Tax burden, low property values lead to exodus of Detroit residents

Detroit — For a generation, Detroit has levied as many property taxes as it legally could on its citizens.

Now, after decades of plummeting population and property values, some wonder if that was such a good idea. Few officials defend Detroit's tax rate, which is tops among big cities nationwide. Fewer still have any solutions.

"Of course property taxes are too high, but what do you replace them with?" asked City Council President Pro Tem Gary Brown.

Detroit is past the tipping point where taxes become so high they backfire, become a disincentive to invest, produce fewer revenues and lead to weaker city services, said Alan Mallach, a senior fellow at the Brookings Institution who studies Detroit.

Economists call the phenomenon the Laffer Curve. Conservatives call it Exhibit A against tax-and-spend government.

"Detroiters aren't sheep lining up to be sheared. When the tax burdens got too high, many fled to safer climes," said Michael LaFaive, director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy, a free-market think tank in Midland.

"Detroit has such a crushing property tax burden, it's no coincidence the land value is so low."

Brown and others said it's unfair to single out property taxes when decades of government policies, social changes and demographic shifts have sunk Detroit to this point. But they don't dispute the city is in a mess.

Detroit ranked first among the 50 largest cities in taxes and last among property values in a 2011 study by the Lincoln Institute of Land Policy in Cambridge, Mass. Detroit taxes on a $150,000 house were $4,885, twice the national average of $1,983. The city's average house price, $16,800, was nearly 10 times lower than the next lowest, Mesa, Ariz.

If property taxes are a social compact — pay the bills, get services in return — it's broken in Detroit, said state Sen. Bert Johnson, D-Detroit. Surrounded by broken streetlights and overgrown parks, some residents gamble that the city also does a poor job collecting taxes, he said.

So they don't pay, further diluting city services.

"It's a vicious cycle exacerbated by the fact that Detroiters don't believe they are getting a good return on their investment in city services," Johnson said.

"The city hasn't done a good job collecting on debts, so it creates apathy."

Brown and Johnson noted that many thriving cities have high taxes. Both New York and Des Moines, for instance, are in the Top Five for commercial taxes in the Lincoln Institute's list. Detroit is No. 1, while Providence and Philadelphia round out the list.

The only category that Detroit didn't lead was industrial taxes, according to the list. The city was No. 2 behind Columbia, S.C., whose tax rate on homes was five times lower than those in Detroit.

"The overall issue is you need to find a way to fund government services, because funding them through property taxes is not working," Brown said. "We need to find another way to make it work."

Michigan law limits how much cities can levy in taxes, and a growing share is being used in Detroit to pay off its debts. The city's long-term debt, including pension liabilities, has grown to $14 billion, so nearly a third of the taxes the city collects — 9.6 mills of 34 — go to pay it down.

That leaves less money to fund services, said Bettie Buss, a senior researcher at the Citizens Research Council of Michigan and a former budget analyst for Detroit.

"The city for years has tried to figure out how to push the cost of current obligations to the future, but unfortunately, revenues are going down," Buss said. "That made it harder to push off costs."

Mayor Dave Bing has acknowledged the city's property taxes are inflated and last year proposed increasing the city's income tax rate and boosting surcharges on utilities. The state turned him down.

LaFaive argued the city would have greater compliance by cutting taxes. The Detroit News found that, last year, 47 percent of property owners didn't pay. State law allows county treasurers to foreclose after three years of missed payments.

"The big surprise is not that so few pay property taxes, but why (so many) do," he said.

"You can get much greater compliance from lower tax burdens than simply hiring more treasury officials to foreclose on them."

Former U.S. House Speaker Newt Gingrich went a step further in 2010, arguing that Detroit's comeback could be sparked by eliminating all taxes.

A study commissioned by the Detroit Regional Chamber concluded the idea wouldn't generate enough jobs and would cost the city, state and other governments $1 billion per year. Detroit and other Michigan cities have experimented with a host of programs that reduce taxes. They've had mixed results.

The city had 16 renaissance zones that were virtually tax-free for businesses within their boundaries. Gov. Rick Snyder dramatically reformed the statewide program that began in 1996 after years of complaints that it was inadequately monitored and produced few jobs.

Detroit forgave millions of dollars in taxes for companies that produced about 1,900 jobs in 15 years, according to state figures.

Others advocate a more radical approach: Levying roughly the same amount in taxes per parcel, but increasing it on land and decreasing it on homes or buildings.

Known as two-tier taxes, the system discourages speculators from buying and holding onto land and encourages owners to improve properties, said Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence, a tax policy group.

The system isn't widely used in the United States, but it is credited with aiding turnarounds in Pittsburgh and Harrisburg, Pa.

The latter, though, is in state receivership. And a national expert on two-tier taxation said Detroit may be past the point where it would benefit.

"If you have taxes so high and property values so low that half the people are not even paying their taxes, to think about tax incentives turning that thing around is ridiculous," said Richard Dye, a professor at the University of Illinois' Institute of Government and Public Affairs.

"I hate to say it. But in terms of government solutions, tax-wise, it's a lost cause. It sounds harsh, but that's what it is."

jkurth@detroitnews.com

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