Proposed luxury apartment tax break isn't enough to fuel Baltimore redevelopment
Originally published in the Baltimore Journal
Here we go again: With dogged determination to keep doing the same things while expecting different results, Baltimore now plans to expand its tax credit program for new luxury apartment developments.
Started in 2013 with generous credits (zero property taxes for two years; reduced rates for the next eight) for developments of 20 units or more, the idea now is to lower that threshold to 10 units. Councilman William Henry argues that this will make smaller-scale investments economically feasible and spread development to neighborhoods other than downtown or along the waterfront.
He is correct that, given the city’s non-competitive property tax rate (more than twice that available a few miles away in Baltimore County), a lot of projects “don’t pencil out.” That does not make another narrowly focused, highly discriminatory subsidy program a good idea.
The first reason to stop handing out these special breaks is that they are not and never will be enough to fuel a genuine renaissance in Baltimore. Proponents of the existing credits on larger developments will doubtless point to the shiny new buildings that have arisen, and the millennials and others happily nesting in them, as proof of their utility.
But our overall population numbers make clear that we are not actually growing the city with such programs, but merely re-arranging where folks live within it. Since this program kicked in, after all, we’ve lost 20,000 city residents (through, of course, numerous ills, most especially our horrific crime rate, which explains some of that exodus).
The simple fact is that unless the entire city’s economy is growing, the new subsidized developments (which, thanks to the tax breaks, can offer lower rents or greater amenities than older, unsubsidized ones) chiefly just poach customers from existing areas. Exhibit A might be the way the Harbor East development drew retail and dining business away from now-bankrupt Harborplace.
The second reason has to do with what economists call, in typically stilted fashion, capital misallocation — e.g., installing new carpeting when you’ve got a leaky roof. Why target tax breaks and raise the return on-investment just on luxury apartments? Why not on office buildings, or factories, or neighborhood pubs, for that matter? If the city’s tax rate was competitive for all, we’d find that investment capital not only floods into Baltimore but finds the uses preferred by consumers rather than those that simply have gotten the attention of politicians.
Third, these special breaks are grossly unfair. The current system creates two classes of Baltimoreans, one tax-privileged and the other tax-punished. In this case, those owning or residing in older or smaller apartment buildings pay significantly higher property taxes than those in newer or bigger buildings. More generally, those who invest in ways that the city’s leaders have favored with incentives — and so far, that has been mainly large-scale developers who can afford to “pay to play” — get competitive tax rates, while everyone else gets left with a relatively larger share of the city’s tax burden. That’s not only highly discriminatory, but invites corruption by those doling out the special deals.
There is a much more effective, more equitable way to encourage investment in Baltimore: a property tax rate that is competitive and applies fairly to everyone, everywhere. The plan recommended by the Maryland Public Policy Institute, in a nutshell, would amend the city charter to cap the rate at 1.1% (identical to the surrounding county’s rate), but effective in six years, after two assessment cycles on city property. This competitive rate would immediately attract investors who want to get in on the ground floor, thus growing the city’s tax base. Extra revenues above those needed to maintain current spending levels would be put in a “lock box” so that the city would have “cash on delivery” to pay for the cut. So Baltimore can be competitive without de-funding key programs.
Defenders of the status quo will argue that this is risky and unaffordable — as if being non-competitive is a safe, viable approach that is working well. Others identify tax cuts as a Republican policy in a Democratic city, and argue that we must turn the tide on crime before we worry about property taxes — as if investment and job growth are not crucial treatments for the root causes of crime.
We simply must think and act differently if Baltimore is to attract investment to all areas, grow its economy and help all our citizens flourish.
Stephen J.K. Walters is the author of "Boom Towns: Restoring the Urban American Dream" and chief economist at the Maryland Public Policy Institute. Email him at email@example.com.