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How Detroit’s Proposed Land Value Tax May Impact Detroit Business Owners

 

On August 31, 2023, Mayor Mike Duggan announced a Land Value Tax (LVT) proposal, which would significantly alter the way property is taxed in Detroit. According to Mayor Duggan, “blight is rewarded and building is punished” under the current property tax system. This is not unique to Detroit. In many places in the United States, property tax systems are set up so that owners of vacant land and abandoned buildings have lower property tax bills than owners of well-kept, occupied buildings. To combat the high numbers of vacant and abandoned property in Detroit, the LVT would penalize land speculators and incentivize building and development. If the LVT is passed, “Detroit will be one of the first big cities in the world to implement one.” Most articles that discuss Detroit’s LVT proposal look at it from the perspective of the residential homeowner, but it affects everyone who owns property, including business owners. This post seeks to expand the conversation and discuss how business owners are impacted by this proposal to change the property tax system in Detroit.

Abandoned Packard Automobile Factory Detroit 200" by Albert duce is licensed under CC BY-SA 3.0.


What is a land value tax?

            Most property tax systems in the US are based on the market value of the property, which includes the land and any improvements made to the land, such as buildings, drains, sewers, etc. The more improvements, the higher the value of the property and the more tax owed. The standard property tax system, therefore, takes away any incentive to build and develop on the land. An LVT is a tax on the value of the land itself. Pure land value taxes disregard any improvements to the property, so a vacant lot is taxed the same as lots with buildings or homes on them. As a result, property owners have an incentive to build on the land.

Duggan’s LVT proposal for Detroit is not quite a pure land value tax and instead takes the form of a split tax. The proposed LVT would create two separate tax rates: one for the value of the land and one for the value of improvements on the land. The value of the land would be taxed at 118 mills and the improvements would be taxed at 6 mills.[1] Under the current system, the value of the land is taxed at 14 mills and the improvements are taxed at 20 mills. An example helps see what this change will do for property owners. For example, a home worth $100,000 pays taxes on $50,000 worth of the value. Under the current system, the owner is paying $1,000 in property taxes (property tax = (20 mills * $ 50,000)/1000). With the proposed LVT, the owner pays $300 in property taxes (property tax = (6 mills * $ 50,000)/1000).

How does it affect business owners?

            For business owners, there seems like there will be more mixed effects if the LVT is passed. According to the City, about 73% of retail businesses would get a property tax cut. It is speculated that the average retail business will see about 5% in savings on their property taxes. That is why some business organizations, including the Detroit Regional Chamber and Metro Detroit Black Business Alliance, have already supported the LVT proposal. A study from the Lincoln Institute of Land Policy used data from municipalities in Pennsylvania who adopted an LVT to analyze the relationship between this kind of tax and business development. It found an LVT was associated with an initial increase in the number of business establishments with significant impact for wholesale, retail, and manufacturing businesses among others.

            Benefits, however, will depend on where in Detroit business owners own their business property. The areas of Detroit where many business owners want to be, such as Downtown or Midtown, are areas that already have higher land values and, as a result, will likely have higher property taxes than businesses in other areas in Detroit. Deputy Chief Financial Officer Alvin Horhn acknowledged that the proposed LVT will move the tax burden to commercial and industrial property owners in commercial corridors and Downtown and away from residential property owners. This is merely because the land values in the Downtown/Central Business District of Detroit are so much higher than the surrounding areas.

            City officials seem conscious of this fact that the impact on businesses varies due to location, so the City has proposed ways to protect existing businesses. After all, the City claims that one of the purposes of the LVT is to support small businesses. To protect these businesses, the LVT tax would be capped for properties that reach a certain threshold for development. Additionally, the City included an exemption for business owners who are required to have parking due to a zoning ordinance. This does not help the Central Business District much because that area has no parking requirements. The LVT would also not affect current systems in place that support development, such as the Detroit Land Bank Authority and Neighborhood Enterprise Zones. Lastly, it would not apply to all “vacant” lots, so urban farms, community gardens, and side lots would be exempt. The question remains to be seen, though, how the positive impact this LVT could bring to businesses in other areas of Detroit compared to the potential negative impact it could have on businesses Downtown. There are those who critique Duggan’s LVT and say that it violates the Michigan Constitution and could raise taxes on certain independent businesses, such as auto lots.  

What are the next steps?

For the LVT proposal to go into effect, the Michigan Legislature needs to pass bills to give Detroit the power to create the LVT. Once those bills are passed, the Governor must sign them and only then can Mayor Duggan request the City Council to authorize the tax. Once authorized, the LVT would be put on the ballot for Detroit voters to decide. Duggan’s LVT proposal went up for a vote in the Michigan House of Representatives in October 2023, but it did not receive enough votes and the House adjourned to allow the bill to be reconsidered at a later date. As of April 2024, it does not appear that the House has turned its attention back to Duggan’s LVT proposal. City officials remain optimistic, though, and still expect the LVT proposal to be on the November 2024 ballot for Detroit voters. If they decide to support the LVT, the city’s tax will take effect in July 2025 and it will be an interesting to see the effects the land value tax has on the City of Detroit.

By Zoe Bowers


[1] 1 mill = $1 of tax for every $1000 of taxable value on a property. To calculate property taxes, the formula is: Property tax levied on property = (mill rate * taxable property value) / 1000. 


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