February 23, 2014 at 11:37 pm

Bankruptcy exit plan explores collecting taxes from residents working outside Detroit

Detroit Emergency Manager Kevyn Orr (Paul Sancya / AP)

Detroit — It’s a single sentence in a bankruptcy document that clocks in at roughly 440 pages, but it’s bound to draw a great deal of attention as Detroit tries to increase its revenues and pull out of its fiscal dilemma.

Emergency Manager Kevyn Orr’s restructuring plan released Friday includes a proposal to try to collect income taxes from Detroit residents who work outside the city limits.

“The city is considering the enactment of a local ordinance that would require employers to withhold city income taxes of reverse commuters,” the disclosure statement reads. It’s not a new strategy, but one likely to draw opposition in some circles.

When city and state officials crafted a consent agreement in 2012, it included assistance for Detroit’s efforts to collect those income taxes. But that plan failed and other legislative attempts to have suburban communities help have gained little traction.

A study released by consultants McKinsey & Co. estimated that uncollected income taxes from Detroit residents working outside the city, or reverse commuters, totaled more than $140 million in 2009. That means the city took in slightly less than half of what it should.

On Friday, a spokeswoman for Gov. Rick Snyder said Orr’s current plan is consistent with what was included in the consent agreement.

“It’s just a way for the state to help assist the city in ensuring effective and streamlined tax collection and compliance with existing laws and provisions,” said Sara Wurfel. “Details and particulars are in the early stages and will need to be worked out.”

The bankruptcy plan unveiled Friday by Orr’s team would mean sacrifice from many of Detroit’s sectors, particularly its pensioners — many of whom could see their payments cut by as much as 34 percent. Going after personal income taxes for those working outside the city would mean asking outsiders — namely businesses — to share that sacrifice.

And that makes it a difficult sell.

“We can’t pass an ordinance here that would compel communities like Pontiac or Lansing to collect those revenues,” said Bill Nowling, Orr’s spokesman. “We would need the state’s help to make something like that happen.”

Eric Lupher, director of local affairs for the Citizens Research Council, agreed, saying some communities in a similar situation would support state legislation putting the onus for collecting those taxes on employers outside their borders.

“We have 22 cities in Michigan that levy an income tax,” he said. “Almost universally, they would all like to be able to collect those taxes, but they can’t do it locally. They need the Legislature to come in and say, ‘If you’re employing people from Detroit or Hamtramck or Lansing, you need to withhold these taxes and remit them to those cities.’ ”

But in most cases, the companies being asked to take on the added responsibility would be likely to balk, Lupher said.

“It’s one more administrative task for companies to handle,” he said. “But then again, they’re already doing it for state and federal taxes. What’s so hard about doing it for a third?”

Brad Williams, vice president of government relations with the Detroit Regional Chamber of Commerce, said many of the larger employers his organization represents utilize computerized payroll that already withholds the city’s income taxes.

“Where I think it becomes an issue is with smaller employers, those doing payroll in a less automated way,” he said. “So you can understand how there might be an issue there. If there is a way that this can be done that does not create a burden on smaller employers, we’re certainly interested in making it easier for Detroit residents to pay the taxes they’re obligated to pay.”

Crafting and passing that kind of legislation would be difficult, but not impossible, according to two state lawmakers from Detroit. State Reps. Fred Durhal Jr. and Rashida Tlaib expressed optimism about the proposal, despite the lightened wallets many city residents may experience.

“There are going to be some challenges,” Tlaib said. “Many people want to pay their taxes, they want to contribute. And this is a way of doing it incrementally without facing a large tax bill at the end of the year.”

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