Property Tax

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.