CAMBRIDGE, Mass. (November 10, 2015) – Having emerged last year from the largest municipal bankruptcy in U.S. history, Detroit is still hindered in its recovery by structural flaws in its property tax system, according to a new report published by the Lincoln Institute of Land Policy.
Detroit’s high property tax rates, delinquency problem, inaccurate assessments and overuse of tax breaks, coupled with limitations imposed by the Michigan constitution and state statutes, continue to expose the city to fiscal stress, according to the report.
The report, Detroit and the Property Tax: Strategies to Improve Equity and Enhance Revenue, suggests several reforms that could put Detroit on stronger financial footing, including further improvement to assessment practices, the more judicious use of abatements, lower property tax rates, and a land-based special assessment tax that would make the system more fair and efficient. Many of the report’s conclusions apply to other struggling postindustrial cities, or Legacy Cities, providing a model for how a city can maintain its property tax system during a crisis and emerge from the brink of insolvency.
“Property tax reform is just one of several challenges facing Detroit and its residents, but tackling it could have a real impact on the city’s economy and quality of life, and could serve as an example for other cities struggling with population and job losses and a shrinking tax base,” said Gary Sands, the report’s co-author and a professor emeritus of urban planning at Wayne State University.
“Detroit has an opportunity to restore the basic covenant that should exist between every city and its residents – fair and efficient taxes in exchange for good public services and reliable infrastructure,” said co-author, Mark Skidmore, a visiting fellow at the Lincoln Institute and a professor of economics at Michigan State University.
Detroit’s fall into bankruptcy in 2013 was caused by many factors, including a decades-long collapse of the city’s manufacturing base, but one important factor was the ongoing decline in the revenue-generating capacity of the property tax, according to the report.
Now, Detroit’s housing market is showing signs of a modest recovery – mostly in the downtown area – and the city is seeking to restore long-neglected public services. But weaknesses in the property tax system inhibit this effort. The report proposes several measures to strengthen Detroit’s property tax, including the following:
· Continue to improve assessments: Vastly over-assessed properties have contributed to Detroit’s historically high property tax delinquency rate, which has been improved but is still about 30 percent, or 10 times the median rate for major cities in the U.S.
· Improve the targeting of tax abatements: Detroit has granted property tax breaks to about 11,400 properties, or 3.5 percent of all taxable private properties. Research shows that the fiscal benefits of abatements are often outweighed by the costs, suggesting this tool should be used more judiciously. Eliminating existing abatements would require a change in state law, but the city could grant fewer new abatements, and allow current ones to expire, under existing law.
· Implement a land-based tax: A land-based tax is based purely on the value or size of a piece of land, with no additional tax for new development or improvements. This approach is favored over the traditional property tax by many economists because it discourages holding property vacant or underutilizing land (e.g. a community garden on a prime piece of downtown property), and encourages development. Completely replacing the property tax with a land-based tax would require a change to the state constitution, but Michigan’s special assessment laws, which allow for taxes tied directly to public services, provide a pathway for a land-based tax under existing law.
· Eliminate the state’s taxable-value cap: Imposed by voters as part of Proposal A in 1994, the taxable-value cap restricts the growth of the tax base as the real estate market recovers. It also gives preferential treatment to longtime homeowners, locking in low effective tax rates at the expense of new buyers.
· Reduce statutory tax rates: Detroit has the highest tax rate of any major U.S. city, more than double the average rate for neighboring cities. Lowering the rate could reduce delinquency and help increase property values, and could help offset increased tax burdens that may otherwise result from reducing abatements or eliminating the taxable-value cap.
The property tax and other land-based financing mechanisms are a key component of the Lincoln Institute’s Municipal Fiscal Health campaign, a multi-year effort to help restore the capacity for local governments to provide basic services and plan for the future. Over the past few years, the Lincoln Institute has been engaged in research on several aspects of municipal fiscal health in Detroit, including papers on land value, tax delinquency and Michigan’s assessment growth limit.
About the Authors
Gary Sands, AICP, is professor emeritus of urban planning at Wayne State University in Detroit, Michigan. He holds a master’s degree in urban planning from Wayne State University and a doctorate in housing and public policy from Cornell University in Ithaca, New York. Prior to his academic career, Sands was a senior economist for the City of Detroit.
Mark Skidmore is professor of economics at Michigan State University, where he holds the Morris Chair in State and Local Government Finance and Policy. He received his doctorate in economics from the University of Colorado in 1994, and his bachelor's degree in economics from the University of Washington in 1987. He currently serves as co-editor of the Journal of Urban Affairs and is a visiting fellow at the Lincoln Institute of Land Policy.
The Lincoln Institute of Land Policy is the leading resource for key issues concerning the use, regulation, and taxation of land. Providing high quality education and research, the Lincoln Institute strives to improve public dialogue and decisions about land policy.
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