Why a ‘legally complicated’ tax change could benefit Detroiters

Detroit Mayor Mike Duggan is backing an effort to reform the city’s property tax structure to reduce the burden on homeowners but warns a lot of hurdles stand in the way of any quick change.


Duggan said he’s a supporter of the so-called “split-rate” tax system, with a higher tax rate for land and a lower tax rate for structures, but noted that the idea is “the most legally complicated thing I’ve ever seen.” Researchers and community advocates say equitable tax reforms could provide immediate relief to residents while discouraging speculators from sitting on undeveloped land, which is holding back revitalization of neighborhoods.

“We don’t have it figured out yet,” Duggan told reporters Tuesday during the Detroit Policy Conference. “But conceptually, the idea that you would raise taxes on the vacant land and reduce taxes on the buildings encourages people not to sit on land and speculate, which has been a real problem for the city, it gives tax breaks to homeowners.”

The change is complicated by a need for a change in state law and it must then be put on the ballot for Detroit voters to approve. Duggan said Chief Financial Officer Jay Rising, a former state treasurer and cabinet official for Gov. Gretchen Whitmer, is working on a plan. A new Democratic majority in the Michigan Legislature gives some hope that Detroit’s lobbying efforts will be heard. House Speaker Joe Tate, D-Detroit, also expressed interest in the idea last year.

Anika Goss, CEO of nonprofit research group Detroit Future City, said having a tool that brings down property tax bills is important, especially following a wave of tax foreclosures in the city caused by inaccurate assessments. An investigation by The Detroit News found homeowners were overtaxed by at least $600 million between 2010 and 2016.

“Less than 15 years ago, not only did we have an entire mortgage crisis, but a tax foreclosure crisis that wiped out neighborhoods completely,” Goss said. “This system of stabilizing the tax structure, allowing for a much more equitable process, that’s what we are trying to get to.”

In a joint report last year, Detroit City Council’s Legislative Policy Division, Office of the Chief Financial Officer and Office of the Assessor acknowledged a split-rate tax could reduce residential property taxes and promote development. However, city officials said, unanswered questions remain about how the tax would be implemented, applicability of state laws, how the split-rate affects tax abatements, exemptions and neighborhood enterprise zones and other issues.

Duggan said that a land value tax could create a different set of “winners and losers,” and that needs to be considered.

“People who might own a small building in a wealthy area could see their taxes go up in an unfair way,” Duggan said. “We’ve got to make sure that there’s no inequities in it.”

Esmat Ishag-Osman, a Detroit policy expert at the Citizens Research Council of Michigan, said he sees merit in the split-rate tax structure’s ability to spur downtown development but it also raises questions about the effects on Detroit’s neighborhoods. A split-rate tax would incentivize development on empty lots used for $40 parking, he noted, but questioned what the impact would be for someone who buys a grassy side-lot from the Detroit Land Bank Authority.

“It would overwhelmingly benefit residents because it would increase the value of (structures), but the split-rate property tax idea assumes that residents in the neighborhoods have the resources to develop on land,” Ishag-Osman said. “It assumes that every vacant lot in the neighborhood needs to have a structure on it, and I don’t think that is the case.”

Ishag-Osman said property tax reform “is something everyone is talking about,” which is a good sign that headway could be made on the issue. But he emphasized the complexity that comes with making changes, including considerations of constitutional hurdles and how it would affect Detroit’s competitiveness in the region.

“Is there another way to incentivize development on vacant land that may not produce such winners and losers?” Ishag-Osman said.

Duggan said it’s a worthy effort. Affordable housing developments, he said, largely rely on tax breaks to finance their projects. Detroit property taxes can reach 90 mills while nearby Plymouth is around half that, the mayor said as an example.

“We have to do (tax) abatements or nobody would build in the city,” Duggan said. “You can say all the political rhetoric you want, but the truth is, nobody would build. If we can get that 90 (mills) down to 70, I’m not saying there’ll be no abatements, but there’ll be far fewer and they would be far smaller.”

Duggan this week also announced a new program through the Downtown Development Authority that will offer loans to developers who commit to setting aside one-fifth of planned housing units for households making between 50% and 70% of the area median income.

That translates to a household income between $31,350 and $43,890 for an individual or $44,750 and $62,650 for a family of four. The new incentive will apply only to downtown developments in the DDA’s boundary.

Developers would be less reliant on these incentives if a land value tax was implemented, argues Nick Allen, a doctoral candidate at Massachusetts Institute of Technology. Allen co-authored a report released last year that suggested a land value tax would help revive Detroit’s economy and reduce tax bills for nearly every homeowner.

“If we’re going to do anything about property taxes, the first and more important thing is to bring tax relief to residents and businesses throughout the city to reduce the tax rate citywide and find a way to make sure existing businesses and new businesses are paying a rate that they would get elsewhere,” Allen said at Tuesday’s conference.

Roderick Hardamon, CEO of URGE Development Group, said development projects live or die by the abatements they are able to receive. Neighborhood projects often don’t have the same access to those incentives as projects in the downtown, he said.

“A lot of our apartment owners and landowners don’t have the luxury, the systems or the know-how to get a tax abatement,” Hardamon said. “They’re excluded from that benefit system. This shift would make it a more equitable system.”

Changing Detroit’s property tax structure would increase property values, Allen said. Detroit’s existing system penalizes homeowners when they improve their properties, he said, and is preventing growth in the city’s neighborhoods.

“Any tax reform is going to have a lot of changes in the short-term, but you also have to think about the way this would change the opportunity structure in every single neighborhood in the city,” Allen said. “This is about thinking about the long-term and what it would do to have a tax that doesn’t discourage people from doing exactly what their neighbors and their communities would want them to do with their property.”