Local-Option City Income Taxation in Michigan
Memorandum 1103, January 2011

Michigan’s prolonged economic recession is creating fiscal stress for many local governments and causing city government officials to seek alternative revenue sources. Revenues from the two current primary sources, property taxes and unrestricted state revenue sharing, have fallen sharply in recent years. Some might prefer a local-option sales tax, but the state Constitution dictates the maximum sales tax rate and the dedication of sales tax revenues. Without the ability to go above the current six percent rate, it is not likely that a local-option sales tax could be authorized without the state ceding some of the tax it currently levies or a constitutional amendment, which would require voter approval in a statewide election. The local option income tax, therefore, is the revenue option immediately available to cities.

Since 1964, Michigan law has authorized cities to impose local-option income taxes as an alternative, or supplement, to property taxes. At present, only 22 cities levy an income tax. The following will explain how city income taxes work, analyze the history of the cities levying this tax, and investigate the incentives and disincentives municipal policy makers may wish to consider relative to imposition of this tax.

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