Detroit Considers Changing its Property Tax System to No Longer Punish Investments
Under the duress of blight, Detroit is studying a solution that might curb the raging decline of the city: a split-rate tax, where land will be taxed higher than the buildings or improvements made on it.
Detroit has been referred to as a “lost city,” a place whose early embrace of auto-centric development undermined the resiliency of the city in the face of the multiple crises that befell it in the late 20th century, tearing down social, political, and financial strength that had once made Detroit a great place to be. Now, it’s a place where many property owners sit on vacant or poorly maintained property. With property tax rates among the highest in the country for commercial buildings and apartments, allowing a property to fall into decline can be a rational strategy for landlords to save on their taxes, according to Strong Towns President Charles Marohn.
Tax policy plays an important role in creating the incentives that make it profitable to sit on a property that is a source of blight. When a city taxes improvements made on buildings, or new constructions on a property, it’s not creating an incentive for people to invest in the community. And according to Strong Towns President Chuck Marohn, this sort of property tax system is punishing those who choose to make their city or home a better place.
By switching to a reverse split-rate tax, the incentives will change, and Detroit will have the chance to encourage growth instead of rewarding blight. “I think it would be a very, very helpful change for the city,” said Alex Alsup, VP of research and development with Regrid (a industry-leading property data and location intelligence company). “There’s lots of surface parking lots downtown and in major commercial districts in the city. There’s scattered, vacant lots. And I think in practice, hopefully, this split-rate tax can stimulate different land use decisions there.”
A hundred years ago, Pennsylvania suffered a similar fate as Detroit; property owners squandered on lots with no incentives to construct or improve buildings for fear of rising property tax rates. So in 1923, the cities of Pittsburgh and Scranton adopted a tax system where land was valued higher than the buildings upon it. Once property owners were no longer punished for building on or improving property, these cities began to grow again. Over a dozen Pennsylvanian cities have followed this example since the 1950s, including the town of Harrisburg. Joshua Vincent, a land-based tax system expert, wrote on Harrisburg's success: “The number of vacant structures in Harrisburg declined from over 4,200 in 1982 to under 500 by 2001. The downtown—previously a ghost town—is alive, even at night. The number of businesses on the tax roll has grown from 1,908 to 8,864.
A 2022 study from the Lincoln Institute of Land Policy says that if Detroit embraces a split-rate tax, “Almost all neighborhoods [will] see tax savings, with lower-value housing seeing moderately greater savings.” Homeowners are likely to see an average savings of $160 per year.
While this shift in how properties are taxed could help reduce tax bills for homeowners and accelerate the development of long-vacant properties, it won’t solve all of Detroit’s property tax issues. Between 2011 to 2015, one in four properties throughout the city experienced foreclosure for not paying property taxes. To this day, tax foreclosures continue to transpire.
“I don't think a split-rate would be a silver bullet for ending tax foreclosure,” said Alsup, “because it's not a matter of cheaper property taxes for homeowners in poverty, it's a matter of, they need to be exempt. They need to get the exemptions from their property taxes all together, that they deserve, because they're in poverty.”
“It (a split-rate tax) would sort of spur different investments and programs,” said Alsup.
According to the Lincoln Institute: "The baseline forecast [...] estimates a 16.3 percent growth in the total value of taxable property from 2019 to 2024, or 3.1 percent annualized growth." In other words, Detroit is likely to see an immediate increase in property tax income if this change happens.
“So yeah, I'm hopeful about it,” said Alsup on Detroit moving forward the conversation of changing its tax system. “I'm certainly, you know, encouraged that it sounds like there's going to be a serious push for it.”
As reported by Crain's Detroit Business, Mayor Mike Duggan said in January “that the city was ‘80 percent of the way to a solution’ that would allow a split-rate tax structure.”
Mansions on large lots, not rundown properties in low-socioeconomic-status neighborhoods, are the real blight on a community’s financial health.