Work-From-Home Challenges City Income Tax Reach

Two dozen Michigan cities that levy local income taxes face a reckoning with a new workplace reality brought on by the COVID pandemic.

Workers who commute to jobs inside these cities have been obligated to pay local income taxes. Many of these employees, however, no longer come to the office, and it’s unclear how many of these nonresidents still pay the local income tax.

With 2020 income tax filing deadlines approaching, city financial offices are bracing for a hit.

“Until we get a full round of (income tax) returns, we won’t know for sure,” said Grand Rapids income tax administrator Jennifer Woodard. She added that roughly 80% of nonresident filers, to date, are seeking at least tax relief for working from home, she said.

Grand Rapids collects a 0.75% tax on the income nonresidents earn in the city.

In a typical pre-COVID year, about 45% of total income tax collections come from those who live outside the city, Woodard said.

Grand Rapids officials have estimated overall collections could be down by as much as $20 million for the 2020 tax year because of the pandemic and mandatory work-from-home orders.

One thing is clear, said Patrick Wright, vice president of legal affairs at the Mackinac Center for Public Policy: “You can’t tax the income of someone who doesn’t live or work in the city.”

“Just like, if you live and work in Michigan, you can’t be taxed by Illinois,” Wright said.

It’s not clear how many nonresident taxpayers have continued to pay local income tax through payroll withholding after their obligation to do so ended in March 2020 with government stay-at-home orders.

In Detroit, which levies the highest nonresident income tax in the state (1.2%), anecdotal reports suggest that many employers have not adjusted their collection practices to the changing circumstances.

Blue Cross and Blue Shield of Michigan told Bridge Michigan that its employees who live outside the city(and now work outside the city as well) have continued to pay the Detroit income tax.

Those employees are entitled, if they claim it, to a refund for taxes paid on income earned outside the city when they file their 2020 returns.

Some cities have set up procedures for employers and employees to cease withholding for nonresidents who no longer work within their boundaries. Woodard said Grand Rapids has a form available for those seeking to stop automatic deductions.

But the calculations can become complicated, she said.

In processing 2020 returns to date, Woodward said, city officials have found that some taxpayers claimed to have worked at home for the entire year, even though stay-at-home orders weren’t issued until mid-March.

Each of those claims has to be reviewed, she said.

The Michigan Municipal League, a lobbying organization for local governments, has encouraged state lawmakers to change state tax law. It wants the state to let municipalities collect income taxes from individuals who work for a company inside their borders, even if those individuals neither live nor do their work there.

Ohio took that approach last year. Taxpayers and their advocates have filed multiple lawsuits challenging its legality, according to Cleveland.com.