Last week, the Detroit Public School Board approved a $700 million plan to upgrade their buildings in the district. The enormous capital improvement plan included funding for five new buildings, rebuilding and reopening several shuttered schools and undertaking renovations at nearly every school.
This eye-popping expenditure is just a fraction of what district leaders say —- after years of deficits and deferred maintenance — they actually need to turn the district’s facilities into places where children can focus on learning. For a complete overhaul of its buildings, the district estimates they would need to spend about $2.1 billion.
The district doesn’t have that kind of money because much of what DPSCD raises through tax millages levied on Detroit residents goes to pay off complicated debt obligations caused by state intervention, first through emergency management and then bankruptcy prevention.
A decent chunk is also “captured” by the city’s Downtown Development Authority (DDA). The authority has just that — state law gives it the power to seize a percentage of the revenue raised by Detroiters’ property taxes to give subsidies to developers in the greater downtown footprint. That’s revenue that could help pay off the district’s substantial debt, allowing it to focus on building upgrades sooner.
“One of the reasons why our facilities are in disrepair is because we do not have the revenue to maintain the capital infrastructure we have,” said Jeremy Vidito, chief financial officer at DPSCD.
DPSCD told Outlier it lost $24.7 million in 2021 due to tax capture. It’s expected to lose $726 million by 2056.
The Detroit Economic Growth Corporation, which manages the DDA, says without the subsidies provided through tax capture, downtown Detroit wouldn’t have been able to flourish over the last decade. Those incentives have provided jobs (though most of the better paying ones have not gone to Detroiters) and, crucially, raised property values.
Over the past three weeks, we contacted the DEGC by phone and email to respond to questions about its operations. It declined to answer even basic questions about how it determines the amount of taxes to capture each year or which developments it chooses to support. Instead, it released a brief statement by email attributed to Kenyetta Hairston-Bridges, DEGC vice president of real estate and financial services:
“[Tax] capture [can] offset, what are often, exorbitant costs associated with environmental remediation, site preparation and infrastructure improvements … Without this type of incentive, many cities would lose the opportunity for jobs generating economic development activity, as the properties would remain vacant due to the liability that accompany these properties and the financial challenges associated with redeveloping these sites.”
An increasing number of critics, however, say tax capture takes away funds from Detroit’s library and public schools systems that would be spent on crucial facility upgrades, forcing them to shutter buildings and defer maintaining others. It also saps money from the City of Detroit’s general fund that could go to essential services. In other words, through tax capture, the city is choosing future development over social goods and current needs.
To pay for their planned upgrades, DPSCD is spending nearly all of the $1.2 billion it received from the American Rescue Plan Act. Without the infusion of federal relief dollars, the buildings would have continued to decay either until 2040, when the last of the debt obligations will be paid off, or by issuing a round of bonds that would further raise property taxes on Detroiters.
“The District’s position has been that the School Board should always be empowered to review and approve or decline the tax abatements that impact the school district’s revenue,” Chrystal Wilson, a spokesperson for DPSCD, told Outlier by email. “The authority is taken from the elected School Board when the City makes that decision in isolation.”
How does tax capture work?
Downtown Development Authorities were created by the state of Michigan in the 1970s to help grow economic centers using tax dollars.
Revenue for these optional DDAs comes largely through Tax Increment Financing (TIF), a tool these authorities use to capture up to all of the taxes from year-over-year increases in property values from select projects or districts.
For example, the Book-Cadillac Hotel downtown generated $989,256 in property taxes in 2019. Detroit’s DDA captured $949,686, or about 96%, of those taxes.
The DDA then diverts this revenue through subsidies and loans to developers to offset the costs of property acquisition, site remediation and construction. The theory is that this investment will help property values continue to rise, enabling even greater tax capture and investment.
Detroit’s DDA is managed by the Detroit Economic Growth Corporation (DEGC), a quasi-governmental body with a board appointed by the mayor.
In 2021, the DDA captured more than $55 million in property taxes. That was nearly $6 million more than 2020, in part due to increases in property values.
Over the years, the DDA has contributed substantial funding to downtown projects, including renovation of the Book Cadillac ($12.5 million) and construction of the Q-Line ($9 million). Most recently, it issued a $8.5 million million loan to Bagley Development Group for the redevelopment of the United Artists Building.
Its largest contribution by far went to Little Caesars Arena, which it owns and leases out to Olympia Development. It subsidized $324 million of the project’s cost through a TIF plan.
Criticisms of tax capture
In recent years, Detroit has seen property values rise across nearly every neighborhood in the city.
Normally when property values rise, tax revenue rises as well, which can better support basic city services. But despite voters approving hefty millages, the Detroit Public Library (DPL) and DPSCD didn’t see equivalent increases in their budgets because much of those funds were diverted to the DDA. With few exceptions, DDAs can capture as much in taxes as it chooses in revenue that comes from millages — that includes Wayne County Community College and the City of Detroit’s general fund.
Around 90% of DPL revenue comes from a city tax millage. In 2020, that would have accounted for more than $25 million. But the library lost $3.3 million in potential revenue through tax capture that year — nearly triple the amount from 2015. Library officials want it back.
“Tax capture impairs our operations and puts us in a downward spiral financially,” said Russ Bellant, a member of the Detroit Public Library Commission.
The library system shut down its branches at the start of the pandemic, but has only reopened six of its 21 branches since. It’s planning on opening 11 more in July this year. But that expense, plus money spent on building maintenance, including about $2.2 million to replace roofs at three branches and change HVAC systems in two other branches, will require DPL to dip into its savings.
“Those 11 branches will put our operating costs at $3.1 million more than our revenue. We’re gonna be borrowing from our rainy day fund,” Bellant said. “Without tax captures the last two years, we’d easily have enough to cover these costs.”
Detroiters and other visitors to downtown do get to enjoy new amenities at restaurants, retail and venues built as a result of TIF. But at what cost?
The DDA’s substantial contribution to the Little Caesars Arena project has received criticism over the years as a generous giveaway and for failing to catalyze nearby development. “District Detroit,” promoted as a vibrant economic district by Olympia, has largely failed to materialize. The Ilitch family continues to maintain large portions of its land as surface parking lots.
“The Ilitches got money to do ‘improvements’ that really just serviced them and didn’t provide a lot of long term value or benefit to small businesses or residents,” said Francis Grunow, former chair of the Arena District Neighborhood Advisory Council set up to monitor the development. “It provided very focused benefits for the deal and a billionaire family that frankly has barely performed on even the most basic of those elements.
“They sought all that they could get and got everything,” he added.
After the arena project, Detroit voters approved a 2014 library millage renewal that also capped the amount of taxes that can be captured by the DDA of the DPL’s revenue at 5%. But the DDA is set to capture more than 13% this year.
The DEGC declined to respond when asked about this by Outlier, but has previously told the Detroit Free Press that “language in a ballot initiative cannot supersede state law.”
How much longer will we need tax capture?
That stated goal of tax-increment financing is to revitalize downtowns by catalyzing projects that wouldn’t be possible without incentives. That means there should also be a tipping point — a time when there is enough economic momentum to support development on its own.
How far is Detroit from a thriving downtown that is not a drain on other city resources?
“I would have said we probably reached that point before the pandemic hit,” said John Mogk, a law professor at Wayne State University who studies development deals. “Because the economy was improving dramatically on its own, there appeared to be a likelihood that the rehabilitation of buildings and new development could occur without having any significant financial or public incentives applied to the projects.”
The economic downturn, which has caused vacancy at downtown office space, may have changed the equation.
Without changes to the state law or priorities at the mayor’s office and DEGC, there is little that can be done by other parties to control the rates of tax capture.
The Mayor’s office was not able to respond to a request for comment by our deadline.
In April this year, Council President Mary Sheffield introduced a resolution promoting a change in state law that would exempt the Detroit public library and school systems from tax capture. But the resolution is just a recommendation and has no actual authority.
Detroiters pay some of the highest property taxes in the nation relative to income. The 20 mills levied on property owners is the highest amount allowed by the state of Michigan. Property values of Detroit homes are lower than their suburban counterparts.
Reforming the tax code is one possible way to make property taxes more equitable for low-income Detroiters. A split tax rate, which is currently under consideration by City Council, would increase the tax rate for land owners and speculators, while reducing the tax burden for homeowners and those that develop the land. The reform wouldn’t eliminate tax capture, but it would place more of the burden of property taxes onto speculators.
“Are we shackled to tax capture for the foreseeable future?” said Grunow, who is a proponent of split rate tax reform. “Or is there actually a version of the city where we can all be taxed in a way that is equitable and pays for basic services in a way that doesn’t punish the people who can afford it least?”
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