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Abstract
All U.S. states permit local governments to recover unpaid property taxes through a tax lien foreclosure process. Tax relief policies can reduce household tax burdens and prevent the foreclosure of owner-occupied homes, but little is known about their use and effectiveness. Like other cities, Detroit, Michigan, experienced a rise in tax foreclosures following the 2008 deep recession. Michigan law requires cities to exempt low-income homeowners from some or all of their property tax obligation. Implementation of this policy, the Poverty Tax Exemption, nevertheless failed to protect many low-income homeowners from dispossession through tax foreclosure. State-mandated and locally-determined procedures placed the burden of learning about and applying for the exemption on financially stressed homeowners, restricting widespread access to this critical tax relief. Eliminating institutional barriers to tax relief can prevent many owner-occupied tax foreclosures, especially in cities where a high need for tax relief occurs under local conditions of fiscal austerity.
Acknowledgments
We thank Ted Phillips and Michele Oberholtzer of the United Community Housing Coalition and the Healthy Environments Partnership Steering Committee for partnership in this research.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 The 5-year American Community Survey (U.S. Census Bureau, Citation2016a, Citation2016b) provides estimates for the number of homeowner households by income category and the average size of homeowner households for Detroit. PTE eligibility is primarily determined by household income adjusted for different household sizes. Therefore, we estimated the number of eligible households by first determining the PTE income level for the average household size. Second, we estimated the number of households that had incomes lower than that amount by summing the number of households in each category of income below the PTE eligibility level plus an estimate of the share of households below the PTE level from the category that included the PTE income limit on the assumption that the households were evenly distributed across the income category. In addition to household income, the Detroit Board of Review considers household assets and debts when determining PTE eligibility. Since the American Community Survey does not provide data on these, this estimate of the number of eligible households could be too high if many households have substantial assets or too low if many households have substantial debt.
2 Attorneys for the plaintiffs included American Civil Liberties Union (ACLU) of Michigan, the NAACP Legal Defense and Educational Fund, Inc., and the law firm of Covington and Burling.
3 Calculations by the Detroit Land Bank Authority.
4 This total represents the debt for the foreclosable tax year. It does not include prior or subsequent years of unpaid taxes, which accumulate through the same process.
5 Data that distinguish between owner-occupied and renter-occupied properties are not available. This figure also double-counts structures that went through tax foreclosure more than once in this period.
6 Regardless of income or assets, the Principal Residence Exemption (PRE) exempts owner-occupant homeowners from the tax levied by their local school district. In 2017, the Principal Residence Exemption reduced the tax rate for Detroit homeowners by 20% (Michigan Department of Treasury, Citation2017).
7 Michigan’s Homestead Property Tax Credit is equal to 60% of the amount by which the property tax exceeds 3.5% of household income, with a maximum benefit of $1200 (Michigan Legislature, Citation2017). Homeowners who are not required to file an income tax return may still file and claim this property tax credit.
8 The Interest Reduced Stipulated Payment Agreement (IRSPA) lowers the interest on delinquent tax bills from 18 to 6% and removes the home from immediate foreclosure proceedings after the initial payment. This law will expire in July 2026.
9 Applicants must disclose but need not provide proof of all assets.
10 About 18% of homeowner households with incomes less than $25,000 had mortgages in 2017 in Detroit, but none of those seeking aid from UCHC had mortgages (U.S. Census Bureau, Citation2017c). When a homeowner becomes delinquent on mortgage payments, the lender can begin foreclosure proceedings. The homeowner has a 6-month redemption period following a foreclosure (MCL 600.3140). Thus, mortgage foreclosure happens much more quickly than tax foreclosure. Property taxes are a superior lien; if the homeowner pays the mortgage but not the property taxes and tax foreclosure occurs, the lender loses the collateral that backs the loan (MCL 211.40). Therefore, mortgage agreements may include a provision to pay property taxes to the lender.
11 This figure excludes participants whose homes were foreclosed during the study period. For comparison, the average approximate market value of homes (based on properties' 2016 assessed home values) for participants with tax debt was $25,009. This figure excludes one participant for whom 2016 assessed home value data was not available (85 respondents).
12 In the sample as a whole, an additional 6.67% (N = 7) of participants who had not obtained, completed, and/or submitted the application at the time of their initial interview were ultimately approved for the exemption.
13 One participant did not respond to this question (73 did respond).
14 One participant did not respond to this question (71 responded).
15 The letter includes a ‘BOR reason code number.’ The recipient must find the description of the code within a list of more than 60 codes to learn whether ‘full poverty granted’, ‘partial poverty granted’, or ‘poverty denied’ applies to their case (W. Donwell, chair, Detroit Board of Review, personal communication, September 2017).
16 In 2014, Michigan law (MCL 117.4s) mandated that all cities with a population greater than 600,000 establish a Chief Financial Officer, to be appointed by the city’s mayor. Detroit is the only city in Michigan with a population greater than 600,000 and therefore the only city subject to the CFO law. The CFO is to supervise all financial and budget activities in the city government, certify that the city’s annual budget complies with the uniform budgeting act, and provide his or her opinion on the effect that policy or budgetary decisions made by the mayor or the city council will have on the city's annual budget and its four-year financial plan.
17 This number was estimated as follows. Property tax revenues for the City of Detroit general fund totaled somewhat more than $119 million in fiscal year 2018, almost 12% of revenues for the city’s general government activities (City of Detroit Office of the Chief Financial Officer, Citation2018: p. 25). Residential property value makes up about 44% of all property value (Wayne County Division of Assessment & Equalization, Citation2018b: p. 20) so property taxes from residential property make up about 5.25% of the city government general fund revenues. A little less than half of residential properties are owner-occupied, which therefore contribute about 2.5% of the general fund revenues.
18 This calculation counted each household eligible for a 50% exemption as half an owner-occupied property, converting them to full-exemption equivalents, which meant that about 29.6% of owner-occupied properties could receive full exemption. If all houses had the same value, they would make up between .7 and .8% of the property tax base. This is a considerable overestimate because the lower value of the properties would mean the share of the tax base is also lower. Multiplying the percent of the property tax base times the general fund property tax revenues yields a maximum loss to the city’s general fund revenues of $7 million for fiscal year 2018. We cannot readily determine why the Chief Financial Officer’s estimate is so much higher than ours.
19 No study of enrollment in the Principal Residence Exemption (PRE) exists, but one county treasurer stated to one of the authors that he estimated that half of owner-occupants in his county did not have the PRE and about half of landlord-owned properties did have it.
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Notes on contributors
Alexa Eisenberg
Alexa Eisenberg is a doctoral candidate in the Department of Health Behavior and Health Education at the School of Public Health and a National Institute of Health trainee at the Population Studies Center at the University of Michigan. Her research uses a community-based, participatory approach to understand and address the relationship between housing policy and urban health inequities.
Roshanak Mehdipanah
Roshanak Mehdipanah is an Assistant Professor in the Department of Health Behavior and Health Education at the School of Public Health at the University of Michigan. Her research focuses on aspects of urban health including urban renewal, planning, housing, and gentrification and their impacts on health inequalities. She has led several projects on housing and health including health evaluations of housing policies on affordability and discrimination within the U.S.
Margaret Dewar
Margaret Dewar is Professor Emerita of Urban and Regional Planning in the Taubman College of Architecture and Urban Planning at the University of Michigan. Her research addresses remaking cities following abandonment and strengthening deteriorated neighborhoods. She has authored several articles on tax foreclosure and on reuse of property after foreclosure. She has a PhD in urban studies and planning from the Massachusetts Institute of Technology.