Ask ELi: Will Homeowners' Tax Liability Really Be "Offset"?
East Lansing Info (ELi) runs a regular feature called Ask ELi to Investigate. We take reader questions and work to get clear answers to them.
Today we’re tackling this submitted question: “My husband and I are city shoppers, considering East Lansing versus Okemos. We are dismayed to hear about the pending income tax. (I grew up in EL, graduated ELHS - love the town.) In researching the proposal on the city's website, I note that they are using misleading language to describe the property tax ‘offset,’ making it seem like the tax is a wash. Calculating the impacts of the property tax on the income my husband and I make results in a $3,000 income tax bill, and the ‘offset on a property valued at for example $129,900 would be about $700. ‘Offset’ implies full offset, not a slight discount.”
Background: East Lansing voters will be asked to weigh in on a City-wide income tax on November 7, 2017. To deal with the City’s mounting financial problems, City Council has elected to put on the ballot a 1% income tax for residents, a 0.5% income tax for non-residents earning income in the City, and a property tax reduction. The idea is that residents’ new income tax burden would be “offset” by a property tax reduction. (Read more.)
Is it fair to call this arrangement an “offset” of taxes? I put our reader’s question to Jill Feldpausch, East Lansing’s new Finance Director, and she explained the City’s use of the term “offset” this way:
“The income tax study calculated approximately $5 million of income coming from East Lansing resident taxpayers, so the thought process by the Financial Health Team and Council was to reduce property tax total income by approximately $5 million. Of course, this is not going to work out to be even for each individual, as income and property taxable values are not all the same; but in total, it would even out. Some people will benefit and pay less taxes [overall], however, there will be some that end up paying more in taxes overall.”
In the analysis of income tax feasibility, external consultant Plante Moran calculated that an income tax would generate approximately $10 million in revenue if a 1% income tax were applied to residents and a half-percent tax were applied to non-residents’ income earned in East Lansing. A property tax reduction was seen as a reasonably equitable way to offset the burden on residents while still providing the City with the opportunity to collect the $5 million in non-resident income taxes. (Councilmember Erik Altmann has characterized the income tax as a tax on “tenured MSU professors living in Okemos.”)
Why an income tax? Michigan’s Constitution limits the ways in which Michigan cities can raise revenue. Some revenue sources, like traffic tickets and other fines, are variable and can’t be counted on from year-to-year. Cities cannot levy sales taxes, because the State sales tax rate is already as high as the Michigan Constitution allows.
Property taxes, city income taxes (which can go up to 1% for residents, and are limited for non-residents to half of whatever residents pay), and fees on services are potential revenue sources for cities, and, of those sources, an income tax is the only one that can be relatively easily applied to a city’s non-resident earners. A city cannot alter property tax rates without voter approval and cannot set different tax rates for different properties, so there is no way legally to have an exactly-equal offset of property taxes to income tax.
Figuring out what you might gain or owe in total: There is a chart on the City’s website as part of the Income Tax and Property Tax Reduction information page that shows the possible impact on homeowners at different incomes and property tax levels. It is a little confusing, because households of different sizes will be able to claim additional deductions in terms of income tax liability.
The chart is based on a presumed exemption of $600, meaning that if you earned less than $600 gross in one year, your income wouldn’t be subject to tax. A married couple filing jointly would have two $600 deductions. East Lansing’s City Council has indicated their willingness to raise that deduction level to ease the burden on low-wage earners (mostly students), but $600 is the standard exemption amount under the Michigan Income Tax Ordinance that was recently adopted (which would not go into effect until after voter approval).
Here are two examples of how East Lansing residents might be impacted by the potential income tax with simultaneous property tax reductions:
A single person making $55,000 a year of taxable income would owe $550 in City income tax. Assuming that this person owns an average-valued house in East Lansing, which is approximately $178,000 according to Zillow, her property tax reduction would be $440. (Remember that State Equalized Value on your home, on which your property taxes is based, is about half the market value of your home.)
A married couple whose combined income totals $140,000 would pay $1400 in City income tax. If they owned a home with a market value of $320,000 (with an State Equalized Value of $160,000), their property taxes would be reduced by $800 under the proposed reduction.
Because there is huge variance in household income and property values, there will be a lot of variation in cost or benefit of this City income tax/property tax reduction proposal. Some incomes, like those derived from Social Security and Pensions are not subject to income tax, but citizens with that kind of income would still receive the property tax reduction.
On another part of the spectrum, we find college students who earn comparatively less money in East Lansing and rent their living spaces. Consider a hypothetical student who works fifteen hours a week, for $9 an hour, and then increases his work hours to 30 hours per week during the summer. He will have an income of close to $9000, which would cost him $90 in City income tax. He is unlikely to see any benefit from the property tax reduction, because, as City Council has acknowledged, landlords are unlikely to pass any savings from property tax reductions along to their tenants.
The bottom line: There is no way legally for East Lansing to exactly offset the cost of City income taxes with specific property tax reductions, and, as noted above, not everyone who would be subject to the tax is a property owner. The $5 million dollar property tax “offset” is meant to ease the burden of the income tax on East Lansing residents while still capturing additional revenue from non-resident workers. But how it will work for individuals will depend on their individual situations.