When Cities Are Too Generous
Budget season is here, which means jettisoning the long-term strategies birthed in the idyllic days of budgetary prosperity. Or if not jettisoning, at least reconsidering. Expansion of public transit gives way to finding drivers, youth monitoring programs disappear and are replaced by the tried-and-true method of jailing, and plans to plant trees are replaced by the realization that we had enough trees all along. And taxes, the lowering of which is the cornerstone of any city’s long-term growth strategy, stop their declines or return to the higher levels they knew before “tax relief” entered the lexicon of strategists’ vocabulary.
Tax abatements – programs which allow developers, homebuyers and/or businesses to forgo paying property taxes or pay them at a reduced rate for a number of years – have been put on trial throughout the country. Houston, which has suspended its program, and St. Joseph County in Indiana, which is scaling its back, are just two of many municipalities that are carefully reevaluating the benefits of tax abatement in a time when a shrinking tax base is the primary pain of the crisis for cities. The idea is that in these times, one can only raise actual tax rates – like sales and wage taxes – so high without inducing flight, so tweaking how tax abatement is applied can be an alternative way to raise taxes without really raising taxes.
It’s not clear whether or not doing anything with the programs will make a difference right now, with homeownership declining and businesses tightening their ambitions for expansion – it might deter these individuals, but they’re already deterred by their own lack of money. In the past, tax abatements have clearly had effects: The revitalization of Philadelphia’s downtown is often ascribed by many to the city’s ten-year tax abatement for new homeowners. The Wall Street Journal recently published an article about Philly’s program and told an anecdote about a man who moved from Boston to Philly and bought a $495,000 condo while paying $125 annually in property taxes – and commutes to the Philly suburbs.
Still, tax abatement programs have often been considered too generous, and cities are now wondering if they’ve been giving away free money. A 2005 study at Indiana University found that the programs usually cost states (which this study focused on) more than they brought in. At least concerning tax abatements that completely nullify property taxes, it doesn’t sound like an unreasonable accusation.
Obviously, backtracking on the tools used for growth is something no city wants to do, but it’s good time for cities to wonder if they overshot their tax abatement programs the whole time. It’s easy to look at growth in a city, then look at the tax abatement program and decide that one wouldn’t exist without the other. Largely, it’s often true, but that doesn’t mean growth would only have occurred with the programs in their current forms. It’s important to reevaluate equilibriums to maximize benefit, and if cities can make more money without hampering growth, this is the time to figure it out. Right now, an overly generous tax abatement looks like a city throwing money into the streets standing out the sky roof of a limousine, even though that limo is about to be repossessed.
Philadelphia’s Ongoing Self-Perception Problem
Bill Lindeke in Saint Paul, MN 55117 on Wed, May 27, 2009 at 10:05am
I’m not sure that the article claims that the man was commuting all the way to Boston. Rather, he moved from Boston, and was doing a “reverse commute”, most likely to somewhere in the Philly suburbs.
Diana Lind on Wed, May 27, 2009 at 12:05pm
Glad you wrote about this! I think tax abatements are tricky—perhaps generalizations of whether they are good or not should be avoided. Still, I think there’s little sense of accountability when a project fails to bring a city the revenue. I wonder if there isn’t some kind of interim report that projects could file to see whether they deserve the full term of the abatement?
Andrew Thompson on Wed, May 27, 2009 at 12:49pm
Yeah, good call, Bill. I think my brain selectively left out the part about the suburbs beacuse the idea of a tax abatement being so generous that a guy commutes 4 hours to Boston everyday was just too good. Too bad the internet allows for instant fact-checking. Edits on the way.
Max in Seattle on Wed, May 27, 2009 at 3:37pm
Hey Andrew- I know the thesis of this article is to bring a discussion about the downtown tax abatements as a public policy. . . .but I think your intro distracts from the article.
Obviously, if cities, and government more generally, developed policy using a serious cost benefit anaysis our prison poulation would be tenth of what it is, our youth and other diversion programs as well as our education and medical systems would be light years above where they currently are. . .
liz in dc on Fri, May 29, 2009 at 1:50pm
tax expenditures in general are sketchy and sneaky financing tools, and the popularity of this kind of off-budget spending is what helps cities like dc fall into a multi-billion dollar budget shortfall (and will probably come at the expense of the city’s already failing public school system.) see the center on budget and policy priorities’ recent report that calls out states (but this certainly applies to cities too) on the need for budget transparency and more specifically, through detailed tax expenditure reporting and unified development budgets, so that the full impact of tax abatements, credits, and exemptions on revenue and the budget overall is made clear
thanks for posting this, its an issue that needs alot more attention especially as the issue becomes increasintly relevant
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