John E. Mogk is a law professor at Wayne State University
In the report recently released by Detroit Future City, "Growing Detroit's African-American Middle Class," and highlighted in Bridge Magazine the main point made is that the revitalization of the City's neighborhoods is dependent upon significantly expanding the City's African-American middle class. Detroit lost a substantial percentage of its African-American middle class between 2000 and 2010 when 237,000 residents left the city – 25 percent of its population.
The report's goal can be achieved by abolishing the real property tax on homeowners, along with concerted efforts to improve K-12 education in the city. With no real property tax, middle class homeowners would be motivated to stay in Detroit, middle class buyers outside of the city attracted to live in Detroit and tax foreclosures shattering home ownership and blighting neighborhoods would be ended.
Lower income homeowners will benefit considerably, as well as the middle class. Many low income homeowners are simply too poor to avoid tax foreclosure. An expanding industry of investors is flourishing in Detroit scooping up thousands of owner occupied homes at the tax auction and renting them in neighborhoods that were formerly stable owner-occupied communities. The entire city is being transitioned from predominantly home ownership to investor-owned rental housing creating neighborhoods not attractive to middle class home buyers. This trend moves Detroit into uncharted and unstable waters with absentee landlords playing an increasing role in the well being of the city's neighborhoods.
The real property tax paid by homeowners is not a major source of city revenue. Unlike other cities, real property tax revenues combined on residential, commercial, industrial and residential property make up only about 13 percent of Detroit's general fund budget. The income tax, casino tax, utility tax, state revenue sharing and other revenues are the city's major revenue sources. Property taxes contribute $133 million to total general fund revenues of more than $1 billion.
Lost revenues from abolishing the real property tax on homeowners would have to be replaced in the city budget. Moreover, other local governments share in the city's property tax bill, such as the Detroit Public Schools, Wayne County and Wayne County Community College. Their lost revenue would have to be replaced, as well. However, replacement is possible.
A number of alternative sources might be considered, such as a local sales tax, excise tax, a sharing of increased property taxes being kept downtown, payments in lieu of tax from tax exempt organizations and a tax increase on commercial and industrial property, to name a few.
Tax exempt properties are along for the ride. They receive the bulk of city services and pay for none of the costs, a concession Detroit can no longer afford. Tax exempt real property holdings are not insignificant.
Since the 1970's the increase in property tax revenues downtown have been kept downtown and paid to the city's Tax Increment Financing Authority. The Authority uses the revenues to eradicate blight downtown and support private development. Times have changed dramatically since, with blight largely eradicated and property values soaring, greatly increasing property tax revenues. Within the next decade hundreds of millions of dollars that otherwise could flow into the city's general fund to support services in the neighborhoods will be diverted to improve business conditions and investors' profits downtown. Some or all of this funding should be used to help replace revenues lost from abolishing the real property tax on homeowners.
The burden of replacing the real property tax on homeowners could be lowered by abolishing the tax only in neighborhoods outside of the city's 7.2 square mile core experiencing a remarkable comeback on its own, or limiting the program to owner-occupied homes built before an earlier date, such as 2000 for example. Either of these methods would target neighborhoods that need a comeback.
If the Detroit Future City report is to be taken seriously, the city should take steps to abolish the residential real property tax on homeowners for the good of Detroit residents, the building of its neighborhoods and the city's future.