I’m going to have something with more background coming out this week concerning the City of Detroit’s land value tax proposal. But, before that, I wanted to address some of the criticism the proposal has gotten and a couple (implied?) alternative ideas that have popped up as the land value tax bills have sputtered a bit in Lansing.
Malachi Barrett of Bridge Detroit shared the following on Friday. I want to focus on the last couple sentences in the press release:
To my mind, there are three ways to interpret the question “Does Detroit even need to tax homeowners?” in a way that points to potential policy implications (setting aside whether those policies are plausible or not).
I’ll go through them in order of most significant implications to least significant.
1. Eliminate all property taxes
The most extreme policy interpretation of the question “Does Detroit even need to tax homeowners?” is that it suggests all property taxes should be eliminated. Given that Malachi Barrett also shared that Council Member Waters invited a conservative activist who is proposing precisely that, it seems worth addressing:
Obviously there are lots of ways to think about the implications of eliminating all property taxes, but I’ll just consider two:
The City of Detroit and other milling entities would lose a lot of operating revenue.
But, as seen above, Karla Wagner of Axe MI TAX said to that “How are we going to replace the revenue? I don’t care.” So I guess that’s that. Fine, on to the next implication.
Speculating on land in Detroit is already nearly frictionless — eliminating property taxes would make it completely frictionless.
One of the issues the land value tax proposal seeks to address is the low holding costs of disused land in Detroit. It’s really cheap to sit on property in Detroit, especially vacant land, because the property taxes are very low. If taxes go up on vacant land, it could stimulate owners to do something with that land. If taxes are eliminated, then there is nothing to keep speculators from sitting on that land indefinitely, always holding out for a bigger payday somewhere down the line and holding hostage the neighborhoods around them.
I’ve seen some critics of the land value tax proposal say “The Detroit Land Bank is the biggest speculator in my neighborhood.” More sympathetic I could not be. But what is one of the superpowers of the Detroit Land Bank? They are a government entity exempt from taxes. They can afford to sit on land as long as they like. Eliminating property taxes gives speculators from Southfield to Miami the same superpower. At least the DLBA is on paper accountable to the public. Private speculators are not. So, if you really want to give a boost to speculators you’d eliminate property taxes.
2. Eliminate all property taxes but only for homeowners
This is a bit less extreme than eliminating all property taxes, but also maybe more unconstitutional. The Uniformity Clause might create some problems here, but I’m going to ignore those for the sake of the thought experiment.
I’m also going to assume that, since we’re not axing property taxes altogether and replacing the lost revenue with nothing, revenue neutrality would be a component of eliminating homeowner property taxes. That means that when homeowner taxes are eliminated, that lost revenue needs to be made up for elsewhere. (The City’s land value tax proposal is designed to be revenue neutral, too, by shifting the tax burden from occupied homes to forms of disused property.)
If Detroit homeowner taxes are eliminated it stands to reason that revenue neutrality might come from raising taxes on all other property. What would that mean in practice?
Using 2023 Detroit tax roll data and some rough calculations, Detroit homeowners will owe around $100 million in property taxes this year. All other Detroit properties will owe around $415 million in property taxes. (Remember, most of these property taxes are not actually owed to the City of Detroit — there are other milling entities who rely on property taxes for revenue, too, like libraries and the County).
So, a loss of $100M in homeowner property taxes means that property taxes for non-homestead properties need to increase by about 25% across the board. What group of people would that especially hurt? Renters.
The average single family home rental property in 2023 will have a tax bill around $1,600 by my estimates. A 25% increase in property taxes means that tax bill goes up to $2,000. That $400 / year increase? It would be passed directly on to the tenant.
Punishing the 50% of people in this city who rent so homeowners can see their property tax bills eliminated? No thanks.
3. Eliminate the portion of property taxes the City of Detroit controls, but nothing else
This is the least extreme and most plausible implication of asking whether Detroit needs to tax homeowners. The City of Detroit is responsible for about 28 of the 67 mills that a homeowner pays in property taxes. Eliminating the City’s portion of the tax bill would lower taxes for homeowners as well as all other properties. Again, that raises a few issues:
It’s not revenue neutral. If all property taxes are cut by 28 mills, that leaves a big hole in the city general fund — probably something like $130M / year.
It benefits homeowners, but also speculators. An across the board elimination of the City’s mills reduces everyone’s taxes and, again, reduces the friction for speculators holding vacant and unused land. That’s a problem.
It’s not that different from the City’s land value tax proposal (aside from the fact it helps speculators). The City’s land value tax proposal would lower the millage rate for homeowners by 14 mills, while increasing the millage rate for vacant land. The land value tax proposal both supports occupied housing while discouraging speculation. Simply eliminating the City’s mills would both support occupied housing and help speculators, which, again, is not a productive outcome.
There are plenty more consequences of the question “Does Detroit even need to tax homeowners?” that I’m not addressing here, most of them more fundamental than what I’ve focused on (like revenue and constitutionality). But implied in the question, to me, is an insinuation that it leads to fundamentally beneficial outcomes for Detroiters. That’s just not the case.
Proposing exempting homeowners structure value from taxation?
Certainly setting up a privileged group and discriminating against other property owners.
Detroit has to tax structures and apply assessed values even if not actually taxed. Why? Because the roll of all properties both land value and building value is used for municipal bond underwriting.