July 27, 2015

Two Tales of One City

It’s the best of times and the worst of times for Detroit.  The city “has emerged from the largest municipal bankruptcy in U.S. history with new leadership, a downtown restocked with young professionals, and a public-relations slogan, ‘America’s great comeback city,” reports Bloomberg Businessweek. But the landscape radically changes when one looks beyond the city center to the neighborhoods where 95% of Detroit residents live. The Center for Community Progress told Bloomberg Businessweek that “Detroit is at risk of becoming two different cities: one thriving and one continuing to decline.”
Abandoned homes in Detroit.

The outward signs of that decline are boarded-up homes that sell for incredibly low prices, a good thing for would-be homebuyers like Cindy Gresham, who, according to Bloomberg Businessweek, paid $6,000 in 2010 for her home. Not bad, except for the $8,589 unpaid property tax bill which tripled to about $25,000 today.

But that’s not all for Gresham and many other Detroit homeowners. Detroit’s property taxes, like those of most jurisdictions, are based on a property’s fair market value. Consequently, the tax assessments should fluctuate with market values. In Detroit’s case, though, assessments often don’t reflect “the 48 percent plunge in home values over the past decade.”  The city has been lowering tax assessments while trying to boost property values, partly by suing the owners of blighted property, seeking that they improve the properties or turn them over to the city.

Detroit’s strategy illustrates the fiscal policy paradox facing many cities. Lowering assessments makes homes more affordable to low- and moderate-income people, but not if they have to pay back taxes. Making homes more affordable by bringing assessments into line with depressed home sale values also works if cities don’t increase tax rates to maintain municipal services. Cities could reduce tax rates by cutting services, but that could backfire if the level and quality of those services falls, thus depressing property values and causing people and businesses to move.

Ironically, Michigan law waives property taxes for homeowners like Gresham whose household income put them below the poverty line. But the rule isn’t well known, and filing the documents can be complicated, University of Michigan (Ann Arbor) urban and regional planning professor Margaret Dewar told Bloomberg Businessweek.  If the rule were widely known and applied, the tax load borne by other taxpayers might increase, thus creating another policy paradox.