Matt Helms

Detroit Free Press

Detroit’s efforts to boost income tax revenues are paying off significantly as the city goes after companies large and small that haven’t been complying with the law, officials said Wednesday.

Income taxes are the category of revenue that Detroit’s top financial leaders say will be easiest to grow in the coming years as the city recovers from its historic bankruptcy and looks to improve on collections of taxes owed to the city.

The State of Michigan began collecting income taxes on individuals who work in the city — residents and nonresidents alike — this year, permitting people to file city income taxes electronically for the first time and boosting compliance with tax laws.

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Now, Mayor Mike Duggan's administration is going after companies that do business in the city but haven’t paid the corporate income taxes they’re supposed to pay, according to the city.

So far, the effort is working, said John Naglick, the city’s chief deputy chief financial officer and finance director.

Amid the crackdown, a Detroit company in November voluntarily disclosed corporate tax records to the city for three prior years, paying the city $1.2 million in uncollected corporate income taxes. City officials declined to name the company, saying they are prohibited by state law from discussing income tax issues pertaining to individual taxpayers and corporations.

The city also recently won a Michigan Tax Tribunal ruling against downtown law firm Honigman, which also has offices in the suburbs and outstate.

According to records, Detroit, in recent years, had sought to force Honigman to adjust the percentage of profits the firm earned in Detroit, based on revenues paid by clients for work its lawyers performed in the city. Honigman argued that the taxes should only be levied on revenues from clients based within the city.

Tribunal Judge Steven Lasher, in an opinion released Dec. 1, found Honigman responsible for paying $942,000 in back corporate income taxes and late payment penalties. Honigman is appealing the ruling.

“For more than 65 years, Honigman has been committed to Detroit,” said the firm’s spokeswoman, Susan Waun. “We disagree with the City of Detroit’s calculations and are proceeding through the dispute resolution process.”

Naglick told the Free Press that, as the city becomes more aggressive in enforcing income tax laws and collections, it has targeted what he called “areas of big potential,” including law firms with lawyers who work in the city proper, hospitals and physicians groups with doctors and surgeons working in the city, and 63 of the city’s largest purchasers of spirits through the state’s Liquor Control Commission, primarily party stores in Detroit.

The party store crackdown, still under way, has resulted in $200,000 in additional corporate income tax assessments, documents show.

Among the medical targets, the city said it identified one hospital system where, among 83 individual doctors under investigation, 40% did not file city income taxes, likely reducing the amount of corporate income taxes owed to the city if the doctors performed work in the city. Detroit has assessed $900,000 in additional income taxes in those cases to date, the documents show.

“The city’s strategy and decision to focus more resources on tax enforcement is beginning to show results,” Naglick said, crediting the city’s treasury and law departments for increased compliance measures. “We are in a much better position to enforce our tax laws aggressively and fairly review taxpayers’ filings to ensure everyone is paying their fair share toward city services.”

Naglick said Detroit in the near future also will target athletes and entertainers who perform in Detroit, particularly as sports and entertainment venues increasingly consolidate into downtown with Comerica Park and Ford Field to be joined next year by a new arena that will be home to the Red Wings and the Pistons.

In 2017 and 2018, the city also has preliminary plans to target tobacco wholesalers, funeral homes, real estate sales companies and developers, construction projects, medical marijuana shops and even the North American International Auto Show.

The additional revenue generated from downtown’s growth and increased enforcement benefits the entire city through more stable financing of city services. But it will also be crucial to Detroit’s ability to meet significant debt and pension obligations in the coming years, spurring the city to prepare a first-of-its-kind 10-year financial report.

Residents who work in the city pay 2.4% tax on their income; nonresidents who work in the city pay 1.2%. Businesses are assessed 2% corporate income taxes. Taken together, the income tax is the city’s largest source of revenue for its annual budget of about $1 billion, ahead of property and casino taxes and state revenue sharing.

The state’s collection of individual income taxes for Detroit is also boosting the city’s bottom line, with revenue expected to hit $268 million in the current fiscal year.

Recent revenue estimates set by the city-state Financial Review Commission, the board that has oversight of the city’s finances post-bankruptcy, project income tax revenue will be more than $273 million in the 2017 fiscal year, nearly $279 million the following year and more than $284 million in the 2019 fiscal year.

Contact Matt Helms: mhelms@freepress.com or on Twitter: @matthelms.