Ann Arbor’s Budget: The Case for a City Income Tax III

Soundbite conclusions, misleading comparisons, and poorly explained statistics.

Cities in Michigan face limitations for revenue (taxation).  As we’ve discussed in previous posts, the City of Ann Arbor relies mostly on the property tax. We are advocating that the voters should be allowed to consider substituting an income tax (collected from a broader base, namely all income earned in the city) for part of the property tax. This would mean that the general operating millage, which in 2010 was 6.1682 mills, would be eliminated.  Ann Arbor residents would still pay all other current property taxes.  This would mean a higher rate of revenue for the city and avoid some really nasty budget decisions.  (See the current discouraging article from the Ann Arbor Chronicle.)

AnnArbor.com has been publishing stories on this issue.  The most recent discussed the possibility of a local sales tax.  But as we have explained, that is contrary to current state law.  Anyone care to place a bet on the Michigan Legislature making that particular change this year or anytime soon?  So despite local legislators promising to put it on the table, Mayor Hieftje’s expressed preference for it is wishful thinking.  Council (or anyone else) should not allow themselves to be distracted by this fanciful possibility.  (As an aside, it is not clear how a local sales tax would interact with the Headlee restriction on total tax capture;  it might actually require a constitutional amendment.)

Misleading comparisons lead to overstated conclusions.

Earlier, AnnArbor.com had two companion stories based on a  “Memorandum” from the Citizens’ Research Council on local-option city income taxes in Michigan.   Much of that CRC report is a summary rather than an analysis.  It is an overview of cities in Michigan that have local income taxes.  (Ann Arbor itself is not mentioned in the report.) But AnnArbor.com’s main story appears to draw the conclusion from the study that income tax wouldn’t work for a city like Ann Arbor.  Again, Mayor Hieftje is quoted as saying that it “reaffirms his thinking that a city income tax may not be the right move for Ann Arbor”.  Yet that conclusion is not justified by the report or the facts.

Aside: Mayor Hieftje has now stated that he is hoping to “make it through the recession without a tax increase”.  What is his plan, exactly?

The main argument against an income tax is made in a story with a misleading headline, “City income tax revenues can be volatile, unreliable during recession, Grand Rapids shows“.

Comparison of Grand Rapids and Ann Arbor taxes. Reprinted with permission of AnnArbor.com

But the information in the graph that relates to Ann Arbor is misleading. Let us refer to the authoritative source of information about Ann Arbor City’s finances, the Comprehensive Annual Financial Report (CAFR).  The numbers used for Ann Arbor are difficult to reconcile with the figures in these reports, but it appears that in the last few years the numbers are Total Revenues, not property tax collections.  As the attached spreadsheet shows,  property tax collections for FY 2008, FY2009, and FY 2010 were flat, at about $70 million each year.  The higher number (about $80 million) includes Michigan state shared revenue.

Notes to the spreadsheet:

  • Figures do not include other sources of revenue, like fees, interest on bank deposits, sale of property, etc.
  • Figures are from Basic Financial Services section under “General Revenues” and include property tax for debt retirement purposes but do not include “Business-type Activities”, which are enterprise funds.  Instead, they are “Governmental Activities”.

The conclusions drawn also fail to consider implications of the time context.

The AnnArbor.com graph refers to “2010” as its last data point.  But assuming that the Grand Rapids figures are correct and that they and the Ann Arbor data are both referring to Fiscal Year 2010 (though the Grand Rapids CAFR for that year shows a slightly higher figure), we should remember that FY 2010 ended June 30, 2010.  The income tax figures thus would reflect tax collected on income made in 2009.  But Ann Arbor’s FY 2010 property tax collection is based on taxable value from 2008 assessments.

This time-frame shift is important in making this comparison.  First, the Grand Rapids numbers date from the most severe year of the recession, and before the voter-approved increase from 1.3% to 1.5% (which took place July 1, 2010).  But Ann Arbor’s property tax figures do not reflect either the worst of the bursting of the housing bubble or loss of the Pfizer property tax with the sale of that property to the UM.

Thus, the comparison is highly misleading and overstates the stability of Ann Arbor’s property tax vs. the Grand Rapids example.

Ann Arbor’s Property Tax History (CAFR)

The graph above shows the taxable property valuations and the property tax collected over most of the last decade, based on figures from the CAFR.  Note that while property tax is collected in a given Fiscal Year, it is based on valuation from a calendar year two years earlier.  (The dip in property tax collection early in the decade was because Council reduced the millage rate below what was allowed.)  This shows that the trend in valuation had dropped and tax collection had flattened even before loss of the Pfizer property (December 2010) is accounted for .

Improper comparisons with other Michigan cities

The headline for the other story was, “New report says city income taxes work best in smaller cities, are less reliable than property taxes.”  But this is not an accurate summary of the report.  What the report did was to lump a number of Michigan cities into categories and compare the performance of income taxes for cities within each category against statewide figures for property tax and state income tax.  Notably, the period considered was from 1996 to 2009. (AnnArbor.com reproduced both a graph and a table comparing cities from the report.)

  • Over this period, city property tax collection over the entire state increased steadily.  But is this a surprise?  We knew that the housing bubble and the real estate bubble in general lifted all boats through most of the last decade.  (Note, as we have explained, there is a two-year delay in translation of property values to tax collected, hence the 2009 figures in the report likely reflect a 2007 property valuation, before the big crash.)
  • Over the same period,  the total income tax collected for all Michigan cities that impose them sank steadily.  Again, no surprise.  Michigan has been losing jobs for most of the last decade.  But this result was partly because it largely reflected Detroit’s tax collection. As the report says, “Detroit income tax revenues have constituted about 60 percent of all city income tax revenues over the past decade”.  And Detroit has, of course, been bleeding residents as well as manufacturing jobs.  So the statewide city income tax collection looks very poor because it is actually a statement about Detroit’s economy, not about smaller cities.
  • There were three categories of cities shown separately: “Larger Core” cities such as Grand Rapids, Battle Creek, and Lansing; “Smaller Core” cities like Albion, Hudson, and Port Huron; and “Suburban” cities like Hamtramck, Highland Park and Pontiac, which were actually near large manufacturing core cities, especially Detroit.   Both Larger Core and Smaller Core cities actually did pretty well with their income taxes over the decade; the tax collected remained essentially level for that period, and well above the 1996 baseline.  Only the Suburban cities declined. But Ann Arbor does not match any of those cities in important ways, and is not at all like the Suburban cities.

How does Ann Arbor differ from the cities studied and how does that matter?

  • Ann Arbor is comparable in population to some of the cities (like Lansing) described in the “Large Core” group, though it is  larger than some (like Jackson).  But it is much smaller (at about 110,000) than Grand Rapids (187,695 according to a 2008 estimate). Yet it is also the core city for a larger metropolitan area.
  • Most of those cities (which include Flint, Saginaw, and Battle Creek) were dependent on the auto industry and other heavy manufacturing, much of which has been lost.  Ann Arbor is not.
  • It is clearly not at all like the “Suburban” cities, which are dependent on large manufacturing centers in nearby cities. Again, Ann Arbor is insulated from the loss of heavy manufacturing.
  • It has a high quality of life and attractiveness that encourage election both as a place of residence (retired people and others for whom this is an option) and upscale business ventures.
  • It has the University of Michigan, with a physical plant that looks pretty well rooted in place.  The UM also raises the income level of the region.  While the median household income is shown for most cities in the CRC report as between roughly $27,000 and $40,000, the Ann Arbor area has held steady in the $60,000 range for many years.  (Current HUD figures used for housing estimates are $67,400 for a household of 2.)
  • It is “landlocked” (mostly finished with annexation), and the UM has steadily acquired property within the city borders. Thus the property base for taxation is decreasing permanently.

In summary, Ann Arbor has a higher-income population, plus higher-income jobs that draw workers from adjacent communities; it is unlikely to lose its major industry, the University of Michigan; it is also likely to remain attractive to residents and businesses because of its quality of life and cachet, despite any change in method of tax collection; and its ability to continue increasing property tax collections (or to remain at the same level) is doubtful.

As the report states, much of the problem with income tax collection in some of the larger cities has been directly related to the problems with the (Michigan manufacturing-based) economy. “…the city income tax revenues also reflect the out migration and loss of income in the state’s largest core cities.”

Of course,  part of this discussion depends on your view of the future.  The belief in “business cycles” has become almost religious in some circles, but does it really apply to cities like Ann Arbor? Are the factors affecting future revenue collection from property tax vs. income tax really cyclical (and therefore stability is the key factor) or have circumstances changed for real?  I believe that it is a dynamically changing scenario and parts can be predicted.  More on that later.

The stories in AnnArbor.com are certainly timely and it is good to have the discussion happening.  But I hope that there is not a lot of prejudgment going on in advance of placing the question on the ballot. In spite of the negative tone and misleading comparison of Ann Arbor with Grand Rapids in the companion story,  a slim majority of those polled at the end of the story still supported putting the income tax on the ballot.

UPDATE:  Since this post was written, there were many changes enacted in Michigan tax law, which caused me to withdraw my support for a city income tax at this time.  These were reviewed in a campaign blog post,  Budgets, Taxes, and Other Fun Subjects, May 2012. Some other developments are pending which may make this out of date as well.

Explore posts in the same categories: civic finance, politics

11 Comments on “Ann Arbor’s Budget: The Case for a City Income Tax III”


  1. […] This post was mentioned on Twitter by First Income, Vivienne Armentrout. Vivienne Armentrout said: More on the city income tax – Ann Arbor is not Grand Rapids. http://tinyurl.com/4pdkjfo […]

  2. Patricia Lesko Says:

    If Rick Snyder’s proposal to tax pensions passes the House & Senate, the argument that oldsters will save money with a city income tax becomes much less compelling.

    Furthermore, the idea that we need a city income tax is absurd. Tm Crawford was quoted in the press as wringing his hands over the possibility of reduced revenue sharing in Snyder’s proposed budget. Only 30 percent of Michigan municipalities participate in revenue sharing. Instead of fretting, and spending more and more each year on projects that increase the debt load, the city needs to reign in spending.

    City staff have not been expected to do that in a decade. They’re not about to start now, it would appear from the current proposed budget where IT spending was increased. Hieftje actually tried to explain how an increase in funding was an overall decrease in funding.

    It’s like a three-ring circus. I’m hoping the Street Repair millage, Parks millage and any income tax proposal put on the ballot get voted down.

    • varmentrout Says:

      Yes, when I read about Snyder’s budget proposals, it occurred to me that it could change the landscape for city income tax. But we are some time off from how those proposals will shake out.

  3. Karen Sidney Says:

    If you look in the statistical section of the FY2010 CAFR, you will find Table VIII, which shows taxes levied and taxes collected for the last 10 years. AnnArbor.com’s chart matches the column for total taxes collected.

    If you exclude data from the enterprise funds in the analysis, you will exclude taxes collected for solid waste, which were 11.7 million in FY10.

    • varmentrout Says:

      Thanks for pointing that out.

      The issue of which taxes to compare is a big problem in this discussion. However, the solid waste millage would not be eliminated with an income tax, which is one reason I omitted it. Total taxes include some of the other dedicated millages, I assume, which would also not be altered if an income tax is adopted. I was trying to get as clear a contrast between taxes collected for general operating expenses and what an income tax might collect as possible.

      As a note, City Administrator Roger Fraser has also suggested scaling back the solid waste tax and privatizing that operation (turning the responsibility back to taxpayers).

  4. Sturat Brown Says:

    Here are what I view as the three main problems with a city income tax: 1) the purpose is to generate more revenue; why does the city need more revenue when it has a $28 million surplus in the Streets Repair fund? The city does not spend its current revenue on citizen priorities now so why would they in the future? Why give them a bigger check to blow on priorities most people don’t care about while neglecting the ones they do care about (like police and fire safety services?) 2) So, you want to increase income taxes on people who rent so you can give a tax break to landlords…Slick Rick Snyder would agree! You want to tax people who can’t vote here…Slick Rick will love it. 3) The long term effects of a city income tax could give an increased advantage to communities near Ann Arbor to attract population that would otherwise move to Ann Arbor. Ann Arbor is already expensive compared to surrounding communities so why do you want to make this equation even more tilted against the city?

  5. varmentrout Says:

    You have three good discussion points.

    1. My understanding is that the $28 million in the street repair fund is intended to use for the Stadium Bridges repair, beginning soon, I hope. Even if this were not the case, the street repair fund is earmarked for that purpose (from a millage) and can’t be used for other, general fund priorities. The gymnastics with the DDA’s parking fund in the last round illustrate how ridiculous our position has become in the need to balance the general fund balance, and we have laid off fire and police personnel to the point that some are worried that our safety is compromised.

    2.Yes, there would inevitably be a tax shift to renters, but not as much as you imply. Landlords would pay less property tax but would also have to pay income tax on their rental income, so would probably not realize much of a savings. (I haven’t done any calculations.) As for taxing out-of-town workers who can’t vote here, in a sense they have voted with their feet by living outside the city, usually in a lower property tax area. Many of the out-of-town workers, especially at the UM and in financial services, etc. are very highly paid and should contribute to the costs of the city they are using as an employment base.

    I think your references to Rick Snyder are to imply that I am for the “fat cats”. I’m a long-time Democrat and something of a populist. I favor a generous personal exemption. The total cost to non-property owners who are low income would not be great. Suppose that you earn $30,000 a year and both live and work in the city. At a 1% rate and with various exemptions and deductions, you would pay below $300 a year. That’s less than $25 per month.

    3. The shift from property tax to income tax might actually make the move to Ann Arbor more likely for people looking to buy a home. With the city income tax, homeowners would no longer pay the general operating millage. Many people choose to buy outside the city because of the high property taxes here.

    • Stuart Brown Says:

      1. If the $28 million in the street repair fund is intended for the Stadium Bridges repair, this would be at odds with what the city has been telling people in regard to getting funding from the State and Federal government for this bridge. Also, this would show how incompetent the city is in managing maintenance funds due to the fact that letting streets degrade to “poor” status costs more to fix in the long run. Large capital projects like replacing a major piece of infrastructure should be financed with bond money, spreading the cost out over 30 years. The city has no good reason for depriving the voters of Ann Arbor the road maintenance they should have been getting while this fund was accumulating about 3.5 years worth of tax receipts from the road repair millage. My point in raising this issue is not to say that roads repair millage money should be re-purposed to some other use; but to point out that the city does not spend the taxpayer’s money on the priorities the voters have indicated through the ballot box. Another example is the city has been charging the park’s funds an excessive amount of money for IT services, in effect, draining money from a clear voter priority to a non-priority “bucket”. This diversion of funds indicates the city is playing games with the voters and calls into question the city’s credibility.

      2. Landlords make their money from the capital gains realized when the property is sold, not from the profits on rents. Most of the rent money is chewed up in debt service, depreciation, taxes and insurance. It is unclear how much of any realized capital gains would be effectively subject to the city’s income tax, especially given the holding companies that are set up to insulate firms from having their taxable values reset.

      3. In my case, the savings from reduced taxes on my home is less than the increase in income taxes that the city would realize from my income; a situation I believe would be typical for any family living off of the income generated by a job. The property tax offset appeals to retirees with paid-off homes living on a reduced fixed income who also happen to be the people most likely to vote in local elections. The example of a couple earning $30,000 per year would apply to two minimum wage workers making around $8/hour full time. Taking $25/month out of their paycheck would probably cause some real pain and more likely result in increased use of high interest payday loan services by the couple.

      As I have stated, the purpose of a city income tax would be to increase the city’s revenue; anybody sensitive to saving taxes would look at the total tax burden, not just the property taxes. The pattern repeated in Michigan in the major metro areas that have income taxes is that the rich flee, leaving the less fortunate to pay for the amenities a large metro area can offer. I don’t like this reality anymore than anybody else, but it is a realty. The city’s previous city manager, Roger “Dodger” Fraiser, refused to live in the city and chose to live in the low tax parts of the county; this should tell you something about the city’s ability to attract highly compensated professionals.

      • varmentrout Says:

        We are starting to get into uncharted territory here.

        1. I was told the information about the street millage by a council member and I have not examined the grant proposals for the Stadium Bridge, so I can’t evaluate your statement. However, we will have to supply local matching funds and perhaps that will be how the $28 million is used.

        2. There are a number of long-standing property management companies who collect rents in a positive capital flow over a long time. I can’t evaluate your statement that only capital gains are involved because I don’t have the data, but I doubt that this is the case. There have been a couple of recent studies by consultants and I guess that I need to review them.

        3. We are getting into hypotheticals here; again, a set of calculations to determine relative costs and benefits to different income groups is needed. Here are my personal figures:

        My house has a state equalized value of $156,600 (TV is less). This July I will pay $895.85 in general operating millage tax. At 1.0%, my income would have to be $89,500 to equal that in income tax. Your personal income must be considerably above the median, or you live in a very modest house by Ann Arbor standards.

        Note that in the $30,000 example, the $25 per month is a ceiling, not a floor. The actual amount would be less after exemptions and deductions.

        For retired people, the advantage has been diminished by changes in state law; pensions are now taxable.

        4. You make a number of sweeping statements that I don’t agree with about what has happened to metropolitan areas. Detroit’s problems were not just taxes but social and political as well, and the citizens of Grand Rapids recently voted to raise their income tax level. You’d need to support your statements with a lot more specific examples to be convincing.

        Thank you for joining the discussion. We need to have many such discussions.

  6. Stuart Brown Says:

    If the Stadium Street bridge is the reason why the city has been neglecting road maintenance; I am appalled. Why does the city have bond money for capital improvement projects that are of dubious value (Larcom expansion, Hole by the Library) but not for needed infrastructure improvement? Regardless of how much in matching funds are needed, there is no excuse for neglecting the basic maintenance the citizens should expect from their two mills in road repair funds. As you are probably aware, there is contradictory evidence as to just how many miles of roads in Ann Arbor are “poor” and it is my understanding that Ann Arbor has the third worst roads in the State of Michigan. Letting roads degrade to “poor” status costs more in the long run, offsetting any advantage gained by paying for the Stadium Street bridge with cash.

    No, I believe what is going on is that the city is afraid that voters will not approve a renewal of the Street Repair millage, so let the roads degrade so the city can plead poverty and convince the voters to renew the millage. The Street Repair millage offsets money that would need to be spent out of the General Fund as was the case before 1984 when the millage was approved. This would put more of a crimp on the Mayor’s “vision” for the city of Ann Arbor; less bond money available for pie-in-the-sky projects like the $40 million dollars that was almost given away for the Lower Town project.

    The city’s gutting of its safety services has me really pissed off and I want some pay-back; there is no way in hell I will vote to approve a renewal of the Streets Repair fund when the fund is sitting on a surplus of $28 million. Cutting my taxes by 2 mills would be nice; if the city is going to save money by cutting police and fire, I think the savings should go to me and my family before it goes to the city. Taxes spend on things that make Ann Arbor a place where people want to live make it worth paying them; but don’t assume that the more you pay, the more it’s worth. Every now and than the voters should send a message; now is one of those times. The city has seen its tax revenue increase from about $55 million 10 years ago to over $80 million today; an increase well in excess of inflation. Yet the city has squandered the largesse. The city is pleading poverty and cutting services that make Ann Arbor a place where people want to be while spending more on stupid projects like the Hole-next-to-the-Library and the Fuller Road parking deck. How much you want to bet the city has plans in the works to privatize the water department the way it just privatized the composting service?


  7. […] 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 taxation as a subject, […]


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