When Cities Are Too Generous

In his column, Metronomics, Andrew Thompson wonders whether tax abatements are an effective prescription for long-term urban health.

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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.

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