Answers to Questions about the Income Tax Update

Above: East Lansing Income Tax Administrator DaMar Boyd (photo by Andrew Graham)

Our report this week giving the updated forecast on net revenue from East Lansing’s new income tax generated a number of questions from readers. Here are those questions and answers to them.

What is the City doing about compliance – about getting people who legally owe the tax to pay it?

The City’s Income Tax Administrator DaMar Boyd is continuing to work on compliance in conjunction with staff from Innovative Software Services, Inc., the external consultant which Council hired to process the income tax returns. They are using various techniques to figure out who might need a compliance reminder, including using public records about business operations in East Lansing.

Boyd said at Council’s December 10 meeting that businesses had been responsive to contacts about the income tax, but that the rate of compliance will only really become clear after the first year’s cycle is complete. That’s because the City can’t know who will file a return.

The City’s largest employer, Michigan State University, has asked its employees to complete the East Lansing W-4 form and has been undertaking withholding as a result. (Employers withhold based on what employees indicate on their forms.)

I’m not sure if I owe income tax to East Lansing. How do I find out?

Check out the City’s dedicated webpage on the income tax. That includes contact information for DaMar Boyd, who is happy to take questions by email or phone.

What did the ballot language about the income tax actually say? In other words, what did voters approve?

In August 2018, a 58 percent majority of East Lansing voters approved a 12-year income tax in a Charter Amendment ballot measure that asked:

“Shall Section 11.1 of the East Lansing City Charter be amended to authorize an excise tax on income for 12 years commencing January 1, 2019 implementing reduction of the City property taxes from a maximum of 20 mills to a maximum of 13 mills and requiring the net income tax revenue to be dedicated as follows: 20% to police and fire protection; 20% to the maintenance and improvement of streets and sidewalks, water and sewer systems, and parks, recreation, and city-owned facilities; and, 60% to supplemental payments for unfunded pension liabilities for retired city employees.”

So is the City required to divert $5.3 million from the new income tax revenue to the General Fund to make up for the property tax reduction? (Where is “net income tax revenue” defined?)

The following chart was provided in Monday’s report and shows (in the light blue rectangle) the $5.3 million to which this question refers.

That’s the amount expected to be diverted from the first year of the income tax revenue to the General Fund to cover the property tax reduction.

At the May 14, 2018, meeting where City Council voted to put the income tax on the August 2018 ballot, Council voted through a resolution which specified how the revenue of the income tax would be distributed by defining “net income tax revenue” to mean:

“the income tax revenue actually received by the City minus the difference between the amount of property taxes which lawfully could have been assessed without the reduction in property taxes required by Section 10.5 of the City Charter and the amount of property taxes actually received by the City, as calculated annually; and, further reduced by the cost of administration of this [income tax] and refunds.”

What is the City going to do with that $5.3 million? Could some or all of it go to the pension debt?

City Council decides through the annual budget process how funds will be allocated from the General Fund. City leaders have been working to make supplemental payments to the pension system to try to increase the City’s “funded” ratio for retirement-related debt – the amount of money “in the bank” compared to what is owed to present and future retirees.

So, yes, City Council can take more of the income tax revenue and put it to the pensions than just the 60 percent of the net revenue indicated by the ballot resolution. But keep in mind the property tax reduction means this $5.3 million is not essentially “extra” revenue to the City.

What is the City doing about trying to reduce the City’s pension liability?

Before the income tax vote, ELi’s Chris Root conducted extensive research in order to answer readers’ questions about how the City is handling retirement-related obligations, including how the City’s pension approach has been changing. To learn what she found in her research, the best place to start is this article: Did Council Follow the Financial Health Team’s Pension Recommendations?

Does the estimate of $400,000 for administrative costs for the income tax really include all the overhead costs of the new tax?

The estimate includes the salary and benefits of our Income Tax Administrator and also the fees expected to be paid to the external consultant, Innovative Software Services Inc. (ISSI). These are all costs that would not have been incurred without the income tax.

The number is an estimate because ISSI is charging the City on a per-return basis, and we don’t yet know how many returns will be filed.

The property tax reduction has taken place, so why does it seem like my property taxes haven’t gone down?

We explained in this article why you may not be seeing much – if any – property tax reduction in terms of actual dollars you are paying on your East Lansing property, particularly if you live in Ingham County and the East Lansing Public Schools district.

Note that the March 10 (2020) ballot in Ingham County is going to include ballot proposals on the following property tax issues: Potter Park Zoo operational millage; Ingham County Trails and Parks millage renewal; Ingham County Health Services millage for low-income residents not eligible for Medicaid; Ingham County Intermediate School District Special Education millage; and a CATA millage renewal.

Check out this helpful set of graphics from the City of East Lansing to see where property taxes collected in East Lansing really go.

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