Skip Navigation

Incentivizing Development in Detroit: An Interview with Mark Skidmore

Image via LinkedIn

Mark Skidmore is a Professor of Economics and Agricultural, Food, And Resource Economics at Michigan State University. He holds the Morris Chair in State and Local Government Finance and Policy and is the co-editor of the Journal of Urban Affairs. He recently co-authored Split-Rate Property Taxation in Detroit, a report from the Lincoln Institute of Land Policy, where he is a Visiting Fellow and Distinguished Scholar.

James Hardy: So just to begin, could you briefly introduce yourself and tell us how you’ve gotten to this point in your career?

Mark Skidmore: My name is Mark Skidmore. I’m a professor at Michigan State University, and I hold appointments in economics and agricultural food and resource economics. I’m not an agricultural economist, I’m more of a regional/public finance economist, but when you look at urban, suburban, and rural—that regional context—things that happen in the urban areas inevitably spill over and vice versa. 

I also hold an endowed chair called the Morris Chair in state and local government finance and policy. So a big part of my role at the university is to look at policy questions related to cities and local government in general. Detroit is our big city in Michigan and it’s got a long, storied history. Its population used to be about 100 percent larger than it is today. So we’ve shrunk, as have a lot of other post-industrial cities, and now we have the footprint of a big city that was designed to hold twice its current population. We have excess housing, and that transition is really, really challenging. Of course, Detroit went through bankruptcy following the last financial crisis and is now on better footing. So the goal is to stabilize the city’s population and hopefully reverse that trend. But in the meantime, there are all kinds of challenges. And the idea of a land value tax or a split rate tax won’t solve all of those challenges, but it could help.

JH: I’d like to get people acquainted with those challenges Detroit is facing. I saw someone describe it as a “fiscal death spiral” which is some colorful phrasing, but what does that fiscal death spiral look like, especially with regard to land value? 

MS: Well, if a city’s population, on net, is declining, you’re going to have challenges. A big component of any city’s revenue base is the property tax. And if people are leaving then you feel compelled to raise tax rates on existing properties that are still operational. But at the same time, if you raise your taxes too high and that doesn’t translate into more high-quality public services, then you end up placing the burden on taxpayers. And then that exacerbates the problem because people who are interested in adding value and living in a high quality place will say, “Well, if I do that, I’m gonna face a very high tax rate.”

So there’s this sort of tension that happens in a regional context of, “Well, what place am I going to live in and what is the tax service package that is being offered?” And so all of those challenges are happening in Detroit, because you have relatively more prosperous suburban communities and you have the core city of Detroit, which still has a fantastic base, but it has a relatively high tax rate. Its situation has improved, but you’re right, if the population does not stabilize, then you end up reentering this fiscal spiral downward. So I think that is where the city is. It is in a little bit of a race to stabilize its population and generate something new that will attract, and it is happening. 

I think of Detroit as not just one big city, but as several districts. If you look at certain parts of the city, there is renewal and there are new exciting things happening, but then you can end up in a huge area that has really difficult challenges, like what to do to all of the dilapidated housing that is no longer suitable for living––do you tear it down? And at what cost? And does that yield a benefit over time? And what if you don’t tear it down, what are the implications? So all of those kinds of things are in the works right now.

JH: Some have said that the current system incentivizes people to not develop or even incentivizes blight. I’m interested in how that works.

MS: Well, the property tax is supposed to be based on the market value of a property, which includes the structure as well as the land. In most cities where there are high concentrations of people, the value of the land is higher, so that incentivizes people to build up and make the most use of that land, and that tends to be true in Detroit as well. The land is valued highest in the core of the city, and then less as you move further out, especially in some of the very challenged areas. And then, actually, as you get closer to the suburbs, the land value starts to go back up again.

But at any rate, you have the structure and the land, and a typical property tax assesses the entire bundle and then bases the tax on that. With a land tax, we say, “Well, we’re not gonna tax the structure. We’re only gonna tax the underlying value of land.” And so what that does is it creates two things. The first is it imposes a cost on holding high-valued land in an undeveloped state. Because if you’re not generating a lot of revenue and you have this vacant property, say, in downtown, then your tax payment is pretty low, if you base it on the structure and the land. But if you do a land tax, you’re gonna end up increasing the rate to generate the same amount of revenue. 

In downtown Detroit, there are a lot of empty lots that are just used as parking for when there’s activities and stuff. And the tax right now on that land is very low. So there are fairly wealthy people who own those vacant land parking areas, but it doesn’t cost them a lot to hold it in an undeveloped state. And when activities come to the city and parking happens, they generate a fair amount of revenue. So there’s not a huge incentive to necessarily develop the land. But if you start taxing land only, then in addition to increasing the cost of holding the land in its undeveloped state, you don’t penalize somebody for investing in the land. So if you build something on it and make something happen, that new development, the structure, isn’t taxed. So you remove the penalty associated with development and you increase the cost of holding land in an undeveloped state. So if you happen to have undeveloped land in a prime real estate area, then it encourages you to either sell it and let somebody else have it or do something with it. That doesn’t solve every problem, but it could move development forward and encourage new activity.

JH: Could you explain some of the findings of the Lincoln Institute paper you contributed to?

MS: Yes. So the Lincoln study had several authors and several chapters, and one is about what would happen to development if you moved to a split rate tax. It’s a challenge to work that out empirically, but the evidence suggests that if you move to a split rate tax, that you would see an improvement in economic development. So that’s one aspect. Another is, what would happen to the distributional implications? Who would experience a tax increase? Who would experience a tax decrease? So that people understand the trade-offs and the winners and losers.

That was one part of it. Most property owners, residential property owners particularly, would actually experience a net tax reduction. But some people––and those are people who are relatively wealthy––who own the prime land would, especially on the undeveloped components of it, experience a tax increase. So there’s this negotiation that has to happen. 

The work that I did focused on what would happen to compliance. In Detroit, after the financial crisis, the tax compliance was really low. Tax delinquency was over 50 percent, so only half of property owners were paying their taxes, and part of that was because of the assessment problems. If you buy a house for $5000, but you’re being asked to pay taxes as if it were valued at $50,000, within a couple of years, your tax payments exceed what you paid for the house in the first place. So those were the kinds of challenges. The analysis suggested that we would experience an improvement in overall tax compliance. We also looked at what might happen to the rate of home ownership versus rental property. In that case, we didn’t see any big impacts, and on net there didn’t appear to be a big change in homeownership rates. That’s a quick summary of the full report.

JH: I’d like to talk about the difference between a split rate tax, which is what the paper focused on, and a full land value tax, as well as why you might think Detroit is better suited for a split rate than a full land value.

MS: Well if you have just a pure property tax, the rate is the same on land and structures. A land tax is on the consumers all the way down where structures are taxed at zero. And then if you wanted revenue neutrality, you’d apply a higher rate on the land. A split rate tax is where you increase the rate on land and reduce the rate on structures. So you’re kind of moving in the direction of a land tax, but you’re not going all the way. It’s kind of an in between. That’s a split rate tax. And I think it’s probably, really driven by feasibility. For example, if you go all the way to a full land value tax, suppose you’re a relatively wealthy person who owns the empty parking spaces and parking lots in downtown Detroit. As you move towards a land value tax, then the cost of it is going to increase for you. So you could imagine the political balance of, well, who’s going to oppose moving towards a land value tax or a split rate tax and who’s gonna support it. I think probably on balance it was thought that a split rate tax and moving in that direction was more politically feasible than going to pure land tax.

And I think we’re getting close. The state is working to develop the legislative language that would empower Detroit and other communities in Michigan to adopt a split rate tax. So I think that’s going to go through, but I’m not 100 percent sure that it’s actually gonna be implemented yet because of the political tension. So I am really hopeful.

JH: On that note, I wanted to ask about why it’s so legally complicated. This is something that Detroit Mayor Mike Duggan has talked about being a barrier to adoption.

MS: I think that a split rate tax or a land value tax is not common and it is not just a lot easier to administer a property value tax on land and structures at the same rate than it is to tax land at a different rate, or focus just on land. And as we talked about, if you happen to own really high valued land you might oppose this kind of change at least initially. So there’s the political tension. 

There’s also a practical component. In urban areas it’s a little bit of a challenge, empirically, to separate the value of the land from the value of the structure itself. In order to come up with a good land value tax or split rate tax, you have to have a reasonable estimate of the underlying value of the land and the value of the structure on top of it. A lot of economists tried to get a handle on coming up with a feasible way. And empirically it’s a challenge in the technicality, so can you really expect it to be implemented? That is one of the challenges of adopting a land value tax or a split rate tax, separating the value of the land from the structure. But then there is also the political reality that anytime you make a change in policy or public finance policy, you’re going to have winners and losers. There are the immediate winners and losers, and then over time, there are long term winners and losers. What does it look like? So all of those things have to be negotiated, and I think that’s part of the challenge.

JH: That bit about winners and losers reminds me of something I saw from Esmat Ishag-Osman, a policy expert [formerly] at the Citizen’s Research Council of Michigan. He said something similar, asking if there might be another way to incentivize development on vacant land that might not produce such distinct winners and losers. Part of the reason for asking was that this kind of policy assumes that every vacant lot in the neighborhood needs to have a structure on it, which he doesn’t think is the case. What do you think of that? Do you think that there is a better way, or is this the best compromise? 

MS: So in the case of Detroit, you have a lot of vacant lots in sort of the troubled areas that really aren’t worth any value at all. So moving to a land value tax really doesn’t affect those neighborhoods very much at all. It doesn’t change the incentives. If the value of a lot is $1000, then moving to a land tax would increase the tax, but it would be pretty minor. And in those areas, the estimates are that if we move to a split rate tax, that 90 percent of homeowners would receive a tax reduction. So the differential is really about, as you move into the core of the city where land values are higher, it’s those property owners with parking lots that are going to really experience a significant increase in their taxes. 

So that’s the first thing. The second thing is, an alternative to a split rate tax or a land value tax might be offering specific tax incentives or tax breaks. This is used all over the country by communities and states that offer tax reductions in order to draw in business. And there is a whole cost benefit analysis associated with that. But one of the biggest challenges for me is equity. So if you have some political power, you can negotiate a lower tax, or you can get your neighborhood to be in the renaissance zone and you get the lower tax, but as soon as you cross the street outside of that zone, your tax goes up. So you end up with two otherwise similar properties, one across the street with a higher tax and one in the zone with the lower tax, and you’re thinking, “How is that fair? Is that how we want to do things?” So that’s one of the things that I like about the split rate or the land value tax. It starts to incentivize and move things in a direction, but without picking winners and losers and creating inequities based on your location or the degree of your political strength.

JH: Yeah, that makes a lot of sense. Almost like it’s just not picking winners and losers. It might make them, but it gives less undue influence to some versus others.

MS: It’s a more level playing field that everybody is operating under.

JH: I saw a quote from another interview you did where you talked about other cities, including Providence, looking to Detroit as an indicator of what might be in their future. Do you think that the split rate tax would be useful in a lot of cities other than Detroit in the United States? 

MS: Oh, yes.

JH: I was curious if Detroit has had problems that were very specific to it or uniquely pronounced versus other cities that made it an especially good fit for split rate.

MS: Well, I think Detroit does have a lot of problems, and perhaps deeper than most cities in the country, but I absolutely think the principle of a split rate tax or land value tax could benefit other places in the same way because it creates the same kinds of incentives. It is not like the land value tax or a split rate tax isn’t used elsewhere, but if Detroit does it and it moves the needle in a meaningful way, then other places are likely to do it. And that’s exactly what is happening with the legislation in the state of Michigan. They do not want to just enable it in Detroit. They want other places that think it could help them to be able to use it as well.

And one of the things, if it goes through, that I would like to do is hold a workshop for municipal authorities to talk about the barriers and opportunities of moving to a split rate tax and what you can expect, what you would have to do in order to make it happen. And then they can assess whether it’s worth it for them. But we clearly have other cities in Michigan. We’re sort of now coming out of it finally, but when you’re so heavily dependent on manufacturing and manufacturing jobs are going like this, you’re gonna end up with dislocation and disruption. I think we’re finally out of that, and really, Detroit is in a fantastic location. It’s really a beautiful place. So there’s lots of opportunity, but I just do not know how it is all going to work out or when it’s gonna work out.

JH: Right. Going off of your point about other cities in Michigan, obviously no city in Michigan that would institute this would be as large as Detroit or face the exact same problems as Detroit does. The ratio in Detroit that the Lincoln Institute paper proposed was roughly five to one, land to improvements, if I recall. How could a city tinker with that ratio? And what are the implications of increasing or decreasing it?

MS: Like how would the city settle on the right number?

JH: Pretty much. And also generally, what kinds of effects can you see from a lower ratio versus a higher ratio?

MS: I don’t have a clear answer to that question. If you were to ask an economist, I think most economists would say that a land tax is far more efficient than a general property tax. So you would want to go all the way down, but then there are the political realities of doing that. I think that the reason that Detroit is looking at a split rate tax rather than a pure land value tax is exactly that. What can you move, can you get done? 

The closer you get to a land value tax, the greater are the potential benefits to a place. But maybe you only want to go part way and there are certain risks. So moving from a pure property value tax to a land tax, maybe you can do it incrementally and you can say, “Well, let’s move to here.” And then if people are okay with that and it actually starts to generate some gains, then you could imagine shifting the rate even more and moving that direction. So I don’t view it as, “We’re gonna move from here to here, and that’s the end.” Once you have the legislation and the empowerment, you could potentially say, “We’re gonna start here, try it out, and if we get some of the positive gains that we’re hoping for, then maybe we can go further.” And then you have to have the discussion over again.

So there are some costs there, but I think of it as more of a continuum that you can explore and try to identify something that will get you started, and then see what the gains are and go from there. That’s how I think about it. The political realities of engaging in a discussion to get to here—and then having to do it again to get to there—might be a challenge.

*This interview has been edited for length and clarity.