No Legislative Action to Stop July 1 Detroit Income Tax Rate Rollbacks

In January, CRC wrote about the City of Detroit Income Tax rate rollbacks (both resident and nonresident, but not corporate) scheduled to occur on July 1, the start of the city’s new fiscal year.  CRC noted that barring a change in state law, the maximum authorized rates in Detroit would have to be reduced because the city failed to meet at least three of the four criteria in state law that would prevent the rollbacks from occurring.  In the time since January, the Michigan legislature has not changed the statutory provisions that control the maximum authorized rates, thus rate rollbacks will automatically occur on July 1.  The maximum resident income tax rate that the city is authorized to levy will fall from 2.5 percent to 2.4 percent and the nonresident income tax rate will fall from 1.25 percent to 1.2 percent, effective July 1. 

The scheduled rate rollbacks affect three groups of people differently.  Broadly defined, the groups include the City of Detroit, businesses located in the City of Detroit, and city income taxpayers (both resident and nonresident).  For the City of Detroit, the effects will be felt in the budget through a reduction in revenues to support services.  The rate reductions are estimated to cost $8.5 million on a full-year basis.

Businesses located in the city and who are responsible for income tax withholding (monthly or quarterly) will have to adjust their payroll systems to reflect the reduction in tax rates beginning July 1.  At this point, employers have not been notified by the City of Detroit of the scheduled rate reductions and the city has not provided employers with updated withholding schedules.  If employers continue to withhold city income taxes at the higher rate until some time later in the year, taxpayers will be able to reconcile their withholdings when they file their annual income taxes.

Resident and nonresident city income taxpayers will benefit from the rate reductions.  Holding everything else constant, taxpayers’ liabilities will be reduced and take home pay will increase.  Again, if employers do not adjust income tax withholding immediately, employees will not see immediate benefits; however, taxpayers will realize the benefits most likely when they file their annual income taxes.

At this juncture the maximum income tax rates the City of Detroit is authorized to levy will be reduced effective July 1 because changes to state law have not been enacted.  However, those affected by these changes are not likely to feel the effects, positive or negative, immediately.  It remains to be seen whether the Michigan legislature will step in, after July 1, to address the rate rollback issue retroactively.

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