No clear path forward to compensate Detroit homeowners overtaxed by $600 million

Originally published by Outlier Media in The Dig.

Before COVID-19, one of the most talked about issues was news that the City of Detroit collectively overtaxed homeowners by at least $600 million between 2010 and 2016. And, at least 53% of the assessments were in violation of Michigan’s Constitution. 

The sense of urgency about redressing the overtaxed has faded, but many policymakers, activists and experts agree there should be some type of remedy for overtaxed residents. But after two failed attempts in the last year—one at City Hall and one at the ballot box—the path forward for relief remains unclear.

Now, those who were taxed at high rates—many of whom lost their homes to foreclosure—are left wondering if they’ll ever get back what they lost, even partially.

Some haven’t stopped in their efforts. Detroit Action, a grassroots organization advocating for compensating overtaxed Detroiters, has been building a coalition of groups and residents to lobby policymakers. 

“Residents should be made as whole as possible,” said Jennifer Disla, co-executive director of Detroit Action. 

Here’s a refresher on the ideas that have failed, those that are still viable and the programs helping Detroiters with tax debt.

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Reviving Proposal P

The Charter Revision Commission, created after the 2018 election to amend the city’s charter, looked to address the over assessments through a new charter, called Proposal P, on the 2021 primary ballot. Had it passed, the new charter would have created an Overassessment Relief Program and provided $1,000 in annual tax credits to any overtaxed homeowner until they were paid back the amount they were overtaxed.

Although Proposal P was rejected by voters, many individual subsections, including the Overassessment Relief Program, can still be adopted by the City Council and Mayor Mike Duggan. 

“Just because Proposal P wasn’t approved, that doesn’t mean the legislature and executive are off the hook for adopting good policy recommendations,” said Peter Hammer, a professor of law at Wayne State University, who said he thought Detroit voters should have adopted the revised charter.

Nicole Small was a member of the Charter Revision Commission and is currently running for an at-large seat on City Council. If elected, she has pledged to reintroduce the Overassessment Relief Program.

“This is something that’s very obtainable with the right leadership in place,” Small said. 

One thing Proposal P left out was a way to compensate the at least 28,000 overtaxed residents who lost their homes to tax foreclosure. Small suggests that those homeowners should be eligible to buy a Detroit Land Bank home for $1 and have access to newly created city-funded home repair grants. 

“Just giving someone a Land Bank home is going to cost them more than they can afford,” she said. “Without a grant program, it’s not a solution to the problem.”

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City proposals

Mayor Mike Duggan opposed Proposal P and has said Small’s proposal would require the city to raise taxes, which would be unfair to residents who utilized the appeals process and got their property taxes reassessed. 

In the past, however, the tax appeals process has favored landlords and commercial property owners over owner-occupied homeowners. Between 2015-2017, owner-occupied homes accounted for just 15% of all decisions involving Detroit properties at the Michigan Tax Tribunal, the administrative court that handles tax appeal cases. 

A Working Group led by City Council President Pro Tem Mary Sheffield released a report soon after the extent of the overtaxation was revealed by the Detroit News. The group’s report came up with a number of closer to revenue-neutral options for overtaxed people to receive compensation. Some of those recommendations include waiving requirements for the city’s 0% Interest Home Repair Loan program, discounted prices to Detroit Land Bank property for homeowners, access to affordable housing funds and more. 

Duggan introduced a $6-million package for City Council approval in late 2020 that included some of those options, along with giving the overtaxed priority in affordable housing, job opportunities and other benefits. But City Council rejected that proposal in a 5-4 vote. At the time, critics said the sum wasn’t large enough and because over assessments from 2014 on were not included. 

The Mayor’s Office and City Council haven’t come to an agreement since. The next council will have at least four new members; any agreement will likely have to wait until they’re seated.

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Ask a billionaire (and other lifelines)

Billionaire Dan Gilbert, through the Gilbert Family Foundation, committed $15 million to erasing tax debt for as many as 20,000 low-income Detroit homeowners as part of a $500-million pledge to Detroit’s neighborhoods. 

To qualify for the Gilbert program, called the Detroit Property Tax Fund, homeowners must first enroll in the Pay As You Stay (PAYS) program, which launched in 2020. 

The city has estimated that about 31,000 residents could qualify based on income for the PAYS program, which reduces the debt burden for homeowners behind on their property taxes. 

But as of March this year, fewer than 5,400 Detroit homeowners with tax debt have gotten onto a payment plan since it launched. Wayne County has suspended foreclosure of occupied homes through March 2022. 

So far, 1,000 Detroiters have received money from Gilbert’s Detroit Property Tax Fund since it was launched in March.

Homeowners below a certain income level are also eligible for a full or partial exemption on their taxes through the Homeowners Property Tax Assistance Program (HPTAP). According to City Assessor Alvin Horhn, all residents who received an exemption last year are eligible for one this year because of  a change in state law. 

In total, about 13,000 homeowners are enrolled in the program this year, though his office estimates that somewhere between 22,000 to 25,000 might be eligible. 

“The city doesn’t want your house. The county doesn’t want your house,” Horhn said. “If you’re having trouble, just ask, and we’ll do everything we can to help.”

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Obstacles to compensation

Mark Skidmore, an economics professor at Michigan State University, who co-authored a paper in 2017 identifying Detroit’s overassessment problem, said that a program to compensate overtaxed residents “would be really a big move to improve the social contract between the citizens and city.”

But Skidmore also cites several potential issues. Determining the precise amount each resident was overtaxed would be “tricky and potentially contestable,” he said. “To do it for every home would require going back in time and looking at what the sales prices suggest the assessment should have been and mapping that with each taxable value, which differed depending on length of homeownership.”

The city undertook a complete property value reassessment in 2017, which lowered most homes’ assessed values. But those assessments would have been substantially lower if done in 2010. 

Determining the precise amount a homeowner was overassessed would be “extremely difficult,” said Horhn. “And the further we get away from that time period, the more difficult it becomes.” 

The biggest hangup, however, is the cost. The $600-million price tag would be difficult enough for the city to afford, but that estimate is almost certainly conservative. The Detroit News analysis didn’t look at the years prior to 2010, when home values were declining after the start of the Great Recession between 2007 and 2009, but hadn’t totally bottomed out. 

If Small’s plan were passed, it would also require the city to compensate people who lost their homes—a group that was not only overtaxed, but also missed out on property appreciation. 

This enormous sum could put some tough questions to the city about paying for core services. 

“Would people who were overtaxed rather have their lighting fixed, roads plowed and have improved safety? Or would they rather have their money back?” Skidmore questioned.

Christopher Berry, academic director of the Center for Municipal Finance at the University of Chicago, co-authored a paper in 2019 that linked overtaxation to tax foreclosure. (The paper’s co-author, Bernadette Atuahene, a law professor at Chicago-Kent College of Law, has been on the forefront of the effort to compensate Detroiters.)

Berry is skeptical the city can afford compensation for everyone wronged. 

“The charter’s proposal is very open-ended as to what the city’s liability would be,” he said. “So many people were overtaxed for so long by so much, I think it’s just financially unfeasible to make everybody whole.”

But Hammer, the Wayne State law professor, argued that “the city saying it stole so much it can’t pay it back isn’t very persuasive.” 

He also said the city regularly provides millions of dollars in subsidies to developers, like Tax Increment Financing (TIF), wherein the city invests in projects by “capturing” the increase in property tax over time. 

“You don’t hear the city claim poverty when it wants to subsidize a multi-billion dollar development or write off millions of dollars for TIF incentives,” Hammer said. “We should be consistent about why and where we’re spending money and who’s benefiting.”

Berry also said that overassessment continues for Detroit’s poorest residents. 

“Detroit has one of the most regressive tax systems in the United States,” he said, referring to a situation where the lowest value homes are assessed as much as 15.68 times more than the highest-valued homes. 

“While it’s great to talk about fixing past injustices, the city should make sure to end injustices that are ongoing.”