After years of crisis, Detroit’s housing market is finally on the upswing. Foreclosures are falling and house prices are rising, following a period from 2011-15 in which 1 in 4 houses in Detroit was foreclosed on. But a crucial root cause of these problems remains: the system that Detroit uses to assess property values for tax purposes, which is used in most of the U.S., is fundamentally flawed. These flaws have been particularly devastating in the cycle of decline and renewal Detroit has undergone.
In a recent paper, Bernadette Atuahene and Timothy Hodge argue that unfair and illegal property assessments were a major cause of the foreclosure crisis. Tax assessments were not updated as Detroit housing prices fell sharply in 2008, so for many years homeowners were charged property taxes far in excess of legal limits. Yet authorities were not simply malicious: keeping assessments accurate is costly. A comprehensive property value reassessment started in 2014, the first such project since the 1950s, cost the Detroit government almost $9 million. And the government loses out on property tax revenue whenever assessments decrease. Should we be surprised that officials may not have exerted themselves to update assessments downward?
We suggest an alternative assessment system, first proposed by University of Chicago economist Arnold Harberger: instead of making assessments the responsibility of local government, homeowners could be responsible for assessing the value of their own properties. Under this system, all property owners would simply declare the market values of their properties each year, and pay taxes based on these self-assessed values. Tax foreclosure would be eliminated, and the government would only be allowed to acquire property by purchasing it from owners at their self-assessed values, perhaps paying an additional premium of 30-50 percent.
This system would eliminate the need for third-party assessors. Assessments for all properties would be updated by homeowners annually (or more frequently if the owner desired), so assessments would quickly adapt to changes in local market conditions without the need for government intervention. Self-assessed values would be public, so assessment would effectively be crowdsourced, as homeowners would be able to set appropriate assessments based on their neighbors’ assessments, recent house sale prices and their own experience. Homeowners who want to sell their houses could announce valuations somewhat lower than market values; this would reduce their tax payments, and the government could target these houses for purchase and redevelopment.
Self-assessment could first be implemented on a limited scale, focusing on blighted neighborhoods where accurate assessment is difficult and costly. This system could even speed up government efforts for neighborhood revival. Rather than taking tax-delinquent properties for demolition after many years of neglect and decay, the government could simply buy out vacant properties in a neighborhood based on owners’ self-assessed values. Owners would be compensated at a premium over their valuations, and nearby homeowners would benefit from redevelopment of vacant properties. This would also prevent absentee landlords from repeatedly repurchasing delinquent properties during foreclosure auctions, charging rents without paying property taxes.
The experience of Detroit in the past few years has shown that the property assessment system is fragile, and can fail catastrophically in times of housing market distress. Self-assessment is a simple alternative that would reduce costs, eliminate the need for discretionary government intervention, make eminent domain fairer and put the power and responsibility for property assessment in the hands of homeowners themselves.
Weyl is principal researcher at Microsoft Research New England and a visiting senior research scholar at Yale’s Economics Department and Law School. Zhang is a Ph.D. student in economics at the Stanford Graduate School of Business.