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Faculty Profile of Andrew Reschovsky
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Weidong Qu is a research fellow at the Peking University–Lincoln Institute Center for Urban Development and Land Policy in Beijing, and an associate professor in the Department of Land and Real Estate Management at Renmin University of China. Dr. Qu’s research interests include real estate appraisal, land and cadastral management, fuzzy cluster analysis, GIS programming and analysis for real estate valuation, and real estate investment analysis and finance.
Since 2003, he has focused much of his research on property tax reform in China. Dr. Qu has authored five academic books and published over twenty papers for both international and domestic Chinese journals and conferences. He earned his Ph.D. in real estate appraisal at the Geodetic Institute of the University of Hannover, Germany, in 2000.
Dr. Qu also serves as director of the China Association of Real Estate Academicians and executive secretary general of the Global Chinese Real Estate Congress. He is also conducting research in Munich on real estate mortgage valuation and risk analysis as a Humboldtianer fellow of Germany’s Alexander von Humboldt Foundation, and taking part in a research project on property tax reform in Germany.
Land Lines: How did you become associated with the Lincoln Institute of Land Policy?
Weidong Qu: After returning to China in 2002 following my studies Germany, I took part in a training seminar on urbanization and smart growth that was cohosted by the Lincoln Institute and Renmin University. Then, in December 2003, I was invited by officials in the City of Shenzhen to participate in an international symposium on property taxation organized by China’s State Administration of Taxation and the Lincoln Institute. At a later conference on property taxation in Beijing in 2007, I met Joyce Yanyun Man, the director of the Institute’s China Program and the Peking University–Lincoln Institute Center for Urban Development and Land Policy, and she invited me to join the Center’s research group to lead the property tax team.
Land Lines: Why is research on property taxation in China so important?
Weidong Qu: China’s real estate market has developed rapidly over the past 30 years as economic reforms have been introduced. At the same time, real estate–related taxes remain relatively complicated, with a lack of distinction between taxes and fees, and widespread use of administrative fees in place of taxes that may not otherwise have been approved by central regulatory authorities. The steady increase in the use of taxes and fees has begun to influence development costs in the residential housing sector, with the combined charges estimated to account for 40 percent of total costs for new housing stock. This situation is a growing source of criticism from both property developers and residents, who see this increase in charges as one of the factors pushing China’s urban housing prices ever higher.
Another tax-related issue confronting the sustainable growth of China’s real estate sector is the preference for levying taxes and fees on the developer rather than the ultimate owner. To date, China has not established a property tax system, and taxes and fees levied on property owners remain comparatively low, which has contributed to overinvestment and speculation in the property market.
In addition, due to China’s centralized tax system and the lack of a stable local revenue source such as a property tax, local governments have become heavily dependent on revenues from land transfer fees to fund public expenditures and infrastructure investments. According to China’s Ministry of Land and Resources, during the 11th Five-year Plan (2006–2010), more than 33 million mu (more than 200 million acres) of land was transferred by local governments for development, generating revenues of 7 trillion renminbi (approximately US$1.1 trillion). This land-based approach to public finance undermines economic stability and puts pressure on land prices, with the potential to contribute to a real estate bubble.
Land Lines: What challenges differentiate property tax issues in China from the experience in the United States, Europe, or other developed economies?
Weidong Qu: Property tax levies in developed countries are generally based on an assessed value, and most jurisdictions utilize computer-assisted mass appraisal (CAMA) systems to administer their property taxes. At this time, however, none of the taxes or fees levied on China’s real estate sector are based on an assessed value and, consequently, there is a critical shortage of experienced assessors and officials. Most current assessors focus primarily on individual properties, and they lack experience with mass appraisal techniques.
Administering a modern property tax also requires an integrated geographic and property database. My research indicates that more than 90 percent of China’s cities do not yet have such a property database, and many local governments cannot document the number of parcels within their jurisdictions, or even the ownership of each parcel.
Land Lines:How does property taxation in China relate to the country’s rapid urban development and growth?
Weidong Qu: According to a projection from the Chinese Academy of Social Sciences, China’s rate of urbanization will be 52.28 percent in 2015, 57.67 percent in 2020, and 67.81 percent in 2030, after which the rate is expected to stabilize. This trend will produce a rapid increase in the urban population and the need for significant expansion of basic infrastructure, such as schools and hospitals, as well as more residential housing. Supplying land for this new infrastructure will be an ongoing challenge and will eventually render China’s current land-based public financing approach unsustainable.
Land Lines: How do you approach property taxation in China through your own research?
Weidong Qu: The first official mention of property tax reform came in a report from the third plenary session of the 16th Central Committee of the Chinese Community Party in 2003. That report directed the government to “reform city and village construction taxes and fees, and levy a property tax on fixed assets when the conditions are ready, including the concomitant cancelation of overlapping taxes.” This statement was one of the major impetuses for the Lincoln Institute to become involved with property tax research in China and to collaborate with the State Administration of Taxation in Shenzhen, as well as the beginning of my own work in the area.
With the central government’s support, policy makers selected six Chinese cities to serve as initial property tax reform pilot cities for internal sample valuations and research. The study was later expanded to ten cities, including Beijing. These pilots have built upon China’s ongoing stamp tax reform, which refers to a value-based tax paid during the sale of a property and has been invaluable in pushing jurisdictions to formulate their own assessment standards. According to the Ministry of Finance, China will transition to an assessed-value standard for the stamp tax by 2012, which will require each jurisdiction to develop its own computer-assisted mass appraisal system.
In my opinion, four key issues merit research attention. First, it is important to define what we mean in China by a property tax, because considerable disagreement exists among policy makers and scholars about what such a tax should include. Second, property databases remain incomplete or inaccurate, so it is vital to conduct a national-scale survey of housing stock and ownership. Without this data, government agencies are unable to assess property values for all parcels within their jurisdictions or ensure that property tax bills are mailed to the correct property owner.
Third, further research into mass appraisal theories and techniques is still needed. Although China’s tax officials have made progress in their knowledge of the basic principles of mass appraisal, they generally lack specialized real estate training, and their limited understanding threatens to lead to ill-informed policy making. Fourth, before any progress can be made, it is necessary to overcome opposition from China’s political and economic elites, who often own multiple properties and have emerged as one of the biggest obstacles to property tax reforms. Given the uncertainty as to the final direction of property tax reform in China, these interest groups have seen delaying the imposition of a property tax as their best strategy.
Land Lines: What challenges has the PKU-Lincoln Center’s property tax demonstration project sought to address?
Weidong Qu: Since property tax reform in China was first mentioned in 2003, the Lincoln Institute has contributed to this important issue by hosting training seminars and international conferences on property tax assessment and theory, along with lessons from other international experiences. The property tax demonstration project represents the logical next step in the Institute’s work, with a goal of identifying and addressing the practical challenges of such reform. Many of these challenges, such as the importance of cross-ministerial information sharing and CAMA valuation codes, are not the high-profile issues focused on by officials, but they are equally important in ensuring the success of any property tax reform.
Specifically, the demonstration project has focused on 18 properties on Financial Street in western Beijing, the location of the People’s Bank of China and the headquarters of a number of other major domestic and international financial companies. We chose Financial Street because it is one of the most developed districts in Beijing; however, even in such a modern area it took us several months to collect all of the geographic, property, and tenant information needed. This underscores the importance of constructing standards for data gathering and information sharing among government agencies.
Land Lines: What are the biggest remaining obstacles to implementing an effective residential or commercial property tax in China?
Weidong Qu: Assessing a property tax on residential housing stock and on commercial real estate are two separate issues in China. As mentioned, many factors hinder the implementation of a property tax on residential housing stock, including the opposition of powerful interest groups and the current lack of reliable property transaction and ownership data. As in most countries, citizens’ historic opposition to paying taxes on owner-occupied property is also a challenge.
In terms of a property tax on commercial real estate, the current consensus is to leave the existing tax burden unchanged by eliminating the present land use fee and the rental-income and original-value-based real estate taxes levied on commercial property and then establishing a single assessed-value property tax. This approach should not generate the same opposition as that seen against a residential property tax.
In my view, there are two key challenges remaining. The first is to revise China’s existing laws related to taxes on property and then to draft new legislation. The second challenge is the current variety of commercial real estate and the lack of consensus on what valuation method should be used for each type. The demonstration project conducted by the PKU-Lincoln Center in 2009 focused exclusively on top-grade commercial real estate, such as office space, hotels, and apartments. There remains a need for further research on the best valuation methods for property such as gas stations, hospitals, shopping centers, and informal shops in China.
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Es difícil figurarse la manera en que la pérdida constante de población ha devastado a Detroit. Entre 1900 y 1950, cuando el crecimiento de la manufactura automotriz en los EE.UU. la convirtió en uno de los principales centros industriales y culturales del país, la población de Detroit saltó de 300.000 a 1,85 millones de habitantes. A partir de 1950, sin embargo, comenzó a disminuir. Y este descenso ha continuado hasta la actualidad, desplomándose a sólo 700.000 habitantes en 2010, una tasa de reducción casi tan rápida como lo había sido el aumento en la primera mitad del siglo XX.
A pesar del esfuerzo de Detroit durante varias décadas para mantenerse al ritmo de la pérdida de población eliminando el inventario de viviendas ruinosas, aproximadamente un cuarto de sus 380.000 parcelas se encuentra hoy abandonado y administrado por la ciudad u otros entes públicos. Hasta julio de 2014 se han demolido 114.000 propiedades, y 80.000 más se consideran arruinadas (Austen 2014). Si bien es cierto que el centro se está recuperando y los suburbios siguen mostrando vitalidad, un visitante desprevenido quedará anonadado por la “incomprensible desintegración del paisaje edificado” en amplias zonas de la ciudad (Austen 2014).
Este artículo, el primero de una serie de dos, considera las causas fiscales y repercusiones del superávit de viviendas y terrenos baldíos en Detroit, desde la extensión y ubicación de las casas y lotes abandonados en la ciudad hasta la espiral descendente de los precios de las viviendas, que ha provocado una sobrevaluación de las propiedades, mora en el pago del impuesto sobre la propiedad y ejecuciones tributarias; la adquisición pública de dichas propiedades; el patrón de valores del suelo a lo largo de la ciudad; y, finalmente, algunas maneras potenciales de reconciliar la cantidad de habitantes que quedan con la cantidad de propiedades vacantes y administradas públicamente. Estas medidas van desde revitalizar vecindarios densamente poblados a establecer un cinturón verde y adquirir parcelas vacantes para uso público, como parques, bosques, zonas de amortiguamiento industrial, lagunas de retención y otros espacios abiertos (Austen 2014).
Factores de la caída
Las causas de la decadencia de Detroit son múltiples y quizás demasiado conocidas. La infraestructura de transporte subsidiada por el gobierno federal, como por ejemplo el sistema de autovías interestatales, facilitó la rápida suburbanización, promovida además por códigos de desarrollo inmobiliario permisivos. La tensión racial, las fuerzas económicas globales y la corrupción desgastaron lo que quedaba de la ciudad propiamente dicha. En las primeras etapas del deterioro, los residentes de mayores ingresos, la mayoría de los cuales era de origen caucásico, se mudó a los suburbios en busca de una mejor calidad de vida, como se muestra en la tabla 1. Para 1990, la población afroamericana también había alcanzado su pico, y comenzó a disminuir en la primera década del siglo XXI. A comienzos de 1960, la manufactura de automóviles de Michigan inició su largo y vertiginoso declive, que afectó de forma desproporcionada a Detroit y Flint. La pérdida de puestos de empleo bien remunerados para la clase media dañó aún más la base demográfica y económica urbana, ya que dichas familias fueron a buscar oportunidades de empleo en otro lado. Las crecientes tasas de crimen y la erosión constante de los servicios públicos provocaron otra ola de deserciones.
La tabla 1 ilustra esta decadencia de las condiciones demográficas y económicas de la ciudad entre 1950 y 2010. Para el 2012, según fuentes gubernamentales, la mediana de ingresos de las unidades familiares era de solamente US$25.000, menos de la mitad de la mediana nacional de ingresos. Los índices de pobreza y desempleo eran 38 y 27,5 por ciento, respectivamente. La tasa de participación laboral era del 54 por ciento (comparado con el 63 por ciento en todo el país) y por cada 6,35 trabajadores empleados había una persona que recibía beneficios de discapacidad del Seguro Social (comparado con 1 de cada 12 en todo el país). Más del 34 por ciento de la población de la ciudad recibía cupones de alimentos, y el 81 por ciento de los niños de las Escuelas Públicas de Detroit eran elegibles para el Programa de Almuerzo Gratis o a Precio Reducido. Las fuentes de ingreso comenzaron a depender cada vez más de aportes externos, incluyendo los no residentes, como se explica en el recuadro 1. En 2013, cuando la ciudad finalmente sucumbió al peso de los problemas fiscales acumulados y se declaró en quiebra, sus deudas y obligaciones sin fondos ascendían a US$18.000 millones, o sea US$68.000 por unidad familiar, lo cual es aproximadamente 2,7 veces la mediana de ingresos de las unidades familiares (Turbeville 2013).
El fracaso del mercado de la vivienda
El descomunal excedente de oferta de viviendas que se acumuló a lo largo de las décadas como consecuencia de la demanda selectiva en Detroit corroyó el valor de la propiedad. La crisis inmobiliaria de 2007–2008 asestó el golpe final, lo que dio como resultado la desintegración casi completa del mercado de la vivienda de Detroit. En 2010, el precio promedio de una propiedad residencial, que en 2006 era US$57.000, se había desplomado a alrededor de US$7.000 (Hodge et al. 2014a). El excedente actual de suelo y vivienda de Detroit podría inhibir una recuperación de los precios inmobiliarios en los próximos años, incluso si la población se estabilizara.
Mora en el impuesto sobre la propiedad, abandono y adquisición pública de propiedades
Los funcionarios de la administración tributaria no han recalibrado el valor de tasación de las propiedades para que este refleje la caída del precios de las viviendas. Esto ha traído como consecuen-cia una sobrevaluación de hasta el 80 por ciento (Hodge et al. 2014a), contribuyendo a una falta de voluntad generalizada para pagar los impuestos, según Alm et al. (2014). Su investigación también muestra que hubo otros factores que agravaron, como las altas tasas tributarias estipuladas por ley, y la limitación de servicios como la seguridad pública.
En el medio de esta crisis inmobiliaria, la tasa de mora en el pago del impuesto sobre la propiedad llegó a un nivel alarmante del 50 por ciento (Alm et al. 2014). La figura 2 (pág. 15) muestra las tasas de mora por vecindario de la ciudad en 2010. La recaudación del impuesto sobre la propiedad depende de la capacidad de una jurisdicción para imponer sanciones por falta de pago, como señala Langsdorf (1973). Cuando los valores inmobiliarios colapsan, las autoridades tributarias no tienen un mecanismo de cumplimiento práctico; el ahorro de los propietarios por no pagar el impuesto sobre la propiedad es mayor que el valor de la casa que poseen y que perderían en caso de ejecución tributaria. Más aún, lo recaudado por la venta de propiedades ejecutadas de bajo valor es insuficiente para cubrir la deuda tributaria morosa y el costo para el gobierno de iniciar las actuaciones de ejecución tributaria.
La falta de pago generalizada del impuesto sobre la propiedad y el abandono subsiguiente de las viviendas ha traído como consecuencia la adquisición pública de miles de propiedades en todo Detroit. El quince por ciento de las parcelas de esta ciudad de 360 km2 está ahora vacante, y cerca del 25 por ciento de la superficie del suelo de Detroit no es actualmente tributable al ser propiedad o estar administrada por la ciudad o algún otro ente público (Sands y Skidmore 2014), como se ilustra en la figura 3.
La espiral descendente de ejecuciones tributarias
En la actualidad, la cantidad de propiedades que pasan a manos públicas por ejecuciones tributarias es mucho mayor que la cantidad de propiedades públicas adquiridas de vuelta por contribuyentes privados.
En Michigan, los impuestos sobre la propiedad morosos están sujetos a una tasa administrativa del 4 por ciento y un interés mensual del 1 por ciento sobre el monto adeudado, a una tasa de interés no compuesta y a partir del primer mes de falta de pago. Después de un año de mora, la ciudad transfiere la propiedad al gobierno del condado y el dueño es sujeto a un cargo de interés mensual adicional del 0,5 por ciento. Durante este período de dos años, los dueños pueden recuperar sus propiedades pagando todos los impuestos y cargos vencidos.
Si el impuesto sobre la propiedad queda sin pagar por más de dos años, el tesorero del condado de Wayne inicia las actuaciones de ejecución tributaria. Después de una audiencia para demostrar causa justificada en la corte de apelaciones, el tesorero del condado vende las parcelas ejecutadas en subasta pública. El monto inicial de la subasta es el del equivalente a los impuestos sobre la propiedad adeudados más intereses y penalizaciones, y lo recaudado se distribuye en forma proporcional entre las jurisdicciones tributarias. Si la propiedad no se vende en la primera subasta, el condado reduce el monto de subasta mínimo a US$500 y organiza una segunda subasta. Este procedimiento ha causado más evasión tributaria, ya que algunos propietarios prefieren ignorar sus facturas de impuestos a la espera de volver a comprar su parcela por US$500 en la segunda subasta.
Las propiedades que no se venden en ninguna de las subastas se pueden transferir a un organismo público (municipal o estatal) o a un banco de suelo estatal o local, o se puede retener para una subasta subsiguiente. Los registros del condado indican que el 80 por ciento de las parcelas vendidas a compradores privados en subasta en los últimos dos años están nuevamente en mora tributaria (MacDonald 2013). Dado que la tasa de mora tributaria es del 67 por ciento para propietarios que no residen en su vivienda (Alm et al. 2014), da la impresión de que una cantidad significativa de los compradores en subasta son propietarios absentistas que pretenden reducir sus gastos operativos y aumentar sus ingresos netos de alquiler dejando de pagar sus impuestos sobre la propiedad.
En las parcelas de bajo valor, los impuestos sobre la propiedad son, en la práctica, optativos. Para reducir la cartera de lotes con mora tributaria (MacDonald 2013), el condado no ejecuta la hipoteca de propietarios que deben menos de US$1.600 en impuestos y multas acumuladas, con lo cual estas deudas se convierten en optativas.
La recaudación prevista por la venta de parcelas de bajo valor es insuficiente para cubrir los gastos legales de una ejecución por falta de pago de impuestos y saldos tributarios impagados. El resultado final es una creciente tasa de mora e inventario de propiedades indeseadas que terminan en manos públicas, donde no generan ningún ingreso para la ciudad.
Y de aquí, ¿adónde vamos?
Se espera otra ola de ejecuciones tributarias a fines de 2014 y comienzos de 2015. ¿Qué se puede hacer para estabilizar la situación?
Cómo poner freno a la mora en el impuesto sobre la propiedad
Como se mencionó previamente, la mora se reducirá cuando los contribuyentes perciban que reciben un valor proporcional a su dinero. Así, si se mejoran los servicios prestados con la recaudación de impuestos como la seguridad pública, la evasión y el pago atrasado de impuestos se reducirá (Alm et al. 2014). Bajo el liderazgo del alcalde recientemente electo, Mike Duggan, el gobierno de la ciudad está adoptando medidas para mejorar el suministro de servicios públicos básicos y ordenar su panorama fiscal. Por ejemplo, en la actualidad sólo 35.000 de las 88.000 luces de la ciudad funcionan, así que Duggan piensa instalar cada mes 2.400 luces que alumbren (Austen 2014). También aumentó la cantidad de autobuses operativos de 143 a 190 y mejoró los servicios de remoción de nieve durante el pasado invierno, que fue particularmente riguroso.
Una reducción de las tasas de impuestos también reduciría modestamente la tasa de mora (Alm et al. 2014). Las tasas tributarias de Detroit, que son aproximadamente el doble del promedio de la región, son de 67 y 85 milésimas por dólar de valuación para propiedades que son un bien de familia y que no lo son, respectivamente. Este valor es el máximo admitido por el estado. Si bien es cierto que una reducción mejoraría la competitividad de la ciudad con relación a otras comunidades de la región, en la actualidad no se está considerando una reducción en la tasa del impuesto sobre la propiedad.
La alineación de la valuación con las condiciones del mercado actual también reduciría la mora. El Alcalde Duggan recientemente prometió reducir las valuaciones en un 5 al 20 por ciento en toda la ciudad, para reconciliarlas con las pautas estatales. No obstante, las reducciones prometidas por Duggan son sólo una pequeña fracción del recorte del 80 por ciento necesario para alinear las valuaciones con el valor del mercado, según Hodge et al. (2014a).
Retirar suelo del mercado
En la ausencia de una demanda sólida de suelo, la cual no parece probable en un futuro cercano, el excedente se tiene que retirar del mercado por un período de tiempo con objeto de que el valor inmobiliario mejore de manera general en toda la ciudad. Dado que los entes públicos poseen ahora tantas propiedades, son las autoridades gubernamentales las que tienen el poder para retirarlas del mercado de forma creíble. Sin este tipo de medidas políticas, la posibilidad de que estas parcelas se transfieran rápidamente al sector privado afectará la recuperación de los precios.
En la actualidad, hay muchos entes públicos que poseen suelos. Las autoridades de la ciudad de Detroit, el condado de Wayne y el gobierno estatal están colaborando para consolidar estas parcelas bajo un solo ente que pueda administrarlas de manera más efectiva. Detroit Future City (2010) detalla esta propiedad fragmentada de suelos públicos:
Los suelos públicos en Detroit están en manos de muchas agencias distintas de la ciudad, el condado y el estado, como también de muchas entidades autónomas o cuasi autónomas como las Escuelas Públicas de Detroit, la Comisión de Vivienda de Detroit y la Corporación de Crecimiento Económico de Detroit. Hay pocas ciudades que tengan un inventario de propiedades tan fragmentado de suelo público. No hay coherencia de políticas, procedimientos o misiones entre estos entes, y muchos de ellos están maniatados por requisitos legales burocráticos y procedimientos complejos. El Departamento de Planificación y Desarrollo controla la mayor cantidad de propiedades; sin embargo, su capacidad para darles un destino estratégico está restringida por obstáculos de procedimiento, como la necesidad de obtener aprobación del Concejo Municipal para cualquier transacción, no importa cuán pequeña o insignificante sea desde la perspectiva de la ciudad.
Aunque este proceso de consolidación es necesario, no es suficiente. Hacen falta recursos financieros para eliminar el deterioro urbano e implementar planes de uso del suelo. Los dirigentes municipales se centran principalmente en estrategias para devolver estas parcelas a manos privadas. Si pudieran estimular un mayor interés en las propiedades de Detroit, esta estrategia podría ser viable.
Hay, efectivamente, oportunidades emergentes para estimular la propiedad privada en el distrito comercial central (central business district, o CBD). Daniel Gilbert, fundador de Quicken Loans, ha mudado su sede al centro de Detroit y ha invertido US$1.300 millones en bienes inmuebles (Forbes 2014). Y la renovación del área del centro ha generado un aumento considerable de los precios de alquiler (Christie 2014).
Los valores del suelo en el CBD son muy altos, como se muestra en la figura 4 por las parcelas negras, que representan los valores del suelo más alto del mapa. Sin embargo, el gradiente de valores del suelo en Detroit es muy pronunciado. Si bien varias zonas dentro del anillo que rodea el CBD han retenido algo de valor, el precio del suelo cae rápidamente a medida que aumenta la distancia al CBD, aun cuando vuelven a subir al acercarse a de los límites de la ciudad, probablemente debido a las comodidades disponibles en los suburbios cercanos, como centros comerciales.
Dada la débil demanda fuera del CBD, podría ser más efectivo determinar qué propiedades públicas deberían volver a manos de contribuyentes privados, qué propiedades deberían retirarse del mercado durante una década o dos, con la opción de volver a introducirlas al mercado en caso de que las condiciones cambien, y qué propiedades deberían retirarse del mercado de manera permanente.
El plan de ordenamiento de 2012, delineado por Detroit Future City, propone la reasignación de suelo para parques, bosques, amortiguadores industriales, vías verdes, lagunas de retención, jardines comunitarios y hasta campamentos (Austen 2014). La implementación plena de esta propuesta ambiciosa requiere recursos financieros importantes. Pero consideremos la manera en que las autoridades estatales y federales intervinieron en el último episodio importante de ejecución tributaria masiva. Durante la Gran Depresión, muchos dueños de residencias familiares en suelos agrícolas marginales de Michigan, Minnesota y Wisconsin ya no pudieron pagar sus impuestos sobre la propiedad, lo que causó una ola masiva de mora tributaria, ejecuciones hipotecarias, abandonos y en última instancia confiscaciones. En esos estados, los gobiernos del condado frecuentemente pasaron a poseer miles de hectáreas, gran parte de las cuales fueron vendidas a los gobiernos estatales y federal. Los seis bosques nacionales de Minnesota, Wis-consin y Michigan, así como numerosos bosques estatales de la región, tuvieron su origen en el abandono masivo de suelo durante la Gran Depresión, cuando las autoridades estatales y federales fueron uniendo en mosaico un conjunto de suelos adyacentes adquiridos a los condados, ansiosos de vender las propiedades que habían decomisado por falta de pago.
En la actualidad, las autoridades del estado y el gobierno federal no se inclinan por un rescate financiero de Detroit. Pero la historia sugiere que los gobiernos federal y estatal podrían ayudar a Detroit a recuperar su viabilidad fiscal adquiriendo grupos de parcelas no deseadas, realizando pagos en lugar de impuestos (como es habitual para otros suelos públicos) y usando después el suelo para beneficio del público en general. Los usos potenciales se describen en el plan de ordenamiento mencionado anteriormente, y se exploran en el segundo artículo de esta serie. Una alianza del gobierno federal con el gobierno estatal y los gobiernos locales para hacerse cargo de estas propiedades podría ayudar a estabilizar el mercado del suelo y crear una fuente de ingresos para la ciudad y demás jurisdicciones fiscales pertinentes (incluyendo el gobierno estatal mismo, a través del impuesto de educación del estado). La recuperación del valor de la propiedad en combinación con la reinversión en el centro de la ciudad, el mantenimiento de los esfuerzos para mejorar el paquete de servicios brindados con la recaudación tributaria de Detroit y la eliminación del deterioro urbano, y una inversión a largo plazo en el capital humano y social de Detroit son elementos esenciales para una recuperación sostenible de la ciudad.
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Recuadro 1: Los no residentes como fuente de ingresos
Las fuentes de ingresos de Detroit dependen cada vez más de aportes externos, como por ejemplo de los no residentes, ya que su población y su base económica se han reducido. Este cambio se produjo en parte porque con el tiempo las legislaturas estatales de Michigan permitieron que la ciudad de Detroit usara estrategias de exportación de impuestos para afianzar su situación tributaria debilitada y lidiar con los cambios estructurales masivos de la economía regional. Aunque hubo períodos en que parecía que Detroit estaba por recuperarse, varias fuerzas impidieron la “velocidad de escape”.
Hoy en día, la ciudad de Detroit depende del impuesto sobre los ingresos, el impuesto sobre la propiedad, el impuesto sobre las apuestas en casinos, la coparticipación en los ingresos estatales, un impuesto de uso sobre las utilidades, subvenciones federales, y varios aranceles y licencias para financiar sus servicios públicos. De estos, el impuesto sobre las apuestas en casinos y el impuesto municipal sobre los ingresos se adoptaron para reforzar los debilitados ingresos provenientes de fuentes más tradicionales.
El impuesto sobre las apuestas en casinos, basado en las facturas de las ganancias de los apostadores, ha adquirido particular importancia para la ciudad de Detroit en la última década, como se muestra en la figura 2, que resume las tendencias de las fuentes principales de ingresos de la ciudad entre 1960 y 2012. La legislatura estatal autorizó la actividad de apuestas en casinos y el impuesto sobre las apuestas en Detroit en 1996 para ayudar a superar sus problemas fiscales. La construcción del casino se completó en 2001. Los US$180 millones en ingresos anuales adicionales ayudaron a reducir la presión financiera mientras otras fuentes, como el impuesto sobre los ingresos y la coparticipación de ingresos estatales, se iban reduciendo. Hasta el 85 por ciento de los apostadores de los tres casinos principales de Detroit no son residentes, según informes recientes y entrevistas con expertos de las apuestas (Miklojcik 2014).
Desde 1963, el impuesto municipal sobre los ingresos ha representado la fuente de ingresos más importante y, durante varios años, la de mayor crecimiento. En el momento de su adopción, la mayor parte del impuesto sobre los ingresos era abonada por los residentes de la ciudad. Sin embargo, a medida que la población se ha ido reduciendo, el impuesto sobre los ingresos de los no residentes que trabajan en la ciudad ha cobrado una participación cada vez mayor en la base gravable tributaria, compuesta de sueldos y salarios ganados por empleo dentro de la ciudad. La tasa tributaria es del 2,4 por ciento para los residentes de la ciudad, y del 1,2 por ciento para los no residentes. Aunque las corporaciones y sociedades también pagan un impuesto sobre los ingresos, es una porción muy pequeña de los ingresos totales recaudados. Según Scorsone y Skidmore (2014), aproximadamente la mitad de la recaudación del impuesto municipal sobre los ingresos en Detroit está pagada por no residentes.
La coparticipación de los ingresos estatales sigue desempeñando un papel clave en las finanzas de Detroit, a pesar de que la pérdida de población también ha reducido esta fuente de ingresos. En Michigan, el gobierno estatal recauda un impuesto estatal sobre las ventas y después comparte una porción de lo recaudado con los gobiernos municipales. Los ingresos del impuesto sobre las ventas se asignan a los gobiernos locales de acuerdo a disposiciones constitucionales y legislación estatal. La porción constitucional de la coparticipación de los ingresos depende del porcentaje de la población total del estado de cada jurisdicción. Dada la disminución del número de residentes en Detroit, esta porción de la coparticipación estatal ha venido disminuyendo a lo largo de varias décadas. La ciudad experimentó un crecimiento significativo de los fondos de coparticipación de ingresos en las décadas de 1970 y 1980 debido a aumentos en la coparticipación de los ingresos estipulados por las leyes estatales, que se distribuyen de acuerdo a fórmulas que los legisladores han ido ajustando en décadas recientes. Pero los nuevos cambios en las leyes estatales, en combinación con el estancamiento del impuesto sobre las ventas, ha provocado una reducción del crecimiento y en última instancia una caída en los ingresos de coparticipación de todas las ciudades del estado en la década de 1990. Durante la década de 2000, Michigan experimentó una recesión y esta caída continuó en la mayoría de las jurisdicciones locales, incluyendo Detroit.
Algunos han señalado que las reducciones en la coparticipación de ingresos fue una de las causas principales de los problemas financieros de la ciudad de Detroit y uno de los catalizadores fundamentales de su quiebra. No obstante, estas reducciones afectaron a todas las ciudades que recibieron fondos de coparticipación en Michigan. Si bien la reducción de los ingresos de coparticipación probablemente aceleró la declaración de quiebra de Detroit, no fue la causa principal. Más aún, es importante recalcar que la coparticipación de ingresos estatales de Detroit representa una transferencia neta positiva de fondos del resto del estado a la ciudad. Según el censo económico de 2007, las ventas al por menor en la Ciudad de Detroit fueron de US$3.200 millones, o sea alrededor del 2,9 por ciento de los ingresos totales del estado de Michigan, de US$109.000 millones. En 2012, los ingresos totales por coparticipación en todas las municipalidades de Michigan fueron aproximadamente US$1.000 millones, y la parte que le tocó a Detroit fue de US$172 millones, es decir el 17,2 por ciento. Dado que Detroit representa sólo el 3 por ciento de las ventas minoristas totales de Michigan, se puede concluir que la mayor parte de los ingresos de coparticipación estatal que ingresaron en Detroit se originó en transacciones producidas fuera de la ciudad.
En 2014, la ciudad de Detroit contaba con aproximadamente US$1.000 millones en su Fondo General, un monto considerablemente menor que en 2002, cuando los ingresos llegaron a un pico de US$1.400 millones. Esta caída de ingresos del 30 por ciento a lo largo del tiempo, sin un recorte proporcional en los gastos, condujo a la crisis fiscal de Detroit y su declaración de quiebra en 2013. Para el año 2012, Detroit había tomado en préstamo más de US$1.000 millones para tratar de evitar la mora y una crisis de liquidez (Departamento del Tesoro de Michigan, 2013).
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Sobre el autor
Mark Skidmore es profesor de Economía en la Universidad Estatal de Michigan, donde ocupa la Cátedra Morris en Finanzas y Política Gubernamental Estatal y Local, con nombramientos conjuntos del Departamento de Economía Agrícola, de Alimentos y Recursos y del Departamento de Economía.
Referencias
Alm, J., T. Hodge, G. Sands, and M. Skidmore. 2014. “Detroit Property Tax Delinquency—Social Contract in Crisis.” Documento de trabajo. Lincoln Institute of Land Policy.
Austen, B. 2014. “The Post-Apocalyptic Detroit.” New York Times, 13 de julio. http://nyti.ms/1mFu3Jn
Center for Educational Performance and Information. Accedido en julio de 2014 en www.michigan.gov/cepi/0,4546,7-113-21423_30451—,00.html
City of Detroit. 2013. Comprehensive Annual Financial Report. www.detroitmi.gov/Portals/0/docs/finance/CAFR/Final%202012%20Detroit%20Financial%20Statements.pdf
Christie, Les. 2014. “I’ve Been Priced Out of Downtown Detroit.” CNN Money, 27 de mayo. http://money.cnn.com/2014/05/27/real_estate/downtown-detroit/index.html
Detroit Future City. 2010. Detroit Future City Strategic Framework Book. http://detroitfuturecity.com/framework
Forbes. 2014. “World’s Billionaires.” www.forbes.com/profile/daniel-gilbert
Hodge, T., D. McMillen, G. Sands, y M. Skidmore. 2014a. “Tax Base Erosion and Inequity from Michigan’s Assessment Growth Limit: The Case of Detroit.” Documento de trabajo. Lincoln Institute of Land Policy.
Hodge, T., G. Sands, and M. Skidmore. 2014b. “The Land Value Gradient in a (Nearly) Collapsed Urban Real Estate Market.” Documento de trabajo. Lincoln Institute of Land Policy.
Landsdorf, K. 1973. “Urban Decay, Property Tax Delinquency: A Solution in St. Louis.” The Urban Lawyer 5: 729–748.
MacDonald, C. 2013. “Half of Detroit Property Owners Don’t Pay Taxes.” The Detroit News, 12 de febrero.
Michigan Department of Treasury. 2013. Supplemental Documentation of the Detroit Financial Review Team. www.michigan.gov/documents/treasury/Review_Team_Report_Supplemental_2–19-13_411866_7.pdf
Michigan Department of Treasury. 2010. Real Property Tax Forfeiture and Foreclosure. www.michigan.gov/taxes/0,4676,7-238-43535_55601—,00.html
Miklojcik, J. 2014. President of Michigan Consultants. Información compartida en entrevista personal con Eric Scorsone.
National Public Radio. 2014. “Chinese Investors Aren’t Snatching up Detroit Property Yet.” www.npr.org/2014/03/04/285711091/chinese-investors-arent-snatching-up-detroit-property-yet
Sands, G. y M. Skidmore. 2014. “Making Ends Meet: Options for Property Tax Reform in Detroit.” Journal of Urban Affairs 36(4) Octubre.
Scorsone, E. y M. Skidmore. 2014. “Blamed for Incompetence and Lack of Foresight and Left to Die.” Response to William Tabb’s “If Detroit Is Dead Some Things Need to Be Said at the Funeral.” Por publicarse en Journal of Urban Affairs.
Turbeville, W. 2013. “The Detroit Bankruptcy.” Demos, 20 de noviembre. www.demos.org/publication/detroit-bankruptcy
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Since first holding democratic elections at the national and provincial levels in 1994, South Africa has undertaken far-reaching constitutional changes. Arguably, the most fundamental transformation is taking place at the local government level, where the divisions created by apartheid were most severe. These changes were set in motion by the Local Government Transition Act of 1993, and during 1994-1995 the formerly racially segregated urban local authorities were amalgamated into a variety of non-racial transitional councils:
In non-metropolitan areas, the former regional services councils were transformed into district councils, thereby retaining a secondary tier of local government in rural areas.
In March 1998 the national government published the White Paper on Local Government, which set out its vision for the future of local government. The White Paper resulted in passage of the Local Government Demarcation Act and the Local Government: Municipal Structures Act. Under the Demarcation Act, the Municipal Demarcation Board was established to assign new boundaries for the different categories of municipal governments throughout the country. The present 843 transitional municipalities are to be severely reorganized after the local elections in November 2000 into 284 newly demarcated municipalities (see Table 1).
Within the six metropolitan areas to be established, single-tier metropolitan municipalities will replace the TMCs and TMLCs. In the non-metropolitan areas 47 district municipalities will replace the present 42 district councils. Each district municipality will consist of two or more (primary-tier) local municipalities to replace the present local and rural councils. A typical future local municipality will consist of a number of neighboring towns and their rural hinterland. In sparsely populated rural areas where the establishment of a local municipality is not viable (designated as district management areas), a district municipality will be the only form of local government.
Municipal Finance Reform
The structural reforms at the local government level also require reform of municipal finances. The government is currently preparing two important pieces of legislation in this regard, the Local Government: Property Rates Bill (dealing exclusively with property taxation) and the Municipal Finance Management Bill.
Section 229 of South Africa’s Constitution guarantees “rates on property” (i.e., the property tax) as an autonomous source of revenue for municipalities. It states that the “power of a municipality to impose rates on property…may be regulated by national legislation.” National framework legislation regarding the property tax is indeed needed for the following reasons:
Therefore, the Local Government: Property Rates Bill, currently in its 10th draft, is to be welcomed, at least in principle. It has not yet been published for public comment and may be further amended. However, when this bill is eventually passed into law, it will regulate the levying, assessing and collection of property taxes by municipalities.
Policy Issues in the Property Rates Bill
Diversity of Tax Bases
Urban municipalities generally have a choice between three tax bases, which are spread remarkably evenly throughout the country:
Earlier drafts of the Property Rates Bill retained this diversity as well as local choice. However, clause 5(1) of the 10th draft of the bill now states that a rate levied on property “must be…an amount in the Rand (South Africa’s currency) determined by the municipality on the improved value of the property.” Although it seems that government has opted for a single tax base (i.e., improved capital value), the bill goes on to provide that a rate levied on the “improved value of property may be composed of separate amounts on the site value of the property and the value of the improvements.” By implication, therefore, composite rating and site rating have been retained (if the amount in the Rand on improvements is set at zero).
Extension of the Tax Base and Possible Exclusions
In principle a municipality may tax “all property in its municipal area,” including areas where the property tax has not been levied before, such as agricultural and tribal land. However, the bill also allows a municipality to exclude a category or categories of property from rating. These excluded properties need not be reflected in the valuation roll.
McCluskey and Franzsen (2000) suggest several reasons why municipalities should include all properties in the valuation roll, and then allow specific exemptions rather than exclusions from the taxing process. First, it can be difficult to justify and defend exclusions constitutionally; second, it is politically easier to phase out an exemption than to introduce a tax on formerly excluded properties; and third, if properties are not valued and thus not reflected in the valuation roll, the extent of the tax base relinquished through exclusions is not known.
“Public infrastructure” is to be excluded from the tax base. This will have significant implications, particularly for municipalities with large tracts of land owned by public utility companies, and may need to be reconsidered in light of privatization. International practice suggests that public utilities should be rated at least on their operational land.
Differentiation and Phasing-in of Rates
Current legislation only provides for rate uniformity throughout a municipal area. However, municipalities sometimes achieve effective differentiation by granting arbitrary rebates to certain properties on the basis of zoning. For example, all improved residential properties in the Pretoria TMLC are presently granted a 35 percent rebate.
The bill provides that different rates may be levied for different categories of property according to use, status or location-a critical point in light of the extension of municipal boundaries into rural areas. For example, it would be possible for a future local municipality (comprising various small towns, commercial farmland and tribal land) to have the following different property categories (and therefore different tax rates):
However, a municipality will have to justify its differential rate schedule in an annually revised rates policy document presented to all taxpayers. Although municipalities may be permitted to treat ratepayers differently, they must justify this action. The bill also allows for the phasing-in of rates over a three-year period with respect to property not subject to property taxation before 1 July 1999 (e.g., tribal land). In certain instances the period may be extended for a further three years.
Tax Rates
The bill (clause 5(2)) states that municipalities may set their own tax rates. However, the Minister for Local Government, in concurrence with the Minister of Finance, may set a limit or rate cap on the amount. Apart from reducing municipalities’ fiscal autonomy, rate caps set nationally may not reflect differences in taxing capacity that exist between municipalities (see Table 2).
An alternative, and more practical, “capping” measure that has been inserted in the 10th draft (clause 5(3)(a)(ii)) is to limit the annual tax rate increases, not unlike one part of Proposition 13 in California.
Extension of Property Tax to Tribal Land
Extending property taxation to tribal land is an area of major political concern and is fraught with practical problems. “Ownership” of tribal land is not uniform, and some tribal authorities are not prepared to accept any form of local government within their area of jurisdiction, let alone any form of taxation of “their” land. Identifying the taxpayer may be problematic. Furthermore, formal ownership of tribal land seldom reflects the complex system of tenure rights of the individuals entitled to the use of that land. Even if it were possible to identify a taxpayer and establish an assessed value for (tribal) “property,” the abject poverty and inability of residents in many tribal areas to pay any tax will have to be considered. In fact, few tribal areas presently receive municipal services that could justify the introduction of a property tax.
Rates Policy
Clause 13 of the bill requires municipalities to adopt a rates policy and then levy rates accordingly. This is a welcome change. The rates policy, which is to be reviewed annually, must explain and justify the provision of exemptions, rebates, reductions and relief for the poor. This policy should significantly enhance the transparency, efficiency and accountability of municipal councils, and perhaps encourage compliance.
Valuation Quality Control
Another welcome aspect in the bill concerns monitoring valuation quality for equity and consistency across the country. However, the bill (clause 64) confers this responsibility on the Minister responsible for local government. McCluskey and Franzsen (2000) suggest that an independent and professional valuation agency, preferably at the national level, should be established for this highly technical task. Such agencies exist in Australia, New Zealand and Canada. In South Africa, this type of agency should perform the following primary tasks:
The monitoring service could well be expanded to provide valuation advice, expertise and data to municipalities. Such an agency could also undertake valuations of property for other taxes levied at the national level, such as estate and gift taxes.
Conclusion
The Local Government: Property Rates Bill should provide a solid framework for property taxation as South Africa begins to implement its new local government structure. If municipalities adhere to the principles articulated in the bill, a more uniform, equitable and efficient property tax system will play an even more important role in the future.
Riël C.D. Franzsen is professor in the Department of Mercantile Law at the University of South Africa in Pretoria, South Africa. His research on property tax reform in South Africa has been supported in part by the Lincoln Institute.
References
Budget Review 2000: Chapter 7. South Africa Department of Finance. http://www.finance.gov.za/b/budget_00/default.htm
Franzsen, R.C.D. 1999. Property taxation in South Africa. In W.J. McCluskey (ed.) Property Tax: An International Comparative Review. Aldershot, UK: Ashgate, 337-357.
Local Government: Property Rates Bill. 2000. 10th draft. South Africa Department of Provincial and Local Government.
McCluskey, W.J., and R.C.D. Franzsen. 2000. Some policy issues regarding the Local Government: Property Rates Bill. SA Mercantile Law Journal 12: 209-223.
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In the context of entirely new fiscal policies and new approaches to property rights in central and eastern Europe over the past decade, taxes on land and buildings have taken on significant new roles—politically as adjuncts to privatization, restitution and decentralization, and fiscally as revenue-raising tools for local governments.
The Lincoln Institute is particularly interested in the complex debate over property-based taxes and in how different countries experience the transition from communism to democracy and from planned to market-driven economies. Over the past four years, the Institute has undertaken a series of educational programs to help public officials and business leaders in eastern Europe understand both underlying principles and practical examples of property taxation and valuation through offering varied perspectives and frameworks for decision making.
The Institute is also sponsoring a series of case studies to compare the implementation of ad valorem property tax systems in eastern European countries. These studies provide a unique perspective from which to review the initiation of land privatization, fiscal decentralization and land markets, as well as to compare the various legal and administrative features adopted for the respective tax systems.
Programs in Estonia
The Baltic country of Estonia was the first of the new independent states to recognize the benefits of land taxation and thus has been the focus of several Lincoln Institute programs. The Institute’s work in Estonia began in September 1993 when Fellow Jane Malme and Senior Fellow Joan Youngman participated in a conference with the Paris-based Organization for Economic Cooperation and Development (OECD) on the design of a property taxation system. Estonia had just instituted its land tax program, and since then the Institute has continued to support programs there relating to land reform and property taxation.
The most recent education program, on “Land and Tax Policies for Urban Markets in Estonia,” was presented in the capital of Tallinn in May to nearly 30 senior-level state and city officials interested in public finance, land reform and urban development. President H. James Brown, Jane Malme, Joan Youngman and a faculty of international experts explored current issues concerning land reform, valuation and taxation. They also discussed methods of urban planning, land management and taxation to both encourage development of urban land markets and finance local governments.
Estonia is also serving as the pilot case study for a survey instrument to gather and analyze information from countries adopting new fiscal instruments for market-based economies. Malme and Youngman are working closely with Tambet Tiits, director of a private real estate research and consulting firm in Tallinn, to draft the survey, research and collect data, and analyze the results.
Other Case Studies and Conferences
A second case study examines Poland, where an ad valorem property tax law is under legislative consideration. Dr. Jan Brzeski, director of the Cracow Real Estate Institute, serves as the country research director and liaison with the Institute. Subsequent studies will survey Latvia, Lithuania and Russia. In addition, Professors Gary Cornia and Phil Bryson of the Marriott School of Management at Brigham Young University in Utah are using the Lincoln Institute survey instrument to study property tax systems in the Czech and Slovak Republics.
The Lincoln Institute was a sponsor of the fourth international conference on local taxation and property valuation of the London-based Institute of Revenues, Rating and Valuation (IRRV) in Rome in early June. The conference attracts about 300 senior level officials from central as well as local governments throughout Europe. Dennis Robinson, Lincoln Institute vice president for programs and operations, was on the conference advisory committee and chaired a session on “Case Studies in Local Taxation in the New Democracies,” at which Jane Malme and Joan Youngman discussed the Institute’s case studies on land and building taxation in transitional economies. Other participants in that session were Institute associates Tambit Tiits of Estonia and Jan Brzeski of Poland. Board member Gary Cornia spoke about his research on property taxation in the Czech Republic. Martim Smolka, senior fellow for Latin America and the Caribbean, presented a paper on “Urban Land Management and Value Capture” at another session chaired by Joan Youngman. Jane Malme also was a discussion leader for a session on “Tax Collection and Administration.”
The Institute is planning another program with OECD in December 1997 for public officials and practitioners in the Baltic countries of Estonia, Latvia and Lithuania to examine policy aspects of land valuation and mass appraisal concepts for ad valorem taxation.
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The Lincoln Institute’s China Program was established several years ago, in part to develop training programs on property taxation policy and local government finance with officials from the State Administration of Taxation (SAT). The Institute and SAT held a joint forum on international property taxation in Shenzhen in December 2003, and more than 100 participants attended another course held in China in May 2004. In January 2005, 24 Chinese tax officials from 15 provinces visited the United States for additional programs; many of them are developing property tax systems in six pilot cities. The Institute also supports the Development Research Center (DRC) of the State Council to research property tax assessment in China, and they jointly organized a forum in February 2005.
Economic growth and institutional reforms in China over the past two decades have created profound changes within the society. The central authorities now need to set forth new policies and procedures for modern governance to address devolution of certain authority to local governments, rapid urban and rural development, and changes in land uses and land and fiscal policies. The national government’s commitment to further modernization is most evident in the effort to develop and implement a new property taxation system.
This article describes the current system and discusses issues and challenges that must be overcome to implement a successful property tax policy in China. Given the complexity of this endeavor and the huge variation in economic development across the country, a gradualist approach, which has proved effective in China’s modernization process, may be the best way to initiate property tax reform and development.
Current Taxation System
China collects 24 types of taxes. The central and local governments share the value added tax (VAT) and business tax revenues; the former tax is the primary revenue source for the central government, whereas the latter is the most important tax for local governments. Two other important tax sources for the central government are the consumption (excise) tax and the personal income tax. Twelve taxes are related to land and property, but most do not generate significant revenues. The business tax accounted for 14.41 percent of total central and local government revenues in 2002, but only a small portion of that amount was generated from property-related sources. The reason is that business and income taxes are collected only when land or property is rented or sold, and thus do not provide a steady stream of revenue. It is hard to imagine that any of the 12 property-related taxes could play a key role in resource allocation and local government finance over the long term.
An evaluation of the current tax system reveals additional concerns.
The shortcomings in the current taxation system have resulted in major fiscal problems for the central government, such as declining revenue mobilization and ineffective use of tax policy to leverage macroeconomic policy (Bahl 1997). When the government conducted tax reform in 1993 to overcome some of the problems, one of the largest initiatives shifted responsibility for urban and public services to local governments.
This measure was successful in improving the central government’s fiscal condition; however, the revenue share for local governments was not increased at a level commensurate with their increased responsibility. Consequently, many local governments face increasing budgetary deficits. Figure 1 illustrates the financial deficit for local governments after the 1993 tax reform. More than one-third of county-level governments have serious budget problems and over half of the local governments directly below the provincial level have budgets that merely cover the basic operations of public entities.
Public Land Leasing
One of the means by which local governments increase revenues in the absence of an effective taxation system is through public land leasing. In the late 1980s and early 1990s, the state introduced market principles into the decision-making process regarding land use and allocation by separating land use rights from ownership. This separation promotes the development of land markets, which in turn have created tremendous impacts on real estate and housing development, urban land use and land allocation. Except for a short yet dramatic drop in the early 1990s due to a macroeconomic policy designed to prevent the national economy from overheating, the prices for access to land use rights and public land leasing rates have been increasing steadily.
Despite the significant number of land leasing transactions, the government closely regulates and controls the amount of land being leased by maintaining a monopoly on land supply (Ding 2003). Most land in rural areas still belongs to the collectives, and urban construction is prohibited on rural land unless it is first acquired by the state. Land developments that occur on collectively owned rural land are considered illegal, and administrative efforts such as monitoring and inspecting have been implemented to eliminate these violations.
General land use plans and regulations to preserve cultivated land further control the amount of land available for urban development. The land use plans determine the total amount of land that can be added to existing urbanized areas through an annual land supply quota. At the same time, China’s preservation policy for cultivated land influences both land supply and the location of land available for urban development. The Land Administration Law specifies that at least 80 percent of cultivated land should be designated as basic farmland and prohibited from land development. Land productivity is the dominant factor used to delineate the boundaries of basic farmland. Since most cities are located in areas with rich soil resources, farmland protection designations commonly exist in urbanizing areas. Thus farmland protection inevitably results in urban sprawl and leapfrog development patterns requiring costly infrastructure investments and land consumption.
Financing Local Government. As a result of the government’s regulations and monopoly on selling land use rights, local authorities use the public land leasing system to increase their revenues through land use conveyance fees. For instance, Hangzhou City, the capital of Zhejiang Province with a population of almost four million, is among the top five in per capita national income and GDP. The city generated land conveyance fees of more than six billion YMB in 2002, more than 20 percent of the total municipal government revenues.
Interestingly, these fees were generated largely from selling to commercial users the right to access the state-owned land, yet commercial land development represented only 15 percent of total land uses in newly developed areas. The rest of the land was allocated to users through negotiation in which the sale price either barely covered the costs of acquiring and improving the land, or land was offered free to generate competition for businesses and investments.
Local governments can raise enormous revenues from limited-market transactions of land use rights, in part because land conveyance fees represent lump-sum, up-front land rent payments for a leasing period and in part because local governments exercise their strong administrative powers to require farmers to sell their land at below-market rates. When the government later resells the land at market rates, the price could be more than 100 times the purchase price. After considering the costs of land improvement, however, net revenues may be only ten times the total cost of the land.
Rising land prices resulting from the government monopoly allow local governments to use the land as collateral to borrow money from banks. These loans plus the revenue generated from conveyance fees accounted for 40 to 50 percent of the Hangzhou municipal government budget in 2002. In turn these revenues were used to fund more than two-thirds of the city’s investments in infrastructure and urban services.
Hangzhou City specializes in textiles, tourism, construction and transportation, and generates substantial revenue from business and value-added taxes, although the city’s share of income generated through the public land leasing system is also large. Many smaller cities and towns with fewer commercial and business resources use land leasing directly through land conveyance fees or indirectly as collateral to support up to 80 or 85 percent of their total investments in urban initiatives. These smaller cities must turn to land to generate revenues to fuel economic growth, launch urban renewal projects, and provide infrastructure and urban services that were neglected for a long time prior to the reform era. Land-generated revenue is also used to improve the overall financial environment, attract businesses and investments, and support the reform and reallocation of state-owned enterprises.
Negative Consequences. Despite the importance of public land leasing for income generation, the practice of using this tool to finance local governments may have serious consequences in the long run. The fiscal incentives that compel local governments to control and monopolize the land markets will negatively impact real estate and housing development, industrialization and land use. Furthermore, land is a fixed resource and ultimately there will be no more land left to lease for revenue.
Increasing pressure to protect the rights of farmers also makes it more difficult and costly to acquire land from farmers. As a result, local governments must increase land prices or face reduced revenues from land leasing. Finally, not only does land scarcity and farmer compensation pose a challenge to income generation, but recent policy reform now permits land owned by a collective to enter the land market directly. This change will prevent local governments from acquiring collective lands and exacting conveyance fees for these transfers.
Taxation Reform: Principles and Challenges
The fiscal deficits experienced by local governments and the problems with the resulting public land leasing system provided the impetus for the central government to restructure the entire taxation system. That reform is based on four guiding principles: (1) simplify the tax system; (2) broaden the tax base; (3) lower tax rates; and (4) strictly administer tax collection and management. The central authorities in charge of tax policy and administration offer several specific goals with respect to property-related taxes.
Considerable debate exists over the merits of the proposed property-related tax reform. Despite the lack of consensus as to the best option, the costs and benefits must be assessed to effectively guide the development and implementation of a new property tax system. In addition, several outstanding issues need to be resolved in order to implement the proposed land and property tax reform.
The implementation of a value-based tax also will require the assembly and cataloguing of massive quantities of data, which historically have not been collected systematically. Furthermore, the data that have been collected are stored in different locations and in paper format. The Ministry of Land and Resources records and handles land-related data and information, whereas the Ministry of Construction is in charge of structure-related information. Matching related records from different ministries and digitizing this data will take years if not decades and will require a huge investment of resources.
The Chinese public has limited understanding of property taxation systems, so education will be required to avoid potentially significant political resistance. Capacity building within the Chinese government also will require professional training in appraisal, evaluation, appeals and collection to achieve effectiveness and efficiency in the new tax system.
Conclusions
Despite these unanswered issues and challenges, the Chinese government appears committed to implementing property taxation reform. The application of the widely used and successful gradualist approach for implementing policy and institutional reforms will ensure that the development and institutionalization of the property tax system proceeds on course. For example, data for industrial and commercial structures is more complete and of higher quality than data for residential structures. Furthermore, newer structures tend to have better records than older structures, and records are more complete for structures in urban areas than in rural areas. Thus, applying the property taxation system first to commercial and industrial structures, newly developed land with residential structures, and urban areas will allow the system to take hold before attempts are made to implement change in the areas with greater obstacles to overcome.
References
Bahl, Roy. 1997. Fiscal policy in China: Taxation and intergovernmental fiscal relations. Burlingame, CA: The 1990 Institute.
Development Research Center. 2005: Issues and challenges of China’s urban real estate administration and taxation. Report submitted to the Lincoln Institute of Land Policy.
Ding, Chengri. 2003. Land policy reform in China: Assessment and prospects. Land Use Policy 20(2): 109-120.
Liu, Z. 2004. Zhongguo Suizi Gailan. Beijing: Jinji Chuban She. (China’s taxation system. Beijing: Economic Science Publisher).
Lu, S. 2003. YanJiu ZhengDi WenTi TaoShuo GaiKe ZhiLu (II). Beijing: Zhongguo Dadi Chuban She. (Examination of land acquisition issues: Search for reforms (II). Beijing: China Land Publisher.)
Chengri Ding is associate professor in the Department of Urban Studies and Planning at the University of Maryland, in College Park. He specializes in urban economics, housing and land studies, GIS and spatial analysis. He is also special assistant to the president of the Lincoln Institute for the Program on the People’s Republic of China.
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It is difficult to overstate how ongoing population loss has devastated Detroit. Between 1900 and 1950, when the rise of U.S. automobile manufacturing made the city one of America’s premier industrial and cultural centers, the population spiked from 300,000 to 1.85 million. Beginning in 1950, however, it began to fall. And its decline has been continuous to the present day, plummeting to just 700,000 in 2010, at a rate of descent nearly as swift as the rate of ascent in the first half of the 20th century.
Despite Detroit’s decades-long effort to keep pace with population loss by removing dilapidated housing stock, roughly a quarter of its 380,000 parcels are now abandoned, managed by the city or other public entities. As of July 2014, 114,000 properties have been razed, and 80,000 more are considered blighted (Austen 2014).
While the downtown is recovering and the suburbs remain vital, the “unfathomable dissolution of [the] built landscape” in vast areas of the city may shock the unsuspecting visitor (Austen 2014).
The first installment in a two-part series, this article considers the fiscal causes and repercussions of Detroit’s surplus of housing and vacant property: from the extent and location of abandoned homes and lots throughout Detroit to the downward spiral of house price declines leading to overassessment, property tax delinquency, and foreclosures; the public acquisition of that property; the pattern of land values across the city; and, finally, some potential ways to reconcile the remaining number of people with the amount of vacant and publicly held property. These measures range from targeting densely populated neighborhoods for redevelopment to establishing a greenbelt and reclaiming vacant parcels for public use as parks, forests, industrial buffers, retention ponds, and other open space (Austen 2014).
Factors Behind the Fall
The reasons for Detroit’s demise are numerous and perhaps too familiar. Federally subsidized transportation infrastructure, such as the Interstate highway system, facilitated rapid suburbanization, which was further enabled by permissive development codes. Racial tension, global economic forces, and corruption corroded what remained of the city proper. In the early stages of the malaise, higher-income residents, most of them Caucasian, left for the suburbs in search of a better quality of life, as shown in table1. By 1990, the African-American population had peaked as well and began to drop in the first decade of the 21st century. Beginning in the 1960s, Michigan auto manufacturing began its long, precipitous decline, disproportionately impacting Detroit and Flint. The loss of well-paying middle-class jobs further harmed the urban demographic and economic base, as households sought new employment opportunities elsewhere. Rising crime rates and continued erosion of public services induced another wave of exits.
Table 1 illustrates this downturn in the city’s demographic and economic conditions from 1950 through 2010. By 2012, according to government sources, median household income was just $25,000, less than half of the national median income. Poverty and unemployment rates were 38 and 27.5 percent, respectively. The labor force participation rate was 54 percent (compared to 63 percent nationwide), and for every 6.35 employed workers, there was one person receiving Social Security Disability benefits (compared to 1 of 12 nationwide). More than 34 percent of the city’s population received food stamps, and 81 percent of children in the Detroit Public Schools qualified for the Free and Reduced Lunch Program. Revenue streams became increasingly dependent on external sources, including nonresidents, as discussed in box 1. In 2013, when the city finally succumbed to the weight of accumulating fiscal challenges and declared bankruptcy, its debt and unfunded liabilities amounted to $18 billion—or $68,000 per household, which is about 2.7 times the median household income (Turbeville 2013).
The Failed Housing Market
The enormous excess supply of housing that accumulated over decades as a result of winnowing demand in Detroit corroded the value of that property. The real estate crisis of 2007–2008 dealt the final blow, resulting in the near-complete breakdown of Detroit’s housing market. By 2010, the average price of a residential property had plummeted to about $7,000 from $57,000 in 2006 (Hodge et al. 2014a). Detroit’s current excess of land and housing would likely suppress real estate price recovery in the coming years even if the population were to stabilize.
Property Tax Delinquency, Abandonment, and Public Acquisition of Property
Tax officials have not recalibrated assessment values to reflect house price declines. The resulting overassessment is as high as 80 percent (Hodge et al. 2014a), contributing to a general unwillingness to pay taxes, according to Alm et al. (2014). Their research also shows that additional factors such as high statutory tax rates and limited services such as public safety worsen this delinquency as well.
In the midst of the real estate crisis, property tax delinquency reached an alarming 50 percent (Alm et al. 2014). Figure 2 (p. 13) shows delinquency rates by neighborhood across the city in 2010. Property tax collection depends on a jurisdiction’s ability to impose sanctions for nonpayment of taxes, as noted by Langsdorf (1973). When real estate values collapse, taxing authorities have no workable enforcement mechanism; homeowners’ savings from nonpayment of property tax are greater than the value of the house they own and would lose in the instance of foreclosure. Further, proceeds from the sale of low-valued tax-foreclosed property are insufficient to cover back taxes owed and the government costs of initiating foreclosure proceedings.
Widespread failure to pay property taxes and the subsequent abandonment of homes has resulted in the public acquisition of thousands of properties throughout Detroit. Fifteen percent of the parcels within the 139-square-mile city are now empty, and nearly 25 percent of Detroit’s land area is now nontaxable, owned and managed by the city or some other public entity (Sands and Skidmore 2014), as illustrated in figure 3.
The Downward Spiral of Foreclosures
Currently, the number of properties flowing into public hands via tax foreclosure far outpaces the number of publicly held properties being purchased back by private taxpaying owners.
In Michigan, delinquent property taxes are subject to a 4 percent administration fee and 1 percent monthly interest on the delinquent amount computed at a non-compounded rate, beginning in the first month of nonpayment. After one year of delinquency, the city forfeits the property to county government, and the owner becomes subject to an additional 0.5 percent monthly interest charge. During this two-year period, owners may redeem their properties by paying all outstanding taxes and fees.
If property taxes go unpaid for more than two years, the Wayne County Treasurer initiates foreclosure proceedings. After a show cause hearing in the Circuit Court, the County Treasurer publicly auctions the foreclosed parcels. The starting bid equals the unpaid property taxes plus interest and penalties, and the proceeds are distributed proportionately to the taxing jurisdictions. If the property doesn’t sell at the first auction, the county lowers the minimum bid to $500 and holds a second auction. This procedure has led to further tax evasion, as some homeowners elect to ignore their tax bills with the expectation that they will be able to repurchase the parcel for $500 at the second auction.
Property that doesn’t sell at either auction may be transferred to a public body (city or state) or to a state or local land bank, or it may be held for a subsequent auction. County records indicate that 80 percent of the parcels sold to private buyers at auction over the past two years are once again delinquent on taxes (MacDonald 2013). Given that the tax delinquency rate is 67 percent for non-homestead property owners (Alm et al. 2014), it seems likely that a significant proportion of buyers at auction are absentee landlords who intend to reduce their operating expenses and increase their net rental income by never paying property taxes.
Property taxes are effectively optional on low-valued parcels as well. To minimize the backlog of tax-delinquent lots (MacDonald 2013), the county does not foreclose on homeowners who owe less than $1,600 in taxes and penalties in aggregate, effectively rendering these debts optional.
Expected revenue from the sale of low-valued parcels is insufficient to cover legal expenses associated with tax foreclosure and unpaid property tax balances. The end result is an increasing rate of delinquency and a growing inventory of unwanted property that ends up in the public sector, where it generates no revenue for the city.
Where to Go from Here?
Another wave of property tax-related foreclosures is expected in late 2014 and early 2015. What can be done to stabilize the situation?
Curbing Property Tax Delinquency
As mentioned, delinquency will abate when tax payers perceive that they receive commensurate returns for their money. Thus, improving the tax-service package by upgrading core services such as public safety will reduce evasion and lateness (Alm et al. 2014). Under the leadership of recently elected Mayor Mike Duggan, city government is taking steps to improve basic public service provision and put its fiscal house in order. For example, just 35,000 of 88,000 streetlights currently work, so Duggan plans to install 2,400 functioning streetlights per month (Austen 2014). He also increased the number of operating buses from 143 to 190, and improved snow plowing during the particularly harsh winter.
Lowering tax rates would modestly reduce delinquency as well (Alm et al. 2014). Roughly double the regional average, Detroit tax rates are at the state’s maximum of 67 mills and 85 mills per assessed value for homestead and non-homestead properties, respectively. While a reduction would improve the competitive position of the city relative to other communities in the region, currently there is no discussion of reducing property tax rates.
Aligning assessed values more closely with actual market conditions will also reduce delinquency. Mayor Duggan recently promised to lower assessments by 5 to 20 percent across the city to reconcile them with state guidelines. However, Duggan’s promised reductions are just a small fraction of the 80 percent cut needed to bring assesment to market levels, according to Hodge et al. (2014a).
Removing Land from the Market
In the absence of robust demand for land, which seems unlikely in the near future, the excess must be removed from the market for a period of time in order for real estate value to improve broadly across the city. Given that public entities now hold so much property, it is within the power of government authorities to credibly remove it from the market. Without this type of policy action, the possibility that these parcels could be quickly transferred to the private sector serves to hamper price recovery.
Currently, public lands are held by many public entities. Authorities from the City of Detroit, Wayne County, and state government are working to consolidate these parcels under a single entity that can manage them more effectively. Detroit Future City (2010) details the extent of the fragmented ownership of public lands:
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Public land in Detroit is held by many separate agencies, including city, county, and state agencies, as well as autonomous or quasi-governmental entities such as the Detroit Public Schools, the Detroit Housing Commission, and the Detroit Economic Growth Corporation. Few other cities have such fragmented holding of their public land inventory. There is no consistency of policy, procedure, or mission among these agencies, while many are hamstrung by burdensome legal requirements and complex procedures. The Department of Planning and Development controls the largest number of properties, yet its ability to do strategic disposition is constrained by procedural obstacles, including the need to obtain City Council approval for all transactions, however small and insignificant from a citywide perspective.
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While this consolidation process is necessary, it is not sufficient. Financial resources are required to remove blight and implement land use plans. City leaders are focused mainly on strategies to return these parcels to private ownership. If they can stimulate greater interest in Detroit property, this approach might be viable.
Indeed, opportunities for private ownership are emerging in the central business district (CBD). Daniel Gilbert, founder of Quicken Loans, has moved his headquarters to downtown Detroit and invested $1.3 billion in city real estate (Forbes 2014). And downtown renewal has led to substantial rental price increases (Christie 2014).
Land values are very high in the CBD, as depicted in figure 4 (p. 16) by the black parcels, which represent the very highest land values on the map. Detroit’s land value gradient is very steep, however. While several areas within the donut around the CBD have retained some worth, land values plunge rapidly as distance from the CBD increases, though they rise again near the city’s border, probably because amenities such as shopping are available in the nearby suburbs.
Given the weak demand outside the CBD, it may be more effective to determine which publicly held properties should return to private taxpaying parties, which properties should be taken off the market for a decade or two, with the option of returning land to the market should conditions change, and which should be permanently removed from the market.
The 2012 master plan, as outlined by Detroit Future City, calls for the reclamation of land for parks, forests, industrial buffers, greenways, retention ponds, community gardens, and even campgrounds (Austen 2014). Full implementation of this ambitious proposal requires significant financial resources. But consider how state and federal authorities intervened in the last major episode of mass tax foreclosure. During the Great Depression, many homesteaders on marginal agricultural lands in Michigan, Minnesota, and Wisconsin were unable to pay their property taxes, and this default resulted in a mass wave of tax delinquency, foreclosure, abandonment, and eventual forfeiture. In these states, county governments frequently became the owners of thousands of acres, much of which was eventually sold to the state and federal governments. The six national forests in Minnesota, Wisconsin, and Michigan, as well as the region’s numerous state forests, all have origins in this mass land abandonment of the Depression Era, as state and federal authorities pieced together a patchwork of adjacent lands purchased from counties eager to sell off their tax-forfeited property.
Today, state and federal authorities have no taste for a Detroit “bailout.” But history suggests that state and federal governments could help Detroit regain fiscal viability by purchasing patchworks of unwanted parcels, making payments in lieu of taxes, as is typical for other publicly owned lands, and then using the land for the benefit of the general public. Potential uses are mapped out in the aforementioned city master plan which the second installment of this series will explore. A federal, state, and local government partnership to reclaim these properties could help stabilize the land market and generate a revenue stream for the city and the other overlying taxing jurisdictions (including the state government via the state education tax). Property value recovery in combination with downtown reinvestment, continued efforts to improve Detroit’s tax-service package and remove blight, and long-run investment in Detroit’s human and social capital are essential elements of a sustainable Detroit recovery.
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Box 1: Targeting Nonresidents for Revenue
Detroit’s revenue streams have become increasingly dependent on external sources, including nonresidents, as its population and economic base have declined. This shift occurred in part because over time Michigan state legislatures empowered the City of Detroit to use tax-exporting strategies to help shore up weakening fiscal conditions and deal with massive structural changes to the regional economy. While there were periods during which it appeared that Detroit was on the cusp of recovery, various forces prevented “escape velocity.”
Today, the City of Detroit relies on the income tax, property tax, casino wagering tax, state revenue sharing, a utility user’s tax, federal grants, and various fees and licenses to fund public services. Of these, the casino wagering tax and the city income tax were adopted to bolster fading revenues from more traditional sources.
The casino wagering tax, based on gamers’ winning receipts, has become particularly important to the City of Detroit over the last decade, as shown in figure 2, which summarizes trends in the city’s major revenue sources from 1960 through 2012. The state legislature authorized casino gaming activity and the wagering tax in Detroit in 1996, to help the city address its fiscal challenges. By 2001, casino construction had been completed. The $180 million in additional annual revenues helped to stave off financial pressures even as other sources, such as income taxes and state shared revenues, were in decline. Up to 85 percent of gamers at the three major Detroit casinos are nonresidents, according to recent reports and interviews with gaming experts (Miklojcik 2014).
Since 1963, the city income tax has represented Detroit’s largest and, for a number of years, fastest-growing revenue source. At the time of adoption, the majority of the income tax was paid by city residents. As Detroit’s population has declined, however, the income tax on nonresidents who work in the city has become an increasing share of the city income tax base, composed of wages and salaries earned at a city-based job. The tax rate is 2.4 percent for city residents, whereas nonresidents pay 1.2 percent. While corporations and partnerships also pay an income tax, it is a very small portion of total revenues collected. According to Scorsone and Skidmore (2014), about half of the city income tax revenue in Detroit is paid by nonresidents.
State revenue sharing continues to play a critical role in Detroit’s finances, though population loss has diminished even this income source. In Michigan, state government collects a statewide sales tax and then shares a portion of the proceeds with municipal governments. Sales tax revenues are allocated to local governments based on constitutional provisions as well as state statute. The constitutional portion of revenue sharing is based on each jurisdiction’s share of the total state population. Given the dwindling number of Detroit residents, this portion of state revenue sharing has been falling for decades. The city experienced significant growth in total revenue sharing funds through the 1970s and 1980s, due to increases in statutory revenue sharing, which is distributed by formulae that have been changed by legislators many times in recent decades. But new changes to the statute combined with stagnation in the sales tax led to declining growth and eventual decline in revenue sharing for cities across the entire state in the 1990s. As Michigan entered a decade-long recession, this decline continued for most local jurisdictions, including Detroit, through the 2000s.
Some have pointed to revenue sharing reductions as a major source of stress for the City of Detroit, and a major catalyst for the bankruptcy. However, these declines affected all cities that received revenue sharing in Michigan; while cuts to revenue sharing likely influenced the timing of Detroit’s bankruptcy, they were not the ultimate cause. Further, it is important to note that revenue sharing for Detroit represents a net positive transfer of funds from the rest of the state to the city. According to the 2007 economic census, retail sales in the City of Detroit were $3.2 billion, or about 2.9 percent of the $109 billion in the State of Michigan.
In 2012, total state revenue sharing to all municipalities in Michigan was about $1 billion, and Detroit’s share of the total was $172 million, or 17.2 percent. Given that Detroit represents just 3 percent of total state retail sales in Michigan, one can conclude that the majority of state revenue sharing that flowed to Detroit originated from retail transactions that occurred outside the city.
As of 2014, the City of Detroit had approximately a $1 billion General Fund, considerably lower than in 2002 when revenue peaked at $1.4 billion. A 30 percent drop in revenues over time without a commensurate cut in expenditures led to the Detroit fiscal crisis and the eventual declaration of bankruptcy in 2013. By 2012, Detroit had borrowed more than $1 billion in an attempt to stave off default and a liquidity crisis (Michigan Department of Treasury 2013).
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About the Author
Mark Skidmore is professor of economics at Michigan State University, where he holds the Morris Chair in State and Local Government Finance and Policy, with joint appointments in the Department of Agricultural, Food and Resource Economics and the Department of Economics.
References
Alm, J., T. Hodge, G. Sands, and M. Skidmore. 2014. “Detroit Property Tax Delinquency—Social Contract in Crisis.” Lincoln Institute of Land Policy Working Paper.
Austen, B. 2014. “The Post-Apocalyptic Detroit.” New York Times, July 13. http://nyti.ms/1mFu3Jn
Center for Educational Performance and Information. Accessed in July 2014 from www.michigan.gov/cepi/0,4546,7-113-21423_30451—,00.html
City of Detroit. 2013. Comprehensive Annual Financial Report. www.detroitmi.gov/Portals/0/docs/finance/CAFR/Final%202012%20Detroit%20Financial%20Statements.pdf
Christie, Les. 2014. “I’ve Been Priced Out of Downtown Detroit.” CNN Money, May 27. http://money.cnn.com/2014/05/27/real_estate/downtown-detroit/index.html
Detroit Future City. 2010. Detroit Future City Strategic Framework Book. http://detroitfuturecity.com/framework
Forbes. 2014. “World’s Billionaires.” www.forbes.com/profile/daniel-gilbert
Hodge, T., D. McMillen, G. Sands, and M. Skidmore. 2014a. “Tax Base Erosion and Inequity from Michigan’s Assessment Growth Limit: The Case of Detroit.” Lincoln Institute of Land Policy Working Paper.
Hodge, T., G. Sands, and M. Skidmore. 2014b. “The Land Value Gradient in a (Nearly) Collapsed Urban Real Estate Market.” Lincoln Institute of Land Policy Working Paper.
Landsdorf, K. 1973. “Urban Decay, Property Tax Delinquency: A Solution in St. Louis.” The Urban Lawyer 5: 729–748.
MacDonald, C. 2013. “Half of Detroit Property Owners Don’t Pay Taxes.” The Detroit News, February 12.
Michigan Department of Treasury. 2013. Supplemental Documentation of the Detroit Financial Review Team. www.michigan.gov/documents/treasury/Review_Team_Report_Supplemental_2–19-13_411866_7.pdf
Michigan Department of Treasury. 2010. Real Property Tax Forfeiture and Foreclosure. www.michigan.gov/taxes/0,4676,7-238-43535_55601—,00.html
Miklojcik, J. 2014. President of Michigan Consultants. Information shared in personal interview with Eric Scorsone.
National Public Radio. 2014. “Chinese Investors Aren’t Snatching up Detroit Property Yet.” www.npr.org/2014/03/04/285711091/chinese-investors-arent-snatching-up-detroit-property-yet
Sands, G. and M. Skidmore. 2014. “Making Ends Meet: Options for Property Tax Reform in Detroit.” Forthcoming in Journal of Urban Affairs.
Scorsone, E. and M. Skidmore. 2014. “Blamed for Incompetence and Lack of Foresight and Left to Die.” Response to William Tabb’s “If Detroit Is Dead Some Things Need to Be Said at the Funeral.” Forthcoming in Journal of Urban Affairs.
Turbeville, W. 2013. “The Detroit Bankruptcy.” Demos, November 20. www.demos.org/publication/detroit-bankruptcy
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Conventional wisdom and basic economic principles would suggest that an area subject to higher commercial and industrial property taxes than its nearby neighbors will suffer reduced economic development in comparison to those neighbors. On the other hand, any effort to reduce such unequal or “classified” property tax rates will produce a revenue shortfall. Raising taxes on homeowners to equalize rates and recover this lost revenue will encounter enormous and obvious political resistance.
This is the situation currently facing Cook County and the city of Chicago, and was the subject of a conference led by Therese McGuire of the Institute of Government and Public Affairs (IGPA) at the University of Illinois at Chicago. Held last September and cosponsored by the Lincoln Institute, the IGPA, and the Civic Federation of Chicago, the program brought together more than a hundred business and civic leaders, academics and practitioners to consider alternative methods of addressing the problems presented by the Cook County classification system.
In Illinois, the use of a property tax classification system by Cook County has been blamed for the economic decline of Chicago and the inner suburbs. The classification system is also seen as a barrier to reforming school funding and the state’s tax system. Are these charges valid? Does the classification system put Cook County at an economic disadvantage compared to its rapidly growing adjacent “collar counties”? If classification has so many shortcomings, why was it instituted in the first place? If we are only now recognizing those shortcomings, what steps can be taken that are both economically and politically feasible to overcome the problems?
Overview of Tax Classification
Illinois has long operated under the twin principles of uniformity and universality for both real and personal property, and both principles were incorporated into the Illinois Constitution of 1870. However, de facto or administrative classification of real property developed in Cook County as a response to the difficulty in taxing personal property in the same manner as real property. By the 1920s, the Cook County assessor publicly acknowledged assessing residential property at 25 percent of real value and business property at 60 percent.
A 1966 Illinois Department of Revenue report noted that Cook County was using 15 different classification groups. Despite the fact that classification was clearly in violation of the 1870 Constitution, the Illinois Supreme Court had refused to confront the issue. By the late 1960s, however, the court was prepared to overturn the existing system, and the 1970 constitutional convention faced the potential threat of court intervention.
The convention was the product of numerous reform efforts in Illinois during the previous decade. The state had failed to find a compromise redistricting plan after the 1960 census, causing the entire Illinois House to be elected as at-large members in 1964. That election brought many reformers to office, and a House-created commission charged with recommending constitutional reforms subsequently called for the 1970 convention.
Several delegates on the convention’s revenue committee were passionately in favor of uniformity, and they had considerable support from experts who opposed classification as a matter of economic policy. On the other hand, the Chicago delegation was adamant in demanding that the new constitution legalize classification. It was generally believed that without legalization, the new constitution would not have the support of Chicago Mayor Richard J. Daley and his delegation, in which case it would fail to pass.
As a result, the 1970 Illinois Constitution allowed counties with a population greater than 200,000 to classify property for taxation. The extension of classification to these large counties was also allowed for the collar counties because many taxing districts crossed those county boundaries. Cook County’s system was thus guaranteed, but the Constitution gave the General Assembly the power to apply limitations because of concerns there would be a crazy quilt of classifications should the collar counties adopt that system. Nevertheless, no collar county has done so.
Today, Cook County’s classification system is considered by many to be an impediment to Illinois’ attempts to deal with a variety of social and economic issues. Politically, classification is believed to be partly to blame for the failure to reform education funding in Illinois. In 1997, then Governor James Edgar led an unsuccessful attempt to convince the General Assembly to gradually shift the burden of education funding from property taxes to income taxes. One of the strongest arguments against the effort was that it would be a windfall for businesses and corporations, whose property taxes would be shifted to individual taxpayers. That shift would have even been greater in Cook County, which has more than 47 percent of the state’s entire assessed value and where businesses pay property taxes at a rate double that of homeowners.
Impacts on Economic Development
In terms of economic development, some observers believe that classification puts Cook County at a disadvantage in the eyes of business people who might consider locating in Illinois or expanding their operations in the state. While there are obviously other factors involved, the concern is that classification would cause these companies to look more favorably at locations in the collar counties or other states.
Recent research has shown that high property taxes do have a negative effect on the market value of property and do deter businesses from locating in the affected areas. Studies of property tax differences in the Boston, Phoenix and Chicago areas have shown that, because higher property taxes mean higher rents and lower market values, real estate development shifts from the high-tax area to the low-tax area over time. Other studies have shown that manufacturers seeking to relocate are very sensitive to local property tax rates. New construction and retail trade are also affected negatively, although the service sector is not as influenced by high property taxes.
Is this the case in Cook County? A recent study by Richard Dye, Therese McGuire and David Merriman, all affiliated with the IGPA, found that the effective tax rate of Cook County (5.52 percent for commercial and 5.78 percent for industrial property) is higher than in the collar counties, which have an average rate of 2.54 percent on all property. Furthermore, they found that four measures of economic activity-growth in the value of commercial property, the value of industrial property, the number of establishments and the employment rate-were measurably lower in Cook County than in the collar counties. But is that the end of the story?
No, according to the study’s authors. A multifaceted national trend is dispersing population, employment and business activity away from metropolitan centers to outlying counties. To determine if it is this national trend or specific property tax differences that is causing slower economic growth in Cook County, the study examined the characteristics of 260 municipalities in the Chicago metropolitan area. The researchers used two samples of municipalities-one metro-wide and the other limited to those near the Cook County border, where the effects of higher tax rates should be most potent.
The researchers presented their results, at the conference finding, “weak evidence at best that taxes matter.” Once other influences on business activity were factored out, the researchers determined that, for the entire six-county region, employment was the only economic activity that seemed to be adversely affected by property taxes, although in the border region the market value of industrial property was also affected. “The bottom line is that the evidence is mixed and inconclusive,” said McGuire. “There is no smoking gun.”
Another participant in the conference challenged this interpretation of the results. Michael Wasylenko of Syracuse University, who had been asked to review the study in advance and discuss it at the conference, said he was convinced that the researchers did find significant effects because the employment measure is a better measure of economic activity than the others. “I think the weight of the evidence suggests that these results are consistent with previous findings that property tax differentials will have a substantial effect on employment growth within a metropolitan area.”
If the employment factor, then, is the one to be given the most weight and Cook County’s property tax classification system is economically disadvantageous, in addition to being a political roadblock to reform, what is to be done? “It comes down to whether the economic gains that might be realized if you went to a non-classified tax are worth the political battles. Are the economic development advantages enough to want to do this,” said Wasylenko.
The economic and political stakes in this decision are high, since Cook County currently levies more than 50 percent of all property taxes in the state. The county cannot rapidly shift a large part of the tax burden among classes of property, but neither can it ignore concerns that the tax burden on businesses located there place it at an economic disadvantage with regard to its nearby neighbors. Any solution must be approached as a component of the overall tax system, be grounded in verifiable data, and have significant support from the public, the media and business interests. The September conference sought to contribute to that process of informed public debate on a crucial fiscal topic.
In early December, the Cook County assessor proposed reducing the assessment ratio (the ratio of assessed value to market value) for certain types of business property: from 36 to 33 percent for industrial properties such as factories and distribution facilities; from 33 to 26 percent for large investor-owned residential property; and from 33 to 16 percent for multiuse storefront businesses with apartments on upper floors. The assessor’s hope is that more favorable treatment of business will lead to even more rapid growth of the tax base over time. While these recommendations came out of several different tax studies, any changes in assessment rates must by approved by the Cook County Board before they can be implemented.
Scott Koeneman is communications manager at the Institute of Government and Public Affairs (IGPA) of the University of Illinois in Urbana, Illinois.
References
Dye, R., T. McGuire and D. Merriam. 1999. “The Impact of Property Taxes and the Property Tax Classification on Business Activity in the Chicago Metropolitan Area.” Lincoln Institute of Land Policy Working Paper.
Giertz, J.F., and T. McGuire, “Cook County, Ill., Assessor Proposese Changes in Assessment Levels,” State Tax Today. Dec. 7, 1999.
Man, J. 1995. “The Incidence of Differential Commercial Property Taxes: Empirical Evidence,” National Tax Journal, 48: 479-496.
McDonald, J. 1993. “Incidence of the Property Tax on Commercial Real Estate: The Case of Downtown Chicago,” National Tax Journal, 46: 109-120.
Wheaton, W. 1984. “The Incidence of Inter-jurisdictional Differences in Commercial Property Taxes,” National Tax Journal, 37: 515-527.
Source: Illinois Department of Revenue
