Reforming Detroit’s property tax system by taxing land at a higher rate than buildings would help to revive the local economy and reduce tax bills for nearly every homeowner, according to a new study from the nonprofit Lincoln Institute of Land Policy. 
 
With the lowest property values of any large U.S. city and some of the highest property tax rates, Detroit is caught in a decades-long cycle of rising tax rates that still fail to generate enough revenue. In the absence of strong public services, high property taxes increase owner costs, reduce property values, and increase the costs of repair and redevelopment, creating a drag on economic recovery. 

Like many economically distressed cities, Detroit copes with this challenge by offering generous tax abatements for new development and for some homeowners. Abatements relieve excess costs and temporarily raise property values, but only a small set of residents and new businesses qualify. This leaves high—sometimes destabilizing—tax bills in place for long-term owners. While high taxes remain on most homes and businesses, inclusive and lasting incentives for reinvestment are absent. 

A higher tax rate for land than for structures—known as “split-rate” because there are two different tax rates—would address the problem more effectively and distribute the benefits more equitably.  

The new study, Split-Rate Property Taxation in Detroit: Findings and Recommendations, finds that taxing land at five times the rate for buildings would result in lower tax bills for 96 percent of homeowners, with an average savings of about 18 percent. Under a revenue-neutral reform, tax savings would be fully offset by tax increases on vacant and underutilized property. 

“By adopting a split-rate property tax, Detroit can make its tax system both more efficient and more equitable,” said John Anderson, an economist at the University of Nebraska, Lincoln, and lead author of the study. “Efficiency is enhanced by removing the tax-related barriers to capital improvements and development. Equity is enhanced by a reduction in taxes for the vast majority of residential homeowners.” 
 
“Splitting the property tax provides long-time Detroiters with the tax relief that new businesses and residents already receive,” said co-author Nick Allen, former manager of strategy and policy for the Detroit Economic Growth Corporation and now a doctoral candidate at the Massachusetts Institute of Technology. “Our study shows that it is an effective, immediate way to permanently reduce burdens on overtaxed households and restore property wealth. It’s not enough, but it is a required step towards racially equitable recovery.” 

In addition, a split-rate tax increases the cost of holding vacant land and reduces the cost of developing it, or of renovating deteriorated buildings. Reduced tax burdens and accelerated investment lead to an average 12 percent increase in residential property value and a 20 percent increase for commercial property. In a supporting technical paper, the project team also found that the proposed 18 percent reduction in residential taxes would reduce residential tax foreclosures by at least 9 percent. 

“Implementation of a split-rate tax in Detroit offers an opportunity to strengthen the property tax system by increasing efficiency, and reducing property tax inequities and tax foreclosure,” said Michigan State University economist Mark Skidmore, a co-author of the study. 

Commissioned by Invest Detroit with support from The Kresge Foundation, the study analyzes data from municipalities in Pennsylvania that have implemented split-rate taxes, as well as real estate and property tax data from Detroit. In addition to Anderson, Allen, and Skidmore, the study’s co-authors include Fernanda Alfaro of Michigan State University, Andrew Hanson of the University of Illinois at Chicago, Zackary Hawley of Texas Christian University, Dusan Paredes of Northern Catholic University in Chile, and Zhou Yang of Robert Morris University. 

“If we are to continue the momentum of Detroit’s positive, equitable growth, we must transform our property tax structure to alleviate the burden on majority Black homeowners and local developers,” said Dave Blaszkiewicz, president and CEO of Invest Detroit. “This report provides a solution that accomplishes that while also disincentivizing blighted and underutilized properties that hinder Detroit’s growth.” 

“With this analysis, Invest Detroit has elevated an equitable approach to taxation that can bring much-needed relief to tax-burdened Detroiters while encouraging investment and growth. This is a timely idea that addresses an urgent concern, and the highly regarded Lincoln Institute of Land Policy has now provided a solid framework for community discussions,” said Wendy Lewis Jackson, managing director of Kresge’s Detroit Program. 

The team also produced three technical papers to support the study: “Assessment of Property Tax Reductions on Tax Delinquency, Tax Foreclosure, and Home Ownership”; “Split-Rate Taxation and Business Establishment Location Evidence from the Pennsylvania Experience”; and “Split-Rate Taxation: Impacts on Tax Base,” all published by the Lincoln Institute. 

The study is available for download on the Lincoln Institute’s website: https://www.lincolninst.edu/publications/other/split-rate-property-taxation-in-detroit 

Will Jason is the director of communications at the Lincoln Institute of Land Policy. 

Image: Aerial view of Residential district in Detroit Michigan. Credit: pawel.gaul via Getty Images.

Amid rising home values, cities and states need to provide targeted relief to keep property taxes affordable while avoiding overly broad measures that could undermine the largest source of local revenue, a new report finds. 

In the Policy Focus Report Property Tax Relief for Homeowners, Lincoln Institute scholars Adam Langley and Joan Youngman evaluate more than a dozen common tools for tax relief and explain how state and local policy makers can keep tax systems fair and fiscally sustainable. They recommend a mix of sound tax administration, highly targeted relief, and robust state funding. 

“An approach that includes policies such as circuit breakers, deferrals, sound assessment and collection practices, and well-designed state aid formulas will promote a tax system that is fair and affordable for taxpayers while providing the revenue needed to maintain quality public services,” the authors write. 

The report addresses a challenging aspect of the property tax: higher home values do not always equate to greater cash flow for homeowners. Thus, keeping tax bills stable is essential.  

In an attempt to provide stability, states sometimes enact ineffective measures that destabilize state and local budgets, reduce the quality of public services, and deliver disproportionate benefits to wealthier homeowners. The most common among these are far-reaching limits on local tax rates, revenues, and taxable property values. 

“All state-imposed tax limits reduce local control over budget decisions, and so diminish the capacity of local governments to respond to taxpayer preferences and changing circumstances,” Langley and Youngman write. 

Instead, policy makers can employ targeted approaches that keep tax bills as stable as possible and provide relief to those who need it. 

Regular and accurate assessment of property is critical. Without it, assessed values stay artificially low until they eventually spike after a long-delayed revaluation. Further, if property values increase faster than incomes, policy makers need to reduce tax rates accordingly to stabilize tax bills. 

While sound assessment and rate-setting practices go a long way to prevent financial hardship, targeted tax relief is needed to support some homeowners, such as seniors with fixed incomes, people who have lost their jobs, or lower-income residents of gentrifying neighborhoods, whose property tax bills are still growing relative to their income. 

Langley and Youngman recommend circuit breakers, which provide property tax relief to those whose tax bill exceeds a certain percentage of income—so named because they function like a switch that cuts off an electrical circuit when too much current flows. They also recommend deferrals, which delay taxes until the property changes hands, enabling homeowners or their heirs to use proceeds from the sale of the home to pay off the taxes. Finally, they recommend monthly payment options so that homeowners do not face a large bill once or twice per year.  

While cities and towns can administer such programs, states play a critical role. They need to remove legal barriers that prevent local governments from effectively administering the property tax and provide robust aid to make up for gaps in real estate values among different cities and towns. Adequate state funding ensures that even low-wealth jurisdictions can provide quality local services at affordable tax rates. 

“If policy makers are sincere about providing targeted property tax relief for homeowners that has the fewest unintended or spillover effects, they would benefit from serious study of the concepts and approaches presented in this report,” said Alan Dornfest, property tax bureau chief for the Idaho State Tax Commission. “It could not be more timely or more complete.” 

The report is available for download on the Lincoln Institute’s website.

Image: Mailboxes along Route 66, Arizona. Credit: libre de droit/iStock/Getty Images Plus.