Detroit’s relatively high property tax rate is a disincentive to living in the city.
The city’s recent revenue estimating conference suggests that the strong economy and new investments are causing the city income tax revenue to grow faster than anticipated. That growth can be tapped to lower the property tax rate.
In February, Detroit projected it would collect $375 million in income tax revenue in FY2023. Preliminary estimates are that the city will actually collect $397 million—$22 million more than anticipated. Consequently, the city updated its forecast for future years to correspond to improved trends. As income tax revenue increases, incremental improvements between forecasts could be used to offset a cut to the city’s general operating property tax rate.
Of course, Detroit has incredible demands on very limited resources: pension contributions, debt service, pay increases for police officers and bus drivers. However, there is hardly a more imperative need than to halt the near unfettered 70-year decline in population.
Detroit’s 19.952 mill property tax rate (a mill is a dollar of tax for every $1,000 of taxable value), which is far above many other (but not all) jurisdictions, is an impediment to development and homeownership. Consider the near quarter of residential structures that have incurred some level of tax delinquency and been ensnared in the foreclosure process that follows. Income tax has been a more substantial source of the city’s General Fund revenue than the property tax, and the city could increase its reliance on income tax to facilitate property tax relief.
From FY2013, the fiscal year that immediately preceded Detroit’s descent into bankruptcy, to FY2023, inflation-adjusted property tax revenue declined by 20.3 percent—the most substantial decline experienced by the city’s primary sources of revenue. Inflation-adjusted income tax revenue, on the other hand, increased by 22.3 percent. While property tax is more stable, it has also become relatively less important to the city’s financial condition.
Detroit’s citizens—many of whom are poor and have been dispossessed of their property—are subjected to some of the highest property tax rates in the state. Detroit’s $34,762 median household income is a third of the Wayne County median, 55 percent of the state median, and half of the U.S. overall. The poverty rate—31.8 percent—is similarly worse than that of Wayne County, the state, and U.S. overall. Part of the reason many of these citizens are dispossessed of their property is because of the high property tax rates. Between 2002 and 2019, an estimated 135,006 properties in Detroit were foreclosed on due to delinquent property taxes. One home in a dataset constructed by Data Driven Detroit was foreclosed on 10 times.
There have been myriad economic improvements in the city. It has experienced lower unemployment rates and higher incomes, but it has not experienced population growth. Detroit is a shrinking city. It is a bitter irony that as the city needs to retain and attract residents, taxpayers, its tax policy likely entices some to leave, and certainly causes some to lose their homes.
There is admittedly short-term risk inherent to more reliance on income tax. The city is prepared for shortfalls in revenue, however. As of the FY2024 operating budget, the city maintains a budget reserve of $150 million, equivalent to 11 percent of General Fund expenditures—this in addition to the ample amount of unrestricted cash the city has accrued since bankruptcy.
Still, there is understandably a sense that while services have improved since bankruptcy there is more to be done, and the city needs every dollar that flows into the treasury. The size of the city’s population should be taken into consideration, however. Between FY2013 and FY2023, General Fund expenditures increased by 10.9 percent (when adjusted for inflation), even as population declined by 10.5 percent in that ten-year period.
Today, the city spends more on fewer citizens than it did when it filed for bankruptcy. More to the point, fewer of the dollars expended are spent on pension contributions and debt service. So, more resources are directed to service delivery. Yes, labor costs are on the rise, and the current economic moment aside, there is a desire by elected officials to raise police and bus driver pay to parity with nearby jurisdictions. There are and will continue to be substantial demands on city resources. But without tax reform, it will serve even fewer if population loss continues unabated.
The city’s property tax has been a persistent problem for development and homeownership. Even as the city makes laudable investments into infrastructure, better pay for essential workers, parks, and beautification, those investments are funded by a policy that directly countervails its efforts to be an attractive place to live, work, and play. The property tax rate could be cut, and incremental income tax revenues may provide the financial cushion to weather the resultant revenue losses.
James Tatum is director of the Detroit Bureau of the Citizens Research Council of Michigan