issue for me because I am not opposed to paying taxes to support a well-run government. I am unwilling to support shifting my tax burden to a UM Hospital janitor simply on a hunch that we might end up with more revenue.
I have posted the summary information sheet on City revenue that the administration distributed at its January 8, 2011 budget work session.
http://a2docs.org/doc/257/
That document includes summaries of three possible options for increasing City revenues as well as information regarding the reduction of millages due to the Headlee Amendment restriction on tax increases.
I look forward to your continued attention to this topic.
January 12, 2011 at 4:26 pm
Jack, you are correct in identifying the exemption level as a key issue. I want to look at that more closely in a future post on this subject (you didn’t think this was the only one, did you?). I will state that I will lobby for as high an exemption as possible.
I don’t agree that “we lack hard data”, except to the extent that we will never have all the data. There have been two studies in recent years (2004 and 2009) which bear some study. But we have some information from the Census and other sources on income distribution, surely.
I think that you are mistaken in saying that you would not pay income taxes because you work outside the city. It is my impression that all city residents would pay 1% on income, regardless of where it is earned.
Questions have come up about which sources of income are taxable by the city. I need to verify my impressions but they are that any personal income that is taxed by the State of Michigan would be taxed. That excludes retirement income in most forms but includes personal income from S-corporations.
The UM Hospital janitor whom you cite (who is probably less representative than a much more highly paid UM faculty or staffer) would pay relatively little after exemption and after the state tax credit (which is most generous to lowest incomes). Tax shifts also would include from a retired person who owns a home in Ann Arbor that has appreciated, but who has a very low fixed income – to a Barton Village resident earning over $0.5 million per year. Anecdotal examples can be used in many directions. But case studies should be included in the discussion, based on the correct percentages and exclusions.
January 13, 2011 at 5:55 pm
Vivienne,
You are correct, residents would pay city income tax on all income without regard to where it was earned. See MCL 141.612 (uniform city income tax act). Non-residents are only taxed on what they earn within the city. That means that if you live in A2 and work in Detroit, you’d pay city income tax to both cities.
January 30, 2011 at 8:20 pm
From a story I wrote a year and a half ago:
“City officials say the income tax would affect all 114,000 Ann Arbor residents, regardless of whether they work in the city limits. The only exceptions would be individuals who work in other cities that already have an income tax, in which case they would not pay Ann Arbor’s income tax.”
January 30, 2011 at 8:31 pm
Thanks, Ryan. This needs to be clarified but I saw somewhere that a court case decided a question in another city where the individual had to pay 0.5% in his home city and 0.5% in the other city. I’ll try to find that – it is an important point.
May 30, 2012 at 12:39 pm
[…] Roger Fraser, I wrote three posts proposing that Ann Arbor should adopt a city income tax. (Post I Post II Post III) These are still worth reading if you would like to dig really deep into […]