E3 The $500 Billion Bias Problem
Bloomberg Businessweek|March 15, 2021
How an unfair property-tax system blocks the building of Black wealth
Jason Grotto

It’s the last weekend of the month, so Di Leshea Scott’s Saturday begins with a long wait at the post office to get a money order for her rent. From there, she drives north to hand-deliver it at a drab office building just outside Detroit’s city limits. As always, this ritual leaves her angry and frustrated; her landlord refuses to give her a lease, she says, or to make basic repairs. When it rains, she needs three buckets upstairs to catch leaks. The back porch is collapsing before her eyes.

She stands outside the landlord’s empty office and sighs, then moves a welcome mat aside and flings an envelope with her money order under the door. Another $825 destined for someone else’s bank account.

Despite its flaws, Scott clings to her little two-story Tudor on Lawrence Street with a devotion that’s hard to fathom, until you know the house’s ownership history. She’s renting a home she used to own. Wayne County took it away from her in 2013, after she fell three years behind on her property tax payments. Her house, which she’d bought in 2005 for $63,800, was auctioned off by the county and snapped up by an investment company for less than $5,000. Scott lost every cent she’d put into it.

She shouldn’t have. For years the city of Detroit used inflated valuations of Scott’s house to calculate her property tax bills, charging her thousands of dollars more, cumulatively, than she should have paid, according to a Bloomberg Businessweek analysis of her tax records. Hers was among tens of thousands of homes in Detroit’s lower-income Black neighborhoods that the city’s assessors routinely overvalued. Meanwhile, they systematically undervalued homes in affluent areas, reducing the taxes those homeowners paid.

It’s not just Detroit. Local officials have overvalued the lowest-priced homes relative to the highest across the U.S., nationwide data show. From 2006 through 2016, inaccurate valuations gave the least expensive homes in St. Louis an effective tax rate almost four times higher than the most expensive. In Baltimore, it was more than two times higher. In New York City it was three times higher.

These inequities are tucked deep inside America’s system for funding its local governments, tilting property taxes in favor of wealthy homeowners even before any exemptions or abatements. And they carry a jarring implication: The residential property tax, which raises more than $500 billion annually to pay for public schools, fire departments, and other local services, is in effect racist.

That conclusion carries far-reaching implications of its own—not only for municipalities’ day-to-day operations but also for roughly $331 billion in general-obligation bonds that cities, counties, and school districts have guaranteed with property tax revenue, according to data compiled by Bloomberg Businessweek. The evidence of systematic unfairness is mounting. Since at least the 1970s, piecemeal studies from Chicago, Detroit, New Orleans, and New York have concluded that property tax systems favor those who are better off. A 2020 study from the University of Chicago brings unprecedented scope to the question, covering 2,600 U.S. counties. It found that more than 9 out of every 10 reflected the same pattern of unfairness. “It’s a textbook example of institutional racism,” says Christopher Berry, a professor at the university’s Harris School of Public Policy who led the research effort.

The problem is rooted in American history. One legacy of racial discrimination, including the practice of redlining (the refusal of banks to make loans in Black communities), is that Black people own a disproportionate share of lower-valued real estate. Census data show that the median home value in predominantly Black tracts is roughly half the value in majority White and Hispanic tracts. That historical disparity has been aggravated by a flawed tax system built on incomplete data and outdated methods for estimating the value of residential properties. “There isn’t anybody making explicitly racial decisions to produce these outcomes,” Berry says. “Nevertheless, they are racially disproportionate.”

Wide variations in policies and rates among the many thousands of U.S. jurisdictions that levy property taxes make it difficult to quantify the aggregate size of the imbalances. But Berry found in 2018 that in Chicago alone, unfair assessments shifted $2.2 billion in property tax payments from those who owned the highest-valued homes to those who owned the lowest-valued homes—over only five years.

Unfairness doesn’t end there. While tax assessments tend to overvalue many Black homeowners’ property, private appraisals done for the purpose of securing mortgage approvals consistently undervalue them. The president of the Appraisal Institute, a professional organization, this year called it “an absolute priority” to work on addressing such issues, which experts say help widen the wealth gap between Black and White households.

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