Time for reform

Momentum is building behind tax reform ideas in Detroit. But do they address the underlying troubles?

Detroit has one of the most punishing tax structures of any major city in the country. The victims are the very people we need to help the city grow, and flourish: residents, businesses, investors.

Especially when it comes to property taxes, the rate is sky-high and the revenue yield is pitifully low. Cries of anguish rose up as annual assessments hit mailboxes over the past few weeks, and we were reminded again about the disincentives to move to, or stay in, the city.

That’s not a new observation. What is new is how directly it was raised a few weeks ago at the Detroit Policy Conference — and by whom.

Jared Fleisher, the CEO of Bedrock, Detroit’s largest downtown developer, laid out a set of tax reform ideas that went beyond the usual complaints. He argued that Detroit’s tax system actively discourages investment, rewards speculation, and limits the city’s long-term growth. Modest but structural changes could make a real difference.

The proposals didn’t get a lot of public attention or discussion. That struck me as a mistake.

So I sat down with Eric Lupher, the president of the Citizens Research Council of Michigan — the gold standard for tax and fiscal analysis in the state — to walk through the ideas slowly and critically. Not to cheerlead, not to dismiss, but to understand what would actually work, what wouldn’t, and what tradeoffs Detroit would be making if it moved in this direction.

Fleisher proposed three changes to the current scheme:

TAX LAND MORE HEAVILY WHEN IT’S VACANT: The idea is to discourage real estate squatting and development of things like surface parking lots, and to give homeowners a potential tax break.

CAPTURE MORE REVENUE FROM VISITORS: Detroit hosts millions of people each year who use city services but don’t pay property or other taxes. Targeted excise or consumption taxes could shift some of the burden away from residents.

RETHINK DEVELOPMENT INCENTIVES: Fleisher would keep the abatements that are used to catalyze downtown development, but make them smaller and longer in duration, to soften the short-term blow to city coffers.

None of these ideas is simple. And none is risk-free. But together, they might help focus the discussion about tax reform, which is gaining momentum in the mayor’s office, at city council, and especially around kitchen tables.

I’d add an admissions, or “ticket” tax, as I call it, to the list of things that should be in consideration. I’ve also believed, for some time, that Detroit should be thinking more radically about solutions. Could the city stop collecting its share of the property tax altogether? Yes, that would blow a sizable hole in the budget. And the city doesn’t control a large chunk of property taxes: about 70% goes to the county, the schools, the library and other assessors. But the city’s share of the tax is low-yield — third-highest among revenue sources — and it absolutely crushes families who want to live here. Imagine the real estate growth, in terms of sales, values, and investment, that would catch fire across the city if property taxes were cut by nearly a third.

Lupher summed Fleisher’s proposals this way:

Next, we broke down the individual ideas, one by one.

INCENTIVES

Fleisher’s suggestions about changing Detroit’s abatement packages was the newest idea he put forward. The city gives hundreds of millions in tax abatements for development projects, mostly in downtown Detroit. (Bedrock got $60 million over 10 years in local tax abatements for the new Hudson’s Tower, plus other subsidies from the city and state, for instance.)

The idea is that the economy activity spurred by the development will offset the cost of the incentives. Sometimes it works, other times it’s questionable.

Fleisher would have the city offer smaller subsidies, and would spread them out over a longer period of time.

What would a change to incentives really accomplish?

EXCISE TAX

Fleisher’s idea for an excise tax is a sister or cousin to proposals to change the state constitution to permit a broader local sales tax. If you go to cities like Chicago, for instance, and buy anything downtown, you pay 10.25% sales tax. It can be as low as 6.25% in other areas of the state.

How much could an excise tax generate, and what problems would it not solve?

LAND VALUE TAX

Fleisher’s endorsement of the land value tax isn’t new, but the reform has been effectively dead since the legislature failed to pass it two years ago. Former Detroit Mayor Mike Duggan initially proposed the idea as a way to give Detroit homeowners a tax break, believing that the higher tax rate on vacant land would generate more revenue.

Would a land value tax raise money, AND change behavior?

ANALYSIS

After walking through each piece of the proposal, the central question comes back into focus.

Together, what difference would these proposals make?