In a nutshell

• Currently, under consideration by the state Legislature is a bill that would permit Detroit to levy its version of a land value tax.
• The so-called split-rate tax proposal would split the levy between land and built structures, with a higher tax on land to incentivize development and disincentivize land speculation.
• The added penalty to land speculation could worsen the city’s problems with vacant land if speculators decide to abandon property rather than pay more in taxes or develop the land.

Championed by Detroit’s mayor and under consideration by the state Legislature is a proposal that would enable cities with populations of more than 500,000 (i.e., Detroit) to split the property tax into two separate rates levied on land and the built structures on the land. If authorized by the state, the so-called split-rate tax proposal would permit Detroit—after approval by the City Council, then voters via referendum—to enact its version of a land value tax.

The split-rate tax proposal is intended to increase economic vibrancy via two means: (1) lowering property taxes on residents and businesses to retain and attract property owners, (2) raising property taxes on undeveloped land to make land speculation and unproductive uses such as junk yards more expensive. 

While property tax relief for residents and businesses is needed, the split-rate tax proposal may fail to achieve its objective of added economic vibrancy. In its function as a penalty to land speculation, it may have the unintended effect that it worsens the city’s issue with abandoned and vacant land.

Tax relief for Detroiters is needed

The split-rate tax proposal is an effort to address a need: tax relief. Today, Detroit levies 19.952 mills to finance basic city operations, just under the statutorily-allowed maximum property tax rate of 20 mills. (A mill is $1 of tax for every $1,000 of value.) Combined with the taxes levied by coterminous jurisdictions that provide services to Detroiters, e.g., State of Michigan, Wayne County, Detroit Zoo, Detroiters pay more in taxes relative to other major cities and most other nearby suburban jurisdictions. 

As of 2022, principal residences in Detroit faced a total property tax rate of 69.5080 mills compared to a rate of 36.5223 mills in the City of Grand Rapids. Of the 43 cities and townships within Wayne County, only in four do taxpayers have a higher combined property tax rate than Detroit: Ecorse (73.1871 mills), Highland Park (70.2377), Inkster (70.5575), and River Rouge (76.5270). 

Moreover, some of the highest taxes in Michigan are being levied on some of the state’s poorest people. Detroit’s median household income is $34,762 or $18,068 less than the Wayne County median, $28,440 less than the state, and $34,259 less than the U.S. overall. The median home value in Detroit is $57,700, or $78,500 lower than the Wayne County median, $114,400 lower than the state, and $187,200 lower than the U.S. overall.

Median household income by jurisdiction, 2021

Source: 

U.S. Census Bureau

Even with such low incomes, homeownership in Detroit is relatively cheap. On a median household income-to-median home value basis, Detroit’s median home value is equal to 1.7 years of a prospective buyer’s income. (Home value is defined as the Census Bureau’s median value of owner-occupied homes.)  This is cheaper than the Wayne County median (2.6), the state median (2.7), and the U.S. overall (3.5). Yet the city’s homeownership rate has decreased over the years, and only recently rebounded to 50 percent of all households. Unfortunately, city property taxes contributed to the deterioration in homeownership. Between 2002 and 2019, 135,006 properties were subjected to foreclosure for unpaid taxes.

The basic math behind tax bills

Preliminary estimates are that 97 percent of property owners will pay less in taxes under the split-rate tax proposal, and homeowners specifically will likely see a 17 percent reduction in their tax bills. But it is helpful to first understand property taxes as they are currently levied. A simplistic illustration of the calculation behind the current property tax scheme is this:

Property value × tax rate = property tax bill

(Note: In Michigan, property is valued for tax purposes at 50 percent of the true cash value, i.e., market value in the first year of ownership. In each subsequent year, it is valued based on a taxable value (TV) system that limits annual increases in the tax base.)

Property value is a composite of the value of the land and the built structures (sometimes referred to as improvements) on the land. For all intents and purposes, the distinction between land value and that of built structures has been unimportant to property assessment to date.

Under the split-rate tax, the distinction between land and built structures becomes important. Based on the draft split-rate tax proposal reviewed by the City Council’s Legislative Policy Division, total property value would be taxed at six mills and land value specifically would be taxed at 118 mills, at least within the first year of implementation. Fundamentally, the split-rate tax proposal alters and somewhat complicates the calculation behind the property tax. It can be illustrated as:

(Land value × tax rate) + (property value × tax rate) = property tax bill

Incentives to develop land, as well as abandon it

Why would the city bother with an entirely new tax scheme? Mayor Michael E. Duggan says that the current property tax scheme “rewards blight, and punishes development.” In a sense, he is correct.

Governments levy taxes to raise revenue. But taxes also disincentivize certain behavior or transactions, whether intended or not. In the case of property taxes, if a property owner improves the built structure on the land, the property value increases. As a function of the calculation shown above, an increase in one factor, the property value, automatically causes the property tax bill to rise even if the other factor, the tax rate, remains the same. The split-rate tax proposal is intended to add cost to, and therefore disincentivize, the ownership of vacant or otherwise unproductive land, and make development cheaper.

To penalize land speculation, the city must raise the cost to speculate. Per the current proposal, the tax on built structures would fall to six mills from 19.952 mills, and the tax on land would increase to 118 mills. Detroit property values are low, and so it is cheap for speculators to purchase plots and wait for a planned economic development project that increases property values irrespective of their individual effort. To illustrate the issue, The Washington Post found that in 2021, 19 percent of home purchases in the Detroit metropolitan area were made by investors, and much of that activity occurred in Detroit. In the 48213 zip code area of Detroit, for example, 82 percent of residential purchases were made by investors.

In the time between when investors cash in and cash out, the city and residents are deprived of the direct and indirect benefits from development, as speculators may do little to create demand and allow properties to deteriorate. Often out of necessity, the city must bear remediation costs for these undeveloped properties to address crime and environmental hazards. More to the point, speculators that allow property to deteriorate pay little in taxes. Why? Because the property is of low value, the property tax bill remains low too.

The added cost from added taxes are supposed to incentivize three outcomes for land speculators. (1) They may pay more in taxes, which would offset some of the cost to the city incurred for care of deteriorated properties, (2) build on the land, or (3) sell the land to someone ready to put the land to productive use. However, there is a fourth outcome that may worsen Detroit’s issues with abandoned and vacant land.

To be sure, the property tax scheme at the current property tax rate is a deterrent to development. If a vacant plot of land is developed—into a storefront, a factory, a home—the property owner, as is indicated above, has increased their taxes. Detroit’s combined property tax levy in particular further entices prospective developers to develop elsewhere. But for the disincentive to have the intended effect of additional development, there must be market demand for land in Detroit and that demand does not appear to exist. 

In 2014, the city empowered a separate yet related entity, the Detroit Land Bank Authority (DLBA), to intake, repair, destroy, and dispose of real property that came into the city’s possession via tax foreclosure, nuisance abatement, and abandonment. In the decade since, it has acquired over 60,000 vacant parcels, most of which remain in its inventory.

Based on the earliest available data from 2015, the DLBA inventoried 2,482 vacant parcels. Inventory swelled to 67,001 vacant parcels in 2017 and has since decreased slightly to 63,053 vacant parcels today. This constitutes most of the vacant land within Detroit’s 142.9 square miles, and that is not what was intended when the DLBA was created. It was created to collectivize the many ways in which land came into city ownership and to return land to productive use. But there is no substantive market demand for vacant land in Detroit.

The split-rate tax may make land speculation less profitable and development more profitable, but absent demand for whatever structure may be built on the land or the land itself, speculators may choose to abandon their properties. For those land speculators that on occasion frustrate economic development efforts or leave their properties to deteriorate, the choice to relinquish ownership may be more attractive especially when one considers how cheaply the land was purchased in the first place.

Detroit is a city in a 70-year decline, and the likelier outcome to added taxes on passively-held land is further abandonment than robust development.

Conclusion

The current property tax is a deterrent to homeownership and development, and the split-rate tax proposal attempts to alleviate that financial burden. Detroit has already made a serious attempt to reduce tax bills when the citywide reappraisal lowered property values (upon which the tax is levied) for 53 percent of homeowners, to positive effect. Equally effective tax relief could be provided with a simpler approach, which is to lower the property tax rate. It would not require confidence in the reaction of land speculators to costlier passive investments. It would equate to less General Fund revenue, however. The split-rate tax proposal, and alternative proposals to lower the property tax burden, will be explored further in the posts that follow.