Detroit’s Land Value Tax & Tax Foreclosure Risk

Could Detroit's Land Value Tax Proposal Trigger a New Tax Foreclosure Crisis?

Toward the end of last year I had another chance to talk about Detroit’s land value tax (LVT) proposal on WDET’s Detroit Today. It was a great conversation and I appreciated being able to discuss it alongside Nick Allen of MIT — an early advocate for the LVT in Detroit.

During the conversation a concern over the land value tax proposal was raised by a caller. The gist of the comment was this:

“The land value tax proposal isn’t a good idea because raising taxes on vacant & disused land will cause owners to abandon those properties and lead to a wave of tax foreclosures and the City can’t afford that.”

It’s something I’ve heard repeatedly in the LVT debate, as in this Twitter thread:

Don’t mean to pick on this person! The thread is just a good encapsulation of the critique.

This concern is misplaced but I understand where it’s coming from — we spent 15 years dealing with a citywide tax foreclosure crisis, it’s fair to wonder what the impact of raising property taxes on certain types of properties via a land value tax might be. So I want to address it.

Here are the three questions I think are most important to answer:

1. What kinds of properties could be most susceptible to tax foreclosure as a result of the LVT proposal?

2. How many of those properties are there and who owns them?

3. What are the revenue implications in the hypothetical scenario where all this land is suddenly tax foreclosed?

1. Susceptibility

There are a few key ingredients, in my experience, when considering the susceptibility of a property to tax foreclosure:

• Market value

• Tax level

• Ability to pay

• Desire to own

Amongst properties where taxes would increase under the LVT proposal, those four ingredients point clearly to vacant land (and specifically vacant residential land) as the most potentially susceptible to tax foreclosure.

A swath of vacant lots on the east side of Detroit

Vacant residential lots generally have low market value, will have much higher taxes (relatively speaking — the standard residential vacant lot might see a tax jump from $40 / yr to something like $80 / yr), and the desire to own those properties, in some cases, may be low. Ability to pay, I suspect, is less of a factor given that side lots owned by Detroit homeowners will have exemptions from the LVT proposal, meaning that the vacant residential lots seeing significant tax increases are more likely to be business or speculator owned.

There will certainly be significant increases in taxes amongst some larger commercial and industrial parcels — scrapyards, surface parking lots, and others that we’ve heard a lot about amidst the LVT discussion — but those are also likely to retain higher market values and have owners with greater ability to pay, so I consider them much less susceptible to tax foreclosure¹.

Lastly, it’s worth making this related point about susceptibility:

Those arguing the LVT proposal will increase tax delinquency & foreclosure rates due to higher taxes on some properties are also implying that tax delinquency and foreclosure rates will go down where property taxes decline — namely, owner occupied homes.

The argument warning of increased risk of delinquency & foreclosure rests on delinquency & foreclosure being a function of tax price. That means that if taxes go down on certain properties (which would be the case for 97% of homeowners under the LVT) then delinquency & foreclosure would decline as well, offsetting some or all of the losses that, supposedly, would manifest for other kinds of properties where taxes go up. More on this later.

2. How many vacant lots are we talking about?

While vacant residential lots are the most susceptible to tax foreclosure under the LVT proposal, I’m going to use a somewhat more expansive definition of “vacant lot” in order to maximize the hypothetical tax foreclosure impact. I want to lay out a worst case scenario here:

Per City of Detroit tax roll data and data from Regrid, there are right around 56,000 parcels in Detroit that are privately owned, less than 1/2 acre in size and have no structure on them — that’s about 15% of all Detroit properties.

This is a definition that certainly captures more than just vacant residential lots — it includes some smaller structureless commercial & industrial land, too, and some surface parking lots (I tried to weed those out but City data is imperfect there). Again, that’s fine — I would much rather overestimate the hypothetical tax foreclosure impact than underestimate it.

Just under half of those 56,000 parcels are side lots that were sold by the Detroit Land Bank (25,020 as of the end of 2023, per the City’s Open Data Portal). Under the land value tax proposal those side lots will be exempt from tax increase, so they can be excluded. That leaves ~31,000 privately owned <0.5 acre vacant lots.

Who owns these properties?

About 20,000 of those 31,000 vacant lots are owned either by outside speculators, businesses, or investors, per 2023 City of Detroit tax bill mailing address data and an owner typology analysis.

Amongst those owners you’ll find many of the most prominent names mentioned in conversations about Detroit land speculation: Hantz Farms, New Far East Side Development, Matthew Tatarian, Michael Kelly... Just the top 25 owners amongst those businesses & speculators own a total of 5,570 properties (28% of the 20,000 properties) — an average of 223 pieces of vacant land each.

Surveying the land portfolio!

The map below shows the distribution of Detroit-owned vacant land (that which did not come via DLBA side lot sale) vs. vacant land owned by businesses, LLCs, and speculators outside Detroit. As you can see, businesses and outside owners tend to have huge clusters of vacant land and concentrations along commercial corridors. Ownership by Detroiters is much more diffuse, likely reflecting distribution of population (and thus, side lot ownership) rather than efforts to aggregate investment & maximize speculative opportunities.

Outside owners, businesses, and speculators are not likely to let their huge portfolios of vacant land just fall into tax foreclosure. They may decide to sell them, perhaps some will try to develop some of their land, or they may try to game the tax delinquency system and just keep squatting on the land (which I’ve warned of before and I think is a real issue the City is not, but needs to be, prepared for) but I very much doubt they will just walk away from that much land.

What about the Detroiters who own the other 37% of those vacant lots that weren’t sold via the DLBA’s Side Lot Program? Likely, they are overwhelmingly exempt from the LVT proposal, too.

There are 9,062 unique owners who own those 11,720 lots (much less concentrated ownership). Only 117 of those 9,062 owners (1.3%) own more than 4 vacant lots which is the limit for an exemption for side lots under the LVT proposal.

3. Revenue Implications

But what if I’m wrong about the outside owners & businesses that own those 20,000 properties? You should never embark on a change like the LVT proposal by trying to gauge the risk of a bad scenario coming to pass — instead you should evaluate the cost of error. So, what if all these property owners decide to stop paying their taxes at the same time? What are the fiscal implications of that? It’s easy enough to figure out.

The cumulative 2023 tax bill for those 20,000 properties was right around $9M, per City of Detroit tax roll data. Under the LVT proposal, their cumulative tax bill would just about double to $17.5M.

So, if the LVT proposal was enacted and all 20,000 properties’ owners suddenly stopped paying their taxes, $17.5M / year would go unpaid from the citywide property tax levy. (To be clear, that’s $17.5M to all taxing entities, not just the City of Detroit general fund.)

That $17.5M represents ~3.5% of the City’s total property tax levy of $500M. The City general fund receives around 25% of the overall levy meaning it would see a $4.4M reduction in property tax revenue, about 3.2% of total general fund property tax revenues, which were estimated at $136M for FY 2023.

The 2023 general fund’s total recurring revenues were projected at $1.2B, so that $4.4M represents 0.4% of estimated 2023 general fund revenue.

These numbers are quite small but they’re not nothing. Two things to consider, however, to put this worst case scenario in a bit more context:

1. Per January 2024 Wayne County Treasurer delinquent tax data there are $80M of unpaid 2022 property taxes owed by 71,000 properties across Detroit. That total is on the lower end of well more than a decade’s worth of a citywide issue with property tax delinquency and foreclosure. By my estimates, about half of the present day delinquency total ($40M) is owed by occupied homes — both homeowners and landlords. It really shouldn’t be a hypothetical $17.5M worth of taxes on vacant land that spurs one to action on tax delinquency in Detroit.

2. As mentioned in the Susceptibility section, tax decreases on occupied homes — which make up a far larger source of delinquency today than vacant land hypothetically could under the LVT — would offset hypothetical delinquency increases on vacant land. Even if we saw the exact same delinquency rate amongst occupied homes under LVT, the dollar value of that delinquency would be ~20% lower due to the tax reductions residential properties will see under the proposal. So, instead of $40M in delinquent taxes, the same collection rate on residential properties would produce $32M in delinquency. That’s assuming that there is ABSOLUTELY ZERO increase in on-time residential tax payments even with a 20% tax cut, which seems very unlikely, and which opponents of the LVT, again, implicitly argue would not be the case as their argument is that delinquency is a function of tax price.

So, even if we assume the lowest possible expectations for the LVT — 100% tax delinquency amongst those 20,000 vacant lots and 0% reduction in tax delinquency rate amongst residential properties despite a 20% tax cut — we would see a net reduction of $10M in property tax collections, of which $2.5M would have gone to the City of Detroit general fund, representing 0.2% of 2023 general fund revenues.

In other words:

There is no reason whatsoever to argue against the LVT on the grounds that it could spur a new tax foreclosure crisis.

1. Additionally, for the sake of determining which properties are potentially susceptible to tax foreclosure under the LVT proposal I am of course excluding anything where the tax burden is going down. If tax foreclosure rates increase, for instance, amongst the 97% of owner occupied homes where taxes will decrease, it’s not going to be because of the LVT — it will be because some other, far larger and far more significant, economic event has occurred.