UM not ready to follow MSU's lead and offer millions to nix city income tax

ANN ARBOR, MI - While Michigan State University has offered East Lansing $20 million to nix the idea of a city income tax, the University of Michigan doesn't appear ready to offer Ann Arbor the same.

As Ann Arbor officials gear up to once again discuss the idea of taxing people's incomes, including residents and non-residents who work in the city, UM isn't taking a formal position.

At least not yet.

While the East Lansing City Council decided in June to put a city income tax proposal before its voters in November, Ann Arbor officials are still in the early stages of considering whether to put a city income tax proposal before voters here in 2018.

If the Ann Arbor City Council decides to put an income tax proposal on the ballot and it's approved by city voters, it would affect, among others, tens of thousands of UM employees who work in Ann Arbor, a majority of whom commute here from other communities.

"On the matter of a city income tax, in the past the university has considered such matters to be the realm of city government and ultimately the voters of this community," said Jim Kosteva, UM's community relations director.

"There have been no formal discussions with the leadership about a city income tax," Kosteva said.

UM's most recent count shows it has 48,544 full-time equivalent staff, faculty and supplemental employees in Ann Arbor.

The university's data indicates 20,250 -- or 42 percent -- have home addresses with Ann Arbor zip codes.

Altogether, city officials have stated there are roughly 80,000 people who commute to work in Ann Arbor from outside the city.

Under a local income tax, those commuters would start paying taxes to support Ann Arbor city government.

For Ann Arbor, the maximum city income tax rate allowed under Michigan law is 1 percent for residents and 0.5 percent for non-residents, and that's what the city has been considering -- along with some exemptions, including possibly a $20,000 minimum income level before a city income tax is applied.

Ann Arbor officials have discussed the idea for many years, mostly in the context of finding a way to shift some of the city's tax burden to non-resident commuters, including UM employees, who drive on the city's streets and use city services and infrastructure. UM has a large footprint in Ann Arbor and does not pay property taxes.

The Lansing State Journal reported this week that MSU originally offered to pay East Lansing $10 million if the city agreed to pull an income tax proposal from its November ballot, and the city declined, making a counter request of $100 million.

MSU upped its offer to $20 million, while arguing MSU employees would be most impacted by the tax, which would be at the rate of 1 percent for residents and 0.5 percent for non-residents. The proposal also would lower property taxes by roughly 4 mills.

Based on 2015 earnings, MSU estimates its employees would pay $4.9 million in income tax, or about 98 percent of the estimated $5 million in new annual revenue that East Lansing hopes to gain from the tax after considering the property tax reduction.

Under different hypothetical scenarios, Ann Arbor officials estimated last year the city could raise between $5.1 million and $11.3 million in new annual revenue with the implementation of a city income tax combined with a rollback in property taxes.

Ann Arbor's city charter requires that, if an income tax is adopted, the city's general operating millage must be eliminated.

The city millage that would go away is a roughly 6-mill property tax. It costs about $600 per year for the owner of a home with a $200,000 market value and a $100,000 taxable value.

The total homestead tax rate in Ann Arbor for 2016 was about 48 mills, so eliminating the city's general operating millage would amount to about a 13 percent property tax reduction for homeowners.

How the numbers would work out for individual city residents, and whether it would be a cost savings or cost increase for them, depends on the size of each person's income and property tax bill.

For example, for retirees who own a home in Ann Arbor and don't have much income, it could be a cost savings because of the property tax reduction. For working professionals renting apartments in Ann Arbor, it could be a cost increase, as there's no guarantee landlords would pass along the property tax savings in the form of reduced rent.

City officials have described a city income tax as a way to shift some of the city's tax burden onto commuters who benefit from city services and infrastructure and don't currently pay city taxes.

However, a 2009 feasibility study conducted by a city-hired consultant showed that, while a city income tax could general several million dollars in new revenue from non-residents, it also could increase the overall amount of taxes city residents pay by millions, while significantly lowering taxes paid by corporations in the city.

"It's clear that we could generate more revenue from it, but there are some unintended consequences, and those can be the appearance of business friendliness of the city, the impact on lower-income, particularly non-property-owner residents, because people who rent aren't going to see a benefit; they'll just see the downside," City Administrator Howard Lazarus said last December after the idea of a city income tax emerged at a city budget retreat.

"So, those are things that will all be discussed, and we'll have to weigh the benefit of additional revenue versus the other costs."

Ann Arbor's city staff is scheduled to present more information to the City Council at a special work session on Sept. 11.

The meeting is dedicated to the topic of city revenue and the idea of implementing a local income tax. It starts at 7 p.m. inside the council chambers on the second floor of city hall, 301 E. Huron St.

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