In a nutshell

• Various factors including high tax rates, high auto insurance rates, racism, and poor service delivery have contributed to the city’s massive population losses and demographic trend.
• Detroit’s property taxes, which are among the highest in the nation, create a disproportionate tax burden on its residents. The tax is high because of the city’s lack of authority to levy a local-option sales tax, its low home values, and its high local government spending.
• Detroit’s high property tax burden serves as a major obstacle towards residents’ upward economic mobility, however, there are interventions to address the city’s high tax rates.

Factors Contributing to Detroit’s Population Loss

A recent blog documented Detroit’s population loss. The 2020 U.S. decennial census found Detroit had lost 10.5 percent of its residents in the last decade. The city continues to be plagued with fiscal problems associated with population decline that include tax base loss and a loss in revenue critical for the provision of city services. 

That blog also documented the decrease in the number of city households over the past decades. Although some areas of the city are currently enjoying hot real estate markets, as a whole, the city is not experiencing the same resurgence. Between 2017 and 2021, Detroit saw an average annual decline of 7.9 percent in the number of home sales (chart below). 

Detroit Home Sales, 2017-2021

The declining home sales trends and the raw decline in the number of housing structures reduces the taxable value of property across the city and subsequent tax yields. 

The persistent population decline in Detroit continues to create fiscal challenges for the city. Factors such as deindustrialization, racism, high tax rates, city mismanagement, poor service delivery, the highway system, and crime contributed to this detrimental loss in population. 

The persistent loss of population is a major challenge facing Detroit’s economic recovery. This blog focuses on one of the factors cited above the city can control in reversing the trend of population decline – high tax rates. 

Detroit’s High Property Tax Rate

Detroit’s property taxes are among the highest in the nation. Due to the complexity of states’ property tax rules, it is useful to look at effective tax rates when comparing national averages and rival states. An effective tax rate is presented as a percentage of a home’s value. When comparing rates across jurisdictions, the median home value of a community is most often used. 

In 2020, Detroit’s 2.83 percent effective tax rate on a median valued home was more than twice  the national average of 1.38 percent. This means the median Detroit residential property owner was paying $1,667 on property taxes on a home value of $58,900. Nationally, the median residential property owner was paying $3,470 in property taxes on a home value of $281,581. Even at twice the rate, Detroit is unable to capture close to the same tax yield as the national average. Detroit also has the highest effective property tax rate of 4.16 percent on commercial properties valued at $1 million. This deters businesses from wanting to locate in the city and is one reason why Detroit provides so many tax incentives to businesses as a way to bolster economic growth (i.e., tax abatements). 

Highest Effective Property Tax Rates on a Median Valued Home (2020)

Highest Effective Property Tax Rates for Commercial Property Valued at $1 Million (2020)

The effective property tax rate is different from the property tax rate. The state government levies a statewide tax of six mills and additional rates are set by local government tax authorities. Property tax rates in Michigan are expressed as mill rates. For example, if one’s total tax rate is 20 mills and their taxable value is $150,000, their taxes owed would be $3,000 annually. 

Detroit property taxpayers pay some of the highest rates in the state. Residents pay nearly 70 mills (a mill is equal to $1 of tax for every $1,000 of taxable value) and business owners in the city pay roughly 88 mills. For the current year, the city has the 11th highest residential tax rate in the state, just behind ten other southeast Michigan communities.

The City of Detroit and Detroit Public School Community District are responsible for large shares of this tax rate, but other, overlapping jurisdictions are included in the total. This includes county-wide millages levied by county government and intermediate school districts as well as millages for various quality of life services (Metro parks, Detroit Zoo, Detroit Institute of Arts). The city levies nearly 20 mills for operations, but it is also obligated to levy nine mills to repay debt. By and large, the city has little control over these other jurisdictions’ taxing decisions. 

Despite having very high rates, property taxes are not Detroit’s main source of tax revenue. The municipal income tax provides the largest share of the city’s general fund tax revenue. In 2020, property tax represented 12 percent of the total general fund revenue. The large diversity in Detroit’s local tax structure is an attempt by the city to remedy its fiscal problems resulting from an eroded tax base and loss in revenue. 

Causes for High Property Tax Rates

There are three main reasons why a city may have high property tax rates. Cities that lack authority to levy or that have opted not to levy local-option sales and income taxes often have a heavy property tax reliance. 

Cities with relatively low property values may need to levy higher tax rates to raise enough revenue to fund municipal services. Cities with high property values can impose lower tax rates and still raise at least as much property tax revenue as a city with low property values. Higher property values are often an indicator of a robust tax base and a competitive local economy. 

Finally, cities with relatively poor residents may opt to provide a broader range of services to meet the needs of those residents than those cities serving wealthier populations, thus necessitating higher tax rates. 

Detroit’s property taxes are among the highest in the nation because it fits all of these reasons. Detroit relies heavily on the city income tax but does not have authority to levy a local-option sales tax as do many major U.S. cities. Although Detroit has a diverse property tax base, with a mix of residential, industrial, and commercial uses, it is not a wealthy tax base relative to many other Michigan communities. And Detroit has chosen to provide several services to meet the needs of its residents, such as operating its own health department and mass transit, that are not provided by other Michigan cities. 

Detroit is considered one of the poorest big cities in the country, with 35 percent of its residents living below the poverty line. Only 13 percent of Michiganders live below the poverty line. This presents a problem for taxpayers in the city as Detroiters pay more in property tax and, on average, make less income compared to other cities in the state.

Tackling High Property Tax Rates

The fiscal health of a municipality is often based on its tax structure, and a well-functioning property tax system is vital to promoting that health. 

A handful of interventions have been proposed to address the city’s high property tax burden. Providing more local tax options is one potential avenue to provide property tax relief. The expansion of local-option taxes could allow the city to lower its property tax rate, encouraging investment and increasing the city’s appeal to potential residents and businesses. With Detroit increasingly becoming a tourist destination, the city potentially could benefit from taxes that would grow as this trend continues. 

Few tax alternatives are capable of yielding the amount of revenue produced by the property tax. A local-option sales tax can yield a large sum of revenue with a fairly low rate. Another option for Detroit is to levy a number of new taxes that, together, would replace the lost property tax revenue. These could include selective sales or excise taxes on certain goods and services such as alcohol, vehicles, marijuana, entertainment or amusement services, and sharing economy services. Other big cities in the Midwest region allow local units to levy general retail sales taxes or selective sales taxes that would generate a significant amount of tax revenue for Detroit.

The city should continue to work towards its long-term goal of growing its tax base. In order for Detroit to recapitalize, repopulate, and expand economic opportunities for residents, Detroit’s property tax policy must be reformed because it functions as a major obstacle to its citizens’ upward economic mobility. The city can also attempt to address its high property tax rates by divesting itself from services it provides its residents and constrain local government spending. By privatizing, consolidating or outsourcing city services the city can attempt to constrain local government spending and provide some relief to its high tax rates.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the Citizens Research Council of Michigan is properly cited.