Lincoln Institute of Land Policy
Report Part Title: Introduction
Report Title: Assessment of Property Tax Reductions on Tax Delinquency, Tax Foreclosure,
and Home Ownership
Report Author(s): Fernanda Alfaro, Dusan Paredes and Mark Skidmore
Published by: Lincoln Institute of Land Policy (2021)
Stable URL: https://www.jstor.org/stable/resrep43187.3
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms
Lincoln Institute of Land Policy is collaborating with JSTOR to digitize, preserve and
extend access to this content.
This content downloaded from 213.55.83.51 on Fri, 17 Nov 2023 19:40:11 +00:00
All use subject to https://about.jstor.org/terms
Assessment of Property Tax Reductions on Tax Delinquency,
Tax Foreclosure, and Homeownership
Introduction
In this technical report, we provide an evaluation of the impacts in Detroit of citywide reductions
in residential effective tax rates on tax delinquency, property tax foreclosure, and
homeownership. The decline in effective tax rates was driven by a citywide reassessment, which
significantly reduced effective tax rates. These estimates are used to infer the potential impacts
of moving from a traditional property tax to a split-rate tax in which the tax rate applied to land
is higher than the tax rate applied to structures. As shown by Allen (2019), assuming revenue
neutrality, moving to a split-rate tax in Detroit would result in significant reductions in tax
burden on residential property but increases for some commercial and industrial property. In the
years following the 2007–2009 financial and real estate crisis, Detroit property values collapsed.
From 2014 to 2017, Detroit’s Office of the Assessor conducted a major reassessment, which
resulted in assessment reductions for about 68 percent of residential properties during a period in
which property values were either stable or increasing. The reassessment provides an opportunity
to examine how changes in associated tax burden affected property tax delinquency/foreclosure
and homeownership in the city. Reductions in assessed values (AV) translated to significant
declines in effective tax rates (ETR) as defined as the tax payment (TP) divided by market value
(MV):
ETR = TP/MV = (AV Statutory Tax Rate)/MV (1)
With stable or rising market values and stable statutory tax rates over the study period,
reductions in assessed value significantly reduced effective tax rates for most residential
properties in Detroit. Further, a reduction in assessed values as measured by taxable value
translates to a proportionate reduction in effective tax rates. This relationship will be important
for simulating corresponding changes in tax compliance and homeownership that could result
from the adoption of a split-rate tax. In Michigan, the complex property tax environment requires
a more detailed explanation of property assessment for tax purposes; we offer that discussion
later in this report. However, for introductory purposes this explanation offers intuition for the
basis of this evaluation.
Our objective is to approximate the behavioral responses of property owners regarding decisions
to pay taxes and become homeowners if Detroit were to implement a split-rate tax (reduce the
tax rate on structures and increase the tax rate on land). As shown in an analysis developed for
the City of Detroit by Allen (2019), moving to a split-rate tax would lower the tax burden for 98
percent of improved residential properties, but raise the tax burden on some commercial and
industrial properties. In addition, most residential properties in Detroit sit on parcels with less
than $1,000 in land value, which together comprise a small fraction of Detroit’s total property
value. Use of the reduction in tax burden as a proxy for moving to a split-rate tax is therefore a
reasonable approximation. The approach we use relies on annual parcel-level data on tax
delinquency, tax foreclosure, homeownership as measured by the principal residency exemption,
Page 1
This content downloaded from 213.55.83.51 on Fri, 17 Nov 2023 19:40:11 +00:00
All use subject to https://about.jstor.org/terms
assessed values, and other parcel characteristics for years 2011 through 2019. During this period,
there were significant changes in property assessment that lowered assessed values and tax
burdens for many residential properties.
For residential parcels, we have two potential routes by which a split-rate tax is expected to
reduce tax delinquency/foreclosure and influence homeownership decisions. First, there will be a
reduction in tax burden as shown by Allen (2019), which improves perceptions of fairness and
makes taxes more affordable for property owners. This first route is anticipated to reduce tax
delinquency and/or tax foreclosure. Second, anticipated increases in property values resulting
from the tax regime change (Yang 2018) increase the costs of failing to make tax payments
(property forfeiture). If home values rise as a result of lower taxes, property owners have a
stronger incentive to pay taxes. We examine these impacts in a dynamic framework to determine
the length of time for new equilibrium conditions to emerge.
The impact of a significant and permanent tax reduction on the rate of homeownership depends
in part on the relative responsiveness of potential buyers of rental properties versus potential
buyers of property to be used as principle residences. It may also depend on incumbent property
owners’ decisions to maintain tenure as the tax environment changes. As discussed in the
literature review, we consider the relative benefit of a tax reduction for homeowners and rental
properties in the context of the mortgage interest and property tax deduction on the income tax.
Because of the complex tax advantages for homeowner-occupied property, we are not able to
predict whether a tax reduction will increase or reduce homeownership in Detroit. We rely on the
empirical analysis for insight.
This technical report is one of three commissioned studies, all of which offer an assessment of
how the split-rate tax might affect different aspects of Detroit’s economy. In the next section, we
offer a brief review of the most relevant literature that includes a discussion of the research on
land taxation as well as research on Detroit’s property tax environment. This review is not meant
to be comprehensive because other relevant research is discussed in more detail in other parts of
the broader project that includes this report. We also offer a discussion of Detroit’s real estate
market as well as property tax policies and challenges. The literature review provides conceptual
frameworks that serve as a basis for the empirical evaluation. This review is followed by the
empirical analyses, which include simulations of the anticipated magnitudes of the effects on tax
delinquency, tax foreclosure, and homeownership. The report concludes with a summary
discussion and implications of the findings.
Literature Review and Theoretical Framework
This discussion begins with a brief overview of the research on the potential benefits of land
taxation relative to the traditional property tax. From this body of research, we draw inferences
regarding the anticipated effects of implementing a split-rate tax in Detroit. We then discuss
recent research on Detroit’s property tax environment, focusing on tax delinquency and
assessment practices. The discussion of the Detroit property tax environment is followed by a
review of several articles on the relationship between property taxation and homeownership. We
begin with a discussion of the research on land taxation.
Page 2
This content downloaded from 213.55.83.51 on Fri, 17 Nov 2023 19:40:11 +00:00
All use subject to https://about.jstor.org/terms
