Menu Close

Even Detroit Gets a Boost With Local Income Taxes at 4-Year High

Ionia, Michigan, borrowed half as
much for a new fire truck last year as it planned, and its main
drag is freshly paved. The benefactor: its income tax.

As the U.S. begins to shake off a recession that bankrupted
two Michigan automakers, and factories rehire thousands, most of
the state’s 22 cities with income taxes are getting a windfall.
Historically, a volatile levy of last resort because the revenue
varies with economic conditions, it has become a vital safety
net as property taxes flag.

“We are lucky that our income stream is diverse,” Ionia
City Manager Jason Eppler said. “If we had to rely only on
property tax and state aid, we’d be in a lot worse shape.”

Ionia’s income-tax receipts rose 33 percent in 2011 from
2010. Even Detroit, trying to avoid running out of money this
year, got a 3 percent gain in 2011, reaching a four-year high,
according to U.S. Census Bureau estimates. New York, Baltimore,
Pittsburgh and Youngstown, Ohio, also had gains.

“This is all very unusual,” said Eric Scorsone, an
economist at Michigan State University in East Lansing who
compiled data on income-tax revenue. “Property taxes have
always been so stable. Now, from a public-financing standpoint,
income taxes are providing more stability. A lot of it is driven
by higher pay for existing workers and people working longer
hours.”

Wages and Property

Local income-tax receipts across the U.S. for the 12 months
ended December 2011 rose 14 percent to the highest since 2008,
the previous peak, to $19.9 billion, according to Census data.
Local property taxes fell about a third of 1 percent to $453
billion, the second-straight annual decline.

More than 4,900 local governments, covering about 23
million people in 17 states, have income taxes, according to the
Tax Foundation, a Washington-based research group. As many as a
half dozen Michigan cities are considering them, said John
Kaczor, principal for Municipal Analytics LLC in Ann Arbor.

“There has been a significant increase in interest because
property taxes will take decades to recover,” said Kaczor, who
consults with cities on income-tax proposals. “They aren’t
necessarily popular, but there are limited other options to
increase revenue.”

Municipalities should consider diversity of revenue
regularly, said Jeffrey Esser, chief executive of the
Government Finance Officers Association in Chicago, which
provides training and advice.

Passing Condition

“The last recession was different than most,” Esser said.
“For all those previous recessions, once source that didn’t
usually fluctuate that much was property tax. This is a snapshot
at a moment in time and it may not be very reliable in making
projections.”

Auto sales pushed Michigan’s economy in January to its
highest in six years, according to Comerica Bank’s monthly
activity index. Michigan trailed only North Dakota for economic
improvement since the third quarter of 2009 through the fourth
quarter of last year, according to the Bloomberg Economic
Evaluation of States.

Local income-tax receipts collected in the state rose 4
percent last year to about $134.4 million as property tax fell 4
percent to $2.58 billion, according to Scorsone’s analysis. That
helps explain why more cities weren’t taken over, he said. Six
cities or school districts are under state financial control
this year.

Putting Out Fires

In Ionia, 130 miles (210 kilometers) northwest of Detroit,
a third of the income-tax gain is from about 400 new jobs
related to the auto industry. Also, residents who were already
working are getting more hours, Scorsone said.

The city, which expected to borrow $400,000, was able to
pay $230,000 in cash toward a 2011 pumper truck that cost
$465,000, Eppler said. The 33-foot-long fire engine replaced a
21-year-old model in a seven-vehicle fleet, he said.

A budget surplus helped the city provide matching money to
enable a state highway project, Eppler said. The town is home to
four prisons, which make up 5,000 of its 11,200 residents.

In Detroit, 14,000 new people hired downtown as part of
business development there helped income-tax revenue rise to
$223.6 million last year, Mayor Dave Bing said in an interview.
The city figures workers owe another $200 million, he said.

City income taxes began after the Great Depression,
according to the Tax Foundation report.

Pennsylvanians Pay

The first emerged in Philadelphia in 1939, the group said.
Pennsylvania leads all states, with more than 2,900 local
income-tax jurisdictions, according to the Tax Foundation.

Pittsburgh collected $71.8 million from it in 2011,
compared with the budgeted estimate of $70.4 million, according
to Joanna Doven, a spokeswoman for Mayor Luke Ravenstahl.

Controller Michael Lamb said in a telephone interview that
the city likely will report a budget surplus for 2011.

Communities that impose taxes pay a price in lost
development as companies and residents locate in towns without
extra costs, said Travis Brown, chairman of the Kansas City,
Missouri, group Let Voters Decide.

Brown led a campaign for a ballot initiative to block the
local spread of income taxes in Missouri and require their
regular reauthorization in St. Louis and Kansas City. He is
backing efforts to get statewide income taxes repealed in
Missouri, Kansas, Oklahoma and New Jersey.

The Wages Went

“This is all based on a failed assumption that income was
not mobile,” Brown said. “Mayors figured the jobs weren’t
likely to move. Well, they moved.”

For now, cities are just glad for breathing room, said Kyle
Miasek, deputy finance director in Youngstown. In his town,
income-tax revenue rose about 6.9 percent last year, letting the
city match funds from a state program to demolish some of its
2,000 vacant structures and bolster a program to help small
businesses.

“At least we’re moving in the right direction again,”
Miasek said in an interview. “We had a pretty sizable decline
and, without it, the dent would be even deeper.”

To contact the reporter on this story:
Jeff Green in Southfield, Michigan, at
jgreen16@bloomberg.net;

To contact the editor responsible for this story:
Mark Tannenbaum at
mtannen@bloomberg.net.

Leave a Reply