Page 1

MEMO TO:

Kathie Grinzinger

FROM:

Nancy

DATE:

March 30, 2012

SUBJECT:

Income Tax Feasibility Study

In February I distributed a Request for Proposals (RFP) outlining the scope of work for the above work based on the City Commission action of February 13 approving the scope. The RFP was directly mailed to 11 financial analysts or accounting firms and made available on our website. A notice was also published in the Morning Sun. Two responses were received with the following pricing: Municipal Analytics LLC, Ann Arbor, MI $17,550 Plante & Moran PLLC, Southfield, MI 25,000 Both proposals met the requirements of our scope of work. Municipal Analytics assumed 185 hours to complete the work over 3-4 months and Plante & Moran indicated 120 hours over 2 months. Municipal Analytics has completed six similar studies in the last 10 years, two of which were in 2012. Plante & Moran has completed five similar studies, the most recent one in 2010. Municipal Analytics indicated that the primary contact would be with John Kaczor and Mr. Kaczor was the principal in charge of our study in 2001 when he worked for the Michigan Municipal League Consulting Services. He is familiar with our community and our desired approach. I contacted the cities that utilized Municipal Analytics in 2012 for their income tax studies and they were very pleased with the work and how it was done and highly recommend the services of Municipal Analytics. I would therefore recommend that the City Commission authorize the Mayor and Clerk to sign a contract with Municipal Analytics LLC to perform the work as authorized in their RFP response. To finance the study I recommend the City Commission authorize a budget amendment of $17,550 from the surplus savings account. Please let me know if you need additional information

NJR/jms


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MEMO TO:

Kathie Grinzinger

FROM:

Nancy Ridley

DATE:

February 3, 2012

SUBJECT:

Income Tax Background

As we prepare for the funding challenges we face in 2013 and beyond, one potential solution regularly mentioned is altemative funding sources. Unfortunately the state laws are quite limiting in the sources cities have available. Recently some City Commissioners requested some background information on an income tax as it is the only alternative taxing method available. The City of Mt. Pleasant has had outside firms study an income tax twice in the last 20+ years . In 1990 Stauder, Barch and Associates completed an analysis at a cost of $7,500 and in 2000 the Michigan Municipal League completed one for $18,000. In 1994 an intern updated the 1990 study with 1990 census data. The 1990 study primarily relied on data from the census to use to estimate the potential income tax revenue whereas the 2000 study relied more on data gathered from major employers within the City. Both studies estimated the revenue likely to be generated based on numerous assumptions. Both studies also analyzed what reduction could occur in the millage rate, presented charts to show the likely impact to individual taxpayers based on income and property values, the estimated cost to administer the new tax, and a multi-year projection of the expected City revenue. Any city income tax would be governed by Public Act 284 of 1964, as amended and can be found at the following link: http://www .Ieg is latu re .mi.gOYI (S (dbtvvvfotsgj4z55gp rt5 r55))1docu ments/mcl/pdf1mc l-act284-of-1964.pdf One often misunderstood piece of a city income tax is the tax rate. The current law allows the City to set the rate at anything !!Q to 1% for residents and the non-resident rate must be one-half of the City rate. In addition, an amendment in 1995 requires an approved vote of the qualified and registered electors of the City to implement such a tax and requires the adoption of a specific income tax ordinance in conformance with the law. A new alternative may be available for the administration of the tax if one were implemented. The EVIP grant program awarded Grand Rapids $550,000 to create an inter-local agreement with Flint and Lansing to combine their income tax processing and payment systems. It is expected to be in operation in 2012 and other cities may join the partnership. This alternative would need to be explored as an alternative to creating our own income tax department.


Attachment A provides a listing of the Michigan cities currently levying an income tax. Attachment B is the Executive Summary from the 2000 study. The following shows the timeline from the 2000 study to show the amount of time from starting the RFP process to a decision by the City Commission. May 2000 June 2000 January 2001 March 2001 April 2001 May 29, 2001

-

RFP released Contract awarded for study Study results received Various work sessions and educational materials generated Town Hall meeting City Commission voted to not pursue the issue of an income tax at this time and not place the question on the fall ballot

Our community and our economy has changed a lot since the last study in 2000. If we want to seriously consider the income. tax as an alternative revenue source I would recommend we again hire an outside firm to estimate the revenue and potential impacts so we are working from updated predictions. The scope of services I would recommend would be very similar to the 2000 study and would include the following: 1. The study must determine the potential revenue generated by an income tax and the concurrent reduction in the millage rate. 2. The study must rely on data other than census data. 3. The study must analyze the impacts of various income tax rates, exemption levels, and millage rates. 4. The study must detail the financial impact on various classes of taxpayers and determine any shift in overall tax burden, including, but not limited to: a. Resident b. Landlords c. Non-resident Homeowners d. Renters e. Businesses located within the City limits f. Businesses doing business in the City, but not located in the City g. Non-resident workers h. Senior Citizens i. CMU Students 5. The results of the study for individual classes of taxpayers must be summarized in a user friendly format to be easily understandable for public presentation. 6. The results of the study must be in such a form to allow the City to calculate additional scenarios with different exemption levels, income tax levels and millage rates. 7. The study must estimate the costs of administering such a tax. 8. The study must project income tax and property tax revenues for each of the next ten (10) years. 9. The study must include an evaluation of the potential impact on any other City revenue sources. 10. The firm shall present the study to the Executive Management Team and to the City Commission. It would be appropriate to allocate funds from the surplus savings account to pay for such an analysis.


Based on the amount of time to evaluate such a change in the tax structure, it would be important to make a decision soon if the external analysis is desired. If the City Commission is interested in starting the analysis, it would be appropriate to review the suggested scope of services and pass a motion to endorse an agreed upon scope. The budget amendment for funding the study would be presented after proposals are received and the actual amount is known. Please let me know if you need additional information

NJRljms Attachments


Page 1 of 1

- What cities impose an income tax?

Attachment A

Michigan Taxes Department of Treasury Taxes Home I FAQ I Online Services I Contact Treasury I Site Map I Forms

Michigan.gov Home

tel

Income Tax

..

!

Text Version

A+ Text Size

D Sh. re

Business One Stop • Departme nt s Agen cies

:

• Online Se r ul ce s

Business Infonnallon Sales and Use Tax

••

Printer Friendly

Single Business Tax Property Tax Fuel and Tobacco Tax -- -

Reference Library Treasury Home

.Surueys

What cities impose an income tax?

Answer:

Tax Practitioners

Individual Income Tax

For 2011 the following Michigan cities levy an income tax of 1 % on residents and 0.5% on nonresidents.

Albion, Battle Creek, Big Rapids, Flint, Grayling, Hamtramck, Hudson, Ionia, Jackson, LanSing, Lapeer, Muskegon, Muskegon Heights, Pontiac, Port Huron, Portland, Springfield and Walker.

-

The exceptions to the above rates are as follows:

City Detroit Grand Rapids Highland Park Saginaw

Residents

Nonresidents

2.5% 1.3%

1.25% 0.65%

2%

1%

1.5%

0.75%

FAQ Categories • Index of Tax FAa's • Individual Income Tax • Business Taxes " 1099-M ISC Filing Requirements • CollectionslDelinquent Accounts • Tax Inaement Financing • Service Fee/Pilot Housing • State Real Estate Transfer Tax • Native American • Michigan Business Tax • Status of Individual Refund • Industrial Facility Exemption • Energy Efficient Qualified Home Improvement Credit

Links to some Michigan cities are available on this web site. If the tax forms are not available on the website, you will need to contact the

city/county in question and they will mail you the required forms.

Michigan .gov Home I Contact Treasury I State Web Sites I FAQ I Sitemap I Privacy Po licy I Link Policy I Accessibility Policy I Security Policy I Michigan New s I Michigan.gov Survey Copyright © 2001 -2011 state of Michigan

http://www .michigan.gov/taxes/O,4676,7-238-437 15-153 95 5--F, 00 .hlml

112612012


Attachment B

n.

!.

CITY OF MOUNT PLEASANT INCOME TAX FEASIBILITY STUDY: EXECUTIVE SUMMARY January, 2001

MlUNICIPAL (CONSULTING ยงERVICES


Ill!

Olll

January 5, 2001

President CHARLES SMILEY Mayor, Burton

Vice President JEFFREY FITCH VlIIage President, Kalkaska

Trustees

il:

MARGARET 'PEGGI" ARNOLD

!]'

KENNETH BABICH

!]'

FRANKLIN L. CAMPBELL

Mayor, Manistique Mayor, Manette

Mayor and City Commission City of Mount Pleasant 401 North Main Street Mount Pleasant, MI 48858 Dear Mayor and Commissioners: We have completed our Income Tax Feasibility Study for the City of Mt. Pleasant. This letter and the attached exhibits summarize the findings of our analysis. The accompanying final report document provides additional detail related to the results of the project including estimating approaches, assumptions, projections and impacts.

Mayor, Hastings

C.D. "AL" CAPPUCCILLI Mayor, Monroe

HAROLD DRAKE Village President, Ravenna

MYRON FRASIER Council President, Southfield

FREMAN HENDRIX Deputy Mayor, Detroit

PATRICIA KILLINGBECK City Manager, AuGres

KURT KIMBALL City Manager, Grand Rapids

STUDY PURPOSE As a result of Proposal A, the Headlee Amendment and limited potential for development in the City, the City of Mount Pleasant may be unable to generate sufficient income from property taxes in future years to meet anticipated expenditures for municipal services. The City is exploring options for meeting future financial needs without substantially increasing the property tax millage rate. One option under consideration is the implementation of a city income tax. This study has been undertaken to determine the feasibility of an income tax in Mt. Pleasant including revenue potential, administrative costs and shifUn tax burden.

GEORGE KORTHAUER City Manager, Petoskey

ENABLING LEGISLATION

KATE LAWRENCE Mayor, Brighton

JAMES LEIDLEIN City Manager, Harper Woods

CAROL SHEETS Mayor Pro Tern, Wyoming

ROBERT SLATTERY, JR. Mayor, Mount Morris

JOEL THOMPSON Mayor, Otsego

Under the provisions of the Uniform City Income Tax Act of 1964 (UCITA), Michigan cities may levy an income tax on specific categories of income for city residents and on a limited scope of income earned in the city by non-residents. UCITA establishes a maximum tax rate of 1% on residents and corporations and partnerships within the city. The non-resident rate cannot exceed one-half of the resident rate. A personal exemption of not less than $600 is required by the Act, and employers within the city must withhold the income tax from employees' payroll. Currently, 22 Michigan cities of all sizes utilize an income tax for a variety of purposes.

MICHAEL USKIEWICZ City Manager, Escanaba

Executive Director GEORGE D. GOODMAN

A member of the National League of Cities Web Address

Headquarters Office

Lansing Office

Northern Field Office

www.mml.org

1675 Green Road, P.O. Box 1487 Ann Arbor, M148106-1487 Phone: 734-<362·3246 Fax: 734-<362·8083

320 N. Washington Square, Suite 110 Lansing. M148933·1288 Phone: 517485·1314 Fax: 517·372-7476

8925 Garden Road Garden, M149835·9270 Phone: 906-<344·2299 Fax: 906-<344·2298


PROJECT APPROACH

In conducting the study, we utilized demographic and economic data from a wide variety of sources to arrive at the estimates contained in this report. Estimations were developed using a computer spreadsheet-based model that incorporates all of the data components collected. Several estimating approaches were developed for each taxpayer group and the results of each approach were averaged to arrive at the estimates presented. The model will also allow the City to test alternative scenarios and update variables over tirne.

FINDINGS

Utilizing the data collected, we developed estimates of revenue, tax burden, administrative costs and millage irnpacts. Our findings are summarized below: Revenue Potential •

A Mt. Pleasant city incorne tax could generate $2.6 million dollars if irnplemented in fiscal year 2001

Income tax revenue is estimated to increase 3.3% per year, while taxable value of property is projected to increase only 2.7% per year

Impact on City Millage •

An incorne tax could allow the City to reduce the current rnillage from approximately 16 mills to approxirnately 8 mills, with no change in net revenue for the City's General Fund

Administrative Costs •

Costs to administer the income tax are estimated at $163,000 in the first year

Tax Burden •

The tax burden paid by Mt. Pleasant residents is estimated to decrease slightly under an incorne tax scenario (see Figure 1)

The tax burden for corporations and partnerships is estimated to decrease substantially under an income tax

Non-residents, including stUdents at Central Michigan University, could contribute approxirnately 25% of the City's general operating revenues under an income tax

Sorne individual residents could see ah increase in their tax burden, as sumrnarized in Table 1


Table 1: Net Increase (Decrease) in Tax Burden for Residents Under an Income Tax

Taxable Value

5,000

15,000

25,000

Adjusted Gross Income 35,000 45,000 55,000 65,000 75,000 85,000 95,000 100,000

$138 $338 0 $38 $238 $438 $638 $538 20,000 ($131 ) ($31) $69 $169 $469 $269 $369 40,000 . ($300) ($200) ($100) $0 $100 $300 $200 50,000 ($384) ($284) ($184) ($84) $16 $216 $116 60,000 ($269) ($469) ($369) ($169) ($69) $31 $131 70,000 ($553) ($453) ($353) ($253) ($153) $47 ($53) 80,000 ($638) ($538) ($438) ($338) ($238) ($138) ($38) 90,000 ($722) ($622) ($522) ($422) ($322) ($222) ($122) 100,000 ($807) ($707) ($607) ($507) ($407) ($307) ($207) 120,000 ($975) ($875) ($775) ($675) ($575) ($475) ($375) 150,000 ($1,229) ($1,129) ($1,029) ($929) ($829) ($729) ($629) 200,000 ($1,651 ) ($1,551 ) ($1,451 ) ($1,351) ($1,251 ) ($1,151) ($1,051)

$738 $569 $400 $316 $231 $147 $62 ($22) ($107)

$838 $938 $669 $769 $500 $600 $416 $516 $331 $431 $247 $347 $162 $262 $78 $178 ($7) $93 ($275) ($175) ($75) ($529) ($429) ($329) ($951) ($851) ($751)

$988 $819 $650 $566 $481 $397 $312 $228 $143 ($25) ($279) ($701)

Effect of Higher Exemption Levels •

Should the City desire to adopt a personal exemption level higher than the $600 minimum established by the Uniform City Income Tax Act, it would realize less income tax revenue and be required to levy a somewhat higher millage rate (see Table 2)

Table 2' Impact of Higher Exemption Levels Current Personal Exemption Level Property Tax $1,500 $600 $1,000 Income Tax Revenue $0 $2,453,703 $2,633,032 $2,553,512 City Millage Required 15.9500 7.5046 7.7684 8.0994 Resident Tax Burden 53.5% 52.5% 52.4% 52.2% Corporate Tax Burden 46.5% 21.8% 22.6% 23.7%

Additional Considerations •

Full implementation and revenue realization of a city income tax would require several years as the City educates employers and residents of the new tax and establishes administrative procedures for tax administration and compliance

The City may benefit from establishing withholding agreements with some ofthe larger employers located outside of the City who are not required by UCITA to withhold

Comparison with Prior Income Tax Studies in Mt. Pleasant •

Overall, findings are similar to those reported in the 1990 income tax study, although the current study reveals a more positive outcome for residents of the City, as illustrated in Table 3


Table 3: Comparison of Current Study with Prior Income Tax Studies in Mt. Pleasant

1990 Study Income tax revenue ($600 exemption) Population Non-resident employees Millage reduction Administrative costs Tax burden: Residents Non-residents Corporation/partnerships

$2,193,127 21,890 8,793 8.3 mills. $89,200 - $94,300 From: 53.75% 0.00% 46.25%

To: 53.87% 27.47% 18.70%

1994 Update

2000 Study

$2,242,736 23,285 9,989 8.3 mills $78,028 - $119,557

$2,638,704 24,003 12,473 (Incl. students) 8.4 mills $158,322 -$168,444

From: 60.37% 0.00% 39.63%

To: 53.73% 26.05% 22.66%

From: 53.50% 0.00% 46.50%

To: 52.50% 25.70% 21.80%

Each of these findings is discussed in more detail in the accompanying report. The spreadsheet model used to develop the estimates is also included in the final report.

CONCLUSIONS The City of Mt. Pleasant may be able to generate more revenue under an income tax than would be possible under a property tax only. The City's demographics, labor market and status as a primary business district in central Michigan make Mt. Pleasant a good candidate for a city income tax. Under an income tax scenario, City property tax payers could see as much as a 50% reduction in the millage rate and a reduction in total City taxes, while non-residents could contribute as much as 25% of the City's general operating revenues. ******************************

We have enjoyed working with the City on this important project, and we appreciate the time and input provided by City employees and the Mt. Pleasant community on this study. If you have questions related to this report, please do not hesitate to call me at 734-669-6327.

/2) ( ) L .

Very truly yours,

If ----. dr

J . n Kaczor Municipal Consulting Services


=

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FIGURE 1 CITY OF MOUNT PLEASANT CITY INCOME TAX IMPACT ANALYSIS ESTIMATED CHANGE IN TAX BURDEN WITH AN INCOME TAX

60.0%

50.0%

,..

,...

,...

40.0%

1-

I--

r-

1-

-

30 .0%

1-

I--

t-

r--

I-- I--

r-

r-

-

I-

I-

-

f-

I--

-

1-

l-

t-

1-

1- -'1-

-

10.0%

.. ..

".

1-

.,

-

-

-

-

I-

I-

1-- 1-

-

-1.,

-I

,...

r-

r-

-

-

20.0%

0.0%

,...

r-

f-

,

-

-

1-

I-

-

,

llt-

i

.

FY 2001

FY 2002

FY 2003

FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

FY 2009

FY 2010

o Residents (Status Quo)

53.5%

53.5%

53.5%

53.5%

53 .5%

53.5%

53.5%

53.5%

53.5%

53 .5%

• Residents (Income Tax)

52.5%

53.3%

53.2%

53.1%

53.1%

53.0%

52.9%

52.8%

52.7%

52 .7%

o Non-residents (Status Quo) o Non-residents (Income Tax) o Corporations (Status Quo)

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

o. 0%

25.7%

23.4%

23.6%

24.0%

24.3%

24.7%

25.1%

25.5%

25.9%

26 .3%

46.5%

46.5%

46.5%

46.5%

46.5%

46.5%

46.5%

46.5%

46.5%

46 .5%

I!!!I Corporations (Income Tax)

21.8%

23.3%

23.2%

22.9%

22.6%

22.3%

22.0%

21.7%

21.4%

21.1%

Mount Pleasant Income Tax Documents  

Courtesy of city government.

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