Giving Detroiters a tax break

The cost of living in Detroit can feel like a punch from its famous landmark. (Photo by Flickr user Kate Sumbler; used under Creative Commons license)

If a wave of potential new Detroiters is standing by, waiting for the word to move in (or move back), those words might just be “tax reform.”

It’s no secret to anyone who lives or works in the city that Detroit has the highest tax rates in Michigan – and a few taxes that almost no one else in the state pays.

For instance: Detroit’s property tax rate is the highest in the state for cities with more than 50,000 people. Detroit also has the highest income tax rate (2.4 percent on residents, 1.2 percent on nonresidents who work in Detroit) And it is the only city, county, township or village in the state to levy a utility tax – 5 percent on electric, gas and phone bills.

Taxes have piled up on residents for decades as a declining tax base forced city leaders to scramble to replace lost revenue. For instance, the city has one quarter of the property value in 2012 that it had in the 1950s, when accounting for inflation.

The income tax approved in the 1960s was an outgrowth of underfunded city worker pensions, said Eric Scorsone, a Michigan State professor who studies city finances and is working on a book about Detroit’s financial history. “This has been a historic problem for the city,” he said.

The utility tax was adopted in the 1980s to help pay for police protection. As the city has shrunk, this tax is generating less each year. Still, it’s something that no other city levies.

Combined, these taxes generate more than $1.5 billion for the city’s general fund, putting it well above the average American big city in terms of per-capita revenue, according to a study by the Pew Charitable Trusts. The problem isn’t the amount of revenue that Detroit brings in, according to Emergency Manager Kevyn Orr, it’s that the city spends more than a third of its money paying off past debts and future liabilities.

These past and future obligations have created a crushing tax burden in a city with high unemployment and staggering poverty. And it’s created a unique situation where people who can’t pay their property taxes or water bills are slapped with a 5 percent tax on utility bills.

“In a city of this kind of poverty, it doesn’t make sense,” said Scoresone, who believes the utility tax should be eliminated.

If that is done, the city would have to make up about $39 million in lost revenue. But in a city that’s hoping to shave $7 billion off its debt in bankruptcy court, the loss of utility taxes could be relatively minor.

Orr also expressed interest last year in lowering property taxes, though his proposal to reshape the city after bankruptcy does not call for the elimination of any taxes.

“He’s in a position where he’s in a no-win situation,” said Douglas Bernstein, a prominent bankruptcy attorney who has been following the Detroit filing.

Orr could reasonably suggest that lowering taxes would attract more people to Detroit, which would ultimately raise more money for the city. But taking that position could also expose Orr to an attack by creditors – including the huge insurance companies fighting to stave off potentially billions in payouts – that if Detroit can afford to cut taxes it can afford to pay them back.

What is beyond debate is the burden that the city’s high property assessments places on residents. Combined with a millage rate of 67 mills for homeowners – it’s typically between 30 and 50 mills elsewhere in the state – the unusually high assessments are tough on city residents.

“I think that’s the most fertile area for reform because it’s widely accepted that everybody is over assessed,” Bernstein said.

Some changes are in the offing, at least in terms of property taxes. Mayor Mike Duggan has said he wants the city assessor to quickly reassess property to match values. Many people who have failed to pay taxes say they are paying far too much on homes worth very little.

In January, just days into his administration, Duggan said he was directing his new assessor, Gary Evanko, to lower assessments from 5 to 20 percent. The process began in April and is the beginning of a two-year reassessment of city property. It follows a state investigation into property assessments after a review showed they were too high.