Ann Arbor officials lay out city income tax plan to shift tax burden to commuters, increase revenues by $7.6 million

"I've worked in other cities that have city income taxes," said Bailey, a manager at the Hatcher Graduate Library. "It's not something that I find particularly offensive. And especially if the tax money that they collect is used for reasonable things - the greater good - then I wouldn't have a problem with it."

With Ann Arbor's future budget projections looking grim, talk of placing a city income tax question on the November ballot is gaining momentum.

Under the city's charter, if an income tax is adopted, Ann Arbor's general operating millage would be eliminated. That means property taxes would come down by 6.2 mills, or about 15 percent overall.

A property tax decrease would help offset the cost of the income tax for many residents, while non-residents would for the first time pay about $12.4 million a year to Ann Arbor.

"The burden continues to be on property owners to pay for local government services," said City Administrator Roger Fraser. "In our city, there are over 75,000 people that commute every day into work who do not pay for any portion of their services unless they happen to meet one of our finest on the street. We believe that in Ann Arbor, this question is one that we ought to be asking folks."

The Ann Arbor City Council plans to evaluate the idea and decide Aug. 17 whether to place it on the November ballot. Twenty-two other municipalities in Michigan have local income taxes, including Detroit, Grand Rapids, Lansing, Flint, Saginaw and Jackson.

"The most important thing to remember is the City Council does not decide whether or not there will be an income tax," said Councilman Leigh Greden, D-3rd Ward, one of the leading proponents of the tax. "Under state law, only the voters can decide. All the City Council does is decide whether to put it on the ballot."

Ann Arbor City Council members received a 53-page report Friday from financial consultant Plante & Moran, outlining revenue scenarios for an income tax at different exemption levels. City officials are considering offering generous exemptions to individuals - as high as $3,500 per dependent - to lessen the amount of income subject to taxation. For instance, a family of four with an income of $100,000 could be taxed on just $86,000.

At that level, a city income tax could generate $38.6 million a year for Ann Arbor, but that's before factoring in the loss of $28 million from eliminating the city's operating millage. Of the remaining $10.6 million, city officials predict $3 million would cover administrative costs, resulting in a net profit of $7.6 million if an income tax is enacted.

Fraser said the income tax could help Ann Arbor's budget, which already is stretched thin. He said the city will be forced to make dramatic reductions in the next two years in the absence of additional income.

"The stuff that we have to do to balance the budget is just draconian," he said. "We already believe that this year's forecast is overly optimistic. The information that we're getting on our revenue forecasts is telling us that we're probably going to have to take another couple million out before we get to the end of the year.”

Already, the city has implemented hiring freezes and asked managers in every department to begin reducing their expenditures to cut a projected 5 percent to 6 percent to balance this year's budget, Fraser said. City officials also have discussed closing the Ann Arbor Senior Center and laying off 14 firefighters.

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Ann Arbor resident John E. Eaton, a private attorney who works in Southfield, said he's opposed to the tax.

"I think it's a silly idea," he said. "It would tax everybody's income but only relieve the tax burden of businesses and homeowners, so renters wouldn't likely see a reduction in their rents. The people who can least afford to pay more taxes would pay more taxes."

According to the study, Ann Arbor residents currently share 76 percent of the tax burden ($21.3 million) under the city's operating millage system, while corporations share 24 percent ($6.7 million). Under an income tax system, residents would assume 59 percent ($22.9 million), non-residents 32 percent ($12.4 million) and corporations 9 percent ($3.3 million).

City officials say the income tax would affect all 114,000 Ann Arbor residents, regardless of whether they work in the city limits. The only exceptions would be individuals who work in other cities that already have an income tax, in which case they would not pay Ann Arbor's income tax.

City Councilman Stephen Rapundalo, D-2nd Ward, said he's in favor of an income tax.

"I think we're obligated to put this out in front of the voters for them to have an honest dialogue," he said. "Residents want to perceive some equity that they are not the only ones having to shoulder the burden of the cost of services."

Greden said he believes most working class families would see a decrease in their taxes under the income tax system, and seniors and the disabled would see double exemptions. However, it could end up costing high-income residents more money.

"Some people will make money, some people will lose money, and some people will come close to breaking even," Greden said.

Councilman Mike Anglin, D-5th Ward, said he won't support the income tax.

"It hurts the renters," he said. "The landlords would probably not pass on this particular savings to their tenants, so I think what you'd have is an increase (for renters) and half of the people in town rent."

The idea of an income tax in Ann Arbor has been discussed many times over the years; it was twice rejected by voters decades ago. But city officials have been evaluating the idea more closely since the University of Michigan announced it was buying Pfizer's 177-acre campus for $108 million.

The property owned by Pfizer, the city's largest taxpayer, disappears from the tax rolls since U-M is tax-exempt. Pfizer paid Ann Arbor $4.1 million and the county $1.3 million in taxes in 2008.

Though U-M doesn't pay taxes, it has 38,000 employees - the majority of whom commute to Ann Arbor - who would be subject to an income tax.

Greden says he's looking forward to a robust debate in the community about the pros and cons of an income tax.

"We have to make a decision," Greden said. "Do we want to look for a way to bring in some new revenue to protect fire services, to protect parks, to protect things like the senior center? The income tax could be structured in a way to generate new revenue."

Photo by Ryan Stanton: Fenton resident Marcy Bailey, a manager at the University of Michigan's Hatcher Graduate Library, is one of an estimated 75,000-plus people who make the daily commute to work in Ann Arbor but currently don't pay taxes to the city.

Ryan Stanton covers government for AnnArbor.com. He can be reached at 734-623-2529 or ryanstanton@annarbor.com.