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February 2, 1968

The City Income Tax

The development of the municipal income tax is, for the most part, a post-World War II phenomenon. Philadelphia imposed the first local income tax immediately prior to the war and this set the pattern which other cities later followed. Toledo enacted a local income tax in 1946. During the late 1940’s the use of the income tax spread in Ohio and in Pennsylvania, and several cities in Kentucky and St. Louis, Missouri, imposed the tax. In the mid-50’s Gadsen, Alabama imposed the tax. In 1962 the city income tax was first used in Michigan and, as of January 1, 1968, a total of nine Michigan cities were imposing the tax. In 1966 New York City and Baltimore began imposing the tax. Today, income taxes are levied by over 2,000 local units of government in eight states-­Alabama, Kentucky, Maryland, Michigan, Missouri, New York, Ohio and Pennsylvania.

As used in these states, the tax assumes a variety of forms and many variations of legal and popular names are used to describe it; for example, earnings tax, payroll tax, wage tax, earned income tax, wage and income tax, occupational license tax, gross license tax, income and net profits tax, and just plain income tax. Taxation experts generally agree, however, that its general characteristics as used in most localities would be best described were it titled a “gross earnings and net profits” tax.

The tax is most commonly a low flat rate tax on the earned income of individuals and the net profits of businesses and professions. An employer withholding system is almost always used as a collection device. Inter-jurisdictional tax crediting or reciprocity arrangements have been developed and are commonly used to cope with potential problems of double taxation.

In six of the eight states, including Michigan, the net profits of corporations are subject to the tax. In these various units the tax ranges from one-quarter of one percent to five and a half percent under the new New York City tax. Most local income taxes are imposed at a flat rate–New York City is the only city using graduated rates. A total of $472 million was collected from such taxes nationally in 1966. Since 1966 major cities such as New York, Cleveland and Baltimore have imposed the tax and for fiscal 1968 local income tax collections will pass the one billion dollar mark. In many of the cities that use it, the income tax has become the most important source of revenue, out­stripping the property tax.

There are several major differences between the, local income tax levied in Michigan and those levied by cities in other states. Unlike the federal income tax and state income taxes, local income taxes generally do not allow personal exemptions or non-business deductions. Warren, Ohio, New York City and Baltimore are the only cities outside Michigan

that allow personal exemptions. In Michigan, the local income taxes permit a personal exemption of $600 per taxpayer and dependent. A second major difference between the municipal income tax used in Michigan and that used in other states is in the treatment of unearned income. In most other states the tax is on earned income only, such as salaries and wages, and unearned income such as dividends, interest, capital gains, etc., are not subject to tax. In Michigan and in New York City and Baltimore, however, the tax is imposed on the unearned income of resident individuals, unincorporated businesses and corpo­rations as well as on their earned income.

These two differences, allowing personal exemptions and taxing dividend and interest income, make the local income tax in Michigan a much more sophisticated tax than that found in most other cities. The Michigan municipal income tax is more similar in character to state income taxes than it is to the “payroll”- type income tax found in most cities.

February 2, 1968

The City Income Tax

The development of the municipal income tax is, for the most part, a post-World War II phenomenon. Philadelphia imposed the first local income tax immediately prior to the war and this set the pattern which other cities later followed. Toledo enacted a local income tax in 1946. During the late 1940’s the use of the income tax spread in Ohio and in Pennsylvania, and several cities in Kentucky and St. Louis, Missouri, imposed the tax. In the mid-50’s Gadsen, Alabama imposed the tax. In 1962 the city income tax was first used in Michigan and, as of January 1, 1968, a total of nine Michigan cities were imposing the tax. In 1966 New York City and Baltimore began imposing the tax. Today, income taxes are levied by over 2,000 local units of government in eight states-­Alabama, Kentucky, Maryland, Michigan, Missouri, New York, Ohio and Pennsylvania.

As used in these states, the tax assumes a variety of forms and many variations of legal and popular names are used to describe it; for example, earnings tax, payroll tax, wage tax, earned income tax, wage and income tax, occupational license tax, gross license tax, income and net profits tax, and just plain income tax. Taxation experts generally agree, however, that its general characteristics as used in most localities would be best described were it titled a “gross earnings and net profits” tax.

The tax is most commonly a low flat rate tax on the earned income of individuals and the net profits of businesses and professions. An employer withholding system is almost always used as a collection device. Inter-jurisdictional tax crediting or reciprocity arrangements have been developed and are commonly used to cope with potential problems of double taxation.

In six of the eight states, including Michigan, the net profits of corporations are subject to the tax. In these various units the tax ranges from one-quarter of one percent to five and a half percent under the new New York City tax. Most local income taxes are imposed at a flat rate–New York City is the only city using graduated rates. A total of $472 million was collected from such taxes nationally in 1966. Since 1966 major cities such as New York, Cleveland and Baltimore have imposed the tax and for fiscal 1968 local income tax collections will pass the one billion dollar mark. In many of the cities that use it, the income tax has become the most important source of revenue, out­stripping the property tax.

There are several major differences between the, local income tax levied in Michigan and those levied by cities in other states. Unlike the federal income tax and state income taxes, local income taxes generally do not allow personal exemptions or non-business deductions. Warren, Ohio, New York City and Baltimore are the only cities outside Michigan

that allow personal exemptions. In Michigan, the local income taxes permit a personal exemption of $600 per taxpayer and dependent. A second major difference between the municipal income tax used in Michigan and that used in other states is in the treatment of unearned income. In most other states the tax is on earned income only, such as salaries and wages, and unearned income such as dividends, interest, capital gains, etc., are not subject to tax. In Michigan and in New York City and Baltimore, however, the tax is imposed on the unearned income of resident individuals, unincorporated businesses and corpo­rations as well as on their earned income.

These two differences, allowing personal exemptions and taxing dividend and interest income, make the local income tax in Michigan a much more sophisticated tax than that found in most other cities. The Michigan municipal income tax is more similar in character to state income taxes than it is to the “payroll”- type income tax found in most cities.


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