Detroit could double down on tax break for richest residents

March 03, 2020, 10:41 PM by  Violet Ikonomova

Crystal Lemanski and Kevin Morin are the same age, both Detroiters, but worlds apart. Proposed changes to a key property tax break could keep it that way.

"It’s about the rich staying rich and the poor getting poorer," said Detroit mom Crystal Lemanski. (Photo: Violet Ikonomova)

In 2010, Lemanski, then a general manager at a Little Caesars, lost a home on the city's far west side to mortgage foreclosure when payments, including a $3,000 tax bill, became untenable. A break available through the city could have eased her burden, but it was poorly advertised and she didn't know about it.

Around that time, Morin, a tech industry executive and entrepreneur from Bloomfield Hills, caught a major break on a $300,000 downtown condo. For 12 years, through an incentive designed to spur development and lure higher-income residents to the then-spiraling city, he’d pay just $200 in annual taxes, when he would have otherwise paid close to $10,000 — money to support city services.

Today, the 40-year-olds face uncertain fates. Lemanski, a new mom in another home near the one she lost, is again struggling to keep up with her property taxes. Morin, meanwhile, will soon see his sweet deal expire, resulting in a likely 50-fold tax increase he says would force him to sell.

Both say they need assistance. But a City Council plan to redraw tax break districts for homeowners would help only the affluent newcomer, and leave the new mom to help herself.

The break at the heart of their dilemma, the Neighborhood Enterprise Zone-Homestead, allows residents in just 15 percent of the city to reduce their tax bills by up to 20 percent for up to 30 years. Under a rezoning to soon be proposed by City Council and reviewed by Deadline Detroit, the break will be eliminated for thousands of residents in densely populated, lower-value neighborhoods like Lemanski’s, and awarded instead to Morin and the hundreds of other condo owners in his predicament.

It’s a stark picture of Detroit’s inequity, as greater downtown continues to thrive and low-income neighborhoods grapple with an ongoing tax delinquency crisis that threatens to put tens of thousands of residents out of their homes. The proposal to afford higher-income residents additional breaks may also strike a nerve with residents overtaxed by the city, who’ve been told they cannot be reimbursed or receive future credit.

On the whole, the NEZ program, with the benefits it affords to only select residents, reflects a fundamental conundrum at the heart of Detroit’s comeback: How can the city use its limited resources to spur growth, while ensuring promises for parity between longtime residents and newcomers don’t ring hollow?

“The entire debate in Detroit, of late, has been about what is owed to people who've been here the longest, who suffered through the most, and who have the greatest moral claim on what resources the city does have,” said Eric Williams, an attorney with the Detroit Justice Center's Economic Equity Practice. “Clearly, this takes the position that their claim isn’t that great.”

Council members leading the retooling say its ultimate goal is to offset Detroit’s high tax rate for as many residents as possible. Neighborhoods on the chopping block could be there for a variety of reasons, including low levels of homeownership or under-utilization of the break — meaning, not worth the investment, when balanced against the gains to be made somewhere else. Extending the breaks to downtown condos, officials say, would ensure middle-income earners aren’t priced out.

The 5,600 neighborhood homeowners who’ve obtained NEZ-homestead certificates — 36,000 are currently eligible — will get to keep them.

But that nuance is lost on Lemanski, who only sees the city putting the needs of more affluent newcomers before her own.

“It’s kind of sickening,” said Lemanski. “It feels like the people in those big old fancy condos can afford to pay. It’s about the rich staying rich and the poor getting poorer. That’s how I feel.”

Doubling down

Neighborhood Enterprise Zones proliferated in Detroit in the mid-aughts, when an amendment to state law allowed local governments to extend their use to areas of existing single-family homes. Initially a tool to incentivize new condo construction and large-scale residential rehab projects — now the NEZs could also mean more modest reductions for homeowners who opted in and agreed to make minimal repairs.

Three versions of the break offer varying benefits. The NEZ-rehab — the expiring break Morin currently receives at his condo in the Book Cadillac — can result in the most dramatic reductions, as it freezes a property’s taxable value at the point before renovation. The NEZ-new cuts taxes for units in newly constructed buildings by a little more than three-fourths. And the NEZ-homestead allows abatements of up to 20 percent.

Sherwood Forest, a Neighborhood Enterprise Zone, is one of Detroit's most affluent areas. (Photo: Violet Ikonomova)

Seeing an opportunity to shore up home ownership and slow population decline, officials designated as much of the city an NEZ-homestead as possible, slightly exceeding the 15 percent limit imposed by state law. Areas selected to benefit ranged from lower-value neighborhoods of high homeownership like Lemanski’s, to prominent pockets of stately mansions, like Palmer Woods, Sherwood Forest and Indian Village.

In extending the breaks to well-to-do areas, the city hoped to attract and retain middle-class residents who could support local businesses and pay more in city income tax.

Today, these make up a patchwork of limited-relief options that aim to make homeownership and development feasible in Detroit, which has the second-highest tax rate of any major city in the country. About a third of the city’s owner-occupied residential properties — or 36,000 households — are currently eligible for an NEZ. Separately, citywide, at least 30,000 households are believed to be eligible for a poverty exemption, which can eliminate property taxes in full. Fewer than 8,000 homeowners have obtained it.

If residents were to take advantage of their respective exemptions, the tiered taxation system would leave just 40,000 or fewer owner-occupied households to shoulder the full property tax burden to support city services.

Proposed NEZ-homestead Chan... by Violet Ikonomova on Scribd

It’s a subset Wayne State University development law professor John Mogk calls the working poor — low-income residents who earn too much to be in true poverty, but too little to buy in many Neighborhood Enterprise Zones.

“It’s not fair to leave out a large segment of Detroit from receiving any form of benefit,” said Mogk. “But the city has limited resources, so strategically, it has to decide where to place them.”

The approach is in keeping with a broader, winners-and-losers recuperation strategy for Detroit, in which densely occupied neighborhoods are targeted for improvements like blight remediation or commercial corridor upgrades. And while that approach is rooted in some wisdom — the city wants its limited resources to benefit as many residents as possible — critics note it’s inherently inequitable, particularly given the city’s weighty housing history.

Detroit is emerging from a decade-long tax-foreclosure crisis fueled in part by its own negligence. According to the Detroit News, the city overtaxed residents a collective $600 million between 2010 and 2016, including the overwhelming majority of households with delinquent debt as of last fall. In 2018, the city settled a lawsuit alleging it made poverty exemptions too difficult to obtain.

“In the abstract, the NEZ program makes sense,” said Williams. “But when you take it in context … what you end up with is a program that only doubles down on a really negative history.

“No one denies the city needs to do everything it can to increase population, that living in the city is expensive — but the burden of dealing with Detroit’s lack of resources shouldn’t always fall on the people who stayed here.”

Band-aid for a bigger problem

It’s a unique predicament. Detroit is the only municipality in Michigan that uses NEZs to lower the tax rate for a large segment of its population, and the only one that allows eligible homeowners to reapply for the homestead breaks, which are to expire after 15 years.

“The whole point of an incentive is to get you to a place where someday you don’t need it,” said Matthew Roling, head of the accounting program at Wayne State University. “If a neighborhood is robust and thriving and market forces are working, you don’t need incentives anymore.”

Roling and others say the city’s reliance on NEZs underscores the need for property tax reform.

Ideas gaining steam in local academic and development circles include a split-rate system that would tax land at a higher rate than structures, shifting the burden from individual homeowners to large-scale landowners, including commercial entities and speculators. Mogk, meanwhile, has proposed eliminating property taxes entirely for owner-occupants, who generate an estimated $50 million for the city each year. The revenue, he said, could be recouped in various ways, including a local sales or excise tax.

Many condo owners in the Westin Book Cadillac pay virtually nothing in property taxes under an expiring NEZ. (Photo: Sk8terjacob, Wikimedia Commons)

The Duggan administration agrees structural change is needed, but says it must, for now, work within the framework dictated by state law and the terms of its bankruptcy exit.

“Our tax structure can serve as a detriment to the sustainability of economic activity in the city — whether that be people living in homes or new investment — so we do have to figure that out,” said Detroit chief financial officer Dave Massaron. “But we have a plan of adjustment that has a 10-year period that assumed we’d operate a certain way … and until we find something that’s revenue neutral or something better than revenue neutral, we have to do right by our retirees and the residents of the city that suffered so much for us to exit bankruptcy.”

Massaron added that the city’s piecemeal approach has produced benefits for residents overall. Development incentivized by tax abatements has contributed to a 30 percent increase in income tax revenues since 2014, which make up a much greater portion of the city budget than property taxes.

Lessening the blow

Morin is the type of resident the city hoped the NEZs would attract.

Though the entrepreneur pays virtually nothing in property taxes, he dines at the city’s restaurants, supports its businesses, and pays its 2.4 percent income tax. And the break helped enable his pricey condo purchase in 2008, without which the $200 million redevelopment of the Book Cadillac might not have occurred.

The city foregoes millions in annual property tax revenue on the same tradeoff at about 2,000 condo units in buildings scattered throughout greater downtown.

Under the rezoning proposed by city council, each of these units would be eligible for continued, more modest relief under the NEZ-homestead. The deeper, NEZ-new and rehabbed reductions are set to expire at up to 1,600 of those units over the next several years.

Though Morin wants extended relief, he said he understood the terms of what he signed up for, and “anything that happens after that is a nice-to-have.”

“But I would certainly move somewhere else ... before I pay [$12,000 in annual taxes],” said Morin. “I love my place so I don’t want to leave, but if it’s going up by that much I will.”

Experts say that, from a pure fiscal policy standpoint, that’s what the city ought to let happen.

There’s enough demand in greater downtown that a new resident willing to pay Detroit’s full tax rate would likely take Morin’s place. Values, meanwhile, have climbed so high that, even if the expiring break forced him sell below market value, he would likely still profit.

“I don’t see any adverse consequences for the city, neighborhood or condo complexes,” said Mogk.

Brian Robb, a former councilman in Ypslanti, where an NEZ was used narrowly in a low-income neighborhood, called the plan to provide new tax breaks for the condo owners “crazy.”

Councilmembers Scott Benson and Mary Sheffield are leading the rezoning effort. (Photos: City of Detroit)

“At this point, the city is giving away money it has,” said Robb. "You would only want to adopt this plan if property values drop so much they crash the housing market."

But Councilmember Mary Sheffield, who represents a portion of downtown and proposed the change, says she’s sensitive to the condo owners’ situations. Some are middle-income and bought low, before there was renewed interest in Detroit, and today would be unable to afford a place that compares to the one they own.

“You could argue that [keeping the breaks in high-value areas] would further feed gentrification, but there are people who live in those areas … who need those particular abatements to be able to stay,” she said. “And if we remove that, you may see a completely different demographic of people moving in,” — i.e., even wealthier residents.

The Duggan administration says it too supports extending the tax break at condo buildings where existing residents would struggle to pay the full rate.

But Sheffield and the administration concede there’s no data to show which of the city’s homeowners most need and could most benefit from the breaks. In 2016, Duggan officials told Bridge Magazine they were conducting a comprehensive review that would calculate the importance of NEZs to homeowners, but the study was never completed. Council is now trying to determine need and benefit through a hodgepodge of other information, including property values, tax delinquency rates, and the location of homes receiving poverty exemptions.

Sheffield said her decision to extend NEZs to condo owners was a response to concerns they'd expressed at organized meetings.

One city employee familiar with the rezoning effort sided with the experts, saying the condo owners likely do not need continued relief. The proposal, said the employee, who spoke on condition of anonymity, “is not being driven by public policy as much as it is whoever yells the loudest. These are people in some of the more affluent areas, they’re the ones who vote, they’re the ones who go to council meetings. The squeaky wheel is the one who gets heard, that’s how it works.”

An overtaxed homeowner demands repayment at a packed City Council special session March 3. (Photo: Violet Ikonomova)

Williams believes the city is more apt to respond when wealthier Detroiters are the ones making the noise. He noted that overtaxed longtime residents who’ve demanded reimbursement or credit for the thousands they overpaid have been told they cannot be made whole.

“Whenever the government says there isn’t enough money, what they mean is there isn’t enough money for you,” he said. “There is enough money for somebody else. They just value those people more than the people they’re deciding not to give to.”

Sheffield, for her part, said a work group she led on overtaxation explored NEZs as a possible remedy, but determined they wouldn’t be useful as they can cover only portions of the city and affected residents are scattered throughout Detroit.

Two Detroits

On the neighborhood level, the proposal maintains NEZs in the city’s most affluent neighborhoods, while eliminating the designation in lower-value areas to put it elsewhere.

Vibrant neighborhoods of historic homes including Sherwood Forest, Palmer Woods, the University District, Green Acres, Boston Edison, and Indian Village will keep the break. In those areas, tax delinquency is far less of a problem than it is in the rest of the city, and housing values have more than rebounded since the recession, with sales in recent years ranging from $130,000 to more than $1 million. For context, the median sales price for a home in Detroit in 2018 was $35,000.

Neighborhoods in jeopardy of losing the assistance, meanwhile, include five densely occupied lower-value areas that each contain hundreds of eligible homeowners who've neither opted in nor obtained a poverty exemption, an analysis by Deadline Detroit found. The neighborhoods are located near Eight Mile and Wyoming, Eight Mile and Meyers, Cadieux and Mack Avenue, Southfield and Joy roads, and Six Mile and Livernois.

Under the proposal, Joy-Southfield would lose its NEZ designation. (Photo: Violet Ikonomova)

Neighborhoods where NEZs will be created include lower-value areas in Southwest and northeast Detroit where there previously were none, including Conant Gardens, Mohican Regent and Springwells. Higher-value neighborhoods will benefit from new designations too, including historic Corktown, North Corktown and Hubbard Farms.

Five of nine city council members had contributed to the draft map obtained by Deadline Detroit in February. The map is expected to be unveiled and debated in March, with approval targeted for the summer tax season.

Most of the neighborhood adjustments were proposed by Councilmember Scott Benson, who said the break should remain in high-value, stable areas to maximize its benefits. He hurried off the phone when asked whether it made sense to provide it to homeowners most capable of paying Detroit’s full tax rate and did not respond to subsequent interview requests.

Sheffield, meanwhile, reiterated her rationale for giving downtown condo owners additional assistance, saying it keeps neighborhoods accessible for middle-income residents.

Though officials agree their goal is to make NEZs available to as many residents as possible, at least one councilmember argues that should be balanced with need.

Councilmember Roy McCalister, who will see a lower-income portion of his District 2 lose its NEZ designation under the proposed changes, says he thinks the breaks should be used to spur growth in areas that are lagging.

“When we look at downtown, Midtown, and Corktown, that’s an expanding area and we have a lot of money down there — the Ilitches, Gilbert.

“That’s why a lot of people say we have two Detroits. You have all these dollars down there and, yet, some of your neighborhoods aren’t getting the funding and development necessary to help them move forward,” he said.

But he stopped short of saying he’d support the removal of NEZs in the aforementioned affluent, stable neighborhoods in his own district.

“When you’re talking about an area you represent, you never want to lose and you never want to take away,” McCalister said.

Morin, meanwhile, has his sights set on downtown as he eyes a potential move.

He says he’s confident he can find “another deal” there, as new condos come on the market with deep discounts akin to the one from which he benefited in 2008.

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