Jeff Reno's Legislative Testimony Two

19^th Century Policy at the Dawn of the 21^st Century:

Testimony to the Michigan Senate Committee on Economic Development

And Regulatory Affairs

March 9, 1999

Thank You Mr. Chairman for your leadership on this matter.

Michigan's current tax reversion process is lengthy and complicated. It was intended to give property owners facing financial difficulties ample time to pay their taxes before losing their property. Instead, it affords inadequate protection to property owners and often results in a title of questionable legal value. Furthermore, it permits unscrupulous individuals to exploit both families and the government. In short, it creates a circuit of blight, which undermines neighborhood stability and weakens Michigan's urban core cities.

Consider a parcel that is abandoned by its owner. It generally goes unnoticed until its taxes go delinquent. Then it passes through the reversion process—moving from city to county to state; from the Department of Treasury to the DNR—ultimately to be returned to the city six years later. What is left? Little that is salvageable. In the meantime, cities are left with the expense of maintaining abandoned structures as well as managing both the legal and social liabilities abandoned structures attract.

Consider a parcel occupied by a renter whose landlord, knowing that it takes six years for the system to run its course, decides to pocket the rent and skip the taxes. Consider a family that has simply fallen behind on taxes. When it comes to help, our lengthy and complicated process responds with a series of perhaps well-intentioned delays and complicated handoffs whose net result increases the existing debt with interest and penalties. This is no more beneficial than a credit card company that responds to a customer who overspends by raising his or her credit limit.

How did we end up in this mess?

Let us remember that we are dealing here with a procedure designed in 1893, when most of Michigan’s economy was agricultural in nature.

Old does not automatically mean outdated—the U.S. Constitution is much older than the GPTA, yet it still serves us well today. But as the founders understood, where the law is general and fundamental, such as a Constitution, there is less need for innovation and modernization. The same does not hold true for statutory law. When dealing with a matter as sensitive and specialized as this one, there needs to be parity between the law and the local economy.

There is evidence that the 1893 law was inadequate after we made the transition to an industrial economy. As the world grew more complicated the tax reversion process grew more inadequate. It became unable to handle the high volume of delinquent parcels and the terrific complexity of title in an age where many different parties often hold interests in a particular piece of property. Ultimately we began to see failures: People were losing their property without receiving notification and the opportunity to redeem; property rights were and remain in jeopardy under such circumstances.

On more than one occasion, the courts pointed out the problem of poor notification—and then recommended a remedy: additional time prior to foreclosure. Thus emerged a pattern of legislative responses to judicial challenges. Yet we must ask ourselves, if the problem lies in the poor title search and notification procedure, is it logical to respond by extending the time allowed for redemption? The answer is No! All the time in the world would be meaningless in due process terms if a person is not notified of the problem in the first place. The logical response would be to improve the notification system.

Highlights of proposed system

This proposal requires a greater number of notices, sent over a greater variety of media including first class mail, certified mail, personal service, and newspaper publication. More importantly, it is based on the highest feasible quality of discovery through a fully funded title search that occurs two years earlier. Finally, in the cases where foreclosure is necessary, the action requires a judicial decision. The current process takes place through an internal administrative hearing at the state treasury. This means that adverse action will finally be subject to external oversight—foreclosure will not be ordered until a judge is satisfied that property rights were respected and all other options were exhausted. In that regard, it is certainly superior to the existing procedure and also worthy of merit in its own right.

Role of Private Sector, Then and Now

Finally, let me say a word about the role of the private sector in the tax reversion process.

Currently the private sector participates through the lien sale. Remember, a lien sale does not convey an automatic ownership to property, but only an investment interest that later may be converted into an ownership interest. This was a necessary role in the 1893 scenario when units of government would otherwise have had to carry delinquent taxes as debt. However, in the late 20^th century Michigan counties operate revolving funds that render the lien sale extraneous. Today the lien sale is an extra step adding time and complexity to the process, increasing the number of parties entitled to notification in future delinquencies, and therefore contributing to the problem of bad title. In short, it is an artifact of historical inefficiency.

If government continues to operate in an inefficient manner even when a more efficient system is available, only out of deference to an industry which requires government to insure its existence, that is corporate welfare.

Fortunately, far from closing the door on the private sector, the current proposal blows the door wide open. Remember, under the existing system the private sector participates in the lien sale—one day a year. Under the current proposal, the private sector will have opportunity to participate in several steps along the way including the title research, and the notification process for all, not select, properties. Moreover, there will be more, not less investment opportunity as anyone will be able to participate in the three land sales held each year. Private buyers will be able to enter into truly competitive bids and will receive good title to the property they acquire—and, I might add, an incentive to maintain and improve that property so as to protect their investment.

Conclusion

In short, we need a system that embraces the wisdom of people like Adam Smith who taught us that a well-structured political economy allows people seeking their private interests simultaneously to serve the public good. In order to make this happen, we need to move beyond piecemeal tinkering with tax reversion; we need to inject the process with a healthy dose of common sense and move it beyond its origins in the 19^th century before the start of the 21^st century. The tax reversion proposal under discussion today will accomplish that goal.