Ask ELi: Who Pays What If Tax Proposals Pass

Tuesday, September 26, 2017, 8:17 am
By: 
Jessy Gregg

Shown above: Businesses and homes (owner-occupied condos in the City Center complex) at the corner of M.A.C. and Grand River Avenues.

Editor’s note: In our continuing nonpartisan coverage of the two East Lansing tax proposals on the November ballot—an income tax and a property tax reduction—reporter Jessy Gregg is answering readers’ questions. To learn more, see Saturday’s column and also see Jessy’s answer to the question of whether the property tax reduction would really “offset” East Lansing homeowner’s total tax liability.

First off, some reminders:

The East Lansing income tax proposal on the November ballot calls for residents to pay a city income tax of 1.0% and also calls for non-residents to pay a city income tax of 0.5% on income earned in the City of East Lansing.

The property tax reduction, if passed, would reduce taxes paid to the City of East Lansing by about 5 mills. Mayor Mark Meadows had estimated that property owners would see a reduction of their property taxes of about 10% if this were passed.

The property tax reduction proposal is tied to the income tax proposal, so the plan is not to reduce property taxes unless the income tax proposal passes. The idea of these twin proposals is to shift much of the tax burden onto non-resident earners in East Lansing, particularly those working at MSU, partly to help the City pay for the costs of providing emergency services to MSU.

The combined proposals are estimated to net the City additional revenue of about $5 million per year.

Why do residents have to pay twice what non-residents pay?

This is dictated by Michigan’s Uniform City Income Tax Ordinance, the state law passed in 1964 outlining how a Michigan City can implement an income tax. This law specifies that the maximum amount a city resident can be asked to pay is 1.0% and that non-residents cannot be charged more than half of what residents are required to pay. (Cities don’t have to use 1.0% maximum as the rate, but non-residents’ tax liability is capped at half of whatever residents pay.)

Why do residents have to pay on income NOT earned in East Lansing, but non-residents pay only on income earned in East Lansing?

State law mandates which income is taxed under Michigan city income taxes, and it mandates that if a city income tax is passed, residents pay on income earned in and out of the city, and non-residents pay on income earned in the city. Residents are generally assumed to consume more city services than non-residents.

That said, under Michigan’s income tax rules, city of employment takes precedence over city of residence when it comes to tax on a particular income. So, if you happen to live in one city with an income tax and work in a second city with an income tax, you would first pay the city of employment, and then pay the city of residence on the remainder of your tax liability. Total tax liability between both cities could not exceed the 1% limit specified by state law.

So, if I live in Lansing and work in East Lansing, I will have to pay tax and file tax returns in both jurisdictions?

Yes. For example, imagine you live in East Lansing and earn 100% of your income in Lansing, which has an income tax of the kind East Lansing is considering. You would pay 0.5% on 100% of your earnings to Lansing, and then would pay the remainder (0.5%) on 100% of your earnings to East Lansing. You would have to file returns in both places.

If an East Lansing resident worked two jobs, one in Lansing and one in East Lansing, the percentage owed to each municipality would not break down as an even 50/50 split.

Below: MSU's medical school building in Grand Rapids.

What other cities in Michigan have income taxes? Is theirs 1.0% for residents and 0.5% for nonresidents?

There are 22 Michigan cities that currently have income taxes. The last city to pass an ordinance was Ionia, passed in 1994. Albion, Battle Creek, Big Rapids, Flint, Grayling, Hamtramck, Hudson, Ionia, Jackson, Lansing, Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Springfield, and Walker all tax at 1.0% for residents and 0.5% for non-residents.

Cities that already had already adopted income taxes at a rate higher than 1.0% prior to the passing of the Universal City Income Tax Ordinance in 1964 have been allowed to keep their higher rates. These cities are Detroit at 2.4%, Grand Rapids at 1.5%, Highland Park at 2% and Saginaw at 1.5%.

Do MSU employees and East Lansing residents who work part- or full-time in Lansing, Flint, Detroit, Grand Rapids, and other Michigan cities with income taxes have to pay income tax to those cities?

Yes. What they pay follows the same state-mandated rules that an East Lansing income tax would follow.

Will businesses in East Lansing be subject to the income tax?

Yes. Businesses and corporations based in East Lansing will be subject to the same 1.0% tax as individual residents.

Profits from rental property will also be taxed at 1.0% if the owner is an East Lansing resident and 0.5% if they are not.

Businesses that are not based in East Lansing but derive some percentage of their profits from doing business in East Lansing will be asked to calculate the percentage of their profits that were derived from doing business in the City and will pay 0.5% income tax on that.

If a business owner pays herself a wage before her profits are calculated, she would owe personal income tax on her wages (resident or non-resident, depending on where she lives) and also on the profit of the business. (Read ELi’s report about business owners objecting to the income tax proposal.)

Below: Window displays at Mackerel Sky and Footgear, two locally-owned downtown businesses.

If I own East Lansing property, how much will my property tax bill really go down?

If voters pass both measures in November, City Council has promised an approximately 5 mill reduction in property taxes, which would bring the City property tax rate down to about 12.6 mills.

A mill is one dollar for every thousand dollars of taxable value of a property, which is generally about 50% of market value. So, using the average market value for a home in East Lansing of $180,400, the owner’s City property tax liability would go from about $1,596 per year to about $1,145 per year, for a savings of about $450.

Remember that this is just a reduction on City property tax. The proposed reduction would not impact how much you pay in taxes to your county and does not effect voter-approved millages, such as the library millage, school bonds, or the trails millage.

Won’t pairing an income tax with a property tax reduction disproportionately hurt people who are renters?

In all likelihood, yes. If landlord sees fit to refigure leases in the light of receiving tax reductions on their property, renter could see reductions in their rent. Council has agreed that this is unlikely to happen, so it is probable that renters would be subject to the full residential income tax liability without the benefit of the property tax decrease.

Below: The Oakwood Neighborhood, where owner-occupied houses mix with rental houses.

What’s to keep my property tax bill from going back up again in a year or two?

The current City millage rate is 17.6 mills. The City Charter amendment property tax proposal on the November ballot calls for it to go down to 13 mills, a 4.6 mill reduction. Mayor Mark Meadows has said that if the ballot proposals pass, Council will actually reduce the City property tax rate by 5 mills, but only the 4.7 mill reduction will be locked into the City Charter.

This means Council could opt to raise the property tax rate by 0.4 mills in the future. However, Council could not raise the City property tax by more than that without a majority of voters approving an increase.

Why have my property taxes gone up even though voters haven’t voted lately to raise City property taxes?

City property taxes are only part of your property tax liability. Millages passed by voters, including the Ingham County trails millage and the East Lansing Public Schools bond millage, raise how much you pay on your property tax bill.

It’s also worth understanding that, frequently, when property taxes go up, it is because the assessment on the property has increased. If your assessed value increases, then your property taxes go up, because what you pay is based on assessed value.

Even if property values increase, the amount the assessed value can increase is limited by the Headlee Amendment cap. The Headlee Amendment holds back increase in assessed values in a jurisdiction to the rate of inflation. (Read more about Headlee here.) The Headlee Amendment has contributed to stagnation of revenue in the East Lansing general fund, contributing to the City financial problems. (Read more about the City’s stagnated revenues.)

 

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Note: After publication this article was corrected to specify that a mill refers to taxable value, not State Equalized Value.