Detroit Property Tax Delinquency: Social Contract in Crisis

Abstract

As the country emerges from the real estate crisis, the City of Detroit, Michigan, continues to struggle, and is currently in the midst of bankruptcy proceedings. Falling property values have led to significant reductions in property tax revenues. In addition, about half of property owners are tax delinquent, resulting in uncollected tax revenues of about 20%. This high rate of tax delinquency results from a confluence of factors including limited tax enforcement, feelings of tax inequity, and failure to provide public services, all of which have contributed to a breakdown in the social contract between the city and its residents. In this article we develop a theoretical model of the individual decision to become delinquent on one's property tax payments. We then use detailed parcel-level data to evaluate the factors that affect both the probability that a property owner is tax delinquent and, conditional upon delinquency, the magnitude of the delinquency. Our estimates show that properties that have lower value, have longer police response times, are non-homestead (non-owner occupied residential properties), have a higher statutory tax rate, have a higher assessed value relative to estimated market value, are owned by a financial institution or by a Detroit resident, are delinquent on water bills, and exhibit a lower probability of enforcement are more likely to be tax delinquent. These findings can be used to inform policies targeted at improving tax compliance within the city.