Council Considers Politics of Income Tax and Property Tax Increase
Under what circumstances might a majority of East Lansing voters support an income tax or an increase in property taxes? This question came up at East Lansing’s City Council this week, as Mike Moquin, chair of the volunteer Financial Health Review Team, presented the results of that group’s year of work.
Because the City is facing a ballooning debt that now reaches almost $200,000,000, Council convened the Financial Health Team (FHT) last year to try to figure out how the City could cut expenses and increase revenue (income). Three of the options for revenue-increase include a City income tax, a general property tax increase, and creation of a special emergency services authority that would be paid for via a new line-item property tax.
Each of these plans would require approval by a majority of East Lansing voters. As a consequence, some of the discussion at this Tuesday’s meeting centered on what approaches might garner voter support.
Income tax: The idea behind a possible new income tax is that it would apply not only to East Lansing residents but also to non-residents who work in East Lansing. This would affect many employees at MSU and could generate millions of dollars a year in income for the City.
By State law, if voters approve a City income tax plan, East Lansing could institute an income tax of up to 1% for residents (people who live in the City limits) and up to 0.5% for non-residents. By law, non-residents can be charged not more than 50% of what residents are asked to pay.
The FHT recommends the City consider a plan by which East Lansing homeowners’ property tax obligation would be reduced by their income tax obligation. East Lansing homeowners would therefore not experience a net tax increase. The City could also institute a system by which people on the lower end of the income spectrum were required to pay only a small amount, or nothing.
All of this would shift much of the income tax burden onto MSU employees who do not live in the City (and onto higher-income East Lansing residents who live in property they don’t own, but there would not be too many of those). This plan could produce millions of dollars in income for the City. The amount would depend on how the system worked, but it could help the City obtain $5-8 million extra revenue per year.
Since East Lansing homeowners would not see much of a net increase in their tax obligation to the City—again, because their property taxes would be lowered commensurate with the income tax obligation—they might be inclined to vote for this approach.
Why might the City be interested in shifting the tax burden onto MSU employees who don't live in East Lansing? Currently, East Lansing is not fully reimbursed for the emergency services it provides to MSU. Because MSU is a tax-exempt organization, state law PA-289 provides for only partial reimbursement by MSU to the City for emergency services; these payments do not cover all of what the City of East Lansing must provide on campus in terms of fire services.
According to the FHT’s report, for the period 2004-2015, encompassing twelve years, “total MSU-related fire service costs” came to almost $27 million, for which the City received grants of $13.25 million. This left the taxpayers of East Lansing a bill of $13.75 million for MSU’s fire protection.
MSU’s administrators are said to be very unhappy with the idea of an income tax, which suggests they might be willing to bargain some other form of support to the City. Another idea spoken of around town, although not in the FHT report, would be a surcharge on tickets to MSU football and basketball games, the money from which would be given to the City of East Lansing to fund emergency services.
The FHT “strongly encourages City Council to confer” with MSU “with a view towards mutually finding new and forward-looking ways of equitable cost-sharing that meets the evolving needs of the University and the City.”
Property tax increase: The 2008+ recession resulted in property values falling in East Lansing. According to the FHT, “From 2009-2016, East Lansing property values declined 5.7%.” The result? “General property tax revenues have declined from $16.5 million in 2010…to $16.1 million in 2016.”
Property values are coming back up, so property tax revenue should be bouncing back up. But a 1978 Michigan Constitutional Amendment called the Headlee Amendment means that property taxes are automatically rolled back to the rate of inflation. That means that even though property values have come back up, because inflation has been low, the property tax rate has not kept up.
According to the City charter, the City could be charging up to 20 mils, or $20 for every $1,000 in assessed property value. Thanks to the “Headlee Rollback,” as it is known, East Lansing is now only taxing at about 17.6 mills. If a majority of voters of East Lansing supported the move, the millage rate could be set back to 20 mills. The FHT calculates this would raise an extra $2.2 million per year.
How can voters be “sold” on this idea? One way would be to designate that money be used for specific things they care about.
The FHT recommends creation of two “dedicated funds,” one for streets and sidewalks and another for Parks and Recreation, including the Hannah Community Center. Voters could be reassured that if they vote to restore the millage to 20 mills, the monies will go to these dedicated funds and not into the general fund.
As we reported, a twenty-year debt millage that had been funding East Lansing Parks and Rec expired last year. If voters are educated about this, and assured a property tax increase would go specifically to Parks and Rec as well as roads and sidewalks, they might approve a “Headlee Rollback override,” as Mayor Pro Tem Ruth Beier called the approach, to fund these services and infrastructure upkeep.
Creation of special Authorities: Michigan law allows voters to approve special “authorities” which are funded through line-item (extra) property taxes. In particular, Michigan state law PA-57 allows municipalities to join together to create a Police and Fire Services authority, which East Lansing could consider with another jurisdiction. This would be only for the purpose of creating an administrative structure that could raise tax funds.
This approach doesn’t create or fund new services, nor does it consolidate services. It simply shifts the revenue source for an existing one, creating new revenue through new property taxes, freeing up general property taxes for other uses. (This is an approach similar in some respects to what happened with East Lansing’s library millages.)
In its report, the FHT also suggested that the City consider collaborations with other jurisdictions that could allow reductions in costs. The FHT “encourages the City Council to actively explore combination of services with neighboring communities, in the areas of public safety, the district court, and other service consolidations.”
Other possible sources of revenue: The FHT suggested to Council other possible sources of additional revenue. These might include new bonds as well as charging more for fees (like sewer and parking) and for permits (for example, building permits).
What comes next: Council is expected to take up the recommendations of the FHT in the coming months. At their meeting, Council members agreed that it would make sense to break off chunks of the recommendations and deal with them according to a pre-arranged schedule.
Some elements of the recommendations are likely to be on the agenda of the Council’s February 21 “discussion only” meeting, perhaps including development incentives (i.e., Tax Increment Financing or TIF), and real property owned by the City.
Council members were unanimous in their praise of the volunteer FHT members, and in particular Chair Moquin, who attended not only all of the general FHT meetings but many of the sub-group meetings.
You may also be interested in:
- Reports of the Financial Health Team (at the City’s website)
- Council Delves into Pension Recommendations, including Bond Possibilities
- Financial Health Team Looks into Significant Cuts in City Services
- City’s Debt Load Nears $200 Million
- What Happened with the Library Millages?
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