Cut Baltimore City Property Taxes by Half

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A cynic might say that the current situation serves the powers-that-be quite well. Certainly, the city’s high tax rate is a major obstacle to investment, but by selectively rather than generally removing this obstacle, considerable power is focused in City Hall and the urban renewal bureaucracy. Developers who want the PILOTs, TIFs, and other goodies that will make a project profitable have to make friends in high places.

At the least, this vests with city officials an enormous amount of power over development decisions; at most, it is an invitation to corruption and a ‘pay to play’ political culture. In these circumstances, the recent investigations and indictments of Baltimore’s previous mayor and a previous member of its City Council with allegations of corruption involving payments or gifts from developers potentially seeking exactly the sorts of tax breaks discussed earlier are really not surprising. Indeed, given the millions at stake in these projects, the only surprise might be the paltry amounts of the alleged unethical payments involved in the cases uncovered so far.

But let us not be cynical: let us assume that city officials are not using the current inequitable redevelopment strategy to acquire more power or wealth, but simply fail to appreciate the strong dynamic effects of broad-based tax cuts. Or that they are convinced that the city simply cannot afford to cut taxes, for to do so would require such budget cuts (at least in the short run) that would harm the city (or, at least, their near-term political prospects).

Tax receipts are, of course, equal to the tax rate times the tax base. The most common blunder made by budget analysts and policymakers is to assume that the latter is fixed. Such thinking often leads officials to assert that, for example, every penny cut from a city’s property tax rate costs x million in tax revenue. Those millions of lost revenue quickly add up, so it is not hard to imagine rate cuts of any appreciable size leading to layoffs of police officers, firefighters, teachers, and so forth. In economics jargon, this is ‘static’ rather than ‘dynamic’ analysis. In the real world, the tax base is not fixed; indeed, it can change a great deal, and surprisingly quickly, in response to changes in tax rates.

The proposal is simple: lower property taxes to spur development outside of just the harbor, reduce blight and seriously reduce crime.

(Disclaimer: This idea is not original, it has been implemented in Boston, San Francisco, and Washington DC).

  • Since Baltimore is on a three-year assessment cycle, with one-third of city properties re-assessed each year, it should amend its governing charter to deliver a substantial property tax rate cut to take effect in six years, after two full re-assessment cycles.
  • To make investment in the city more attractive than in the surrounding county, this rate ought to be halved. To make this promised cut binding and politically inviolable, the necessary charter amendment should include a stipulation that repeal or modification requires a super-majority popular vote.
  • At the lower tax rate, all city property would eventually be more valuable, so savvy investors, developers, and homebuyers would begin to snap up existing properties immediately, delivering increased transfer and recordation taxes to city coffers. As values rise, renovations proceeded, and new developments are installed over the re-assessment cycle, near-term property tax receipts would actually rise. And as the city repopulated, additional piggy-back income tax receipts would also begin to arrive.
  • All tax receipt increases exceeding the rate of inflation during the period leading up to the rate cut would be put aside (perhaps in Al Gore’s fondly-re-membered “lock box”) as a reserve from which the city could draw to cope with any revenue shortfalls once the cut takes effect. By setting aside the fiscal dividend that would begin to arrive in anticipation of the city’s more favor-able investment climate, budget officials would have “cash on delivery” of the cut itself.
  • In combination with other measures, e.g., assets sales, including auctions of currently-worthless abandoned property, revenue enhancements from the elimination of unnecessary development subsidies, or debt financing similar to current “revenue anticipation bonds,” this fund would leave the city well-positioned to adapt to the eventual change in its tax structure.

There is no doubt that a substantial property tax rate cut will deliver a fiscal dividend: the rapidly-expanding tax bases of post-tax cut San Francisco and Boston are not accidents, but object lessons. Reasonable people might differ about how big the dividend would be in Baltimore or how soon it might arrive, but we need to stop assuming that we cannot afford tax cuts and start telling our elected leaders that we cannot afford to delay them any longer.

The strategy outlined here is a road map forward. If our leaders plan thoroughly, behave responsibly, and take this route to a more capital-friendly Baltimore, they need not slash budgets and suffer near-term political harm. Indeed, those who take up this challenge are very likely to be judged heroes of a genuine urban renaissance.