Property Tax Rates in Detroit: A Michigan Public Policy Recommendation

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CLOSUP Student Working Paper Series Number 5 December 2016

Property Tax Rates in Detroit: A Michigan Public Policy Recommendation Ronald Everett, University of Michigan

This paper is available online at http://closup.umich.edu Papers in the CLOSUP Student Working Paper Series are written by students at the University of Michigan. This paper was submitted as part of the Fall 2016 course Public Policy 475: Michigan Politics and Policy, made possible through funding provided by the University of Michigan Third Century Initiative. Any opinions, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the view of the Center for Local, State, and Urban Policy or any sponsoring agency

Center for Local, State, and Urban Policy Gerald R. Ford School of Public Policy University of Michigan


Property Tax Rates in Detroit: A Michigan Public Policy Recommendation Ronald Everett December 12th, 2016 Political Science 496 On September 9th, 2016, the U.S. Census Bureau released a report outlining state government tax collection by category.1 Michigan ranked top ten out of all fifty states in the category of property tax rates. In addition, Michigan’s “lost decade” has been best characterized by the state’s marked loss in population starting in the early-mid 2000s and continuing until just a couple years ago. The decline in Michigan’s resident population came as a result of several precipitous factors, such as economic hardship in the manufacturing, automotive, and construction industries. As a result, areas in the state heavily dependent on these industries — namely, Southeast Michigan — suffered debilitating blows to their job markets and overall economies. Many residents were forced to relocate to neighboring states or counties that offered more economic opportunity and lower costs of living. While Detroit’s tax structure may not be the cause of population decline in the city, it may very well perpetuate issues caused by the overall economic decline of the city. Detroit should adopt a new tax policy centered on lower property taxes for the purpose of attracting more residents and businesses to the city, building up the tax base, and creating a business environment conducive to job creation. The departure of residents from Southeast Michigan has produced for local government officials in the region several problems related to funding political agendas, the upkeep of local government services, and other budget-related concerns. The region’s main metropolitan hub,

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U.S. Census Bureau, 2015 Annual Survey of State Government Tax Collections, http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk, accessed November 29th, 2016.

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Detroit, has seen its population decline from over 945 thousand residents in 2000 to around 688 thousand residents today — almost a 30% drop.2 Michigan local government income is derived primarily from three sources: sales, income, and property taxes. Sales tax is collected at the local level and given to the state government, which then redistributes those funds at its own discretion. The only type of local government that can impose income taxes within the state of Michigan is a city. Thus, all municipalities rely on sales tax redistributions, property taxes, and, in the uncommon case of a city, income taxes for funding. Villages and townships have control over property taxes only. As a result, if a township or village experiences fluctuations in funding from sales tax redistribution, it may turn to raising property taxes to make up for any funding shortfalls. Given the degree to which the Detroit real estate market suffered during the Great Recession, it is no wonder that city officials have been manipulating or, at the very least, neglecting to change the way the city approaches property value assessments. Between 2007 and 2012, property values in the city fell by about 60%.3 Perhaps the city government kept assessment values artificially high for the purpose of maintaining a baseline for revenue derived from property taxes. If Detroit had opted to assess properties within city limits at half value, as Michigan law requires, the city would have faced a dangerous reduction in tax revenue. To be specific, if assessed values did reflect half the market value, residential property tax revenue would have dropped from over $18 million to under $5 million in 2009 alone.4

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U.S. Census Bureau data presented by Google Timothy R. Hodge, Daniel P. McMillen, Gary Sands, and Mark Skidmore, “Assessment Inequity in a Declining Housing Market: The Case of Detroit,” ​Real Estate Economics (2016): 1. 4 Hodge et al., “Assessment Inequity in a Declining Housing Market: The Case of Detroit,” 19.

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Revenue-sharing between local municipalities and Michigan’s state government has become a source of internal tension in recent years due to the state’s ability to redistribute sales tax revenues at its discretion. A local jurisdiction may or may not expect to receive revenue from the state in an amount at least somewhat commensurate with the sales tax revenue that jurisdiction procured for the state. The erosion of municipal control over local sales tax revenues highlights the decline of home rule in the state of Michigan. Increased centralization in Michigan for the benefit of the state government has occurred at the expense of local governments that in the past enjoyed the ability to administer their own sales tax revenues. With control over sales tax gone, most municipalities in Michigan are forced to place more emphasis on property taxes since, in all cases except cities which can also levy income taxes, it is the revenue source they have the most control over. State policies on revenue sharing make it difficult for Detroit to meet certain funding goals, which may lead it to rely more so on property and income tax revenue. The city’s chapter 9 bankruptcy created an opportunity for the city government to prioritize debt obligations and re-negotiate payment plans with creditors and pension funds. Though bankruptcy may have solved several short term problems for Detroit, it may have failed to create for the city a long-term solution based on financial sustainability. In Southeast Michigan — in the City of Detroit, specifically — there exists a discrepancy between property value assessments and the value of property on the market. Not only does this inconsistency regarding property values cause long-time residents to be pushed out of the city through foreclosure, abandonment, or voluntary emigration, but it also results in property sale prices that are not in line with expected property taxes. For example, in recent years, a home

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assessed by the City of Detroit at $42,000 was sold for $2,300. The buyer, in this case, would have been expected to pay property taxes determined from the assessed value, not the market price.5 In the state of Michigan, local governments are required to assess properties in their jurisdictions at half of true cash value, or market price.6 Even so, there is considerable evidence that the ratio of assessed value to sale price of properties in the City of Detroit deviates significantly from that standard. In fact, a pattern exhibiting the regressive nature of property taxes in Detroit has emerged due to high-priced properties having lower assessment ratios in comparison to properties at lower price points.7 A byproduct of population decline in any jurisdiction is a loss of tax revenue for local governments. It seems, however, that despite the loss in population, Detroit’s city government is committed to raising large amounts of revenue via property tax increases aimed at current residents. In other words, instead of instituting tax policies that may attract more Americans and Michiganders to relocate to the city, local government officials are just increasing the cost of living for those who are currently residing within city limits. Perhaps the city government believes that it must make up for lost revenue that came as a result of population decline by increasing the tax burden for those who have remained in the city. This type of property tax strategy, which raises the cost of residency in the city, may deter citizens of neighboring counties and other U.S. states from moving to the City of Detroit. Not only may it impede the city’s efforts to expand its overall tax base, but by raising the cost of

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Hodge et al., “Assessment Inequity in a Declining Housing Market: The Case of Detroit,” 1. Hodge et al., “Assessment Inequity in a Declining Housing Market: The Case of Detroit,” 3. Hodge et al., “Assessment Inequity in a Declining Housing Market: The Case of Detroit,”

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residency through property taxes, the city risks losing portions of its current tax base through emigration, foreclosure, and abandonment. Most recently, in the Spring of 2015, a majority of local government officials working in municipalities with high population densities, like Detroit, have indicated that property tax revenues have increased over the past fiscal year. Of those government officials working in population-dense municipalities, over three percent indicated that property taxes had greatly decreased, almost 25% indicated somewhat of a decrease, almost 17% claimed no change, over 54% indicated somewhat of an increase, about one third of a percent claimed there had been a great increase, and 2.5% claimed no knowledge of changes in revenue from property taxes.8

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Despite the existence of property tax regressivity, the potential of driving away current and potential residents, and the acknowledgement among local officials that property taxes are

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Center for Local, State, & Urban Policy. (2015). “Changes in Revenue from Property Taxes, q4a.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from ​http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q4a.php​. 9 Center for Local, State, & Urban Policy. (2015). “Changes in Revenue from Property Taxes, q4a.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from ​http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q4a.php​.

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more likely to have increased than decreased in population-dense areas, local officials indicated that they would rather increase property taxes then decrease them, although “no change” was the most popular answer by far. As presented in table 2, less than a quarter of a percent of respondents said property taxes this year would be or already were greatly decreased. Over five percent responded “somewhat decrease,” over 62% said “no change,” over 26% said “somewhat increase,” more than three-quarters of a percent said “greatly increase,” and the remainder of respondents either did not know or claimed that the question was not applicable to them.10

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Table 2 reflects the fact that many more jurisdictions plan to increase property tax rates than decrease them. Although the data is not specific to Southeast Michigan, separate data shows that

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Center for Local, State, & Urban Policy. (2015). “Which action has your jurisdiction taken or is likely to take regarding property tax rates?, q5a.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q5a.php​. 11 Center for Local, State, & Urban Policy. (2015). “Which action has your jurisdiction taken or is likely to take regarding property tax rates?, q5a.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q5a.php​.

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counties in Southeast Michigan, like Wayne County, have higher property tax rates than all other regions in the state.12 In the past, local governments have raised local property taxes for the purpose of increasing local school spending, which is a factor that contributes to rising residential property values in general.13 Reductions in property taxes, however, have normally led to a reduction in city services, such as public safety and parks and recreation. In order to compete with schools in neighboring areas, municipalities, like Detroit, that consist of many low-income and low-property value communities must levy substantially higher taxes than those communities with higher property values and income. Therefore, it would seem that municipalities suffering from low property values and high property tax rates should be more focused on implementing policies that encourage increasing population growth and job demand rather than imposing burdensome taxes on current residents. High tax bills might drive current residents to neighboring municipalities that have lower costs of living. Over the short term, Detroit’s public school system may suffer from reduced property taxes. Over the course of several years, however, the city might be able to attract more individuals who favor lower costs of living. Such an increase in the residential population might drive other forms of population-based revenue, like sales and income taxes, and the lost revenue from lower property taxes may be offset by the greater number of residents paying that lower rate.

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“2015 Millage Rates — A Complete List,” Michigan Taxes, Michigan Department of Treasury, http://www.michigan.gov/documents/taxes/2015_Total_Rates_Report_-_Entire_State_515118_7.pdf​, accessed November 29th, 2016. 13 Kang, Sung; Reese, Laura; Skidmore Mark, “The Effects of Changes in Property Taxes School Spending on Residential and Business Property Value Growth,” CESifo, Working Paper: Public Finance (2012): 21-22.

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Not only would lowering property taxes attract more citizens to Detroit, driving property values up, but it would also have a positive effect on local business growth, which would create a demand for jobs in the city. Though raising property taxes has traditionally resulted in higher residential property values due to increased school funding, it also tends to slow down the growth of local business property values.14 By lowering property taxes, city officials can hope to attract businesses to Detroit, which would, in turn, produce more opportunities for employment. Increased business activity within the city combined with the lower cost of living afforded by a reduction in property tax rates would attract new residents to the city on two fronts. Municipalities, such as Detroit, that may be vulnerable to capital and population flight should not rely on property tax hikes as a method of offsetting lost revenue. Only when a municipality has established somewhat of a monopoly with respect to the elasticity of millage rates should it consider raising property tax rates.15 By shaping an environment that is conducive to business activity and job creation, Detroit officials and others in Southeast Michigan can hope to build up their tax bases and use the subsequent increase in revenue to build up city services and amenities that may grant greater monopoly power to their municipalities. Building a tax base from the bottom up could prove much more sustainable than the current model of egregious property taxes that drive current residents toward property tax delinquency and property abandonment, while keeping potential residents from other regions or states at bay. Keeping property tax rates in Southeast Michigan at their current rates has the potential of increasing the number of cases of property abandonment in low-income neighborhoods. A

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Kang et al., “The Effects of Changes in Property Taxes School Spending on Residential and Business Property Value Growth,” 21-22. 15 Keith R. Ihlanfeldt and Kevin Willardsen, “The Millage Rate Offset and Property Tax Revenue,” ​Regional Science and Urban Economics 46 (2014) 175.

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study on property taxes and residential abandonment in New York City revealed that property tax assessment rates were a key determinant of property abandonment in vulnerable neighborhoods.16 In Southeast Michigan, Detroit has for decades suffered from abandoned properties and subsequent derelict neighborhoods and blight. It is not unreasonable to extrapolate the link between property tax rates and abandoned properties in New York City to Detroit, especially given the city’s enormous population decline over the past few decades and comparatively high property tax rates. The current state of affairs in Detroit necessitates specific measures that will both retain current taxpayers and attract residents from other states and regions in Michigan. In a keynote sponsored by the University of Michigan’s Center for Local, State, and Urban Policy (CLOSUP), Deputy Mayor for Economic Policy, Planning & Strategy for the City of Detroit Carol O'Cleireacain highlighted one of the major problems facing Detroit with respect to raising revenues: property tax delinquency. She argued that Detroiters who perceive tax bills to be unbearably high often opt out of paying even a portion of their property tax bill. However, she said, if taxes were made more affordable and methods of payment more easily accessible, the City of Detroit would likely see a significant rise in revenues. Thus, Detroit tax policy — and the tax policies of other municipalities in Southeast Michigan — should favor the lowering of property taxes for two reasons. First, to make payment more affordable for current residents who may be unable to afford the current rates. Second, to create conditions of residency that are competitive with neighboring states and regions within Michigan.

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David Arsen, “Property Tax Assessment Rates and Residential Abandonment: Policy for New York City” The American Journal of Economics and Sociology 51, 3 (1992) 361-377.

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Lowering property taxes may create a funding squeeze in the short-term, which may halt certain city projects, such as the Woodward Avenue Streetcar Project. Over the long-term, however, lowering property taxes could help municipalities like Detroit expand their tax bases and increase tax revenue through population growth. Doing so would create a sustainable policy that relies on a large number of taxpayers, each paying a lower property tax bill. The alternative, which is also the current state of affairs in Detroit, would be to concentrate the municipal tax burden on a smaller population, which encourages residents to move away to areas with lower property tax rates. This alternative further reduces the taxpayer base and punishes current residents with higher rates. If this policy is kept in place, Detroit will continue to suffer from property tax delinquencies, dwindling population trends, and lower revenues. The Michigan Public Policy Survey conducted by CLOSUP at the University of Michigan — Ann Arbor collected data in the Spring of 2015 that illustrates the disconnect between citizens and local officials and council or board members on the topic of budget surplus priorities. Of those board or council members surveyed and given the choices of saving for future use, spending on public services, paying down debt, and reducing taxes, only 2.37% believed that excess funds should be used to lower taxes. Of local government officials surveyed, 3.44% thought excess funds should provide tax relief to residents. On the other hand, of those citizens surveyed, a whopping 26.55% indicated that lowering taxes should take priority over all other options in the case of a budget surplus. Although the data does not illustrate the priority gap between citizens and members of local governments in Southeast Michigan specifically, it does illustrate that within the state of Michigan as a whole, there exists

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disagreement between citizens and members of local government with regard to the prioritization of local government budget surpluses.

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Developing optimal property tax rates in Southeast Michigan that are at least competitive with, if not undercutting, tax rates in other regions and states should be a top priority for local government officials. Initial losses in property tax revenues will be offset by the eventual increase in the overall number of residents paying their property taxes in full. A jurisdiction that succeeds in expanding its resident population through property tax cuts may benefit more from concurrent increases in other revenue sources, such as income tax, business and building permits, and business and civilian licenses, all thanks to a larger local population. Although tax policy may be considered a non-partisan issue, the feasibility of this policy recommendation rests on the willingness of elected officials and party members in Detroit and

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Center for Local, State, & Urban Policy. (2015). “What would be the highest priority for using any potential surplus (if it had one) according to the following groups or individuals?, q13a, q13b, & q13c.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from ​http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q13a.php​, http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q13b.php​, and http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q13c.php​.

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other local governments in Southeast Michigan to enact it. The academic research that undergirds this policy recommendation calls for a reduction in taxes that will in all likelihood result in austerity measures. Cuts to programs that have in recent news indicated Detroit’s “comeback” may cause a rise in pessimistic sentiment among those considering Detroit as a potential place of residence. Cuts to programs that reduce or eliminate potential and current city-services, such as the proposed M-1 Rail along Woodward Avenue in Detroit, might also make the city less appealing to current and potential residents. Politicians might believe that reducing funding to programs might be unattractive to city residents, but, in the case of budget surpluses, citizens show much a higher preference for reducing taxes than any other option. Those local officials and board and council members who chose tax reduction as their number one priority in the case of a budget surplus represent the smallest percentages in their respective groups. Perhaps it is hard to run a political campaign centered on cutting city-services and programs that might have boosted a municipality's reputation. Over the long-term, however, reducing property taxes might benefit cities like Detroit through population increase and attracting business activity. Boosting a city’s reputation through the increase of city programs and amenities might help a politician reach short term electoral goals. Creating a sustainable tax policy through property tax rate reduction, on the other hand, encourages an expansion in the total number of taxpayers within a city’s limits. After growing the tax-base to a level considered acceptable by city officials, the city’s government can determine an optimal rate of taxation that will not drive away current residents, but will raise enough additional revenue to fund programs and city amenities that may attract additional residents in the future. In the meantime, in order to build up

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the tax base to an acceptable level, property taxes should be lowered not only to attract citizens who value low costs of living, but also so that businesses are financially encouraged to start and grow operations within the city limits, creating greater demand for jobs, and, thus, attracting more citizens to meet that demand. Other cities and states in the United States have also utilized tax policy to attract residents and businesses. The District of Columbia is a prime example of the power low effective property taxes can have on the overall health of a city. Washington D.C.’s median effective property tax rate is .70%, while Detroit’s is 3.81% — the second highest property tax rate on median valued homes out of a group of fifty cities examined by the Department of Taxes and Valuation at the Lincoln Institute of Land Policy.18 The reason for Detroit’s high property tax rate is a combination of low property values due to the insufficient housing demand caused by a declining population and the city’s reliance on property taxes as a source of revenue.19 Detroit’s heavy reliance on property taxes as a source revenue has lead to officials propping up property value assessments as a way of maintaining city property tax income. Unfortunately, doing so only makes living in the city fiscally unattractive to residents who do not appreciate the high cost of residency. If Detroit continues these policies, the city may see further losses in its resident population, which would drive tax revenue down even further. While it is important not to conflate correlation with causation, it is interesting that Washington D.C., with a median effective property tax lower than the national average, has been able to grow its population from over 572 thousand residents in 2000 to almost 660 thousand in

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Department of Taxes and Valuation at the Lincoln Institute of Land Policy, “50-State Property Tax Survey for Taxes Paid in 2015,” Minnesota Center for Fiscal Excellence (2016): 18, 2. 19 Department of Taxes and Valuation at the Lincoln Institute of Land Policy, 2.

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2015.20 Detroit has lost 30% of its population during the same time period.21 D.C.’s unemployment rate has decreased from about 10% in 2009 to 7.5% in 2015.22 Detroit’s unemployment rate in 2015 was just over 10%, down from around 28% in 2009.23 To say property taxes are the key differentiator between these two cities would be specious. However, lower property taxes in Washington D.C. might be one of many key factors that have attracted more individuals and job-creating businesses to move to the city over the past decade-and-a-half. Higher levels of business and civilian activity thanks, in part, to low property taxes may have also increased D.C.’s efforts to raise revenues from license and permit applications. Instead of placing the burden of high property taxes on a relatively low tax base, Detroit should set forth conditions conducive to business activity and job creation, as well as resident immigration. The potential tax, permit, and license revenues derived from greater numbers of residents and businesses far outweigh the current situation, which punishes current residents and businesses for residing within Detroit’s city limits. By changing Detroit’s tax narrative from one characterized by unsustainable and incorrect rates to one characterized by tax revenue sustainability and fair property value assessments, perhaps residents will feel more agency with respect to where their tax dollars go. This policy recommendation does not necessarily encourage municipalities to continue policies of low taxation over the long-term. Instead, it encourages government officials to utilize tax policy in a way that grows residential populations. A higher number of residents paying taxes at lower rates may produce more revenue for a city than a dismal number of residents

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United States Census Bureau data presented by Google United States Census Bureau data presented by Google 22 United States Census Bureau data presented by Google 23 United States Census Bureau data presented by Google 21

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paying egregious tax rates relative to other areas within the state of Michigan. The additional funding raised from the greater number of residents paying taxes at lower rates can be put toward programs that increase the city’s monopoly power relative to other municipalities within the state. Once the tax base population is at an ideal level due to low costs of living and demand in the local job market, city officials can take advantage of the inelasticity of residency, raise property taxes, and then reinvest those revenues in programs and city amenities that might make the city more appealing, dissuade current residents from leaving, and persuade residents from other areas to immigrate.

Data Cross Tables The data tables are presented below in the following order (denoted by corresponding question): q4a, q5a, q13a, q13b, and q13c. These questions and corresponding data are from the Spring, 2015 MPPS survey and categorized under “Budget & Fiscal Health.�

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Works Cited Arsen, David. “Property Tax Assessment Rates and Residential Abandonment: Policy for New York City” The American Journal of Economics and Sociology 51, 3 (1992) 361-377. Center for Local, State, & Urban Policy. (2015). “Changes in Revenue from Property Taxes, q4a.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from ​http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q4a.php​. Center for Local, State, & Urban Policy. (2015). “What would be the highest priority for using any potential surplus (if it had one) according to the following groups or individuals?, q13a, q13b, & q13c.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from ​http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q13a.php​, http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q13b.php​, and http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q13c.php​. Center for Local, State, & Urban Policy. (2015). “Which action has your jurisdiction taken or is likely to take regarding property tax rates?, q5a.” Michigan Public Policy Survey, Spring 2015 data tables. Ann Arbor, MI: Center for Local, State, & Urban Policy. Retreived from http://closup.umich.edu/michigan-public-policy-survey/spring-2015-data/q5a.php​. Department of Taxes and Valuation at the Lincoln Institute of Land Policy. “50-State Property Tax Survey for Taxes Paid in 2015.” Minnesota Center for Fiscal Excellence (2016). Hodge, Timothy R., Daniel P. McMillen, Gary Sands, and Mark Skidmore. “Assessment Inequity in a Declining Housing Market: The Case of Detroit.” ​Real Estate Economics (2016). Kang, Sung; Reese, Laura; Skidmore Mark. “The Effects of Changes in Property Taxes School Spending on Residential and Business Property Value Growth.” CESifo, Working Paper: Public Finance (2012). Ihlanfeldt, Keith R. and Kevin Willardsen. “The Millage Rate Offset and Property Tax Revenue.” ​Regional Science and Urban Economics 46 (2014). U.S. Census Bureau, 2015 Annual Survey of State Government Tax Collections, http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk, accessed November 29th, 2016. United States Census Bureau data presented by Google. “2015 Millage Rates — A Complete List,” Michigan Taxes, Michigan Department of Treasury, http://www.michigan.gov/documents/taxes/2015_Total_Rates_Report_-_Entire_State_515118_7.pdf​, accessed November 29th, 2016.

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