SHELBY — Residents of Shelby who work outside city limits may receive a cut in their income taxes.
Shelby City Council passed the first reading of an ordinance on Monday night that would increase the income tax credit currently applied to city income taxes for people who live within Shelby city limits, but pay a city income tax to the community where they work.
Currently, the credit sits at 67 percent. If approved, the legislation would increase that credit to 75 percent.
Councilman Garland Gates said Monday it’s a good sign for the city’s financial status.
“We now see the general fund is in a healthy condition, healthier than it’s been in a long time, with the free-and-clear balance at over $800,000,” Gates said.
“Two finance committee meetings back, we looked at that and what we might do,” Gates continued. “(Finance Director Steve Lifer) looked to see how we might adjust that credit. Ideally it would be 100 percent, but that’s not the reality. But he feels comfortable in changing that credit from 67 percent back to 75 percent.”
Increasing the tax credit to 75 percent from the current 67 percent would reduce the city’s collection by approximately $40,000 per year. If approved, the legislation would go into effect for the year 2019.
“In effect, for people who live in the city, but work in another community where city income tax is collected, this will be a tax cut,” Gates said.
Income tax levies for the construction of the Shelby Justice Center, which began collection in 2012, and the maintenance of streets, alleys and sidewalks, which began collection in 2014, were approved by voters and are not subject to a tax credit.
Residents who live and work in the city, and non-residents who are employed in the city, currently pay the full income tax rate of 1.5 percent.
According to the legislation, since the year 2016, there has been a steady increase in the annual amount of carryover from year to year in the general fund. That’s a far cry from the city’s financial status in 2014, the legislation was enacted.
“Although the general fund cash balance was in the positive, the encumbered balance was in the red, which in my understanding is illegal,” Gates said. “At that time, many people were dragged kicking and screaming, myself included, to a solution.”
Decreasing the tax credit was first introduced at a council meetig on Feb. 17, 2014. At that meeting, then-Councilwoman Pat Carlisle reported the city of Shelby’s general fund had a negative balance of $44,731 – a historic low for the city.
The ordinance decreasing the credit was passed on Dec. 15, 2014, stating Shelby residents who worked outside the city would receive a 67-percent tax credit on the base 1 percent income tax that was first established in 1972. Up until then, those same residents had received a 100-percent tax credit.
The passage of the ordinance came as part of a package proposed by then-Finance Director Bob Lafferty. By changing the tax credit to 67 percent and making the change “permanent,” Lafferty agreed to transfer $250,000 into the general fund from the Light Debt Reserve Fund.
“That fund was set up in the 1960s when the city issued bonds for improvements at the light plant, and we had to set aside a self-insurance fund should the city default on the bonds,” Gates said Monday. “That was the one place we could transfer money from.”
According to Lafferty’s package, the tax credit would be restored back to 100 percent if any of the following options occur: local government funds are restored to their original level of $317,000 annually, the electorate passes a General Fund tax levy for a term of a least five years, or the General Fund reaches a $500,000 fund balance at the end of any given year.
“I guarantee this is the hardest vote I will ever cast, but I think it’s the responsible thing to do at this time,” said then-Councilmember/Mayor-elect Steve Schag on Dec. 15, 2014. Schag was officially sworn in as mayor two weeks later.
