Last-Minute Questions about the Income Tax Proposal

Monday, August 6, 2018, 7:21 am
By: 
Alice Dreger

We’ve answered many readers’ questions about the East Lansing income tax proposal—which is on the ballot tomorrow—in our nonpartisan voter guide. But over the weekend, a few readers sent in additional questions. Here they are, with answers.

Question: If the income tax proposal passes, does/could it give City Council access to residents’ tax returns and income information?

Answer: Mayor Mark Meadows has said that the City will contract for the administration of the income tax. City Council members would have no role in administering the tax; this falls outside the functions of Council. In fact, State law covers the confidentiality of this information. By contrast, property tax information and voter rolls are, by law, public records. (Therefore, City Council members and anyone else can look those up.)

East Lansing’s Financial Health Team commissioned a study by external consultant Plante Moran of what East Lansing might see in terms of revenue from an income tax, and in that study noted that the State had started processing Detroit’s city income tax and that it was considering offering other cities the same service. The study said that, for now, “Twenty [Michigan] municipalities use the same software system (Innovative Tax Software) to track receipts and compliance.”

Question: Why hasn’t City Council or the City Manager acknowledged the cost of administering the tax?

Answer: They have, consistently, when they cite an expected net revenue amount of $5 million.

The Plante Moran study estimated that an income tax with a $600 exemption would bring in $10.4 million gross. Plante Moran looked at what other Michigan cities are paying to administer local income taxes, and found they now spend about 4%. So that would be about $400,000 on administrative costs for a $10 million tax revenue.

The property tax reduction, which comes automatically if the income tax passes, would reduce the City’s property tax revenue by about $5 million. So, when City Council and the City Manager estimate a net revenue of $5 million per year, they’re using the figure of $10.4 million gross income tax revenue minus $400,000 in administrative costs minus $5 million in property tax reduction.

Question: Why should people “pay to play” in every city they work in?

Answer: We’re nonpartisan so we’re not going to take a position of whether people should pay taxes to cities where they work. However, there are a fair number of Michigan cities and many U.S. states that have opted to tax non-resident income based on the idea that if you’re earning income in those places, you are probably using local services like road repair, emergency services, and the like. (Some states have reciprocal agreements, so that you pay your own state, not the state in which you earned the money.)

If I may provide a personal example of Michigan cities and income taxes, my spouse works as an administrator for MSU for the College of Human Medicine, which has campuses all over the State. Last year, as in years past, we paid nonresident income tax on his earnings in Grand Rapids, Lansing, and Flint, prorated for the proportion of the time he performs MSU work in those cities. Our nonpartisan voter guide explains more about how tax will work for people who, say, live in East Lansing and work in Lansing.

Question: If East Lansing is in so much trouble, why lower property taxes while passing an income tax?

Answer: The combination of a new city income tax with a reduction in property tax was one recommendation made by the Financial Health Team, discussed at some length in the Team’s Revenue Options Recommendations. A City income tax is seen by many as the best new source of revenue largely because it widens the tax base to include commuters who work in East Lansing but live outside the city. The fact that MSU, by far the largest employer and landowner in East Lansing, pays no property tax because it is a public institution contributes to this rationale.

So why not just go for an income tax and leave property taxes where they are? City leaders have had several reasons for combining a property tax reduction with an income tax proposal:

(1) East Lansing homeowners seemed more likely to vote “yes” on an income tax if they were not hit as hard financially because of a simultaneous property tax reduction.

(2) East Lansing has one of the highest property tax levels in the State. This was seen as a way to change that while still bringing in millions of dollars more per year. City Council also saw reducing property taxes as a response to concerns expressed by some residents—but not supported by data—that a city income tax will make East Lansing homeownership unattractive, resulting in property value declines.

(3) A political calculation held that that senior citizens, who vote in higher numbers per capita, seemed more likely to vote “yes” if the vote resulted in a net financial benefit to them. Many older people here own their homes, and, as we explain in our voter guide, many forms of retirement income are non-taxable according to State law. So, seniors as a group are most likely to benefit from this income-tax-with-property-tax-reduction approach. That’s why the Yes campaign sent out targeted mailers specifically to older residents, as shown here:

(4) Last year, City Council was trying to convince MSU to pay millions of dollars a year more towards the cost of emergency services provision. (East Lansing must provide fire and ambulance services to MSU by law.) A tax approach that appeared to shift much of the burden onto MSU employees seemed a way to incentivize MSU’s administration towards paying more to East Lansing in exchange for dropping the income tax proposal. That didn’t work out, and now MSU says it has no money to give, because of the Nassar settlement.

Just to give a sense of scale, MSU’s budget is about $1.6 billion per year, and the City of East Lansing has a budget of about $36 million per year. About half of the City’s income currently comes from property taxes.

Question: Has the “Yes” campaign decided to return the money from businesses that may have financial dealings with the City?

Answer: ELi’s Andrew Graham followed up for us on his report from last week about these campaign contributions from law firms and people/companies involved in the marijuana industry.

Don Power, who is a leader in the “No” campaign, told Graham that he asked the “Yes” campaign to return money donated by those associated with the marijuana industry. Local attorney Jeff Hank has also called on the “Yes” campaign to return that money. (Hank is also a player in the marijuana industry, and so the people who donated money to the Yes committee from the marijuana industry could be seen as potential competitors to his own interests.)

Doug Jester, Treasurer for the “Yes” campaign, has not responded to a subsequent inquiry from Graham for ELi about whether the “Yes” campaign is going to return the funds. City Council Members have also not responded to Graham on his inquiries about this issue. Presumably that means they are not returning the money.

By State law, the contributions are legal. Under East Lansing law, Council Members will not have to disclose those contributions before they vote on matters of interest to those who contributed to the “Yes” ballot committee; they only have to disclose if someone donated $100 or more to their own campaigns.

Question: Any misrepresentations of fact in the latest mailers on either side?

Answer: ELi fact-checks political mailers, and there has been a low rate of misrepresentation this year compared to last year.

Among the latest mailers, including one from the Yes side (see it here) and two from the No side (see them here), we find only misrepresentation on the “No” side, in two specific instances.

The “No” side continues to urge people to “vote no again,” suggesting that the proposal this time is the same as last November’s. There are, in fact, three differences:
(1) This time the income tax would be limited to twelve years, whereas last time it would have been permanent if voters didn’t move to overturn it.
(2) This time the proposal specifies that the “net income tax revenue” would be split 60/20/20 to pay for pension debt, emergency services, and infrastructure.
(3) This time the proposal comes in the form of a City Charter amendment.

The “Clowning Around” mailer from the No campaign also claims, “The East Lansing City Council created a Financial Health Review Team in early 2016 to make long-term budget recommendations, but the Council has largely ignored the team’s expert advice.”

Our reporting has shown otherwise. We have reported that the City has made significant budget cuts which are designed to be long-term. ELi’s Chris Root also did a deep-dive into the Financial Health Team’s pension-related recommendations and what actions the City has taken related to those, and showed a lot of follow-through.

For ELi, I have repeatedly asked the Lansing Regional Chamber of Commerce, which is the major financial force behind the “No” campaign, what specific budget cuts they recommend that the Council hasn’t made. I’ve also asked them specifically what changes to pensions they recommend that haven’t been pursued. They have never answered these questions, although they continue to suggest, vaguely, that there are actions to be taken that haven’t been.

The “Clowning Around” mailer cites some of our other reporting, but apparently missed our reporting on the City’s extensive use of the Financial Health Team’s advice.