August 15, 2013 at 10:01 am

Detroit gets no help from state in collecting city taxes

Lansing— When Detroit leaders first agreed to state oversight of the city’s finances in April 2012, Gov. Rick Snyder’s administration vowed to help collect millions of dollars in unpaid income taxes from residents who work in the suburbs.

More than 16 months later, however, the Snyder administration has not yet put forward legislation to require suburban employers to withhold and remit the 2.4 percent city income tax for Detroit residents. Critics say the lack of action stifles the city’s ability to raise revenues needed to invest in vital services and restructure $18.5 billion in debt while in bankruptcy court.

“This would be a relatively easy way to help Detroit, but there doesn’t seem to be much (legislative) support for helping Detroit,” said former state Treasurer Robert Kleine, who tried to pursue the legislation in former Gov. Jennifer Granholm’s administration to no avail.

One study commissioned by Mayor Dave Bing’s administration estimated Detroit was owed $142 million in uncollected income tax revenue in 2009 from the 54 percent of employed Detroiters known as “reverse commuters” who work in the suburbs. If employers do not automatically withhold taxes from their paychecks, those Detroiters are supposed to estimate and remit the taxes each year on their own.

An estimate of the uncollected income tax revenue in the 2009-10 fiscal year would have amounted to 67 percent of what Detroit actually collected, while running up a $280 million deficit, according to city budget records.

City treasurers across the state say Detroit’s income tax collection woes are not isolated. The state’s other 21 municipalities with income taxes also struggle to get suburban employers to withhold taxes, forcing local tax collectors and contractors to mine state and federal tax data to find residents who have dodged the tax or didn’t know they owed.

“We run into the same issue,” Lansing Treasurer Antonia Kraus said. “It’s not like we’re asking (out-of-town businesses) to do something that they’re not already doing at two other levels of government.”

John Schaut, income tax administrator for Grand Rapids, said numerous West Michigan businesses withhold city income taxes for their employees, but “a lot of big employers” will not do it.

“I do encounter responses that they consider it an unfunded mandate,” Schaut said.

The state Treasury Department has distributed draft legislation to municipal tax collectors that would require suburban businesses to collect and remit city income taxes for residents of any municipality with a tax on earnings, according to Schaut and Kraus.

Noting no legislation has been introduced, Treasury spokesman Terry Stanton said the agency is considering ways to “better align” the city and state income tax laws while “considering provisions that would assist in the collection of city income tax from those who live within, but work outside, the city.”

Ripe for statewide collection

Detroit Emergency Manager Kevyn Orr told The Detroit News last month it might be best to turn over city income tax collection to the state Treasury.

“We’re debating that right now,” Orr said July 19, a day after the city filed bankruptcy. “Anything that gets us a better return and more efficiency, we’re going to look at.”

But the Treasury Department has resisted calls to take over collection of city income taxes, Kleine said.

The state of Maryland — where Orr resides — allows municipalities to piggyback on the state’s income tax form, Kleine said.

“As far as I’m concerned, that’s the only thing that makes sense,” said Kleine, who was state treasurer from 2006-11.

Stanton said collecting 22 different city income taxes would not be as simple as tacking on an additional page to state income tax forms for residents of those jurisdictions.

“If the state is serious about local governments being more efficient, this is a small token of effort it could do to help those cities,” said Eric Lupher, director of local affairs at the Citizens Research Council of Michigan, a nonpartisan group based in Livonia.

Gregory Nowak, a tax attorney at the Miller Canfield law firm in Detroit, said he’s often wondered why there are 22 separate city income tax collection agencies.

“It’s certainly a situation that would be ripe for a statewide administrative program,” Nowak said.

Schaut said state-level city income tax collections would have geographic limitations. “The challenge is you’ve got to have boots on the street,” said Schaut, chairman of the Michigan City Income Tax Administrators Association.

Snyder has advocated for consolidation of local government services.

In April, the Treasury Department awarded a $715,000 grant to Grand Rapids to continue a two-year-old consolidation of joint city income tax return processing with Flint, Lansing and Battle Creek.

Detroit is expected to join the partnership next year.

The cities are contracting with JPMorgan Chase to process paper forms. The banking giant handles the same forms for the state of Michigan’s income tax, Schaut said.

A controversial concept

In southeast Michigan, just Detroit, Pontiac, Highland Park and Hamtramck have personal income taxes, with varying rates.

A new law requiring suburban employers in Macomb, Oakland and Wayne counties to collect and send taxes to those cities could trigger push-back from businesses as well as residents, said House Speaker Pro Tem John Walsh, R-Livonia.

Walsh said it “might be wise” to debate the issue given Detroit’s dire finances.

“I don’t think that subject should be off the table,” Walsh said.

Oakland County Executive L. Brooks Patterson, a Republican, said it’s a “ridiculous concept” to expect employers in his county to withhold Detroit city income taxes that don’t benefit the coffers of suburban communities.

“You’re increasing the paperwork burden on my employers,” Patterson said. “If you live in Detroit, you should pay your taxes.”

State Sen. Bert Johnson, D-Highland Park, said the uncollected taxes problem cannot be resolved by simply relying on Detroiters to voluntarily send City Hall 2.4 percent of their annual taxable earnings.

“I don’t know anybody in Detroit or otherwise who pays a bill that they don’t get an invoice for or are being asked to pay,” he said.
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