Property Tax Post: Could Land Banks Solve Cities’ Poor Collection Rates on Blighted Properties?

Detroit missed the mark on its projected property tax collections for the fourth quarter of FY 2014, ending in June 2014, by nearly 90 percent. The city collected only $6.7 million of an estimated $55 million, for a paltry 12 percent collection rate, according to documents filed with the Michigan Department of Treasury. To close the huge gap between projections and actual collections, Detroit might consider establishing a land bank.

Land banks are quasi-governmental bodies that take over abandoned, vacant, blighted and tax-delinquent properties with the goal of rehabilitating the properties and returning them to productive use so that the property is no longer a nuisance and also so that the municipality can continue to receive revenue from that property.

A handful of other states, including Nebraska, New York, Pennsylvania, Tennessee and West Virginia have attempted to solve this issue by setting up land bank programs to ensure that properties are rehabilitated, but without penalizing owners of such properties with sevenfold tax increases.

One major issue, aside from the general collection and delinquency issues experienced by all jurisdictions, is that so many properties in Detroit are blighted or abandoned, yet are still listed and assessed for taxes, according to Michigan Capitol Confidential, which also reported that the city’s collection rate is comparable to rates seen in developing countries. By comparison, the city exceeded its projections for income and utility taxes by more than 15 percent, and exceeded its projection for gaming taxes by 7 percent.

How bad is the city’s situation? A few years ago, the Mayor was offering $150,000 in housing renovation funds to any police officer who relocated to the city and put down just a $1,000 down payment, according to Business Insider. Other incentives and housing deals were offered to college students as well.

Meanwhile, Savannah, Ga. Is taking the opposite approach—considering a measure to penalize owners of blighted or abandoned properties by increasing their tax rates by imposing a sevenfold increase in the city’s base tax rate, reports the Savannah Morning News. The ordinance is aimed at generating revenue to help cover the costs associated with addressing blight. Once the problems are addressed, the owner’s property tax rate would return to normal.

This seems like a backward solution—if a property owner could afford to properly maintain the property and pay the usual property taxes, how is the owner of a run-down property expected to afford to money to rehabilitate a blighted property, return it to normal condition and maintain its condition while paying seven times as much property taxes?

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: What do you think is the best way to deal with lack of property tax revenue because of blighted properties?

Sign up for a free trialof the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state property taxes.

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