Like many U.S. cities, Detroit suffered a housing collapse during the Great Recession. The crisis delivered a serious blow to the city’s already struggling revenue stream. Unlike other cities, however, Detroit’s foreclosure crisis wasn’t driven by unpaid mortgages. Instead, one-third of its properties went into foreclosure because owners couldn’t—or wouldn’t—pay their taxes. 

Even in 2016, seven years after the recession ended, the city’s property tax revenue totaled just $90 million, compared to $240 million in 1995, according to the Lincoln Institute report Detroit and the Property Tax. But new approaches to tax collection, including payment kiosks and a homeowner assistance program, are making it easier for residents to pay their bills. 

Along with Newark, New Jersey, Detroit’s population is the most underbanked among large U.S. cities. About 20 percent of Detroiters do not have a checking or savings account. Another 30 percent rely on alternative financial services, such as check-cashing, payday loans, and pawn shops, according to a study by Washington, D.C.-based nonprofit Prosperity Now. Many residents find it difficult to pay taxes—no matter the amount—because they’re paying in cash. 

To serve this population, the city has partnered with a payment company, DivDat, to install dozens of multilingual kiosks throughout the city. Residents can use cash, checks, or credit cards to make payments or put down deposits on nearly all of their local bills or fines without a transaction fee. Users can also use the kiosks to look up their upcoming bills and account status.

Bruce Babiarz, DivDat’s director of marketing, says the initial response has shown that making it easier to pay taxes can solve a significant portion of Detroit’s collection issues. “If you are paying by cash, it used to be that you had to show up downtown between the hours of 9 a.m. and 5 p.m.,” he says. “If you’re working, that’s a significant challenge.”

Babiarz says during the first full year of operation in Detroit, the kiosk network collected $2 million in court fines alone for the city. The company’s data show that 40 percent of court tickets paid at a kiosk were after 5 p.m., while another 30 percent arrived on weekends. 

“Our basic model is, if people were given a free way to pay at their convenience, would they?” says Babiarz. “I think this is really good evidence that they will.” If successful, this method has implications for other cities with large underbanked populations, such as Newark, Dallas, El Paso, and Houston.

In Detroit, the kiosk program is just one of several efforts to make it easier for residents to pay their property taxes. The city and county also manage programs that make it possible to pay delinquent taxes in installments and reduce the final amount owed. For example, the Pay As You Stay (PAYS) program restructures debt and can dramatically cut payments. In one example of the program’s impact, the payments for a qualifying homeowner would be reduced from $192 a month for 5 years to $29 a month for 3 years, according to the CFO’s office.

Mark Skidmore, author of the Lincoln Institute study on Detroit and a Michigan State University economics professor, says programs that allow residents to pay property taxes in installments or electronically tend to improve collection rates. While they have not been widely available in the U.S. to date, such programs exist in the United Kingdom, among other countries. 

Another way to improve collection rates, according to the recommendations in Skidmore’s study, is improving public services. This idea of “inspiring people to pay taxes,” says Skidmore, is a more organic process, but there are recent signs of progress there too.

For one, home values in Detroit are rising as the local economy has rebounded—last year’s 20 percent citywide increase in home values was the largest overall increase since 1997. In addition, Skidmore’s recent research indicates that tax payments can improve even on the promise of economic development and investment. In particular, he says, the tax delinquency rate around the Woodward Corridor running through the heart of Detroit dropped following the announcement of a new light rail line along that thoroughfare.

Today, the property tax collection rate is 82 percent, according to the city’s most recent financial statement, up from about 50 percent in 2013. Tax foreclosures on homeowners have dropped by 90 percent, city CFO David Massaron noted in a recent op-ed. Still, the city is still at least 10 percentage points below the property tax collection rate for most other U.S. cities.

And it is still dealing with the fallout of missteps in the mid to late 2000s, when it failed to adjust assessments fast enough in response to plummeting home prices. This led to many property owners getting tax bills nearly equal to the market value of their properties. For example, Detroiter Anna Bolden told the Detroit News she bought her brick bungalow in a tax foreclosure auction for $4,800 in 2011. She received a tax bill for $2,600 because the city had assessed her house at $57,000, about 12 times the recent sale price.

By 2012, there were a full 77 blocks in the city with just one owner who paid taxes, according to the Detroit News. Skidmore says the highest tax delinquency rate during this time was among rental property owners who would buy a property for cash, keep the rental income, and not pay taxes. After a few years, the property would go into tax foreclosure but losing the property was still cheaper than paying taxes, he says. 

“When property values collapse like that but tax obligations don’t, there’s a huge incentive to play the tax game and not pay your taxes,” Skidmore says.

The city entered municipal bankruptcy in 2013—for a whole host of reasons, not just its revenue collections—and emerged in 2014 with less debt but a depressed economy and a lot of trust to rebuild. Newly elected Mayor Mike Duggan began addressing the outdated valuations, immediately reducing assessments citywide by 5 to 20 percent. Over the next three years, the city assessments division got a 50 percent boost in staffing and conducted a formal citywide reassessment with oversight from the state.

Even as it improves its current assessment and collections system, Detroit has yet to find a satisfactory answer to those who did make their tax payments despite the fact that they were inflated. A recent investigation by the Detroit News estimates that the city overtaxed homeowners by $600 million in the seven years following the Great Recession. The Coalition for Property Tax Justice is demanding that the city make reparations, especially for the thousands of people who lost homes to tax foreclosure.

Mayor Duggan has acknowledged the over-assessment problem, but recently noted that the current law doesn’t allow for reparations. And the city, which expects about $100 million in property tax revenue this year, also can’t afford it. Currently, the administration is looking into whether Detroit can set up a fund to partially reimburse residents.

“I have for the last six years done everything legally possible to offset the damage of that,” Duggan has said. “We need to be honest about what is possible and what is not.”

Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center. 

Photograph: The property tax collection rate in Detroit is 82 percent. That’s up from about 50 percent in 2013, an increase the city has achieved with the help of several innovative programs, but is still about 10 percentage points lower than most other U.S. cities. Credit: Thomas Hawk/Flickr CC BY 2.0.

At a recent rally in front of Baltimore City Hall, activists sang, chanted, and otherwise voiced their view that the city’s major nonprofit institutions weren’t “paying their fair share” of property taxes.

The gathering came as the City Council explored renegotiating an agreement under which 14 nonprofit universities and hospital systems voluntarily pay the city a total of $6 million per year. Those payments are in lieu of the estimated $120 million they would owe if they were not exempt from taxes on their real estate holdings.

The voluntary agreement doesn’t expire until 2026. But with state lawmakers considering a plan to allocate $4 billion in new school spending in Maryland by 2030—including $329 million from the city of Baltimore—leaders in that city are eyeing nonprofits as a potential source of additional revenue. And they are not alone. Other cities, under various fiscal pressures, are also seeking to collect more revenue from payments in lieu of taxes (PILOTs), a tool used broadly in the Northeast and Midwest.

In Boston, home to the largest and most lucrative PILOT program in the country, incoming City Council President Kim Janey used her inaugural address to announce the formation of a committee that will reconsider the terms of the city’s decade-old PILOT guidelines. And newly elected New Haven, Connecticut, Mayor Justin Elicker campaigned on the promise of asking Yale University to increase its annual contributions from $11.5 million to $50 million on property worth roughly $6.6 billion within the city limits—a nearly fivefold increase, but still a fraction of the taxes a non-exempt property owner would owe. New Haven, which has one of the highest levels of tax-exempt property in Connecticut, has long struggled with finances and is facing a $50 million budget gap.

“I will be having very lively conversations with the university, because I think that the vast majority of New Haven residents feel like Yale can be doing much more to contribute to the city,” Elicker said upon taking office in January.

The relationship between nonprofits and cities is complex and occasionally contentious. Colleges, hospitals, and other organizations provide valuable services and benefits at little or no cost to cities, from health care to student housing. They are also often major economic engines. To acknowledge the fact that they rely on city services and infrastructure, many agree to make these voluntary payments. While it can be tempting to ask for more, experts caution against bringing nonprofits back to the table too frequently or too soon after an agreement has been reached.

“Cities should not be trying to renegotiate PILOTs on a regular basis,” says Adam Langley, associate director of tax policy and data initiatives at the Lincoln Institute of Land Policy. “It’s an issue of credibility and trust between the local governments and nonprofits.”

Langley cowrote a Policy Focus Report and Policy Brief on PILOTs with Lincoln Institute Resident Fellow Daphne Kenyon. The two say the long-term nature of most PILOT agreements, which typically cover a span of five to thirty years, helps provide a predictable revenue stream for cities and a known budget number for nonprofits. But there are some cases when it makes sense to revisit PILOTs before the specified renewal date. In 2011, for example, Providence, Rhode Island, was facing a $110 million budget deficit and possible bankruptcy. After Mayor Angel Taveras raised taxes, closed some public schools, reworked labor contracts, and suspended cost of living adjustments for public pensioners, he successfully negotiated PILOTs worth an additional $48 million over 11 years from the city’s seven largest nonprofits. “Everyone was taking a hit,” says Kenyon. “So within that context, revisiting a multiyear agreement would be more sensible.”

In Boston, the urge to revisit the current agreement is dictated less by a crisis and more by concerns about the role of “community benefits” in the funding formula. The city’s PILOT model asks nonprofits that own property worth more than $15 million to pay 25 percent of what they would have paid in real estate taxes. But it allows them to cover up to 50 percent of that payment with services that directly benefit residents of the city, such as scholarships, cultural events, preventive medical care, and the development of safe, affordable housing.

While giving credit for community benefits is considered a best practice because it acknowledges that nonprofits provide services that would otherwise not exist or would come out of city budgets, it’s also a primary target of Janey’s inquiry. “Some of our nonprofit partners use ‘community benefits’ in a loose way,” she recently told reporters.

Even if cities negotiate new agreements, there is no guarantee that nonprofits will pay. In fiscal year 2019, Boston requested a total of $109.1 million from nonprofits including schools, cultural institutions, and hospitals but received only $86.7 million—$34.2 million in cash and $52.5 million in community benefits. (In the first year after the guidelines were enacted, nonprofits contributed $21.9 million in cash and $21.9 million in community benefits.)

The difference in the amounts requested and received has to do with the voluntary nature of the payments. “This is not a tax assessment,” says David Thompson, vice president of public policy for the National Council of Nonprofits. “It’s not legally or constitutionally required. This is an ask.”

For her part, Janey sees the shortfall in collections as another reason to reexamine the structure of the program. “We’re leaving millions of dollars on the table that could be invested in our schools and housing and our roads,” she has said. “But we also need [local nonprofits] to do their fair share and contribute their full amount in terms of the PILOT.”

Kenyon and Langley suggest that it’s valid to ask whether the benefits counted as contributions are actually ones the community wants and needs. They also say a decade is a reasonable amount of time to go back and assess a PILOT program. But the process works best, they say, when officials approach it in a collaborative spirit.

“Public shaming is sometimes used to try to compel nonprofits to make contributions,” says Langley. “I don’t see a lot of evidence that’s an effective strategy.”

Instead, they recommend communicating respectfully, justifying the amount of a requested payment, and, when possible, earmarking PILOTS for public services consistent with a nonprofit’s mission.

Thompson agrees. He suggests officials approach nonprofits as partners and ask for contributions related to specific budget needs that directly affect the organizations. For example, an institution located in a high crime area might help pay for an increased police presence in the city. Or a city might put PILOT payments from a university toward improvements to public parks located near campus, as happened in Worcester, Mass.

“Nonprofits are problem solvers in our communities,” Thompson says. “It helps if you come with an approach of, ‘Can you help us? We propose increasing spending, but we also encourage you to solve this with a mission-based activity.’”

Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center. 

Photograph: Baltimore is one of several cities seeking higher contributions from tax-exempt nonprofits in the face of fiscal pressures. Credit: Opacity via Flickr CC BY 2.0.