In a nutshell:
- People are starting to discuss new property tax policies that could provide Detroiters with targeted tax relief in an effort to spur neighborhood revitalization.
- Policy alternatives include a split-rate property tax system and lowering or abolishing the city’s property tax for owner-occupied residential properties.
- Implementing a new property tax policy could bring the city in line with regional competitors and perhaps would grow the property value base.
The property tax burden in Detroit is among the highest in the nation. This has contributed to many residents losing their homes through property tax foreclosure. In addition, it has created a disincentive for potential homebuyers and middle-class residents to invest in the city’s neighborhoods. The revitalization of the city’s neighborhoods and continued economic growth is dependent upon significantly expanding the city’s middle-class population and overall tax base.
City leaders have opportunities to create policies that will have a lasting impact on all its residents and continue the economic growth the city has been experiencing since it left bankruptcy. Policies that address the city’s high property tax burden should be on the agenda.
A key challenge related to any effort aimed at lowering the city’s residential property tax burden is to make sure the city can continue to balance revenues and expenditures. That means ensuring such efforts are revenue-neutral to the city’s budget, on net. In this blog, we explore what options have been proposed in the discussion for property tax relief in Detroit.
Detroit’s High Tax Rates
Detroit’s population decline can partially be attributed to high city tax rates. It is a cause-and-effect phenomenon that occurs as cities levy more taxes to pay for services and retire their debts. The city’s population decline caused fiscal problems for the city, including tax base loss and a loss in tax revenue. To remedy this, Detroit put new taxes in place and raised existing rates to generate revenue, further driving the population exodus from the city.
Population decline also created a city with low taxable value per capita (chart below). The exodus of city residents, abandonment of homes, and aging housing stock caused a plunge in assessed property values in Detroit and a corresponding drop in property tax revenues.
Detroit’s Total Taxable Value Per Capita FY2008 to FY2020
Source: Michigan Department of Treasury
With a depressed property tax base, Detroit must levy property taxes at high rates to generate revenue to maintain city services. When the desired amount of revenue is not yielded through city taxes, city services must be reduced or eliminated to maintain fiscal balance. This juxtaposition between high taxes and lack of services does not bode well for residents or business owners.
It creates a vicious cycle that decreases the incentive to live or locate businesses in the city as Detroiters are unable to see a tax-benefit connection, or a direct link between tax dollars and the benefits received. The resultant effect is the prevalence of tax delinquencies and tax foreclosures that has caused the vacancy and abandonment of homes, and the decline of Detroit’s neighborhoods.
Tools to Bolster Depressed Cities
The city’s tax structure places a large burden on its predominantly low-income residents and creates a disincentive for middle- and upper-income residents and businesses to locate in Detroit. The economic forces at play make it challenging for the city to sustain the economic growth it’s experienced since bankruptcy, which deters meaningful neighborhood revitalization.
In an attempt to bolster economic development, tools are available for municipalities in Michigan that help to attract businesses. They have the ability to selectively reduce property tax burdens through tax abatement programs.
Tax abatements are an economic development tool used by local governments to provide financial incentives for the construction or rehabilitation of businesses and homes. Michigan law provides programs such as renaissance zones, industrial and commercial facility tax abatements, and neighborhood enterprise zones to provide local communities with a menu of options.
Detroit has made extensive use of all these abatement programs, and while they can be effective in encouraging investments in the city, they also result in distortions to Detroit’s property tax base by transferring the tax burden to small businesses and residents less likely to receive tax breaks.
These programs have not drawn families to Detroit neighborhoods nor have they provided substantial property tax relief that would benefit homeowners citywide in a manner that will spur significant neighborhood investment and economic development.
Alternative Property Tax Options
Policy alternatives have been proposed in an effort to relieve the property tax burden on residents and businesses, while spurring economic development. These alternatives include a split-rate property tax system and lowering or abolishing the city’s property tax for owner-occupied residential properties.
A split-rate property tax system would apply differential tax rates to the taxable value of properties, with a higher rate applied to land value and a lower rate applied to structures and improvements on that land. It can be a revenue-neutral tax option that would replace taxes on invested capital with increased taxes on land. Property tax bills would change, but it can be implemented in such a way that the amount of revenue collected by the city would be the same. Constitutional challenges do exist, however, in applying differential tax rates in Michigan.
A second option proposes the lowering or complete abolishment of the city’s property tax for all owner-occupied residential properties. This alternative tax option suggests that abolishing the city’s property tax on homeowners would incentivize families to move into the city’s neighborhoods while incentivizing existing homeowners to stay in the city. It would work to protect home ownership, rebuild the middle class, and strengthen the city’s neighborhoods.
Balancing City Revenues and Expenditures
One of the biggest challenges in implementing policy that would provide significant property tax relief is to ensure the city can continue to balance revenues and expenditures.
The split-rate property tax system addresses this challenge through its revenue neutral component, which suggests that the balance between city revenues and expenditures would be unaffected. However, a failure to achieve this neutrality could be detrimental to city services, other taxing jurisdictions that levy Detroit property taxes, and existing debt obligations.
Implementing policy that would lower or completely abolish the city’s property tax for all owner-occupied residential properties could pose a challenge in balancing revenues and expenditures because it does not have a revenue neutral component. Thus, an alternative form of revenue could be needed to replace the tax revenue lost.
This could be done by imposing a local-option sales tax on local goods and services or imposing specific excise taxes. It could also be done by modestly increasing taxes on commercial and industrial property. However, these revenue replacement alternatives are complicated by constitutional hurdles and restrictions that would need to be addressed.
Incentivizing middle-class families to move or stay in the city could also help to increase income tax revenue as a result of more people working in the city. This could help to offset the tax revenue lost on property taxes.
Reducing Detroit’s tax rate would bring the city in line with regional competitors and perhaps grow the property tax base. If a high-tax community like Detroit were to reduce or abolish its tax rate, it could see an increase in its property values, offsetting the revenue losses due to the rate reduction.
However, Detroit could also see negative property value growth if it fails to maintain a competitive service package within the region. Thus, it is important for the city to make sure that the revenue it stands to lose from reducing or abolishing its property tax can be replaced with an alternative means of revenue and continue to supply the kinds of competitive tax-service packages that are necessary for a growing tax base.
The property tax is just one of several complex problems facing Detroit residents. Many of these challenges have accumulated over the last seven decades and will not be easily reversed. The persistent loss of population is a major challenge facing Detroit’s economic recovery. In order for the city to maintain a steady pace of economic growth, it needs to reverse the trend of population loss to grow its tax base, increase its revenue, and strengthen its neighborhoods.
The city must consider policies that will have a lasting positive impact on all its residents, including those aimed at lowering the high property tax burden to attract investment. Attracting middle class residents, who often act as economic stabilizers, can play an important role in the revival of the city, but Detroit needs to find ways to both attract, as well as maintain, its middle-class population before this can be realized. Targeted property tax relief is one way to make that happen.