A taxing question
Renewing the call for a city income tax
by James Leonard
"We can have an intelligent discussion of a city income tax here," asserts city council member Tony Derezinski. "Because it's a legitimate question: what should be taxed--income or property or both?"
Derezinski's assertion has yet to be proven. In a down economy, any politician who raises the idea of increasing taxes to replace decreasing government revenues risks political suicide. Aside from Derezinski, who represents the Second Ward, no city politician has endorsed the idea outright--though one council member comes close by describing what will happen if the city can't raise more revenue.
"I don't have enough information to be in favor or against a change," says Third Ward rep Chris Taylor. "But I do know that there will be substantial changes in our services because our property tax revenue keeps falling. If the residents value those services, we owe it to them to have a conversation about changing the tax code. Otherwise parks or safety services or human services will have to be cut."
Sabra Briere's view is more typical--and less apocalyptic. "Some members of council feel strongly about it, and the city administrator brings it up routinely," the First Ward rep acknowledges, "but I haven't been convinced, and I'm not supporting it. And I don't think it would pass, especially not in this climate."
Outgoing city administrator Roger Fraser has not only brought up the idea of a city income tax routinely at council retreats, he's strongly for it. "It makes sense for Ann Arbor," he says, "because of the stability we have with the workforce here. The big kahuna is the university, and they're unlikely to go anywhere."
John Petz, president of the Ann Arbor / Ypsilanti Regional Chamber of Commerce, agrees with Fraser up to a point--but is nevertheless strongly against the change. "The University of Michigan isn't going to pick up and move, but their expansions don't have to be in the city, do they?
"Even more importantly," Petz continues, "are the people they want to work with
going to want to work here when there's the economic disincentive? And it's a disincentive for a business to operate in a municipality where there is a city income tax when they can move across the border to another municipality where it isn't."
Not all businesspeople feel that way, however. "A city income tax is necessary," says Mark Hodesh, a nonresident who owns Downtown Home & Garden. "The city has to take in more money. You can't make good choices if cutting is your only means for balancing the budget. They've got to increase the size of the pie."
That's the biggest argument for an income tax: more money for a city faced with declining property tax revenue and disappearing state revenue sharing. The trick would be to capture that revenue without raising residents' overall tax rate.
"It can be designed to add from zero to $12 million [of total revenue]," explains city finance director Tom Crawford. "Property tax is the city's biggest source of revenue, and one reason to consider an income tax would be put in a secondary revenue stream--and to cut back on property taxes."
"The maximum we can charge people who live in the city is one percent of their income," say Fraser, "and half a percent for people who work here but don't live here. That isn't very much--especially compared with the operating millage levy of six mills which we'd be legally obligated to drop."
This would mean lower property taxes--for a home with a taxable value of $110,000, $679 lower. "People are naturally hesitant to vote for new taxes," says Taylor, "but most people don't know an income tax comes with substantial property tax reductions. If you pay property taxes, you'd receive a 13 to 14 percent cut."
"For most people [who live and work in the city], it would be a wash," explains mayor John Hieftje. "A person who had relatively high property tax and low income would pay a little bit less, and
a person who had relatively low property tax and high income would pay a little bit more, so most seniors would do well if they owned their home."
The mayor, a canny judge of political realities, is nevertheless against the change. "The income tax idea has kicked around for years, and I've never been a proponent of it, because it presents a new variable," he says. "Our property tax is relatively stable. It'll go down sometimes like now, but at least we don't have the variable of an income tax that can go way down."
"An income tax is more volatile than property tax," Crawford acknowledges. "We'd have to develop greater reserves to smooth out the cycles."
Whatever its volatility, there'd be no incentive to add an income tax if doing so didn't produce more revenue for the city. Even if an income tax were a wash for residents, it's attractive because it would apply to everyone who works in Ann Arbor rather than just those who own property here. The extra money would come from taxing commuters.
According to the U.S. Census Bureau's 2007-09 American Community Survey, 63 percent of Ann Arbor's workforce lives outside the city. Most commuters work at the U-M, and their numbers have been rising--dramatically. According to the 2000 census, there were 92,363 jobs in town; the 2009 survey counted 106,850. Of those 14,487 new jobs, the U-M accounted for 8,161 or 56 percent.
"The university contributes a tremendous number of jobs to town," says Hodesh. "But they use a lot of services too, and they should pay."
"The irony is that the basis of the city's tax revenues is property tax, while 40 percent of the property in town is tax exempt because the university owns the property" says Derezinski, "What sense does that make?
"I'm personally interested in this," Derezinski continues. "I worked in two communities that I didn't live in, Grand Rapids and Lansing, and I paid taxes in both. I thought it was more than fair there, and I think a city income tax here is more than fair because it shares the cost of the burden of services with people who work here. Do they get the benefit of our infrastructure and our services? Yes! And don't you think it's only fair to ask if they should help pay their share?"
"Clearly the goal would be to get those people who come here to work to pay for the privilege," says Sabra Briere. "But what if they don't come? That's a significant concern."
And that's not Briere's only concern.
"There's already a love-hate relationship between the city residents and the university," the council member continues, "and I don't know that we want to create an increased level of tension." More significantly, she also believes an income tax would be "damaging to people at lowest incomes." That's because "Ann Arbor is [primarily] a rental community, and there's no guarantee that landlords would pass savings on."
Derezinski waves aside Briere's points. "You could put in certain exemptions and minimums to make sure that renters and people with lower incomes aren't hurt." And though council member Carsten Hohnke says he's "very skeptical moving from property to income tax," he believes "there's a lot of dynamics in the rental market, and if every other landlord lowers the rent and you don't, you could find yourself with less tenants."
"As the largest owner of commercial property in Washtenaw County, I can tell you it's not a good thing," says Albert Berriz, CEO of McKinley Properties. "Every apartment [rental] is based on jobs, and if you darken the job picture, you darken the apartment picture too."
Berriz, who contributed $100,000 to defeat the countywide education millage in 2009, says he's "absolutely" opposed to a city income tax. "Everything we do should be about job creation, not tax creation, and I know instinctively a city income tax won't generate jobs."
He also says that even if the income tax passed, "renters wouldn't get any benefit. This 13 percent savings [in property taxes] is not going to my renters." So would McKinley just keep the money? "Let's just say that even in the extremely unlikely event that it did pass, I'm dubious that there will be any reductions in property tax," Berriz says.
City CFO Tom Crawford says there's no doubt about the property tax cut--the city charter requires it. But that's not Berriz's only objection. "Before we add revenues, look at how we're spending the money we have," he says. "Has the city cut as much as it can?"
Briere thinks not. "We haven't cut as much as we can cut, and we don't have union agreements that result in reduced costs for benefits. If we got $12 million more per year, where would be the incentive to cut costs?"
Fraser says the city would love to reduce the cost of benefits but notes that "our safety service contracts are all subject to collective bargaining, and we've made all the change we can without compromises on the other side. We'll continue to press, but the way the laws are structured, there's no reason for safety service unions to compromise.
"The specific issue surrounds P.A. 312, which provides for compulsory binding arbitration of contract disputes," Fraser explains. "The process is long and cumbersome, and the historic results tend to favor employee organizations. The last contract with police went to 312 arbitration and was not resolved until two years after the contract expiration." When the city is trying to get employees to pay more for their benefits, he adds, "there is some incentive to let the system play out because their compensation and benefits remain unchanged during the negotiation process and retroactive reductions are unlikely."
With projected deficits through 2015 and the state apparently planning to eliminate statutory revenue sharing, Fraser sees few alternatives to an income tax. "We can always keep reducing services--it's what we've been doing and what we do--but we don't have a lot of fluffy services left to reduce unless you consider parks and recreation fluffy--and I don't."
"It's a balance," Derezinski says of the budget process. "You have to do both, and thus far, we've just been doing the cuts. We've cut 25 percent of the [city's] workforce in the last ten years. We cut back on leaf collection last year. We cut back mowing the parks. All that was an effort to save money--but how far can we cut?"
The Ann Arbor / Ypsilanti Regional Chamber of Commerce is the most vocal opponent of the idea of a tax code change. "The chamber was opposed in the past and will vigorously oppose it in the future," says Petz, who also serves as director of government and community relations at Domino's Farms. "We had a poll of our membership the last time this came up in '09, and 74 percent said they would not support a city income tax because it's a disincentive to do business here."
Mark Hodesh doesn't see it that way. "If we do this, we'll have a stronger town, and that leads to good business for me. There's a reason this town has survived: it's a quality place to be. And if it costs a little more to keep it up, well, it's worth it. Besides, if government is only about what something costs, we'd have no national park system and no national road system--and I don't know about anybody else, but I don't like to see our senior centers and public pools closed.
"I don't see how it would have any effect on my business," continues Hodesh. "And the good thing is that the employees who live outside the city will pay a little bit too. I live outside the city, and I use the streets and roads and the city services all the time every day and I should be paying for it. That's fair."
No one can say for certain if an income tax proposal will ever come to a popular vote, much less say if it would pass. But Taylor and Derezinski are determined to keep the issue before the public.
"We are going to undertake a concerted effort to inform and educate the residents," says Taylor. "We're determined to have a public conversation of whether it should go to ballot."
They'll face a determined opponent in the chamber--"I hope that through conversation that we're more than eager to have with the city, they'll understand it's not the right direction," says Petz--and an equally determined opponent on council. Hieftje says his "goal is to get through the recession without a tax increase."
Though he's opposed to any new taxes, the mayor is frank about the alternative. Without more revenue, Hieftje says, the city will have to do less, "because we can't cut any more without a reduction in some services." But if service cuts are the only way to avoid an income tax, he says, "I understand that a lot of people might be OK with that."
[Originally published in April, 2011.]