Detroit could be the largest U.S. city with land value tax, if the state legislature allows it

OCTOBER 19, 2023

Detroit has been on the decline for over half a century, and during that time property taxes have formed a barrier to development and economic growth. A new state law might allow split-rate land value taxes to change the calculus. It may do so in several ways, including:

Declining Rust Belt cities could get a unique boost from property tax reform
Large amounts of low-value land in neighborhoods would result in net tax savings for residents
Built-in abatement for structure improvements and redevelopment would provide a fair boost for new investment
Passing this law would make Detroit the largest American city to enact a split-rate land value tax – a type of property tax where the tax rate for land and structures are different, often with the tax on structures lower than the one on land. Still, it hit a roadblock in the Michigan state legislature recently as legislators moved to delay the resolution before final passage.

Let’s take a look at the Motor City as a candidate for this type of tax reform and how we got here.

The story of Detroit’s economic and population decline is at this point American lore. The city’s population peaked in the 1950 census at 1.85 million, and has trended downward at various rates toward the 2020 figure of 639,000. It has substantial vacant land under public, private, and nonprofit ownership. The Detroit Land Bank Authority, the largest public owner of vacant land, holds 71,000 parcels in its inventory.

There are many theories for why Detroit has suffered such a steep decline, ranging from overreliance on a singular volatile industry to criminally bad governance practices. Various attempts have been made to turn the proverbial ship around, with most of the higher-profile initiatives involving one or more large developments in the City’s downtown area. Because these projects would create new structures that massively increase the property’s taxable value, they seek and often receive tax abatements from Detroit’s famously high property taxes.

In a declining city where property tax rates are “artificially” high to raise adequate revenue from low property values, a valuable new development faces a substantial financial headwind without a discretionary, negotiated abatement from high property tax rates. This limits development to a relatively small number of sophisticated and well-connected firms who can navigate the tax abatement system and opens the door to corruption of City officials with influence over abatements.

This dynamic places a drag on the city’s once-and-future turnaround as most would-be developers who are not politically well-connected or adept at navigating tax abatement bureaucracies invest their money elsewhere.

Reforming and reducing property taxes
An analysis from the Lincoln Institute of Land Policy used Detroit to illustrate the pitfalls of orthodox single-rate property tax systems. It proposed an alternative, split-rate taxation that weighs land value more than structure value when calculating overall tax burden. Benefits of this policy are twofold.

First, neighborhood homeowners–of which Detroit, a “City of Homes”, has many–would see their tax bills decline an average of 18 percent. This is because more of the combined land and structure value in their property is contained in the structure than the land, which is taxed much lower than the land. Second, developers of any size or sophistication would no longer be “punished” for investing in their properties since increases in structure value would not impact the value of the underlying land, which controls most of the tax burden.

The report recommends taxing land at five times the rate of the tax on structures (or taxing structures at ⅕ the rate for land), with the split-rate phased in over five years. Implementing this split-rate tax would also reduce property tax foreclosures by 8.6 percent on residential property and modestly increase overall homeownership in the city, according to the report.

While split value taxation offers a strategic pincer maneuver that rewards the neighborhood homeowner constituency and provides a fairer process for would-be developers, it’s unlikely to be a panacea. Other challenges like old infrastructure and school quality will remain. Still, the hope is that a fairer property tax system can provide a boost where the status quo provides a drag on redevelopment. On the margin, development outcomes will improve, and the cycle of repeat tax foreclosures should slow.

A competitive edge
Intra-regional competition is a hallmark of Southeast Michigan, also known as Metro Detroit. The postwar City vs. Suburbs economic and cultural conflict has scuttled several efforts at regional public transit and other pro-growth collaborations within the region. For much of this period, the suburbs have had the advantage as federally-funded highways unlocked vast tracts of land for housing, offices, and factories.

A split-rate property tax would incrementally swing the tax competition advantage back to the city by lowering the cost of large improvements relative to building on a suburban site. Indeed, a Detroit resource claims the proposal will bring overall property tax rates in line with the city’s suburban neighbors.

City and state politics
After the Lincoln Institute report’s publication earlier this year, Detroit Mayor Mike Duggan emerged as the proposal’s top advocate. Duggan is no stranger to taking novel approaches to the city’s vacant land and redevelopment challenges. As a county prosecutor, he pioneered a strategy of bringing public nuisance lawsuits to compel owners of blighted and vacant properties to turn them over to the government or sell them at auction.

Duggan focused his new tax reform pitch on the benefits to city homeowners, 97 percent of whom would see a tax cut, and no homeowners would see a tax increase.

Before the city can enact the tax plan, state law must change to allow it to levy a split-rate property tax. The bill was introduced by State Rep. Stephanie Young (D-Detroit) on September 12th and passed out of the Committee on Tax Policy on September 28th. The final passage of the bill was postponed on October 11th as several Democrats in the state House broke with leadership and would not support final passage. Four of the nine Detroit City Council members mounted a “full court press” to lobby lawmakers against the bill and Duggan’s aggressive implementation timeline.

Backers now estimate the most likely outcome is continued deliberation of split-rate land value taxes in Detroit’s particular context, with the next opportunity for a referendum coming in the November 2024 general election.

Split-rate land value taxes elsewhere
If enacted, Detroit would not be the first city to implement a split-rate land value tax. The Commonwealth of Pennsylvania has allowed split-rate taxation for over a century, with over a dozen cities and other entities like school districts adopting split-rates. The City of Pittsburgh is the most notable former example. The city used a split-rate tax from 1913 until 2001.

Compared to other midwestern cities, Pittsburgh saw a substantial increase in development after adopting a split-rate tax system. The split-rate formula played a “supporting role” that encouraged new development in the city and helped it avoid overall tax increases during the period. In other Pennsylvania cities that adopted the split-rate tax, researchers found that split-rate taxes encouraged higher-value development for a given amount of land and a greater overall density of housing development. Pittsburgh’s move away from the split rate also demonstrates the importance of administrative competence in delivering theoretically ideal policy ideas: A botched reassessment in the early 2000s triggered a homeowner backlash against the split-rate system and its sudden repeal in 2001.

In Pittsburgh’s repeal, a combination of factors led to a shock for property owners. First, a five-year freeze on reassessments lowered tax burdens over time. Next, ineffective communication created a sense that the LVT was unfair to owners of low value structures on high value land. Finally, a court-ordered property reassessment created a sudden shock for property owners when their property values spiked and city millage rates did not decrease enough to compensate.

A split-rate land value tax could help Detroit continue its post-bankruptcy recovery by encouraging more fair large-scale development, stabilizing neighborhoods, and providing tax relief to ordinary residents. Based on the experiences in Pennsylvania, the reform is unlikely to be a panacea but should make the city marginally more attractive to new residents and investors. The change would also help the city pivot from the traditional redevelopment model where connections and tax abatements are essential and where corruption is a constant temptation. And at the very least, the reform will measurably decrease the rate of repeat tax foreclosures for single-family homes. If implemented, it will be critical to learn from Pittsburgh’s experience and effectively communicate the tax’s benefits while ensuring predictable tax burdens over time.