In a nutshell

• The Detroit property assessor’s office failed to accurately reflect declining property valuations in the years following the Great Recession, causing many residential properties to be over-assessed and creating a financial strain for many property owners in the city.
• Of the estimated $600 million that Detroiter’s were overtaxed, about 48 percent is tied to taxes levied by the city while the remaining 52 percent is related to overlapping levies.
• While reformers must continue to monitor the city’s assessment efforts, there is the question of refunding taxes to those that overpaid. Tackling this challenge, however, presents three significant obstacles.

Prior to the COVID-19 pandemic, one of the most talked about issues in Detroit was the reported over-assessment of properties. The City of Detroit is estimated to have overtaxed homeowners by at least $600 million over a six year period following the Great Recession. The urgency of finding some sort of remediation for the over-assessed properties has somewhat faded away with the new problems ushered in from the pandemic. Finding a remedy for overtaxed residents is the goal but achieving that goal will be extremely difficult as a number of obstacles exist in the many paths leading to this goal.

Background

Detroiters are both overtaxed and extremely poor relative to other large cities. Detroiters pay one of the highest effective homestead property tax rates among the 50 largest U.S. cities and also a large concentration of residents living in poverty. Property tax revenues pay for public safety, infrastructure, libraries, garbage pickup, and other municipal services. But, city residents also pay property taxes to support other services, delivered by overlapping taxing jurisdictions responsible for K-12 education, community colleges, a variety of Wayne County services, and many regional services, such as the Detroit Institute of Arts, metropolitan parks, and the Detroit Zoo.

Detroit’s residential over-assessment problem occurred when the city did not adjust property assessments in the years following the Great Recession. The subprime mortgage crisis along with the Great Recession dragged down home values substantially, but city assessments failed to accurately reflect these fallen values. As a result, for a number of years property values were over-assessed and this was most pronounced among lower-valued homes. This created a financial strain for city residents, especially for those least able to keep up with their tax bills.

When property taxes are not paid, the debt gets passed on to Wayne County for collection.The Wayne County Treasurer reimburses the city for unpaid taxes and then attempts to collect from property owners, adding an 18 percent surcharge to residents’ unpaid tax bills each year taxes go unpaid. After three years, state law requires the County Treasurer to foreclose on a property and put it up for auction where it is sold to the highest bidder. 

Detroit’s Over-Assessment Problem

A 2020 report charged the city with overtaxing property owners by an estimated $600 million from 2010 to 2016. The $600 million figure is a conservative estimate as the Detroit News analysis did not look at the years prior to 2010, when home values were declining during the Great Recession from 2007 to 2009, and before values totally bottomed out. 

A University of Chicago study found that the city’s residential property assessment methodology continues to harm Detroiters in over assessments and the resultant tax foreclosures of homes from over assessed properties. The Coalition for Property Tax Justice asserts that the lowest-valued homes in Detroit continue to be over assessed even after a citywide reappraisal in 2017. These over assessments put extra burden on property owners and put thousands of Detroiters at risk of unjust foreclosure. 

The study estimates that of more than 63,000 Detroit homes with delinquent debt, more than 90 percent were overtaxed by an average of at least $3,700 between 2010 and 2016. In recent years, tax foreclosures of owner-occupied homes in Detroit have dropped 89 percent, falling from 6,408 foreclosures in 2015 to 708 foreclosures in 2018. In 2020, with the COVID-19 pandemic raging and causing all kinds of financial disruptions, Wayne County ceased its foreclosure activity and extended the moratorium through 2021.  

Estimates are that one in ten Detroit tax foreclosures between 2011 and 2015 were caused by the city’s inflated property assessments. Wayne County foreclosed on about 100,000 Detroit properties for unpaid property taxes during this period. Of 173,000 Detroit homes reviewed by The Detroit News, more than 92 percent (159,160 homes) were over assessed between 2010 and 2016. Nearly 96,000 of those properties were taxed twice as much as they should have in at least one of those years. Of the over-assessed homes, about 79,000 have had the same owner since 2010, meaning they bore the full brunt of over taxation during this period. An estimated 59,000 overtaxed properties still owe back taxes, amounting to $153 million with interest and fees. 

Thousands of other Detroit homes without delinquent debt, as well as commercial and industrial properties, were unaccounted for in the analysis of the $600 million over-assessment. This means there are thousands of other Detroit homes which also suffered the same burden of having their property over-assessed and paying inflated property tax bills. 

Distribution of the Tax Revenues 

Of the 69.6 mills (one mill is equal to $1 of tax for every $1,000 of assessed value) Detroit residents pay on homestead property, roughly 34 mills (48 percent) relate specifically to Detroit municipal operations, debt service, and the library. The other 52 percent is for non-city services, that is government operations outside the city, namely Wayne County and its various subunits (Zoological Authority, DIA), Wayne RESA, Wayne County Community College, the Detroit schools debt, and the state education tax. 

The chart below breaks down the distribution of the $600 million of over assessed property tax revenue collected from Detroit homeowners.

Detroit Over-Assessed Property Tax Revenue by Taxing Jurisdiction

Source: Detroit OCFO Treasury Office

The Challenges of Remediation 

From 2014 to 2017, Detroit’s Office of the Assessor conducted a major residential reassessment effort, resulting in assessment reductions for about 68 percent of properties. Yet, the problem of over assessment continues to plague Detroit homeowners. A 2020 study found that the city continued to over-assess homes selling for under $19,000 from 2016 to 2018. These reassessments have been found to generate meaningful improvements in tax compliance as well as increases in homeownership.

While the city’s assessment efforts must continue to be monitored, there is the question of refunding taxes to those that overpaid. Tackling this challenge, however, presents reformers with three significant obstacles.

First, the city would need to conduct a “forensic” assessment to identify the properties affected by the overassessment and identify the value of that mistake. This would include not only the properties in arrears on property taxes, but all properties: residential, commercial, and industrial. The problem is that the over assessment appears to have been citywide, leaving few properties to benchmark against. Retrospectively identifying the market value of each property a decade ago may be impossible at this point.

Second, the city would have to track down the property owners affected by the over assessment. Some may continue to own their properties, but as was chronicled above, many lost their properties because of foreclosure or were taxed out of their homes. Some may have relocated within the city, while many have located elsewhere.

Finally, there is the question of where the money will come from to compensate affected property owners. Should it fall completely on the city, even though entities other than the city received a windfall but did not contribute to the errors that resulted in the over assessment? Neither the city nor any of the other benefiting jurisdictions have kept the extra tax revenues in escrow. Refunding taxes would require each responsible government to either scale back services to free up funding or increase the tax rate to yield the needed funding. In either case, this approach would result in taxing Detroiters today to compensate those that paid Detroit tax bills in the past. 

Multiple challenges lie ahead with any solution that is proposed as a means of remediation. Whatever solution the city comes up with will not be perfect. There will still be winners and losers in this fight, but that does not mean the conversation towards remediation should not be had. This is an opportunity for the city government to learn from its mistakes and be held accountable so future generations do not suffer from the same blunders. As we continue into the decade and adjust to the new housing market and economic realities of the post-pandemic era, lessons of the past should inform viable policy solutions and accountable governmental action.

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.