IIn Michigan’s 24 cities with local income taxes, restrictions on working from home, which still largely apply to office workers, resulted in billions of dollars in budget gaps last year.
The cities that introduced local income taxes – including Grand Rapids, Walker, Muskegon, Muskegon Heights, Ionia, Benton Harbor, Big Rapids, and Battle Creek – collect income from residents and non-residents who work in the city. Under state law, cities cannot withhold income taxes from non-residents if they do not work in the city.
City budget constraints have increased over the past year, while local authorities have no clear end in sight, as relocating from home is expected to play an ongoing role following the pandemic. Income tax cities may have to adjust to lower income tax revenues for the foreseeable future.
“Every community developing a budget has to deal with factors that create their revenue,” said Chris Hackbart, director of state and federal affairs for the Michigan Municipal League. “No question about it, there have been changes in the workplace. The question is: how long-term are they? “
Grand Rapids projects an income tax shortage of $ 15 million to $ 20 million for the current fiscal year ending June 30. Molly Clarin, CFO of Grand Rapids, doesn’t expect income tax revenues to return to pre-pandemic levels until fiscal 2026.
“It’s a loss of approximately $ 45 million” over the next five years, Clarin told MiBiz.
The City of Walker is forecasting a shortfall of roughly $ 2 million this fiscal year out of a $ 18 million budget, Mayor Gary Carey said. The main employer hit by the office job closings, supercenter retailer Meijer Inc., has more than 2,000 employees at its headquarters in the city, Carey said.
“It’s not just this year that worries us. It’s next year too, ”Carey said, though funding from last year’s federal CARES bill could make up for much of the loss this fiscal year.
Walker is also unique among the 24 cities with an income tax in that there are relatively low property taxes. Around two thirds of the city’s budget comes from income tax revenue.
“It’s a nice place to be when the economy is strong,” said Carey. “We’re building the plane while we’re flying it, just trying to figure out what that budget will be.”
Hackbarth said the pandemic is having two impacts on city budgets: while cities are losing income tax revenues from non-residents, unlike the state and federal government, they also cannot levy taxes on unemployment benefits. He pointed to state estimates showing a shortfall of $ 120 million to $ 160 million due to nationwide local income tax losses. The unemployed side of the equation adds another $ 100 million to $ 110 million, which equates to roughly $ 250 million in income for income tax cities, Hackbarth said.
Despite budget concerns, local officials remain optimistic about providing at least the short-term relief included in the U.S. bailout bill. Michigan will receive $ 10.3 billion for the state and local governments.
An analysis by the National Conference of State Legislatures finds that local governments can use the relief funding for pandemic-related costs incurred through December 31, 2024. Funding will be released in two phases: within 60 days of the signing of the March 11th Economic Act and then after the first year. States would also have to distribute the funds to smaller cities within 30 days of receiving them.
“These are important components as communities try to fill potential economic gaps,” Hackbarth said. “We saw in the Great Recession the resistance that local governments faced because they were later hit by land tax implications and falling property valuations.”
In total, according to the National Conference of State Legislatures, $ 45.6 billion was allocated to large cities and $ 19.5 billion to cities with fewer than 50,000 residents.
Grand Rapids is expected to receive $ 94 million, while Detroit is expected to receive $ 880 million, based on a formula in the bill that takes into account population and poverty rates.
Clarin said the incentive would “be of great help,” noting that the city of Grand Rapids has “reasonable assurance” that the latest incentive will make up for the $ 15 million shortfall in the current fiscal year, “and we do not must consider restricting urban services. “
In her fiscal 2022 budget proposal, Governor Gretchen Whitmer also called for $ 70 million relief for cities to offset income tax losses.
Hackbarth hopes the U.S. Treasury Department moves quickly to avoid confusion by providing guidance on how the latest federal money is allocated and how it can be spent.
In the long term, the Michigan Municipal League and income tax cities want state law to address the issue and ensure that state income tax law “adapts to the current situation,” Hackbarth said.
According to Clarin, Grand Rapids is looking to see if there is a possible legislative solution that would determine your tax rate based on where your payroll is drawn up rather than your physical location. This could help address the non-resident withholding component.
She added that city officials are talking to local businesses about their longer-term plans to better gauge the future budget impact of working from home.
“Each of the 24 cities is a bit different,” said Hackbarth. “But there needs to be a long-term discussion about what changes we might need to make.”