Property taxation in a shrinking city

ABSTRACT

This study shows how the property taxation system in Detroit, Michigan, exacerbated neighborhood destabilization even after several programs were introduced to mitigate its amply documented failings. It delves into reasons why this occurred, summarizes reforms enacted after 2017, and proposes additional ones. The study draws upon property records, tax-auction sales information, direct observations of more than 5,000 auctioned parcels, interviews with occupants of a random sample of those properties, and U.S. Census Bureau and U.S. Postal Service data.

KEYWORDS:

• Tax policy
• state and local governments

Acknowledgments

The authors are grateful to the Sociological Initiatives Foundation for financial support for this investigation, to Cynthia Bell, Arthur Howard, Dominic Sweeney, and Clark Washington for their assistance in data collection, to Nick Downer and Matt Hampel for data wrangling, and to Margaret Dewer and the anonymous referees for their many invaluable comments on drafts of the manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1. A July 2020 Michigan State Supreme Court ruling may fundamentally alter the practice of Michigan counties to retain surpluses from the sale of tax-foreclosed properties. Reversing a decision of the Court of Appeals in Rafaeli, LLC v. Oakland County, the Supreme Court ruled unanimously that the county practice constituted “an unconstitutional taking.” In December 2020, Governor Gretchen Whitmer signed into law Public Act 256, which clarifies permissible uses of proceeds from sales of foreclosed properties and procedures through which a former owner may claim surplus proceeds from the sale or transfer of property. According to the legislative analysis of the bill, any excess proceeds may be applied only toward “costs incurred for the foreclosing unit in connection with the forfeiture, foreclosure, sale, maintenance, repair, or remediation of foreclosed property; the defense of title actions or other legal expenses; administration of the act; or for payment of claims for remaining proceeds or other amounts ordered under the codification of the Michigan Supreme Court ruling in Rafaeli” (House Fiscal Agency, 2020). It remains to be seen how the tax reversion process in Michigan will be affected.

2. The WCTO tax payment website is https://pta.waynecounty.com/. The Detroit Open Data Portal website is https://data.detroitmi.gov/pages/parcel-viewer/.

3. USPS carriers exercise judgment in recording an urban address as being vacant, using such indicators as: appearance, accumulated mail, or notice that the customer is residing at a new address. The carrier leaves a notice that provides a means for a resident to convey that the address is in fact occupied. Data are updated monthly. For additional details, see https://regrid.com/vacancy/.

4. The exterior condition of structures was coded according to the following criteria. Good: No obvious repairs needed. Fair: Needs minor repairs—e.g., windows and doors intact, but roof may be missing shingles; exterior elements may be sagging; paint/siding missing; graffiti. Poor: Needs major repairs—e.g., windows and doors broken or boarded up; light fire damage that can be repaired; non-load-bearing elements like awnings, porches collapsed; holes in roof. Suggest Demolition: No longer shaped like a building; damaged beyond practical repair or renovation; structural damage including collapse of roof, walls, foundation.

5. In determining whether a residential property was unoccupied, surveyors considered first whether it was boarded up, burned out, or otherwise plainly uninhabitable. Houses that lacked utility meters or had broken windows, accumulated flyers, or other clear indicators of extended vacancy were also coded as being unoccupied. Conversely, surveyors considered whether a property looked reasonably well maintained, whether a working vehicle was parked in the driveway, or whether people were visible in the house or on the property. A few duplexes that appeared to have one unit occupied and one unoccupied were coded as “partially occupied.”

6. The sample initially included 400 residential properties. Eleven were eliminated during the survey because they lacked habitable structures or were not accessible.

7. Criteria for coding the former owner are as follows. Large Investor: corporation or investment group, or 5 or more properties foreclosed. Small Investor: 2 to 4 properties foreclosed, or 1 non-homestead property foreclosed. Individual: 1 foreclosed property, listed as a homestead (including 111 lots). The coding is based upon tax foreclosures in a single year and thus provides a conservative estimate of the fraction of those properties that were owned by large investors.

8. Tax foreclosure rates were calculated as the number of 2017 tax foreclosures of housing units in a census tract divided by the total number of housing units in the tract as estimated in the U.S. Census American Community Survey, 2015–2019. Some researchers may prefer to exclude large multi-unit apartment buildings from the calculations. We elected not to do so, for several reasons. First, such buildings can and do experience tax foreclosure (Arsen, 1992). That has not occurred in Downtown/Midtown Detroit recently largely because property owners there (whether of entire rental apartment buildings or of individual condominium units) enjoy substantial tax abatements, while residents of most other Detroit neighborhoods do not. In fact, there were zero tax foreclosures in 20 of the 21 census tracts (with a total of more than 31,000 housing units) comprising Detroit’s 7.2 square-mile “Greater Detroit” in the year under study, and only one such foreclosure in the remaining tract; hence, the question of whether to include or exclude such buildings from the rate calculation is moot. More importantly, our measure enables inquiry into the differential impacts of tax foreclosures upon all residents, whether they be homeowners or renters, and upon all neighborhoods.

9. Criteria for coding the buyer are as follows. Large investor: corporate or investment-group or 5 or more properties purchased. Small investor: 2 to 4 properties purchased, or 1 property purchased with a different owner’s address on the deed. Owner occupant: 1 residential structure purchased, with the address of the new owner on the deed being that of the purchased property.

10. The comparatively low vacancy rates for properties sold to intended owner occupants reflect the fact that, according to publicly available records, roughly two thirds of them were purchased by households that had owned and/or occupied them when they were foreclosed. Many of such purchases in 2017 were made indirectly via the nonprofit Tricycle Collective (Baker, 2019).

11. Pfeiffer and Lucio (2015) found that the increased availability of rental housing in Phoenix, Arizona’s more advantaged neighborhoods as a result of investor purchases of foreclosed homes resulted in an expanded “geography of opportunity” for lower-income households, at least in the short term. Additional research is required to determine whether that also holds true in Detroit, despite the other dysfunctional aspects of property taxation and foreclosure there.

12. We applied the same analysis exclusively to houses auctioned in 2017 that had been identified as being owner occupied. The results changed only minimally: of 604 such properties in the MacDonald-Betancourt database, 70% had been over-taxed by at least 50% in 2013, and 51% had been over-taxed by that amount in 2014.

13. Hodge and Komarek (2016) found that the financial benefit of the NEZ exemption is illusory for homeowners who purchased properties recently in NEZ-eligible neighborhoods, because the projected tax savings are fully capitalized into the sale price. Moreover, many homeowners fail to apply for the exemption. Regardless, the point remains that policymakers have focused tax relief largely upon Detroit property owners and neighborhoods that arguably need them least.

Additional information

Funding

This work was supported by a grant from the Sociological Initiatives Foundation.

Notes on contributors

Gregory B. Markus

Gregory B. Markus is Professor Emeritus (Political Science) and Research Professor Emeritus (Institute for Social Research) at the University of Michigan, where he received his PhD in 1975 and remained until his retirement in 2014. He is also founding organizer of Detroit Action Commonwealth (DAC), a nonprofit organization of low-income and indigent Detroiters that began in 2008 at a soup kitchen on the city’s East Side. He divides his time between Michigan and Honolulu, Hawaii.

Jerry Paffendorf

Jerry Paffendorf is co-founder and Chief Executive Officer of Regrid (formerly Loveland Technologies). Regrid began by mapping property information in Detroit and now maintains a nationwide dataset of more than 152 million property boundaries and records that covers 99% of the U.S. population in a seamless, standardized quilt of property information for maps, apps, and spatial analysis. He earned a BFA from Montclair State University and an MS in Studies of the Future at the University of Houston–Clear Lake. He is working on a book about what happened during Detroit’s peak tax foreclosure era.