Detroit Offers Object Lesson in the Fiscal Policy Effects of Going Bust

As the largest American city to ever file for bankruptcy, all eyes will be on Detroit as the courts and the media dissect its fiscal policies. One such policy will be the city’s treatment of tax dollars, both its ability to earn them and its ability to spend them wisely.

One pervasive criticism of the Detroit tax system is that the property taxes are too high. Indeed, according to the Tax Foundation’s survey of property taxes in 2009 , Wayne County (where Detroit is located) was ranked 3rd out of 792 counties for property tax as a percentage of home value. Wayne County also ranked 54th for property tax as a percentage of income. Critics point out that this could have contributed to the individual and corporate reluctance to live or establish a business in the city, reducing the city’s overall tax base.

Refunds for overpayment of these high property taxes are stalled as the city negotiates its debts and the order in which they will be paid. Some people are refusing to pay upcoming bills. Indeed, the city itself owes $1.2 million in back taxes on its 36th District Court Building.

 Despite the bankruptcy proceedings, Detroit remains on schedule for construction of a brand new $650 million hockey arena, which will be paid for with $284 million of taxpayer dollars. Some argue the prudence of spending so much on a sports stadium when thousands of city employees lose their pensions, but proponents of the stadium argue that the tax money used for the project will come from economic development taxes which are completely separate from the city’s general fund. Furthermore, the stadium will theoretically draw increased investment in the surrounding area, ultimately helping the city increase revenues.

Of course, some have thrown out some more drastic ideas for saving Detroit , including eliminating all taxes, turning the city into a tax shelter similar to the Caymans, or even giving the city to Canada.

Detroit will likely remain an American city for now, as it struggles to navigate bankruptcy and to ensure any tax policy changes pave the way for a better city.

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