Detroit’s proposed land value tax – also known as the split-rate tax plan – is generating heated discussion in and outside the Motor City.
If the LVT is implemented, land would be taxed at a higher rate than property with structures. Some estimates place the tax savings on property with buildings between 25% and 30%.
Proponents such as Detroit Mayor Mike Duggan say the LVT will spur landowners to develop vacant or disused properties and provide property tax relief to homeowners.
“Detroit has some of the highest property taxes in the country,and this has been a disincentive to improving the vacant land in the city,” Mackinac Center for Public Policy Fiscal Policy Director James Hohman told The Midwesterner. “A land value tax proposal would address this problem, and it’s good to see lawmakers considering it.”
Opponents call the plan a sop to wealthy business owners and a detriment to urban farmers and scrapyards. Philip Kafka, for example, told Crain’s Detroit Business he opposes the LVT. The owner of 20 acres of city property said the measure of a property’s value is whether it’s put to productive use regardless of the presence of buildings.
“At the end of the day, all I know is if the city raises taxes on land I have as public parks, it’s bad,” Kafka said, adding: “Even if it benefits me, I don’t want to be in a city that discourages the use of farms and public parks. It’s not as interesting a game anymore if it’s discouraged.”
In order for the LVT to take effect, the Michigan Legislature needs to amend the state’s property tax law. From there, the Detroit City Council would be required to accept the LVT before presenting it to Wayne County voters.
“Any land value tax ought to clearly ensure the state constitution’s taxpayer protections remain, like local voter approval of new levies and automatic reductions in rates when the tax base increases above inflation levels,” Hohman said.
Detroit has the highest effective residential property tax rates, second-highest effective commercial property tax rates, and fourth-highest effective property tax rates of the country’s major cities,according to the Lincoln Institute of Land Policy’s annual 50-state property tax comparison report.
According to John Mozena, president of the Center for Economic Accountability, “That means that Detroiters and Detroit-based businesses are paying a larger percentage of their properties’ value in taxes each year than virtually anywhere else in the country.”
In an email to The Midwesterner, Mozena explained: “For decades, the City of Detroit’s economic development policy has involved giving a few well-connected companies and developers giant tax breaks while requiring all the other businesses in the city to pay some of the most confiscatory property taxes in the nation.”
MORE NEWS: Northern Lights could be intense this winter
He continued: “Apartment building owners in Detroit also pay the highest effective property tax rate on those properties in the country, which plays a huge role in the city’s affordable housing challenges. If you were an investor with $10 million or so to spend on constructing an apartment building someplace, why would you do so in Detroit where you’d be paying 2.5 times the national average of your new building’s value in taxes each year?”
Mozena said he applauds Detroit’s leaders willingness to consider a solution that’s not what he called “just more of the same failed top-down, subsidy driven strategy but with bigger price tags for taxpayers. I don’t think anyone knows for sure whether the land value tax is the right idea for Detroit, but the city’s leaders deserve credit for simply beginning the discussion and opening the door for creative solutions that address Detroit’s fundamental challenges.”
Even if the land value tax isn’t the answer, Mozena said, he still considers it a hopeful sign to see that kind of discussion taking place at a high level. He does admit, however, several questions regarding the LVT remain.
“One practical question I have is how this tax would interact with the many economic development subsidy deals currently on the books that are based on companies getting property tax breaks for years or even decades to come,” Mozena said. “For instance, a Tax Increment Finance, or TIF, district is essentially based on tax revenues increasing over time as construction projects increase land values over what they would have been without the new construction. But a land value tax is designed specifically not to spike property taxes when improvements are made to a specific property, which negates the entire mechanism of a TIF district,” he said.
“If nothing else, that’s a complication for the ultimate implementation of this kind of tax in the city as there would need to be a lot of unwinding done of those mechanisms across Detroit; while at worst it might be a deal-breaker if major, politically powerful property owners pushed back too hard against the end of their sweetheart deals.”
In a blistering Detroit News op-ed last week, Charlie LeDuff expressed his opposition to the LVT.
“Under Mayor Mike Duggan’s new scheme, tax on land would triple and the tax on any existing structures on that property would be cut by 30%. This will supposedly ignite development in Detroit by discouraging speculators sitting on 30,000 vacant lots,” LeDuff wrote.
But, he added, LVT proponents are relying on “cherry-picked” data from a study conducted in “Pittsburgh and 18 podunk Pennsylvania towns that have experimented with this idea.”
LeDuff added that Americans for Tax Reform’s Grover Norquist opposes the LVT idea. He also quoted the former mayor of Pittsburgh,who said the LVT will only work in an area, unlike Detroit, with high-demand for land.
“[T]he study was paid for by Invest Detroit, a consortium of downtown Detroit bigwigs with big buildings who already get big tax breaks,” LeDuff wrote, adding billionaire Detroit businessman Dan Gilbert controls a “real estate portfolio of at least 100 downtown buildings…. Skyscrapers have relatively small land footprints compared to the size of the structures. They would reap millions.”