Community Central:Sandbox

1. Introduction
A number of states have limitations on the growth rate of property value assessments. The primary purpose of these limitations is to assure that property tax burdens do not increase too quickly, especially during periods of rapidly rising housing prices. Despite their popularity taxable value growth caps have the potential to generate several layers of undesirable outcomes. In addition to generating both horizontal and vertical inequities (Skidmore, et al., 2010; Hodge,et al., 2013a), there is evidence that taxable value growth caps reduce household mobility (i.e. create a  effect), resulting in the additional social costs of increased labor market mismatches and reduced citizen support for local public goods. With taxable value growth caps, property owners may enjoy substantial tax burden reductions relative to new homeowners; making a decision to move requires the  property owner to give up a potentially significant tax benefit.

In this paper we use  data from the City of Detroit to examine the degree to which Michigan’s taxable value growth limit has created a  effect. As discussed in the literature review, there are now several studies that examine the  effect in other states and contexts. Our study offers several contributions to this body of research. First, we use detailed  data to examine the degree to which tax savings created by the taxable value growth cap have an effect on the probability of property sale. Second, we look at this issue in the context of a state different than prior studies (Michigan) and in a single jurisdiction (Detroit) in which all properties receive services from the same government entities. Further, we consider the issue in the context of a faltering housing market. Finally, we estimate effects across different property value groups and different areas of the city where housing and neighborhood characteristics may differ substantially.

The City of Detroit has been in population decline for 60 years: Population decreased from more than 1.8 million in 1950 to less than 700,000 in 2012. Since 1990, Detroit has experienced population loss of more than 300,000. In the early 1990s, prior to the 1994 adoption of the taxable value growth cap, annual population decline averaged about 5,500 persons; from 1996 to 2001, losses averaged 13,600 a year. In the early years of this century, prior to the start of the Great Recession in 2008, Detroit residents were leaving at a rate of 23,200 annually. Since 2008, the numbers leaving dropped to about 17,300 annually.

Currently, Detroit has an unemployment rate of more than 20 percent. The average selling price of a single family residential home in 2011 was just $7,000, evidence of a severely troubled housing market. Many cities across North America have suffered during the Great Recession, but

Detroit is among the worst hit. As reported in Table 1, information on recession impacts for the 100 largest U.S. metropolitan areas from the Brookings Metro Monitor report (Friedhoff and Kulkarni, 2013) shows that Detroit ranks well below comparable areas like Cleveland and Pittsburgh; only Youngstown is similar to Detroit.

Table 1: The Great Recession in Select Midwest Metropolitan Areas Source: Friedhoff and Kulkarni, 2013.

In addition, 47 percent of property owners were delinquent in their tax payments in 2012 (Detroit News, 2013). Uncollected taxes amount to $131 million, or about 12 percent of the City of Detroit’s general fund budget in FY2012. In 2013, Michigan Governor Snyder appointed an Emergency Financial Manager who subsequently sought bankruptcy protection for the City of Detroit. Currently, the City is beginning the process of bankruptcy proceedings. It is in this context that we examine the degree to which the taxable value growth cap has reduced mobility and deterred housing market transactions.

Detroit’s current circumstances are extreme, but hardly unique. Detroit is not the only city that is experiencing fiscal challenges, which are in large part due to tax base erosion and the underfunding of retiree compensation. A number of cities and states across the U.S. face the challenge of significantly underfunded retiree compensation. As one illustration, Chicago Mayor Rahm Emmanuel recently stated: “Should Chicago fail to get pension relief soon, we will be faced with a 2015 budget that will either double city property taxes or eliminate the vital services that people rely on.”2 Further, many of these cities, including Chicago, have some form of assessment growth limit, which may exacerbate the fiscal challenges by narrowing the property tax base and creating inefficiencies in the housing market. Understanding how policies like assessment growth caps, even in an extreme circumstance such as Detroit, provides a useful contribution to policy discussions in other locations. Our evaluation provides evidence of a lock- in effect even in the midst of a faltering local housing market; if a  effect persists in such adverse housing market conditions, it may persist in other markets as well. Further, such knowledge can be potentially useful in averting crises in other cities.

In the next section, we offer a detailed description of the Michigan property tax system and more specifically within the Detroit context. Section 3 offers a brief summary of the literature on assessment growth caps and their potential effects on mobility. In section 4, we present our empirical analysis and section 5 concludes.

1 O’Sullivan, Sexton and Sheffrin’ (1995) offer a comprehensive discussion of tax revolts and the rise of assessment growth limits. Haveman and Sexton (2008) identify at least 20 states that have some sort of assessment growth limitation. Such limitations have been referred to as “assessment growth caps,” “taxable value growth caps,” “assessment growth limits,” and “property value assessment limits.” These terms are used interchangeably in this paper.

2 Lyman, Rick. 2013. “Chicago Pursues Deal to Change Pension Funding.” New York Times, December 5, New York edition, A1.