Detroit City Income Tax

[iheartthed]

The city's personal income tax made more sense when a much larger proportion of the region's jobs were located in the city, since at the time it incentivised being a resident of the city if you worked there. According to a Freep editorial from last week, Detroit was the location for 40% of the region's jobs as recently as 1970, but that is down to 13% today [[http://www.freep.com/article/2010071...-for-all-of-us).

For the sake of discussion, I personally would advocate either 1) making the resident and non-resident rate the same, or 2) eliminating both. But I also don't think that this tax is a major deterrent for people who are choosing between the city and suburbs. It's probably more like the cherry on top of the icing on the cake.

If the city were to eliminate the personal income tax, I think it should be done with an agreement from the state to make Detroit, or areas within it, some sort of sales tax free zone. But I stress that the income tax ain't the most pressing issue in Detroit right now, IMO.

New York City taxes personal income for residents at an even higher rate than Detroit, and the rate cascades proportional to income, but there is no tax for non-residents. People are going to choose to live in the city for a lifestyle that the suburbs cannot offer. That's what Detroit needs to understand.

[ndavies]

My point was that it doesn't take much motivation to push people to look for jobs in other regions. A plethora of [[mostly) suburbanites that all of a sudden are faced with a reduction in pay & the lack of benefits from that cost and I wouldn't be surprised if some look elsewhere. I've often heard from the Detroit ex-pat's [[myself included) about the "last straw" effect. City tax is one more thing that isn't going to help attract talent to the region. Instead the tax will drive it away & those that are left may not be rightly qualified for the vacant positions.

Part of the problem is, You lose some of your best people when things like this happen. The people who are most able to change jobs are the highest performers. The people with the most incentive to leave are the people with the higher salaries. High performers with high salaries have the most to gain by searching for a new job.

Just as the buyouts at the big three made high performers flee for greener pastures, so do tax hikes.

[szla]

The last figure I thought I had heard for revenue from the residential income tax was $330 million. I could be way off. How about selling the Water Department to a metropolitan authority with the responsibility for providing clean water and cleaning the sewage that goes back in the river [[or rivers) and having all new people tapping in pay the true cost. How about 4 billion as the price tag. Amortize the cost over 12 years and the city has 12 years to get its' house in order. Reduce the onerous income tax to 1 percent and 1/2 percent. It would be a very acceptable cost for living/working in the city and it would feel like we're moving in the right direction. You would still have 165 million to reduce onerous property taxes. After doing this you would only have crime, the schools, other city services, lighting etc.. to deal with. But the income would be gone as an impediment for job growth.

[Hermod]

..but they are going to quit their jobs because they need to pay 2.5% tax to the city?

Maybe band together and go to the boss en masse. Tell him that the worker bees have decided that they would enjoy a grander life style on the same pay if the office moved to Troy.

[Parkguy]

I'm not a tax-cut freak, but I've come to believe that the way taxes are structured in the city may be THE biggest reason for abandonment. More than crime, education, or anything else. I've talked to many young people who have said that they would LOVE to buy a nice old house with character in the city, and have even taken action to look for properties, but have decided to stay in the suburbs because of the heavy tax burden in Detroit proper. When you combine a property tax rate of over 65 mills in most neighborhoods [[except in tax-increment zones) AND a 2.5% income tax, the burden in overwhelming.

If you have an average-level household income of, say $50K, your income tax would equal $1250 before deductions [[of which there are not many!). Add to that the property tax on a $200,000 house [[a nice one, and please, I know that prices are down, but there are plenty of people who bought houses in that range who are impacted by the tax rate) at 65 milss with a SEV of $100,000, you add $6500 to the tax bill. Your total hit is $7750 per year. Commercial property is even more, with a millage of over 70 mills.

If you cross Telegraph into Redford, your homestead millage rate is roughly 42 mills. In Southfield the rate ranges from about 40 mills to 52 mills, depending on the school district. All anyone has to do is move just outside the city borders and escape the costs of maintaining a major city, while still enjoying the benefits.

My suggestion: do away with the city income tax, or make it so minimal that the impact doesn't figure in to a family's calculations. Max out the millage rate at 45 or 50 mills, so that the tax structure in the city doesn't make it fiscally impossible for the average family to live here. Do the same for businesses. It will be hard, and we'll have to pick and choose which services we really value enough to fund, but what we lose in tax rates we'll eventually gain in volume. It will take time to balance out, but it will pay off in the end.

[Novine]

Does anyone really think that there's going to be an influx of residents to Detroit if the city income tax is cut in half? I don't think so. Do the math and see how many people it would take to make up the loss of income that will result from cutting the tax rate. I know that it's right-wing mythology that cutting tax rates leads to more revenue but the recent history shows the opposite. Michigan cuts its personal income tax rate near the end of Engler's last term and tax revenues fell, not increased. Similar patterns have happened nationally, even if right-wingers try to tell you otherwise.

The city income tax is one of the city's largest tax revenue sources. Cut that off or cut that in half and you're looking at another major budget hole to plug or even further cuts in services. That doesn't sound like a workable plan at all.

[Hermod]

Does anyone really think that there's going to be an influx of residents to Detroit if the city income tax is cut in half? I don't think so. Do the math and see how many people it would take to make up the loss of income that will result from cutting the tax rate. I know that it's right-wing mythology that cutting tax rates leads to more revenue but the recent history shows the opposite. Michigan cuts its personal income tax rate near the end of Engler's last term and tax revenues fell, not increased. Similar patterns have happened nationally, even if right-wingers try to tell you otherwise.

The city income tax is one of the city's largest tax revenue sources. Cut that off or cut that in half and you're looking at another major budget hole to plug or even further cuts in services. That doesn't sound like a workable plan at all.

The state and city income taxes are operating on the low [[left) end of the curve and movement up and down are not drivers of economic activity. Yes, people may choose to live outside the city and may choose to work outside the city to save a bit on taxes. So long as state income tax is in the 5% range and the city income tax is in the 2% range, moving them down will result in a loss of revenue.

The federal income tax rates are high enough to have an effect on economic activity. The Kennedy tax cut of 1962, the Carter tax cut of the late 70s, the Reagan tax cut of the early 80s, and bipartisan tax cuts of 1986 all caused a surge of tax receipts to the government. The Clinton tax increase of 1993 came before the 18986 tax cuts had fully phased in and didn't have as much effect as the recovering economy did. Tax receipts actually went up two years after the Bush tax cut.

You have to visualize tax rates as a curve. At a tax rate of zero, you get zero receipts. At a tax rate of 1%, you would get X receipts. At a tax rate of 2%, you should get 2*X receipts. At a tax rate of 100%, you won't get 100*X receipts, you will get zero because people will quit making money.

The curve therefore starts at zero receipts with a zero tax rate, rises to a certain value, then falls to zero at a 100% tax rate. If the purpose of the tax is to raise money for the government [[and not be social engineering or soak the rich), the optimal tax rate is where the curve flattens out and peaks.

The right has estimated that point as being a tax rate of 28%. I have yet to hear an argument from the left for any number except "more".

Where is the "sweet spot" for tax revenues?

[BrushStart]

The state and city income taxes are operating on the low [[left) end of the curve and movement up and down are not drivers of economic activity. Yes, people may choose to live outside the city and may choose to work outside the city to save a bit on taxes. So long as state income tax is in the 5% range and the city income tax is in the 2% range, moving them down will result in a loss of revenue.

Where is the "sweet spot" for tax revenues?

The "sweet spot" is the point known as maximum efficiency. City taxes are different than federal taxes, which are scaled based on income, which some argue has a deterrant effect on increased productivity. Contrarily, Detroit income tax is a flat tax that imposes a "user's fee" on all residents. However, a flat tax of 2.5% is felt greater by someone who earns 30k versus someone who earns 85k, but that is beside the point.

The discussion of taxes based on anything but a statistical model is nonsensical if the object is to both maintain the same level of revenue while increasing residential population. As I said above, there is an income tax level that would operate at efficiency, it may be 2.5%, but I doubt 2.5% is it as it seems completely arbitrary. If the data was collected, finding the sweet spot would be easy. That is, the data might show that at a resident income tax rate of 1.3536% would result in the same revenue as more people would be willing to live in the city. Simply because the rate is lower does not mean the revenue will decrease if there is a greater pool of people paying at the lower rate.

Detroit is in direct competition with the suburbs for residents. And although I am willing to pay the 2.5% resident tax, Detroit has priced itself out of the market for many people who have the option of living in a 0% city income tax location while still having reasonable access to city amenities.

[MCP-001]

The state and city income taxes are operating on the low [[left) end of the curve and movement up and down are not drivers of economic activity. Yes, people may choose to live outside the city and may choose to work outside the city to save a bit on taxes. So long as state income tax is in the 5% range and the city income tax is in the 2% range, moving them down will result in a loss of revenue.

The federal income tax rates are high enough to have an effect on economic activity. The Kennedy tax cut of 1962, the Carter tax cut of the late 70s, the Reagan tax cut of the early 80s, and bipartisan tax cuts of 1986 all caused a surge of tax receipts to the government. The Clinton tax increase of 1993 came before the 18986 tax cuts had fully phased in and didn't have as much effect as the recovering economy did. Tax receipts actually went up two years after the Bush tax cut.

You have to visualize tax rates as a curve. At a tax rate of zero, you get zero receipts. At a tax rate of 1%, you would get X receipts. At a tax rate of 2%, you should get 2*X receipts. At a tax rate of 100%, you won't get 100*X receipts, you will get zero because people will quit making money.

The curve therefore starts at zero receipts with a zero tax rate, rises to a certain value, then falls to zero at a 100% tax rate. If the purpose of the tax is to raise money for the government [[and not be social engineering or soak the rich), the optimal tax rate is where the curve flattens out and peaks.

The right has estimated that point as being a tax rate of 28%. I have yet to hear an argument from the left for any number except "more".

Where is the "sweet spot" for tax revenues?

What you are describing is a Laffer Curve.

The plus side of a Laffer Curve is that it's great for calculating budgets. The down side is that TPTB in Detroit Government are fervent followers of failed Keynesian theory who believe that people holding for onto too much of their own money is bad for the economy in general.

On a national level, Dr. Laffer recommended an 11% across the board flat tax to pay for gov't expenditures. No different tax brackets. No FICA, No Medicaid. Everyone paid just one flat rate on their income and NO other taxes are collected.

It would be possible to implement this on a city level. All property taxes and city fees along with other taxes would need to be abolished first.

But, you will need a stable residency base for this to work long term.

I wouldn't recommend trying to implement this until Detroit's population stabilizes.

[BrushStart]

What you are describing is a Laffer Curve.

The plus side of a Laffer Curve is that it's great for calculating budgets. The down side is that TPTB in Detroit Government are fervent followers of failed Keynesian theory who believe that people holding for onto too much of their own money is bad for the economy in general.

On a national level, Dr. Laffer recommended an 11% across the board flat tax to pay for gov't expenditures. No different tax brackets. No FICA, No Medicaid. Everyone paid just one flat rate on their income and NO other taxes are collected.

It would be possible to implement this on a city level. All property taxes and city fees along with other taxes would need to be abolished first.

But, you will need a stable residency base for this to work long term.

I wouldn't recommend trying to implement this until Detroit's population stabilizes.

A flat tax like the one you propose is a "user fee." Unless the cost of the flat tax is equivalent to the value of the percieved benefits of living in the city, people will leave or stop coming. This is because there is competition for residents between Detroit and the suburbs. The United States does not have this problem because it is not in competition with Canada and Mexico for keeping residents. Otherwise, it would not be able to adjust taxes on a whim.

The resident city income tax rate needs to be set at its equilibrium. That is the point that the city collects the greatest amount of tax revenue while maintaining the most amount of residents. The tax can then be raised when the value of living in Detroit increases at the margin. Right now, the tax rate is not at equilibrium [[the "sweet spot" or point of greatest efficiency) by all reasonable estimation. It is arbitrary. Am I the only one able to comprehend this?

[Novine]

Laffer Curve? Seriously? There was no surge of revenues from those tax cuts under Reagan. The revenues were less than they other would have been had taxes not been cut.

"Am I the only one able to comprehend this?"

On a list of 100 reasons driving decisions to live or leave Detroit, the city income tax is far down that list. The idea that there's some "equilibrium" income tax rate that's going to drive any number of residents or businesses into Detroit is detached from reality.

[BrushStart]

On a list of 100 reasons driving decisions to live or leave Detroit, the city income tax is far down that list. The idea that there's some "equilibrium" income tax rate that's going to drive any number of residents or businesses into Detroit is detached from reality.

No, it's not. If you lowered the income tax from 2.5% to 2.4%, a group of people who would not have previously moved in, would move in. Albeit, the amount would be small. Larger decreases in the rate would result in a larger group, until you hit equilibrium, which I'm assuming is a lower rate given that the alternative rate is 0% [[suburbs). Again, equilibrium would be the point where tax revenue remains the same as before but population increases due to a lower rate. More people paying a lower rate is good if a population increase is the goal.

The physical condition of the city is irrelevant to the analysis; it is merely a factor that is built into the size of the group who will be responsive to adjustments in the rate. It is inherently built into the question.

I find it unbelievable that this issue is not on the front burner. If there are inefficiencies in the current tax rate, it is easy to fix and can have a huge impact.

[Hermod]

Laffer Curve? Seriously? There was no surge of revenues from those tax cuts under Reagan. The revenues were less than they other would have been had taxes not been cut.

Revenues went up. The "lost revenues" were based on the concept of "gee if we raised taxes, we would get more money".

The big reduction in tax rates was in 1986 and that tax cut was supposedly "revenue neutral" in that tax bracket rate reductions were based on trading off tax loopholes. This had an effect on commercial buildings because a new project had to make economic sense where under the pre-1986 rules, it only had to make tax sense.

[Huggybear]

The idea of an equilibrium has a good basis in theoretical economics. But in your example:

1. Unless you've plotted the tax-demand curve and come to some definite conclusions re the elasticity of demand, there is nothing to suggest that dropping 1/10 of a point is sufficient to attract anyone. You're probably looking more at a 1/2 to 1 point reduction. And there will be no way to really test this except by doing it. You would need some very reliable [[and expensive) data to determine where to put the rate.

[[Please don't say you are going to rely on anecdotal "market research" since every young suburbanite would lie about this the same way they say "yeah, we looked at a house in the city, but we couldn't find anything that met our needs.").

2. There will be a lag between dropping the tax rate and having people move in, during which you will run [[bigger) deficits and put the city's bond rating even further in the toilet. If you miscalculate, and revenue does not rise, the deficits will be permanent.

3. Due to the other factors affecting demand, it may not be in equilibrium for more than a millisecond, and you will always be overcollecting or undercollecting unless you revised the tax rate every year. Overshooting means that you don't maximize your revenue, undershooting means that you are losing money on the proposition, and constantly changing rates tends to antagonize businesspeople, who like to be able to plan based on certainties.

No, it's not. If you lowered the income tax from 2.5% to 2.4%, a group of people who would not have previously moved in, would move in. Albeit, the amount would be small. Larger decreases in the rate would result in a larger group, until you hit equilibrium, which I'm assuming is a lower rate given that the alternative rate is 0% [[suburbs). Again, equilibrium would be the point where tax revenue remains the same as before but population increases due to a lower rate. More people paying a lower rate is good if a population increase is the goal.

The physical condition of the city is irrelevant to the analysis; it is merely a factor that is built into the size of the group who will be responsive to adjustments in the rate. It is inherently built into the question.

I find it unbelievable that this issue is not on the front burner. If there are inefficiencies in the current tax rate, it is easy to fix and can have a huge impact.

[MCP-001]

A flat tax like the one you propose is a "user fee." Unless the cost of the flat tax is equivalent to the value of the percieved benefits of living in the city, people will leave or stop coming. This is because there is competition for residents between Detroit and the suburbs. The United States does not have this problem because it is not in competition with Canada and Mexico for keeping residents. Otherwise, it would not be able to adjust taxes on a whim.

The resident city income tax rate needs to be set at its equilibrium. That is the point that the city collects the greatest amount of tax revenue while maintaining the most amount of residents. The tax can then be raised when the value of living in Detroit increases at the margin. Right now, the tax rate is not at equilibrium [[the "sweet spot" or point of greatest efficiency) by all reasonable estimation. It is arbitrary. Am I the only one able to comprehend this?

I would disagree on this one.

When things stabilized so that you could impose a flat tax, this would actually be a selling point for getting people to RETURN to Detroit.

Where would you rather live? In a city where everyone can take a piece of paper and calculate the total taxes they would pay in a year?

Or where you get nickel-and-dimed by a huge laundry list of various taxes and fees?

[bailey]

I would disagree on this one.

When things stabilized so that you could impose a flat tax, this would actually be a selling point for getting people to RETURN to Detroit.

Where would you rather live? In a city where everyone can take a piece of paper and calculate the total taxes they would pay in a year?

Or where you get nickel-and-dimed by a huge laundry list of various taxes and fees?

how the tax is calculated is irrelevant to me. What I get for what I pay in is the only thing that matters.

[jackie5275]

My point was that it doesn't take much motivation to push people to look for jobs in other regions. A plethora of [[mostly) suburbanites that all of a sudden are faced with a reduction in pay & the lack of benefits from that cost and I wouldn't be surprised if some look elsewhere. I've often heard from the Detroit ex-pat's [[myself included) about the "last straw" effect. City tax is one more thing that isn't going to help attract talent to the region. Instead the tax will drive it away & those that are left may not be rightly qualified for the vacant positions.

I think there is some legitimacy in this. When I first started working for Wayne County, I was located in western Wayne. I had a colleague who turned down several promotions because she didn't want to work downtown and pay the City income tax. The way she viewed it, the city tax would cancel out her promotional pay increase. Then toss parking into the equation, and she would be facing a pay decrease.

[lo_to_d]

One of the most ridiculous parts of the city income tax is that city employees get taxed more if they live in the City. How does this make sense? It's a direct financial incentive to live outside the city in which you work. I realize maybe this didn't matter when you had residency restrictions in Detroit, but when they removed it, they should have changed the city income tax to be equal for all city employees. I have written State Reps about this, but to no avail. I would say it is has a lot to do with 50% of the city workers living outside the city, Cops, firemen etc. In the end the city looses more money because of the lack of property tax collection, sales tax dollars, etc.

[Hermod]

One of the most ridiculous parts of the city income tax is that city employees get taxed more if they live in the City. How does this make sense? It's a direct financial incentive to live outside the city in which you work. I realize maybe this didn't matter when you had residency restrictions in Detroit, but when they removed it, they should have changed the city income tax to be equal for all city employees. I have written State Reps about this, but to no avail. I would say it is has a lot to do with 50% of the city workers living outside the city, Cops, firemen etc. In the end the city looses more money because of the lack of property tax collection, sales tax dollars, etc.

When I worked for the city of Detroit, I had to give them a Detroit address before being hired and i was required to maintain that address to remain on the payroll.

[Novine]

The non-resident income tax rate is required by law to be no more than 50% of the resident income tax rate. Residents are always going to pay more.

[lo_to_d]

That must have been before Archer and Engler removed Detroit's residency requirement. At the same time they should have flattened the City Income tax for city employees to be equal like it is in NYC.

When I worked for the city of Detroit, I had to give them a Detroit address before being hired and i was required to maintain that address to remain on the payroll.

[lo_to_d]

So you're telling me that laws cannot be changed? Sounds like the Michigan way to me.

The non-resident income tax rate is required by law to be no more than 50% of the resident income tax rate. Residents are always going to pay more.

[boogiechillen]

Wow, this is an intense thread. I'd like to point out that Detroit, unlike many other cities, does not have its own sales tax. Chicago, mentioned at the top of the thread for having 0% income tax, leads the country in sales tax at 9.75%.

[miketoronto1]

It was found that city income tax was the reason 50% of residents who leave Philly for the suburbs each year chose to leave.

[Novine]

"So you're telling me that laws cannot be changed? Sounds like the Michigan way to me."

You tell me how the law gets changed so that non-residents, who are mainly represented by lawmakers outside of Detroit, have to pay an amount equal to what residents pay. What state representative or state senator is going to vote for that?