A new report commissioned by the Detroit City Council finds “serious socio-economic problems” and high property tax rates make it difficult to stop using tax incentives to attract development.
The Citizens Research Council of Michigan was selected to analyze economic development strategies and study questions posed by City Council President Mary Sheffield and Council Member Angela Whitfield-Calloway about the necessity of tax incentives.
The first of two reports was released this week and found that while Detroit’s economy improved substantially in the decade since its municipal bankruptcy, the cost of development in the city remains high. The release of the public policy research group’s report precedes an upcoming vote on tax incentives for the $3 billion Future of Health project involving Henry Ford Health, The Detroit Pistons and Michigan State University.
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“Detroit can ill afford to cease the use of tax abatements until the gap between costs developers face and return on investment is closed,” the report states.
Those costs include property and income taxes, local hiring requirements, community benefits agreements, stormwater mitigation, construction, labor, insurance and environmental cleanup.
Meanwhile, a post-pandemic reduction of downtown office workers and comparatively low residential rent reduces the return on investment for developers and the banks financing them.
The Pistons, Henry Ford Health and MSU are seeking $231.7 million in tax reimbursements to offset costs associated with a $773 million investment in apartments and a medical research center.
Developers outline a similar case for incentives, arguing that inflation, high property taxes and rising construction material costs requires real estate investors to rely on public financing to help cover financing gaps.
Detroit uses tax incentives to subsidize some of the cost and make development more profitable, the report states. This reduces funding for city services, with the assumption that new development will improve the tax base and create jobs in the long-term.
“The argument is made that if the city has an empty lot, it is better to get half of the tax revenue from a new development than no money from the empty lot,” the report states.
Developers must demonstrate that their projects couldn’t be completed without tax incentives. It’s up to the Detroit Economic Growth Corporation (DEGC) to determine if the city will receive a net benefit from the investment and whether the project relies on tax incentives.
Detroit uses tax increment financing to capture property tax revenue from a downtown district and redistribute the funding to repay debt and reimburse companies for cleaning up dilapidated or polluted sites.
Tax abatements are another tool used to incentivize projects by reducing property taxes for several years, bringing down costs for developers. Detroit waived $214 million in property taxes from 2017 to 2022.
Detroit is faced with a choice between offering tax incentives or risk missing out on potential growth, according to the report. But the report also states that tax incentives put city administrators and City Council “in the position of picking winners and losers.”
“Tax abatements allow some businesses to pay less while the unabated property owners work in a system that has led people to lose their homes and businesses,” the report states.
“DEGC is doing their due diligence to really try to flesh out these numbers, not just taking the data submitted by the developer at its face value but digging into it,” said Citizens Research Council President Eric Lupher.
Still, the report states that only developers truly know whether their project would have occurred without government intervention. Academic research offers a mixed view on the effectiveness of tax abatements, according to the report.
A DEGC report shows the Future of Health project, which includes a hospital expansion and housing in New Center, would lose money without tax incentives. DEGC found the return on investment is 4.5% with tax incentives.
The value of property in Detroit is increasing since dropping swiftly during the Great Recession but remains two-thirds less than 1973. The report states that tax incentives “only slowed the rate of decline.”
The report found personal income grew by $4,180 from 2013 to 2022, but the racial wealth gap widened. Per capita income for white residents grew by 49% but only increased 16% for Black residents. Census data shows a $11,283 difference between per capita income between white and Black Detroiters for 2022.
Thirty-one percent of Detroit residents were living in poverty in 2022.
“You can understand why City Council would say we have a housing shortage and if you’re going to take city money you need to help us address that problem,” Lupher said. “Somebody has to subsidize that. Where’s the money going to come from? It’s not the altruistic nature of the developer to say we want to help, they’re in it for a profit. Somebody has to foot the bill somewhere.”
Lupher said a second report, due by June under a $75,000 contract with the city, will take a closer look at alternative approaches to the city’s reliance on tax incentives. Sheffield has asked the report to determine whether it’s time to dissolve the Downtown Development Authority (DDA), which was created nearly 50 years ago to direct property taxes toward projects in the city’s center.
Millions of dollars in debt stands in the way of ending the DDA. Roughly $571 million in outstanding bonds must be paid off, which could take at least until 2053. The DDA captured $65 million in property taxes for the 2023 fiscal year to pay down outstanding bonds and pay for other development costs.
“To do anything to end the DDA and tax capture would threaten the repayment of bonds,” Lupher said. “We just went through bankruptcy 10 years ago, we don’t need to hurry back in.”
However, Lupher said tax captures have been extended by the issuance of new bonds as the debt is paid off. The DDA was created by the City Council 1978. The development plan has been amended 33 times since. That means downtown growth has had limited benefit for the city’s budget, he said.
“Part of the problem with the tax increment finance laws, as currently written, they just don’t end,” Lupher said. “It really speaks to the need to fix the system.”
Stop subsidizing multi-million dollar corporations on the backs of the People.
Stop subsidizing multi-million dollar corporations on the backs of the People.
Do something for the people for a change.
Detroit needs to make the changes that snowball into a better market situation. Something simple like zoning reform could take tens of thousands or hundreds of thousands of dollars off the cost of a project simply by permitting the developer to choose how much car parking to put for the project. Easy simple things like that snowball into more developments happening at a range of scales instead of only these big projects. In turn, it would boost tax revenues and allow the city to change up their funding models.