Detroit is looking at policy changes to ease the “unsustainable” tax burden it places on residents and to deter land speculators from snapping up and sitting on vacant property.
Varying tax rates – higher for open land and lower for structures and improvements – could reduce tax bills for homeowners and accelerate the development of long-vacant properties, according to a study cited by the city as it investigates how to bring down residential property taxes.
The “split-rate” system has attracted interest from city leaders for years, dating back to when Detroit filed for bankruptcy in 2013, and is getting a renewed push by researchers from the Massachusetts-based Lincoln Institute of Land Policy.
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It’s a suggestion that comes as tax justice advocates continue to demand action to stem foreclosures and seek a city-led plan to help residents overtaxed by $600 million in the years following the Great Recession.
“There are enormous fiscal penalties to living in the city of Detroit as a resident now,” said Nick Allen, a co-author of the April report and a doctoral candidate at the Massachusetts Institute of Technology. “What we’re trying to do is make the imbalance between the services you receive and the taxes you pay more fair.”
Detroit, Allen said, is trapped in a decades-long “fiscal death spiral” where escalating costs for residents and businesses sped up flight and property taxes increased to make up for lost revenue, concentrating the higher costs on the Detroiters who stay. Since 1960, the property tax base in Detroit cratered by 80% and its tax rates doubled.
“Those who have stayed in Detroit have paid escalating legacy costs, received fewer services, and seen their property wealth decline,” said Allen, noting a strong record of research shows splitting property tax rates has clear benefits for Detroiters and the city.
The Lincoln Institute study was commissioned by Invest Detroit with support from the Kresge Foundation and follows a similar 2015 analysis that recommended Detroit cut its tax rate, improve property assessments and implement a land-based tax.
The new study, Allen said, wasn’t sparked by conversations about how Detroit should make up for overtaxing residents between 2010 and 2016, but those overassessments have put a heightened interest on the fairness of property taxes in the city.
‘A rare opportunity’
At-large City Councilmember Coleman Young II said the city views split-rate tax reform and overassessments as separate initiatives, but he linked them within what he sees as a larger conversation about economic relief and revitalization. Young believes the rate changes would be a useful tool that could “move the needle” on housing affordability.
“It’s a rare opportunity,” Young told BridgeDetroit. “If you do it right, this can be prosperous for everybody.”
In addition to making life in the city more affordable, Lincoln Institute researchers said a split-rate tax would eventually grow the city’s tax base. Modeling forecasts used in the study predict increases in residential market values (13%) and commercial market values (22%) over five years. An analysis of several Pennsylvania communities that adopted split-rate tax structures since the 1980s also showed an increase in new businesses in the first years after implementation.
The Lincoln Institute recommends taxing land at five times the rate of structures and improvements and for the practice to be phased in over five years. If Detroit implemented a 5:1 split-rate tax, the study notes, the city’s foreclosure rate would drop by an estimated 8.6%. Nearly all of the city’s homeowners (96%) would experience lower tax bills, with an average estimated savings of 18%, or $160 per year.
“The greatest relief really goes to residents who have the lowest-value homes in the city,” Allen said.
In 2020, Detroit’s 2.83% effective tax rate on a median valued home was more than double the national average.
Detroit residents pay 69.6 mills on their land and improvements. Under a 5:1 split, taxes on improvements would drop to 45.7 mills and the rate for land would increase to 228.3 mills.
The city of Detroit sees potential in the idea, but hasn’t fully committed to it yet.
A joint report by the Detroit City Council’s Legislative Policy Division, Office of the Chief Financial Officer and Office of the Assessor acknowledges a split-rate tax could reduce residential property taxes and promote commercial development. However, city officials said there are unanswered questions about how the tax would be implemented, the applicability of state laws, how the split-rate affects tax abatements, exemptions and neighborhood enterprise zones and other issues.
The report is expected to be presented to the council sometime in the next few weeks, Young said. The councilman said he’s familiar with the split-rate concept and he looked into the legal changes needed to implement it during his time in the state House.
“It’s a good option we probably should use sparingly; there’s ways we can use this, look at the data and expand it throughout the city,” he said. “I’d rather take that approach. But I definitely think it is an opportunity and I look forward to talking about that.”
‘A big decision’
One potentially major hurdle is the Michigan Legislature since changing Detroit’s property tax regime requires a change in state law.
State Rep. Joe Tate, D-Detroit, said he’s planning to champion the legislation and is convening conversations with colleagues about the benefits of a split-rate option for communities across the state. It’s possible that a bill will be introduced this year, Tate told BridgeDetroit.
“It will be a pretty big decision,” Tate said. “It is going to take quite a bit of effort to normalize this concept. Make no mistake that it is going to be work, because it is a very complex issue, but yet it’s something that’s worth doing.”
Allen said he’s seen signs of bipartisan support in Michigan for letting communities opt-in to creating a split-rate tax, once the concept is explained properly.
“The hardest part is making sure people understand the idea and making sure the math makes sense to people,” Allen said. “Optimistically, I think the coalition that comes together around this is a pretty strong one.”
Researchers said while it’s preferable to pursue state legislation to permit a split-rate tax, that isn’t Detroit’s only option.
As long as the changes are revenue-neutral, the city has options for implementation, Allen said. For example, he said, it is possible for Detroit to implement a land-based special assessment tax without any changes to state law.
The city’s joint analysis concluded a split-rate tax system “is worth further investigation for possible implementation in the city of Detroit.” Chief Financial Officer Jay Rising said the city is still reviewing the idea of split-rate taxation and declined to comment further when contacted by BridgeDetroit.
Detroit City Council President Mary Sheffield, an ally of property tax justice advocates, said she’s looking forward to more discussion on the proposal, but declined for now to say whether she’s in favor of it.
Young said taxing land at a higher rate than structures is a good tool to combat land speculation.
“When you’re talking about getting rid of people who are speculating on the land, not only is it economically valuable but it also reduces crime, it improves the neighborhood quality of life as well as economic development opportunity,” he said.
Matthew Roling, an adjunct professor at Wayne State University with past experience at the Detroit Economic Growth Corp. and Rock Ventures, said he’s encouraged that city officials are looking at innovative ways to prevent tax delinquency and foreclosure that is “burning out” neighborhoods.
“I don’t know if it’s going to be a silver bullet,” Roling said. “The devil is in the details. There is a huge problem here and it’s that the property tax regime in the city of Detroit has failed the city. Let’s start with that.”
Detroit’s property tax rates are among the highest in the country. Of the largest cities in each state, Detroit has the highest tax rates for commercial buildings and apartments and the fourth-highest for single-family homes.
Detroit is considered one of the poorest big cities in the country, with 35% of residents living below the poverty line. The median home value in the city is $52,700, according to U.S. Census data.
“Anybody who gets a tax bill in the city of Detroit understands exactly the kind of frustrations of owning a relatively cheap house with a really high tax bill,” Allen said. “Literally tens of thousands of Detroiters are having trouble making their tax bills make sense.”
Property taxes are not the main source or revenue for the city of Detroit. The city’s general fund revenues are about $1 billion, while property taxes are expected to generate $119 million in revenue this fiscal year. That’s less than revenues from the city’s income tax ($295 million) and taxes on gambling ($289 million).
An exodus of residents and businesses eroded Detroit’s property tax base over several decades. The difference is staggering. Detroit’s tax base in 1959 would have created $1 billion in revenue if it still existed today, according to the Lincoln Institute.
The Citizens Research Council of Michigan argues Detroit’s high property taxes are obstacles to stable homeownership and economic mobility. This comes as the city continues to experience a population decline. The U.S. Census Bureau found Detroit has lost one-tenth of its residents since 2010.
“If you think about the tax structure as sort of this intense penalty to residency – basically that the historic fiscal costs of the city has been concentrated on people who have remained in the city – you realize that there’s a pretty significant equity challenge and a racial equity challenge as a core of Detroit’s tax structure,” Allen said.
Roling described a troubling trend where low-income residents fall into tax delinquency and foreclosure, speculators buy up the property, sell them to developers for a big pay day and developers get tax breaks for their projects.
“That is clearly unsustainable,” Roling said. “Trying to attract a tax base by not making them pay taxes and then meanwhile burning healthy neighborhoods from the inside out, I mean one thing I can tell you for sure; The current tax regime is not working.”
Alex Alsup, former director of housing stability for the Rocket Community Fund, said reducing taxes for residential properties and encouraging the productive use of vacant land should be a key priority for the city.
The last decade of tax foreclosure auctions produced “an enormous amount” of land speculation that harmed the city, Alsup said.
Investors bought up tens of thousands of cheap parcels across the city, many of them either vacant or containing dilapidated structures standing in the path of development. It’s relatively inexpensive to hold on to that land, Alsup said, causing speculators to sit on parcels until a lucrative opportunity arises.
“Those properties are like lottery tickets,” Alsup said. “At the moment the city wants to do something or a developer wants a property you own, you can make multiple times your entire investment with those deals.”
Alsup said changing the tax regime to increase the cost of sitting on vacant land encourages more productive use of property.
“That would lead to more development of residential properties, which would reduce the pressure on the housing market in the city overall and hopefully bring more people to the city, which would result in more income tax and increase city revenues,” Alsup said.
The issue ties back to Detroit’s high property taxes, Allen said. It’s effectively impossible to build anything under the full burden of taxation, he said.
“Every day the work of the city is to try to allow particular projects to effectively escape the tax structure,” Allen said. “Almost every single project in the city that gets built has some form of tax incentive, tax abatement or tax exemption built into it.”
Researchers from the Lincoln Institute argue that tax relief should be awarded to all Detroiters instead of select developers. Transitioning from a traditional property tax with select abatements to a split-rate tax, the study notes, is a more direct and transparent means of accomplishing economic development objectives.
The split-rate system, Allen added, could cause a short-term increase in foreclosures on industrial vacant land. Whether that would be seen as a good thing or a bad thing depends on the perspective, he said.
“From my view, it is helpful to have more liquidity in the industrial land market,” Allen said. “People’s ability to basically hold out on valuable parcels doesn’t really help the city’s business development case. It’s not creating jobs, it’s not doing anything.”