Detroit property owners could see major changes to their property taxes under a proposal that aims to cut costs for homeowners and address blight and land speculation.
Mayor Mike Duggan says there’s a lot to like about a “land value tax” system that sets different tax rates for the value of structures and the value of land. His pitch is straightforward: Detroit’s current property tax system overburdens homeowners while promoting land speculation and abandonment.
Reducing taxes on buildings while increasing taxes on land would cut residents a break and make it harder for speculators to hoard vacant property, Duggan argues.
Legislation establishing Detroit’s ability to create the land value tax was introduced in September by state Rep. Stephanie Young, D-Detroit. Lawmakers who spoke with BridgeDetroit said they’re taking time to dig into the details and consider unintended consequences.
Detroit residents are also getting familiar with the proposal, as Duggan’s administration hosts informational meetings. The new system won’t be installed without voter approval. Some Detroiters are skeptical that a land value tax will fix the forces contributing to tax foreclosure and eviction, while others broadly distrust Duggan and his motives.
BridgeDetroit spent the last few weeks speaking with policy experts, city officials and residents to bring some clarity to questions about the proposal. We plan to update this story as details change. If you think of a question that’s not on the list, email us at firstname.lastname@example.org.
What is a land value tax?
A land value tax creates two separate tax rates for the value of improvements on property and the land itself.
Duggan plans to reduce the city’s operating tax by 14 mills while creating a 118 mill tax on the value of land. The average homeowner would see 17 percent shaved off their tax bill, according to the city, an average savings of roughly $184.
“What this aims to do is solve two problems at once, which is to increase the cost of undeveloped land and to make it costlier to engage in land speculation – yet at the same time confer a tax break to homeowners,” said James Tatum, director for the Detroit Bureau of the Citizens Research Council. “It is a complicated policy proposal to address what is in some respects a very simple problem.”
Residential property owners are expected to save $30 million collectively each year the land value tax is in place, according to the city.
The average bill of a vacant residential lot would increase by $37. Abandoned buildings would see large tax increases, Duggan said, along with owners of parking lots and scrapyards.
The average bill on a side lot would increase by approximately $30. However, the proposal includes exemptions for owners of side lots, urban farms, community gardens and pocket parks, and parking lots required by zoning regulations.
Deputy Chief Financial Officer and Assessor Alvin Horhn said property tax assessments already calculate the value of improvements and land separately, but the tax rate is the same. Under the new plan, land and improvements would be taxed at different rates.
The value of land in Detroit’s neighborhoods is much lower than the value of land in commercial corridors and the Central Business District. It’s a difference of around $1.25 per square foot for residential land versus $100 per square foot for a downtown property.
“It shifts the burden of the taxes from residential property owners over to commercial and industrial property owners,” Horhn said during a Sept. 28 presentation. “It reduces the taxes on residential property owners, where relatively low value is, and moves it over to commercial industrial property owners, where the value is high.”
Nick Allen, an urban planning researcher at the Massachusetts Institute of Technology who worked with Duggan’s administration to craft the tax plan, said the current system lets people escape taxes by neglecting their property and driving down the value of crumbling buildings on the site. The new system puts more emphasis on the value of the land itself.
“(A land value tax) charges people for holding property overall, and that charge is relative to the potential value of that land,” Allen said.
What is a millage?
A millage is just another way to describe the rate used to calculate property taxes.
One mill equals a $1 tax on every $1,000 dollars worth of taxable value on a property. Detroit levies a 20 mill operating tax to pay for city services, so a home worth $100,000 pays taxes on $50,000 worth of the value, a total of $1,000.
Duggan proposes cutting the operating tax from 20 mills to 6 mills, a reduction of 70 percent.
Duggan also plans to implement a 118 mill tax on the value of land.
Detroiters pay other millages to fund schools and public libraries, Wayne County Community College, parks, the Detroit Zoo and the Detroit Institute of Arts. Millages also pay off debt owned by the city and Detroit Public Schools Community District
What qualifies as a property improvement?
Improvements include buildings as well as other kinds of physical structures. Chief Financial Officer Jay Rising said any man-made addition qualifies as an improvement, including driveways and parking lots.
“It’s really anything you do to make your property better,” Allen said. “That would include paving and grading property, the fence you put around it, buildings you put on it.”
Tatum said the land value tax would prevent property owners from being punished for creating improvements on their land.
“If you make improvements to your property, you’ve kind of increased your taxes because you will have made your property more valuable,” Tatum said. “What they want to do is swap it, so the majority of what will make up the tax base will be the land rather than the structure.”
However, this does not mean you can pave over a vacant lot and expect to avoid a tax increase, Allen said. The value of the land is still taxed independently of any improvements to the property.
“A lot of people seem to think this is a tax on vacant land, but it’s a tax on land,” Allen said. “It’s a tax on land (regardless) of the use. If you believe that you only pay if your land is vacant, then building would be a way to get out of the land value tax, but that’s just not the way the tax is designed.”
Allen provided this example:
An occupied home worth $50,000 sits next to a vacant home worth $35,000. Under the new tax system, the occupied home would receive a larger tax cut because the building is in better condition.
How will Detroit create the land value tax?
The Michigan Legislature first needs to pass a series of bills giving Detroit the power to create a land value tax. Gov. Gretchen Whitmer, a Democratic ally of the mayor, is responsible for signing the bills into law.
Duggan would then request the City Council to authorize a land value tax. The council may pass a resolution including details on millage rate changes and exemptions. Detroit voters would be asked to vote yes or no on a ballot initiative during the next general election.
Lawmakers amended the bills to require a ballot measure to go to voters in November 2024 at the earliest.
The ballot question would need to include information about tax rates and when the new rates would be implemented. Voter approval allows the city to replace the operating millage with an equivalent land tax rate.
Duggan can choose to recommend immediate implementation of the tax or an incremental implementation over several years. The mayor said he originally planned to phase-in the tax, but later decided to implement it immediately.
The land value tax system, if passed by voters, would never expire. That doesn’t mean the decision is final. City Council has the ability to create another ballot proposal asking voters to repeal it.
Do I need to sign up to receive the tax break?
No. The property tax cut will be automatic and universal for all property owners, Duggan said.
Homeowners will not be asked to apply with the city to receive a tax break. However, owners of urban gardens will need to register their property with the assessor. More on that later.
How do I find out how this will change my taxes?
It’s currently unclear. Rising said the city is working on an online tool that will allow residents to input their property information and determine how their tax bill will change.
Current assessment notices include the combined value of land, Rising said, so it’s difficult for property owners to see the value of land and improvements separately. Assessment notices issued after the land value tax is implemented would explain the taxable value for improvements and land, he said.
However, residents can see the value of their land and the value of improvements through an online database.
The median tax millage would decrease from 67.6 mills to 55.96 mills. Detroit would still have the highest property tax rate of any major Michigan city, but the decrease would bring Detroit below neighbors like Southfield, Eastpointe, Hazel Park, and Inkster.
Is this going to bankrupt Detroit again?
The city needs the tax increases to make up for the reduction in property taxes in order to avoid revenue loss. Theoretically, the plan will be revenue neutral.
The Office of the Chief Financial Officer settled on 118 mills by finding the amount of revenue that would have been generated by the 14 mills slated to be cut, then dividing the number by the taxable value of land in the city.
Horhn said reducing the operating tax by 14 mills would drop revenue by $85 million. That increases to $93 million when adding tax exemptions included in the plan.
Property taxes make up around 11 percent of the city’s revenue. Detroit is expected to collect $138 million in property tax revenue for the current 2024 fiscal year. The city collects more revenue from income taxes ($396 million), state revenue sharing ($224 million) and gambling taxes ($256 million).
The House Fiscal Agency reported the fiscal impact is likely to change over time as property owners respond to the changes.
The council’s Legislative Policy Division found there are too many variables involved to predict the ultimate outcome. It will depend on the details of the mayor’s plan and the response by landowners.
How does this affect schools and libraries?
The land value tax plan doesn’t apply to millages levied to fund schools, libraries, county parks and other institutions. Allen said other taxing jurisdictions could experience a revenue boost if the tax plan increases the amount of taxable value in the city.
Will downtown property owners benefit more than homeowners?
Some residents and lawmakers expressed concerns that owners of downtown properties will fare better than homeowners.
That’s not necessarily the case, Allen said, because the value of downtown land is much higher than the value of land in neighborhoods. Downtown property owners will experience large-dollar tax cuts on the value of their buildings, but also increases on land taxes.
“The downtown district will for the most part see tax increases,” Horhn said. “That’s where all the valuable land is. The most valuable land in the state of Michigan is downtown Detroit. There’s just no getting around that.”
Horhn said roughly 73 percent of retail businesses in Detroit will see a tax cut.
Who are the 3 percent that won’t see a tax decrease?
City officials say 97 percent of homeowners will experience a tax cut.
Rising said owners of large lots or homes in neighborhoods with high land values won’t experience a tax decrease. That largely applies to homeowners in Midtown, Brush Park and downtown, he said.
Will taxes go up on my side lot?
The legislation includes tax exemptions for side lots, land used for agriculture and “publicly designated” properties.
Homeowners who have up to four side lots will not experience an overall tax increase, according to the city. Residents will not need to apply for the exemption on side lots, the city will review property data to identify them.
Homeowners who have a Principal Residence Exemption (PRE) can include side lots as part of their homestead as long as the parcels are adjacent and contiguous. This allows for an automatic tax exemption for side lots.
Multiple side lots can be combined into one parcel through the Assessor’s Office.
Will taxes go up for urban farms and gardens?
No, as long as property owners register with the assessor.
The legislation includes an exemption for urban farms, defined as up to 15 acres of unoccupied land where 50 percent of the acreage is used for agriculture.
Agricultural uses are defined by state law. It encompasses the production of a wide range of plants and livestock that are useful to humans.
Rising said exemptions would be reviewed every three years and automatically renewed if the land use doesn’t change. The process will be more fleshed out next year, he said.
The land value tax plan also includes an exemption for up to five acres of “publicly designated property,” which applies to pocket parks, community gardens and other recreational neighborhood amenities created by block clubs on open land purchased from the Detroit Land Bank Authority.
“Public dedication means you’re creating access or use by other people than yourself,” Allen said.
What kinds of parking lots are exempt?
Properties that are required to have parking by zoning ordinances, such as grocery stores, would not be subject to the tax increases on vacant land. Land owners need to apply annually with the assessor to receive a tax credit.
There are no parking requirements for the Central Business District, so this won’t apply to downtown properties or commercial parking lots that charge a fee.
“Because there are parking requirements on businesses throughout Detroit, the city requires them to carry a lot of land,” Allen said. “It’s imposing a regulation that becomes a tax on the owner and it (wouldn’t be) fair that businesses who follow the regulation have to pay extra.”
Can the assessment division handle this?
Horhn introduced himself as the head of an understaffed and overworked assessor’s office during a September land value tax presentation. Horhn said Detroit “can’t pull this off” unless the city boosts resources for the Office of the Assessor and Office of the Treasury.
Horhn says he’s asking the mayor for more funding to implement the land value tax, but did not provide a dollar amount to BridgeDetroit. He said additional funding would help hire staff and improve technology needed to transition to the new system. Without more funding, Horhn said the plan is “dead in the water.”
“I have begged, screamed, pulled my hair out, foamed at the mouth – everything else I can do during the budget process to get more resources,” Horhn said.
Horhn said the city expects more residents will appeal their assessments during the first few years of the new tax system.
The Legislative Policy Division asked Duggan’s administration whether there is a plan to introduce a budget amendment to the City Council. The mayor’s office did not respond when BridgeDetroit asked the same question.
Some Detroiters are skeptical that the city can accurately calculate property tax rates after residents were collectively overtaxed by at least $600 million following the Great Recession. Detroit assessors failed to acknowledge declining property values, causing a broad overassessment of homes that led to tax foreclosures and evictions.
“From 2009 to 2014, the city was not actively assessing property and was just increasing assessments,” Rising said. “The lag from the 2007-08 recession to get properties properly evaluated, didn’t happen.”
The Michigan Tax Commission intervened, placing Detroit’s assessment process under state oversight from 2014 to 2017. A citywide reappraisal and tax cuts were a result of the oversight.
“That’s really changed,” Rising said. “For years in a row, we’ve had our assessments validated by the county and state within required levels. Whether that’s true for every single property is impossible, that’s why you have an appeal process.”
The Coalition for Property Tax Justice argues the lowest-value homes in Detroit are still illegally overassessed. Bernadette Atuahene, a professor and property law scholar at the University of Wisconsin-Madison Law School who lives in Detroit, said she’s provided the city with data proving it.
“We have empirically proven overassessment,” Atuahene said.
Does this affect the land bank?
No. The Detroit Land Bank Authority is exempt from property taxes under state law.
What happens to Neighborhood Enterprise Zones?
Roughly 7,800 properties in Neighborhood Enterprise Zones can keep their property tax break until it expires.
State law allows for the creation of Neighborhood Enterprise Zones to provide tax incentives for housing development and rehabilitation. Residents who live in the zones can apply for a 50 percent reduction of Detroit and Wayne County operating millages.
Property owners that would receive a larger tax break under the land value system would automatically receive the lower tax rate.
Rising said Detroit’s 152 NEZs are inequitable, since they are concentrated in the city’s wealthiest neighborhoods.
No new zones will be created after the plan is implemented, effectively ending the NEZ system in Detroit.
How does this affect tax abatements?
Existing tax abatement deals will not be affected, Rising said.