Loyola Sellinger School Professor Stephen Walters Discusses Harbor Point

Stephen J. K. Walters

Stephen J.K. Walters is Professor of Economics at Loyola University Maryland and author of Boom Towns:  Renewing the Urban American Dream (forthcoming from Stanford University Press).  In this Q&A, he discusses the current controversy over the city’s decision to subsidize the Harbor Point development project and critiques the city’s tax and redevelopment policies.

Q:  City officials claim that projects like Harbor Point would be impossible in Baltimore without subsidies like Tax Increment Financing (TIFs) and other special breaks.  Is this true?
A:  Yes.  And it’s been true for every major development in the city since Charles Center was completed in the ‘60s.

Q:  Why?
A:  The city painted itself into a corner by raising its property tax rate 19 times between 1950 and 1975, to more than twice the rate in any nearby county.  That wouldn’t be a problem if city services – street safety, school quality, etc. – were twice as good as the counties’.  Since they’re not, it’s more sensible to invest in the suburbs than the city – so that’s what people tend to do.

Q:  How do the subsidies change that?
A:  If you crunch the numbers, you’ll find that the up-front cash infusions in the form of TIFs, enterprise zone credits, and other subsidies generally cut the effective property tax rate on a city project just enough to be competitive with that in the counties.

Q:  That seems discriminatory.  Isn’t it unfair for big developers to get a competitive tax rate while everybody else pays a much higher effective rate?
A:  Definitely.  And the furor over Harbor Point illustrates how much people care about fairness in public policy.  But subsidizing “big footprint” projects downtown and largely ignoring the rest of the city’s 80 square miles is not just inequitable, it’s ineffective:  without a competitive tax rate for all, the city will fail to attract the volume of new investment and population it needs to truly prosper.

Q:  So why doesn’t City Hall cut the property tax rate to a competitive level?
A:  The official answer is that we can’t afford it; that cutting the property tax rate significantly would force draconian cuts in vital services that would make all our current problems worse.

Q:  What’s the unofficial answer?
A:  Cut tax rates and the tax base will grow – but that will take some time.  And in politics, causing short run pain in pursuit of long run gain looks like a prescription for a short career.  In addition, when City Hall decides who gets multimillion dollar tax breaks and who doesn’t, collecting campaign contributions is a lot easier.

Q:  Isn’t there any way to get out of “the corner” we’ve painted ourselves into?
A:  Absolutely.  When other cities have cut property tax rates sharply, their tax base growth has been strong and relatively rapid.  San Francisco, for example, was losing population and jobs even faster than Baltimore back in the ‘70s, but after Prop 13 forced a two-thirds rate cut, that city enjoyed an investment boom and immediate in-migration, so overall tax receipts soared above their pre-Prop 13 level within four fiscal years.

Q:  But “within four years” sounds like three years of painful budgetary belt-tightening – which you’ve just pointed out is politically risky.  Any way to avoid the pain?
A:  My colleague Louis Miserendino and I put forth a plan prior to the last mayoral election.  In a nutshell, the city should amend its charter to set a competitive tax rate – but that amendment should take effect four years hence.  In the meantime, as investors try to get in on the ground floor, so to speak, property values will start to rise, new investment will start to flow, and population will increase (along with piggy-back income taxes), a la San Francisco.  If the city can discipline itself to hold the line on spending over that period and put added revenue in a “lock box,” it will have the means to maintain its budget priorities once the lower rate kicks in.  Not pain-free, but close.

The full details are here:

Q:  Sounds interesting.  Did any candidate embrace the plan?
A:  State Senator Catherine Pugh understood the unfairness and futility of the current approach, and vowed to implement the plan if elected – but she finished second in the Democratic primary.  If you’re a glass-is-half-empty person, that’s proof that good economics is often bad politics.  I prefer to think that it’s a nice first step along the right path, and that Baltimore will eventually get where it deserves to go.

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