April 2 (Bloomberg) -- Ionia, Michigan, borrowed half as much for a new fire truck last year as it planned, and its main drag is freshly paved. The benefactor: its income tax.
As the U.S. begins to shake off a recession that bankrupted two Michigan automakers, and factories rehire thousands, most of the state’s 22 cities with income taxes are getting a windfall. Historically, a volatile levy of last resort because the revenue varies with economic conditions, it has become a vital safety net as property taxes flag.
“We are lucky that our income stream is diverse,” Ionia City Manager Jason Eppler said. “If we had to rely only on property tax and state aid, we’d be in a lot worse shape.”
Ionia’s income-tax receipts rose 33 percent in 2011 from 2010. Even Detroit, trying to avoid running out of money this year, got a 3 percent gain in 2011, reaching a four-year high, according to U.S. Census Bureau estimates. New York, Baltimore, Pittsburgh and Youngstown, Ohio, also had gains.
“This is all very unusual,” said Eric Scorsone, an economist at Michigan State University in East Lansing who compiled data on income-tax revenue. “Property taxes have always been so stable. Now, from a public-financing standpoint, income taxes are providing more stability. A lot of it is driven by higher pay for existing workers and people working longer hours.”
Wages and Property
Local income-tax receipts across the U.S. for the 12 months ended December 2011 rose 14 percent to the highest since 2008, the previous peak, to $19.9 billion, according to Census data. Local property taxes fell about a third of 1 percent to $453 billion, the second-straight annual decline.
More than 4,900 local governments, covering about 23 million people in 17 states, have income taxes, according to the Tax Foundation, a Washington-based research group. As many as a half dozen Michigan cities are considering them, said John Kaczor, principal for Municipal Analytics LLC in Ann Arbor.
“There has been a significant increase in interest because property taxes will take decades to recover,” said Kaczor, who consults with cities on income-tax proposals. “They aren’t necessarily popular, but there are limited other options to increase revenue.”
Municipalities should consider diversity of revenue regularly, said Jeffrey Esser, chief executive of the Government Finance Officers Association in Chicago, which provides training and advice.
“The last recession was different than most,” Esser said. “For all those previous recessions, once source that didn’t usually fluctuate that much was property tax. This is a snapshot at a moment in time and it may not be very reliable in making projections.”
Auto sales pushed Michigan’s economy in January to its highest in six years, according to Comerica Bank’s monthly activity index. Michigan trailed only North Dakota for economic improvement since the third quarter of 2009 through the fourth quarter of last year, according to the Bloomberg Economic Evaluation of States.
Local income-tax receipts collected in the state rose 4 percent last year to about $134.4 million as property tax fell 4 percent to $2.58 billion, according to Scorsone’s analysis. That helps explain why more cities weren’t taken over, he said. Six cities or school districts are under state financial control this year.
Putting Out Fires
In Ionia, 130 miles (210 kilometers) northwest of Detroit, a third of the income-tax gain is from about 400 new jobs related to the auto industry. Also, residents who were already working are getting more hours, Scorsone said.
The city, which expected to borrow $400,000, was able to pay $230,000 in cash toward a 2011 pumper truck that cost $465,000, Eppler said. The 33-foot-long fire engine replaced a 21-year-old model in a seven-vehicle fleet, he said.
A budget surplus helped the city provide matching money to enable a state highway project, Eppler said. The town is home to four prisons, which make up 5,000 of its 11,200 residents.
In Detroit, 14,000 new people hired downtown as part of business development there helped income-tax revenue rise to $223.6 million last year, Mayor Dave Bing said in an interview. The city figures workers owe another $200 million, he said.
City income taxes began after the Great Depression, according to the Tax Foundation report.
The first emerged in Philadelphia in 1939, the group said. Pennsylvania leads all states, with more than 2,900 local income-tax jurisdictions, according to the Tax Foundation.
Pittsburgh collected $71.8 million from it in 2011, compared with the budgeted estimate of $70.4 million, according to Joanna Doven, a spokeswoman for Mayor Luke Ravenstahl.
Controller Michael Lamb said in a telephone interview that the city likely will report a budget surplus for 2011.
Communities that impose taxes pay a price in lost development as companies and residents locate in towns without extra costs, said Travis Brown, chairman of the Kansas City, Missouri, group Let Voters Decide.
Brown led a campaign for a ballot initiative to block the local spread of income taxes in Missouri and require their regular reauthorization in St. Louis and Kansas City. He is backing efforts to get statewide income taxes repealed in Missouri, Kansas, Oklahoma and New Jersey.
The Wages Went
“This is all based on a failed assumption that income was not mobile,” Brown said. “Mayors figured the jobs weren’t likely to move. Well, they moved.”
For now, cities are just glad for breathing room, said Kyle Miasek, deputy finance director in Youngstown. In his town, income-tax revenue rose about 6.9 percent last year, letting the city match funds from a state program to demolish some of its 2,000 vacant structures and bolster a program to help small businesses.
“At least we’re moving in the right direction again,” Miasek said in an interview. “We had a pretty sizable decline and, without it, the dent would be even deeper.”
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