Citing Thomas Jefferson, Michigan panel weighs ban on city income tax for non-residents

Beth LeBlanc Craig Mauger
The Detroit News

Lansing — A Michigan House committee debated Wednesday a ban on city income taxes imposed on individuals who work but don't live in the city, legislation that would shrink the revenues of 24 municipalities, including Detroit.

For about 30 minutes, the House Tax Policy Committee discussed — but didn't vote on — the bill sponsored by Rep. Pamela Hornberger, R-Chesterfield Township. Chairman Matt Hall, R-Marshall, described the meeting as the start of a conversation, spurred in part by the growing use of remote workers during the COVID-19 pandemic.

State Rep. Pamela Hornberger, R-Chesterfield Township, has proposed a ban on city income taxes imposed on individuals who work but don't live in a Michigan city.

The state Department of Treasury opposes the legislation because of the revenue impact it would have on Michigan cities, department spokesman Ron Leix said. 

Opponents contended employees that travel into cities to work are using services and said the proposal would be another hit for local governments that face strict limitations on how they can fund their operations.

But Hornberger said she calls the legislation "the no-taxation-without-representation bill," referring to the fact that non-residents face city taxes while not having a say in city elections.

Twenty-four Michigan cities levy an income tax that impacts non-residents who work within their boundaries, according to the nonpartisan House Fiscal Agency. Hornberger's proposal would reduce their revenues by at least $200 million a year.

"Whether I work in Lansing or not, if I get into a car accident, public safety still has to respond, whether it's the fire department or police. That doesn't matter where you are," Hornberger said. "I fail to understand the argument that people who are employed by a business in a city should be paying a tax to provide those services, as if it provides some extra benefit for them."

Rep. Steve Johnson, R-Wayland, said the proposal was great and said the colonists went to war with the British because of opposition to taxation without representation.

"Thomas Jefferson would be proud," Johnson said.

Advocates for cities were less supportive.

"Michigan is one of the most restrictive states in the country for how local governments are financed," said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League.

Rep. Jim Ellison, D-Royal Oak, said lawmakers need to take a broader look at how local governments are funded and eliminate the need some municipalities feel for city income taxes. But Ellison said if individuals work in a city with a local income tax, they should pay it.

"It's never bothered to me," Ellison said. "Because I feel I am using their services."

In addition to emergency services, street lights, roads, zoning offices and economic development operations are all in place and funded to help with businesses in cities, Hackbarth said.

"Each community has different needs, has a different structure. They've looked at those needs and said this is how we can address it," Hackbarth said. "I think that is important for this committee to realize."

All of the 24 cities impose a lower rate on non-residents than residents. Twenty of them, including Lansing, Flint, Hamtramck and Pontiac, levy a 1% tax on residents and 0.5% tax on non-residents. Detroit, the state's largest city, has a 2.4% tax on residents and a 1.2% tax on non-residents.

Individuals who are non-residents but work in a city are only taxed for the days they actually physically work in the municipality, Hackbarth said.

"They can request refunds of any withholdings that were done based upon days that they did not work in the city," he added.

Cities across the state got a taste of the decreased non-resident tax revenue during the pandemic as many people shifted to work from home and avoided the non-resident tax.

As of March, people who worked but did not live in Detroit accounted for a $23 million fiscal year hit, which occurred in the last quarter of 2020, and a projected $84.9 million loss in 2021, said Deputy Chief Financial Officer and Budget Director Steven Watson.