The results of new reports issued by Citizens Research Council of Michigan conclude that while the city’s economy has improved since its bankruptcy a decade ago, many problems remain.
The council released the first in a two-part series of reports assessing and analyzing the city of Detroit’s economic condition, economic development policies, opportunities for reform, and alternative approaches to reliance on tax incentives.
The reports were developed at the request of the Detroit City Council’s Legislative Policy Division and designed to help inform the debate over the city’s economic development policy.
The first report states while Detroit’s economy has improved substantially, the improvement has not changed the economics of business attraction caused by the city’s significant socioeconomic problems and racial disparities that, when combined with high property tax rates, make the city more expensive and lessen the expected rates of return.
Detroit has substantial socioeconomic problems to overcome, including income, poverty, and educational data, making it even more difficult for the city to compete, even with nearby metropolitan areas.
According to the report, to overcome these socioeconomic problems, city economic development policy relies on tax incentives to make private investment in Detroit more attractive.
Like the rest of Michigan, Detroit’s population has been steadily declining, which has played a significant role in its weakened economic base. The city’s population peaked in 1950 at 1.8 million and has fallen each decade since, dropping to fewer than an estimated 637,000 in 2022, a 65.4 percent decline. That shrinking means fewer people, workers, and business patrons.
“These assessments of Detroit’s economic development efforts will help local elected officials and Detroit’s residents as they discuss, debate, and decide which policy path the city should take,” says Eric Lupher, president of the Research Council. “It is up to elected officials and citizens to decide what to do with this information.”
The property tax rate is one of the handful of costs to do business that the city controls, and to reduce that cost and subsidize what may otherwise be unprofitable investments the city offers tax business attraction incentives — tax abatement and improvements funded through tax increment financing.
After nearly 50 years of granting tax abatements and using tax increment financing to provide improvements in the downtown areas, it was hoped that conditions in the city would have improved sufficiently so that their use would no longer be necessary.
The report states a cursory analysis of the cost of locating in the city and the revenues businesses can expect to yield reveals that a gap continues to exist stacking the deck against the city for business attractions. Detroit can ill afford to cease the use of tax abatements until the gap between costs developers face and return on investment is closed.
The city has multiple reasons to end the Downtown Development Authority and resume distribution of the collected property tax revenue to the taxing jurisdiction. The report states all those reasons are negated by the fact that the DDA anticipates needing more than $571 million to finance bonds pledged against tax capture. This suggests that the DDA could not cease operations until at least 2053 at the earliest.
The next report will seek to answer what tax incentives are awarded by the city, whether tax incentives are effective, whether tax incentives are cost-effective, and why the city uses tax incentives. Importantly, it will ask if local elected officials and citizens should consider whether city economic development policy is improperly focused on attracting individual businesses.
To view the full report, visit here.
