Detroit could be required to cut its income tax rate this year under a Michigan law that was part of a deal to guarantee the struggling city a fixed amount of state revenue aid for eight years.
Without legislative action, Detroit will be required to trim its income tax rate to 2.4% from 2.5% for residents and to 1.20% from 1.25% for non-residents, according to a report by the Citizens Research Council, a private, nonprofit research group.
The reductions are part of a 1998 law that required the city to roll back the income tax rate by 1/10th of a percentage point every year, provided it did not meet three of four unfavorable financial triggers. The city has met most of those triggers since 2004, allowing it to halt the scheduled reductions since 2003. Lawmakers intervened in 2008 and 2009 to freeze the rate.
However, this year, Detroit meets only two of the four triggers, including an unemployment rate that is higher than 10% and two consecutive years of withdrawals from the budget stabilization fund or exhaustion of the fund balance, according to the research council.
The other two triggers — a year-to-year decline in income tax revenue of more than 5% and meeting a certain threshold of the city’s taxable value compared to the rest of the state — were not met this year, the group said.
“This will cost Detroit about $8.5 million in lost revenue on a full-year basis if the rates are not frozen at 2011 levels through a statutory intervention,” the report said.
“Although $8.5 million represents only a fraction of the nearly $1.2 billion general fund revenues generated by the city in 2011, it does add to the current fiscal challenges facing the city,” it said.