At the I-94 service drive near Gratiot Avenue in Detroit sits a vacant lot. It’s been that way for 17 years.
The lot at 9211 E. Edsel Ford Fwy was cheap to buy, going for $300 at the 2004 Wayne County Tax Auction. And it’s been cheap to own: The tax bill was roughly $20 a year. Its low cost created little incentive for its owner to do anything with the lot other than to let it sit, leaving it as the cliche of Detroit: a portrait of neglect.
But in 2018, the lot’s owner Michael Kelly stopped paying the property taxes, letting the lot re-enter this year’s Wayne County Tax Auction; it was one of nearly 1,500 vacant properties listed in October.
Kelly was able to hold onto the lot and make no improvements to it because there are few formal deterrents to large-scale speculation in Detroit.
“It is just incredibly cheap to hold vacant property in Detroit,” said Nick Allen, a doctoral student in urban studies and planning at MIT and former Detroit Revitalization Fellow. Allen pointed out that this status quo increases the potential for blight and gives these speculators a peculiar hold over city planning.
“These individuals have enormous power to influence the future of any development project in the city, and huge bargaining power whenever the city needs that land at any given moment,” he added.
In response, a growing coalition of academics, housing activists and developers are calling for a revision of the city’s tax code, asking for what they call a split rate tax. This change would split up the land and any structures or improvements on the land, treating them as two different units to tax. A higher millage rate would then be applied to the land and a lower one to the structures or improvements.
Those advocating for reform believe it would make speculation more expensive, while making investment and upkeep cheaper.
“It wouldn’t change the city overnight, but it would dramatically change what choices make the most sense with each property, and who can benefit from those choices,” said Allen, who formerly advised the Detroit Economic Growth Corporation.
Under the city’s current tax code, a tax bill is determined by a property’s taxable value, divided by $1,000 and multiplied by the local millage rate. The taxable value is tied to a property’s assessed value, which means that occupied, or well-maintained properties are at a disadvantage. Put another way, well-kept properties would have a higher assessment than vacant or abandoned properties.
The tweak, according to its proponents, would be a game changer.
“The incentive regime right now rewards people for doing nothing with land,” said Matt Roling, executive director of the Office of Business Innovation at Wayne State University and an advocate of the reform. “If you’re improving your land, you get punished because that’s where the taxable value is stored.”
Reducing speculation
The annual Wayne County Tax Auction has been the primary engine for speculation in Detroit over the last decade. High property taxes—which have been historically overassessed—and an aggressive tax foreclosure system set the stage for cheap land to be purchased and then sat on.
A report on the consequences of speculative bulk buying found that speculators accounted for 90% of all purchases in the Wayne County Tax Auction between 2005 and 2015.
For many of these purchasers, it makes more financial sense to wait until development crops up nearby, which tends to increase the value of undeveloped land nearby, than do anything to the land.
“If you’re a savvy person who understands where land value is in Detroit and where investments are likely to happen, all you have to do is purchase one vacant parcel that comes through the tax foreclosure process,” Allen said.
This practice was something Detroiters got to see playout in 2019 when the City of Detroit was tasked with assembling 215 acres of land that Stellantis (formerly FCA) said it needed to enhance its existing Jefferson North Assembly Plant and build a new Jeep factory nearby at Mack and St. Jean. In order to make the deal happen, the City ended up negotiating with several groups—DTE Energy, Soave Enterprises, the Moroun family’s Crown Enterprises, Hantz Woodlands and Kelly—who all owned land that was needed.
Kelly, for example, had five parcels that the City wanted, many purchased between 1999 and 2003. In exchange, he got 15 new properties and was released from more than $1.1 million in unpaid property taxes and more than 800 blight tickets.
A split rate tax wouldn’t eradicate this behavior overnight, but its advocates say it would raise vacant land taxes in a way they believe would make it harder for large-scale speculators to easily shoulder the costs of playing a waiting game.
“Make the carrying costs of speculation much larger,” Allen said. “So, all this inefficient activity, all of this speculative activity, suddenly becomes more costly, and people have to make decisions other than hold indefinitely.”
Incentivizing development
A split rate tax can simultaneously encourage development and home improvements.
“Taxing land at a higher rate than improvements creates a powerful disincentive against keeping land in an undeveloped or underdeveloped state, proponents of the split rate tax claim,” according to a 2003 paper by Connecticut’s Office of Legislative Services. The state passed a law in 2009 allowing cities to utilize a split rate tax.
A report from the Lincoln Institute of Land Policy, a Massachusetts think tank that aims to “improve quality of life through creative approaches to the use, taxation, and stewardship of land,” found Detroit has some of the highest property taxes rates for commercial and residential properties in the nation—with residential property taxes clocking in roughly 2.5 times higher than the average for 53 other cities they studied.
The report concludes that Detroit’s rates are high due to low property values. In order to raise enough money to support municipal services, cities with low property values have to have a higher tax rate.
Allen added that this pressure increases with a declining population.
“Local governments have to keep service levels constant and meet debt payments,” he said. “With a declining base, the only way to do that is raise rates or find new revenue every year. So there’s a debt trap problem.”
According to a February 2021 report by the city of Detroit’s Legislative Policy Division, in 2019 the average residential property tax millage rate across the state was 42 mills. Detroit’s was 1.6 times higher, clocking in at 67.6 mills.
To make the case for tax reform, Allen broke down these differences using real properties in various municipalities in his research.
A $75,000 house in Detroit could have an annual tax bill of $2,550. A similar home in Royal Oak, would likely sell for $89,000 but have annual taxes at $1,845. In Grand Rapids, the home could sell for $95,000 with taxes at $1,615.
It’s a fact that makes development unattractive in Detroit, according to Allen, who said his time at the Detroit Economic Growth Corporation helped him see how much development was dependent on tax incentives. Without them, he said, the taxable land value would be too high—and taxes would undermine a project.
“Detroit’s tax rate is so high, which means you’re constantly fighting against that when you invest in Detroit,” Allen said.
While tax abatements can help a few projects a year, he believes a split rate tax would spread that benefit across all the city’s property owners putting their parcels to productive use.
Side-lot owners or urban farm owners would see increases in their tax bills, and the formula for split rate tax is small increases on land prices. In other words, upticks would be mostly felt by large-scale owners with tons of land.
“We think anybody with three or fewer side lots will see a tax reduction. That covers about 98% of purchasers,” said Allen, who points out that the side-lot program is tied to home ownership so while the land tax may go up, it would coincide with declining taxes on the physical property.
“Urban farms vary. If you’re trying to run a for-profit farm, this probably makes things a little harder,” Allen continued. “But almost every farm I’ve checked either runs as a nonprofit (nontaxable) or on a public land lease (like D-Town Farm).”
Changing the tax code
But how would the tax rate large-scale affect property owners in practice? In 2012, businessman John Hantz bought more than 1,500 vacant and blighted properties from the City for $520,000 cash at closing—around 8.3 cents per square foot. He promised to start a tree farm on the land. He bought an additional 450 parcels in 2019.
An Outlier analysis of Hantz’s approximately 2,000 properties found that in the last tax year, the property owner spent about $91,000 for taxes on his vacant land, or an average of about $45 per parcel. Under a split rate tax, his taxes would be closer to $120 per vacant parcel, or about $240,000 in taxes per year.
Hantz is a complicated figure among the city’s large-scale property owners. His organization and volunteers mow the lawns of his lots. He also has demolished structures on properties he owns. Still, his investment, which had few overhead costs, made waves this year when Crain’s Detroit Business reported that Hantz Woodlands had quietly sold nearly 150 parcels, amounting to a profit of $2.8 million, since 2019.
For the city to be able to enact a split rate tax, legislation would need to be passed in Lansing, and so far the city has not proposed anything.
“If the rate is set high enough, nobody will buy tax foreclosed vacant property and the city and Detroit Land Bank Authority will end up owning much more vacant property than they do now,” John Mogk, a Wayne State University law professor, wrote in email surmising why the City of Detroit has not pushed for the tax change.
Slow movement also may be due to a general aversion to tax reform, from both politicians and citizens.
“Anytime you talk about a fundamental reform of the tax structure people have reasonable caution about all the other things tied into that,” Allen said. “How does this affect school revenues? How does this affect individual tax increment finance in the city? How does it affect my home?”
Detroiters may be particularly distrustful. For years, post-recession property taxes were not properly re-assessed, meaning many Detroiters overpaid—or lost their homes—due to exorbitant taxes.
“I think,” Allen said, “because property taxes have been such a livewire issue for so long, voters have a gut reaction that any changes in the tax code can’t be in their favor and that there has just been so much damage inflicted on people that trying to explain that there is this alternative is hard.”
ALLIE GROSS is a freelance journalist and contributing writer for Outlier Media. Reach her at allison.elisabeth@gmail.com. Outlier Media can be reached at outlierdetroit@gmail.com.