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CITY OF DETROIT CITY TAXES, THE CHARTER, AND NEIGHBORHOOD AND ECONOMIC DEVELOPMENT Taxes produce the money that the city government uses to pay for public services including police, fire, courts, and other public protection; public works; public health; parks and recreation; administration and management functions. Today, we’re going to talk about local taxes generally, about Detroit taxes specifically, about the tax burden in Detroit, and about how taxes relate to neighborhood economic development. State Law and City Taxes Cities do not have an inherent power to tax. Cities can impose only those taxes that are authorized by state law. In addition, the state constitution limits some taxes. For each tax, state law defines a tax base and a tax rate. The base is defined in state law, and can be modified only as allowed in state law (for example, by removing a parcel from the general tax roll and placing it on a special tax roll-we’re going to talk more about exemptions later). State law may fix the only tax rate, or the maximum rate. If state law sets a maximum rate (not an absolute rate), a local charter may limit that tax rate to less than the state allowed maximum rate (many city charters limit the maximum property tax rate for operations to less than the legal maximum of 20 mills). If the charter did contain a tax rate limitation, the charter would have to be amended by a vote of the people in order to allow a higher rate, but in no case could the rate exceed the statutory limit. In order to be effective, any new tax or higher rate of an existing tax contained in the proposed city charter would first have to be allowed by the state constitution and authorized in a state statute (approved by the state legislature and signed by the governor) and approved by a vote of the people of Detroit. This could be done at the same election as that for approval of the charter, or at a different election. For example, a local sales tax is used in some states, but language in the Michigan Constitution has been interpreted to prohibit local sales taxes in this state. A local sales tax or graduated income tax would require amending the state constitution. There are many operational reasons not to limit city taxes beyond what is required in the law: these taxes provide crucial funds to pay for essential city services; it is unlikely that a voluntary reduction in city-source revenues would be replaced by state or federal funds; and many believe that city services are already insufficient. Detroit Taxes Detroit has a more diversified tax structure than any other Michigan city. The City of Detroit imposes four main taxes, at the highest rates allowed by the state (there was a Headlee rollback of 48/1000 of a mill a few years ago): 2011 budget Property tax (19.9520 mills) $176,126,271 (general city operations levy) (8.9157 mills) 80,928,559 (unlimited tax debt service levy) Income tax (2.5/1/1.25) 215,000,000 Utility users’ excise tax (5%) 50,000,000 (police) Casino wagering tax (10.9%) 149,550,000 The total operating revenue from all city taxes is budgeted at $591 million = 45% of the general fund State revenue sharing payments to the general fund are $233 million = 18% of the general fund Other revenues are from various fees, charges, fines, sales, and earnings on investments (general fund total = $1.3 billion) The total budget includes state and federal grants, and enterprise fund revenues (total budget = $2.9 billion) Property Tax Historically, revenues from the property tax revenues have been stable and predictable, but recent reductions in real estate values has diminished the revenues from the property tax. All Michigan cities, villages, townships, counties, school districts, the state, and many special authorities levy a property tax. The Home Rule City Act (PA 279 of 1909) requires that a city charter provide for a property tax. The only tax referenced in the Detroit City Charter is in Sec 8-401: The city is authorized to levy property taxes at the rate of two percent (2%) of assessed value of all real and personal property in the city or to such other maximum limit as may be permitted by law. Included is the power to levy property taxes for public transportation and transit services to the maximum rate permitted by law. The subjects of taxation for municipal purposes shall be in accordance with state law. Property Tax Base The base of the Property Tax is real property (land and buildings) and personal property (business equipment, furniture, and fixtures) that has not been exempted. The total value of Detroit’s tax base for general operating purposes is $8.8 billion in 2010-11. The property tax base for paying debt service includes the value of Renaissance Zones, $284 million. The value of real and personal property in the property tax base is determined by the city assessor. There are numerous exemptions: Churches; nonprofit cultural institutions; government owned property (schools, parks, public office buildings, fire houses, police precincts, public universities, etc); and other nonprofit property is not on the tax roll. Property subject to specific state taxes: railroad and telephone property, intangibles (bonds, notes, leases, copyrights), motor vehicles Property subject to specific local taxes in lieu of property tax (industrial facilities tax, commercial housing facilities tax, neighborhood enterprise zone tax, enterprise zone facilities tax, technology park facilities tax , commercial facilities tax, obsolete property rehabilitation act tax, renaissance zone, mobile homes—these parcels are removed from the general tax roll and placed on the appropriate special tax roll. They are taxed at special rates (for example, 1/2 the statewide average) or on a historical base (such as the value of the parcel in the year prior to designation). Inventory property; special manufacturing tools Other Property in the various Renaissance Zones are exempt form most taxes, but are taxed for debt service. State equalized value is defined in the state constitution as not to exceed 50% of market value. In Detroit, lack of demand has resulted in very low market values for property. (There were over 102,000 vacant housing units in Detroit; 24.4% of all housing units were vacant, in 2009) In 2011, Detroit’s SEV is $11.1 billion. This is down from 2008, when SEV was $14.1 billion. Proposal A of 1994 limits the annual growth in taxable value on a per parcel basis to the lesser of 5% or inflation, which results in taxable value that is less than state equalized value. Property is reassessed to 50 percent of market value when it is sold. Detroit’s taxable value for operations is $8.8 billion Renaissance zones debt service only .3 $9.1 billion taxable In 2009, taxable value was $10.0 billion Rate The property tax rate is measured in mills: one mill is one tenth of one cent. State law allows a maximum of 20 mills for city operations, if the city’s charter allows that rate. Some city charters only allow a rate less than 20 mills. (There are other limits for other forms of local government, for example, a charter county may levy up to 10 mills.) Revenue from the 20 mill levy can be used for general operations, and an additional special debt service levy is used for paying the principal and interest on voter approved bonds that were sold by the city. Detroit property tax rate General city operations: 19.9520 mills $176 million Debt service 8.9157 81 million Total 28.8677 Library 4.6307 41 million Total 33.4984 mills $298 million The solid waste disposal tax of 3% was eliminated in 2006-07, and replaced with a residential fee of $240 (senior rate is $120). In addition to the levy that supports the City of Detroit, there are other property taxes levied on property in Detroit by other governmental entities: 6 mill state education tax on all property 13 mill debt service for Detroit Public Schools 18 mill non homestead school tax 14.0778 mills for the county incl Huron Clinton Metropolitan Authority, Wayne Regional Educational Services Agency, Wayne County Community College, Wayne County Parks, Public Safety, Detroit Zoo The total Detroit tax rate of 65 mills on homestead, and 83 mills on non homestead is the highest in the state. The average statewide homestead rate is 31 mills, non homestead rate is 48 mills. Headlee Amendment requires the rate to be rolled back if the existing base increases faster than the rate of inflation. That’s why the general operating rate for Detroit is 48/1000 less than 20 mills. Levy The tax levy is the tax base multiplied by the tax rate. The total tax levy on city property is $752 million (city is $297.9 million in 2011, Detroit Board of Ed was $254.6 million in 2010, state education tax $53.0 million in 2011, county was $132.9 million in 2010) Largest property taxpayers (2009) Chrysler Detroit Edison MGM Grand Detroit Riverfront Holdings Inc. General Motors Corp. Debt service levy for all full faith and credit obligations-bonds approved by voters Special assessments on taxable value of real property to pay for public improvements are levied on those parcels that benefit from the improvement. (Article 8, Section 6 deals with special assessments) Charter Section 8-403 defines a process for collection of delinquent city property taxes, based on sale of the delinquent tax roll to the city finance director. This was superseded by PA 246 of 2003, which requires that the delinquent tax roll be sold to the county treasurer. This is one of the issues that are sure to be addressed by the Charter Commission. So, the delinquent city tax roll is sold to Wayne County for full value, the county tries to collect for two years, and bills the city for what is not collected. In FY 2009, the city collected 86.8% of that year’s taxes. Non-payment of property tax allows for the forfeiture of the property to the county and sale of the tax lien. The theory of tax capitalization says that the cost of taxes is in reflected in the value of property, so high taxes would depress the market value of property. Uniform City Income Tax is levied on residents, non-residents who work in the city, and corporations. It was adopted in 1964. 22 Michigan cities have a municipal income tax: rate is generally 1% on residents and corporations, ½ % on nonresidents (Highland Park, Saginaw, and Grand Rapids may charge 2% on residents and corporations, 1% on nonresidents) Detroit’s rate is the highest in the state: 2.5% on residents, 1.25% on non- residents, 1% on corporations The Detroit income tax rate used to be 3% on residents, 2% on corporations, and 1.5% on nonresidents who work in the city. A reduction in the rate Detroit imposes was required by PA 500 of 1998, but reductions were suspended in 2003. PA 209 of 2007 further delayed rate reductions until 2014 or later. Revenue from the city income tax can be used for general operations. $215 million in income tax revenues are included in the 2011 budget (This is down from $245 million in the 2010 budget) Revenues peaked at $378 in 1999-2000 (when the rate was 3%; 1.5%; 2%) Reductions in the amount collected are due to the loss of jobs, bankruptcy of some major employers, high unemployment rate, loss of population Enforcement is by court action. The state and federal governments also tax income. The Utility Users’ Excise Tax is levied on the privilege of consuming utility service (telephone, electric, steam, gas) It was authorized by PA 198 of 1970, which expired June 30, 1988 Amazingly, PA 100 of 1990 was retroactive to 1988 The rate of this tax is 5% It is budgeted to produce $50 million this year Revenues must be used to hire and retain police officers Utility users’ tax revenues are affected by the loss of businesses and households, and by energy efficiency efforts This tax can only be imposed in a city of 750,000 or more; Only Detroit may levy a utility users’ excise tax. The tax is included on utility bills; it is collected and remitted to the city government by utility companies. Non payment of utility bills may result in utility shut off. Wagering Tax on Casinos An Initiated law in 1996 allowed 3 casinos in Detroit; it was amended by PA 306 of 2004 Only Detroit and the state may levy a wagering tax. The state rate is 8.1% PA 306 increased the local tax rate annually, but the rate was to be rolled back to 10.9% of adjusted gross revenues when the casino became fully operational The wagering tax is budgeted to produce $149,550,000 this year (It was budgeted at $176.6 million in 2010) The city also receives other payments from the casinos: A municipal service fee is the greater of 1.25% or $4 million, and it will produce $16,780,000 this year The casino percentage payment is budgeted at $23,810,000 Collected from casinos: MGM Grand, Motor City, Greektown “Tax Burden” looks at taxes from the payer’s perspective Businesses and some individuals look for a low tax environment. Detroit is a very high tax environment. The City of Detroit imposes a much larger tax burden on individuals and businesses than other communities in the state do, though varying proportions of each tax are exported to non residents Since all Michigan general purpose local governments levy property taxes, equivalent millage rates may be used for comparison. Equivalent millage rates can be determined by dividing expected revenues from other taxes by the property tax base. City of Detroit Taxes: Cumulative Mills Mills City operating $176,126,271 19.9520 City debt 80,928,559 8.9157 28.8677 Income tax 215,000,000 24.355 53.2227 Utility tax 50,000,000 5.664 58.8867 Wagering tax 149,550,000 16.941 75.8277 But, of course, other governmental units also impose property taxes on property located in Detroit. If you add all of the Detroit taxes except the wagering tax, and all of the other property taxes together, you arrive at a tax rate equivalent to 97 mills for homestead property and 115 mills for non- homestead property. Tax Burden on Residents: Non- Levy Mills Homestead Homestead City operating $176,126,271 19.9520 City debt 80,928,559 8.9157 Library 40,877,502 4.6307 DPS debt 118,454,455 13.0000 State education 52,964,997 6.0000 Wayne County* 124,271,773 14.0778 66.5762 Non homestead 158,894,992 18.0000 84.5762 Subtotal $752,518,549 Income tax 215,000,000 24.355 90.9312 108.9312 Utility tax 50,000,000 5.664 96.5952 114.5952 Subtotal $1,071,518,549 Wagering tax 149,550,000 16.941 113.5362 131.5362 Total $1,167,068,549 Compare this to the 2010 state average of 31.33 mills for homestead property and 48.37 mills for non-homestead property. Effect on Economic and Neighborhood Development: So, you know that it is more expensive to live in Detroit, especially for higher income individuals and families. The Washington DC city government each year calculates the city and state tax burden on residents in the largest city in each state and on DC residents. The most recent analysis indicates that for families at the $50,000 income level and above, Detroit is the third or fourth highest tax city of the 51 cities. State and City Tax Burden, Family of 3, 2008 DC Government report Household income Rank of 51 $25,000 17 $50,000 4 $75,000 3 $100,000 3 $150,000 4 It’s also more expensive to do business in Detroit. There is more pressure to get property tax exemptions, and even if a resident or business gets a property tax exemption, except in a Renaissance Zone, they still must pay income and utility taxes that they would not pay elsewhere Detroit has designated 16 Renaissance Zones where resident businesses and individuals pay no Michigan Business Tax, operating property tax, state or local income tax, or utility users’ excise tax. Residents do pay property tax for voter approved debt service and special assessments. Neighborhood Stabilization Issues Declining population has resulted in empty housing units (over 102,000 housing units vacant according to the American Community Survey). Declining retail, commercial, and manufacturing activity has resulted in unused retail, commercial, and manufacturing buildings. Many of these properties are abandoned, then foreclosed for non payment of property taxes. A 1999 state law change allowed a faster reversion process (2 years instead of up to 7 under the old law). This was government’s way of responding to the serious deterioration of property that occurred during the longer process. There are tax foreclosure prevention (not bank foreclosure) programs- hardship exemptions and foreclosure postponement, but property tax foreclosures have resulted in tens of thousands of properties being taken by the city and county, many of which are now in the inventories of the city, county, and state. Tax foreclosure sales conducted by the city (in the past) and now by the county have resulted in many properties being sold to potential residents and to investors. (The Genesee County land bank will only sell a property to a non-county resident with an enforceable plan to place the property into immediate use.) Bank foreclosures have exacerbated the problem of vacant and abandoned houses. A Possible Strategic Approach The Genesee County treasurer, Dan Kildee, pioneered the use of a land bank to actively manage tax foreclosed properties. PA 123 of 1999 and PA 258 of 2003 created a streamlined system of tax foreclosure that allows clear title. The land bank acquires property through purchase, through the foreclosure process, or by donation. By bundling tax foreclosed properties for auction, thereby dissuading potential purchasers, the county is able to avoid the misuse that sometimes comes from selling land at auction. By selling properties, the land bank is able to generate funds for the demolition of dangerous structures, renovation of salvageable structures, and banking of parcels for which there is no market. THE CITY OF DETROIT CITY TAXES Cities may only impose taxes that are authorized by state law. The City of Detroit imposes four major taxes: Property Taxes, including special taxes such as industrial facilities tax, commercial facilities tax, and neighborhood enterprise zone tax. All Michigan local governments impose a property tax. Non-payment of property tax can result in foreclosure and loss of property. $176 million budgeted for general city operations $ 81 million budgeted for debt payments (not part of the General Fund) Municipal Income Tax. Only 22 Michigan cities impose a municipal income tax. $215 million budgeted for general operations Utility Users’ Excise Tax. No other Michigan local government imposes a utility tax. $50 million budgeted for police officers’ salaries Casino Wagering Tax. No other Michigan local government imposes a casino tax. $150 million budgeted for general operations In this fiscal year, the City’s General Fund budget includes total revenues of $591 million (45 percent of the $1.3 billion General Fund) from these taxes. Revenues from all City taxes have decreased, forcing the city government to reduce expenditures for public services.
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