Detroit taxes to remain despite population fall

CHICAGO (Reuters) – Michigan Governor Rick Snyder signed into law on Thursday legislation that will let Detroit avoid financial catastrophe by allowing the city to keep collecting key taxes despite its steep drop in population.

“Not approving this legislation would have pushed Detroit to the brink of bankruptcy,” the Republican governor said in a statement.

Under a previous law, the city’s income and utility user taxes were tied to a population of at least 750,000, but the 2010 U.S. Census found that the number of Detroit residents slid to a 100-year low of 713,777.

The new law sets a 600,000 population threshold for levying a maximum 2.5 percent income tax on residents and 1.25 percent on nonresidents, as well as an up to 5 percent utility tax. The taxes generated $265 million last year.

The extension of the taxes was part of a budget-balancing package proposed by Detroit Mayor Dave Bing as part of his $3.11 billion all-funds fiscal 2012 budget in April. At that time, Bing warned that the city must get its fiscal house in order or face having the state appoint an emergency financial manager to run it.

Detroit’s shaky finances are a major concern in the $2.9 trillion municipal bond market, where the city’s bonds are rated in the junk category. The city was also cited in a Reuters poll as a potential candidate for rarely used municipal bankruptcy.

Bing and the City Council have differed on just how much spending to cut, with the mayor vetoing on June 1 the council’s budget that included higher cuts and the council subsequently overriding the veto.

Detroit’s fiscal year begins July 1. (Reporting by Karen Pierog; Editing by Jan Paschal)