The city of Detroit stands to lose $160 million in income taxes as many workers shift to telecommuting amid the coronavirus pandemic.
People with jobs at businesses in Detroit who live outside the city do not have to pay city income taxes for the hours they work elsewhere, per the state of Michigan. And that's making things messy.
With many people cooped up in home offices or balancing laptops while lounging on the couch during the pandemic, income tax policies are under scrutiny. And cities that have relied heavily on that money — like Detroit — are likely to end up with less revenue.
Michigan's largest city estimates a $410 million budget shortfall from the pandemic — including $160 million in income taxes, the city's biggest source of revenue by far. Part of that anticipated income tax loss stems from the recent rise in work from home.
Detroit is one of 24 Michigan cities with its own income tax. Residents pay 2.4 percent while commuters pay 1.2 percent. That revenue is split approximately in half between residents and nonresidents, Chief Financial Officer Dave Massaron said.
The commuters' tax does not apply to wages earned from a location outside Detroit, per the City Income Tax Act, as cited on the state of Michigan's website. That's an added issue for cash-strapped municipalities in a time when a quarter of employed Americans were teleworking as of August due to COVID-19 — down from 35 percent in May, per the U.S. Bureau of Labor Statistics. That's way up from March 2019, when the BLS said 7 percent of U.S. workers had the option to work from another location including home.
Employers in Detroit or doing business in Detroit must withhold income taxes from employees' pay — unless those taxes don't apply, due to remote work, according to the state. But it's unclear how that will work in practice.
Companies do have the option of continuing to withhold taxes anyway, meaning a telecommuting nonresident looking to recoup taxes would need to take the initiative to file for a refund in their tax return, said Michael Bannasch, state and local tax senior manager for Troy-based accounting and business consulting firm Rehmann.
Detroit-based Blue Cross Blue Shield of Michigan, for example, has not changed its policy and continues to withhold income tax payments from its more than 5,500 employees who work in the city, Helen Stojic, director of corporate affairs for BCBSM, told Crain's in an email. Detroit-based Henry Ford Health System plans to tell nonresidents working significant hours remotely to "consider" apportioning their 2020 earnings when they file their tax returns based on where they're working, it said in an emailed statement. But the health system's payroll department is also "assessing if there are options available to adjust payroll withholding amounts for the balance of 2020," the statement read. It had nearly 12,000 employees working in Detroit as of early 2019, per Crain's data archives.
Detroit's biggest employer, Rocket Companies Inc. with 17,000 employees in the city, declined to comment.
Income tax is no small slice of cities' revenue, so decisions that states, businesses and employees make here have ramifications for cities' bottom lines. For those that levy the tax, it averages 34 percent of what they take in annually, according to a Citizens Research Council of Michigan report. Cities including Detroit, Flint, Grand Rapids and Ionia that get a substantial chunk more from income taxes than property taxes are likely to experiences those losses more deeply.
It's possible that some cities may challenge the state's view in court, arguing that taking work home doesn't exempt one from taxes. But Michigan collects and administers Detroit's income taxes, so what the state says goes, Bannasch said.
How much less money cities will collect depends partly on what they're willing to expend on enforcement, he said. Will they track down companies and employees looking to game the system?
The state says documentation of telecommuting wages isn't required for tax returns. But it does say employees should keep records handy in case a city tax administrator asks for proof later — and employers should tell employees in a letter the dates they were instructed to work from home.
While some states have released emergency tax rules on telecommuting during the COVID-19 state of emergency, Michigan is continuing to uphold tax laws as written.
Detroit in April projected a $194 million revenue shortfall for fiscal 2021, which started July 1. However, as of September, that estimate has widened by $62 million. That brings the total for 2020 and 2021 to $410 million, though Detroit balanced its budget for the two years with cuts to staff, capital improvements, recreation and more. The city expects to cover the additional $62 million with a larger-than-expected fiscal 2020 surplus, as well as possibly slowing Detroit employees' return to work, Massaron said.
Officials attribute that additional loss to Detroit casinos being closed longer and reopening more gradually than expected, and giving out more income tax refunds to nonresidents working remotely for longer than expected, according to a presentation for the city's September Revenue Estimating Conference.
"Detroit has been levying this (income) tax since 1961 and has a long history of relying on that, and this pandemic may upend that role and force them to rethink their tax structure," said Eric Lupher, president of the Livonia-based Citizens Research Council of Michigan.
Income taxes made up nearly 30 percent of Detroit's revenue in fiscal 2019, before the pandemic, at $361 million, per the city's comprehensive annual financial report. That dropped to a projected $283 million last fiscal year (fiscal 2020, which ended June 30) and $227 this fiscal year, yearly declines of 22 percent and 20 percent, respectively, according to the conference presentation.
Meanwhile the city estimates its wagering tax haul has dropped from fiscal 2019's $184 million to $132 million last fiscal year and $87 million this year. Both income sources are expected to rise nearer to normal levels in fiscal 2022.
Telework isn't as worrying as the financial drain posed by the wider economic shutdown, Detroit CFO Massaron said.
"I don't want to minimize the issue associated with it for the long-term, but I think the largest driving impacts are the economic changes and behavioral changes that accompany the pandemic," he said, such as casinos closing, canceled sporting events, concert venues shut and decreased restaurant activity. "That economic impact is far greater than remote work."
And when it comes to income tax loss, remote work isn't the only factor.
Businesses' 2 percent tax on their own income could also prove troubling for Detroit, according to Bannasch, as it can be divvied up if they operate in several cities but less work occurred in Detroit this year.
"On the business side … this affects businesses much more when they go to file their tax returns in February, March, April or even later next year," he said.
The city will also get less from residents, Lupher said. Detroit's unemployment rate has skyrocketed during the pandemic, jumping to 48 percent in May and June, while dropping to 38 percent in July, a University of Michigan Detroit Metro Area Communities Study survey shows. Twenty-two percent of residents were receiving unemployment benefits as of late July, according to the survey. And while unemployment insurance is taxable at the state and federal level, it's not at the city level.
When it comes to the work from home conundrum writ large, enduring effects on tax revenue depend on when people return to office buildings.
"It's sort of a question of duration now," Lupher said. "People are starting to pop back into the office and work a day or two. How long is that going to go on? Are they going to return to normal? I think the standard answer you get from people is, 'Not until there's a vaccine,' and not until they know their employees will be safe working alongside their coworkers."
September 20, 2020 at 11:10AM
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Increased remote work could bring income tax revenue hit for Detroit, other cities - Crain's Detroit Business
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