Slash Baltimore property-tax rate in half, economist says
The long-standing political consensus on Baltimore's property-tax rate seems to be that it's a necessary evil. The nearly 2.3 percent rate is so much higher than in the rest of the state that it's a disincentive to buy in the city, but substantially lowering it would immediately dent revenues and force big budget cuts -- so the argument goes.
Steve Walters, an economics professor at Loyola University Maryland, is offering up a plan designed to get the city out of that box.
He and a former student, Louis Miserendino, suggest the city reduce the tax rate by half -- yes, half -- in one fell swoop. But not right this instant. Instead, they write in a new paper, officials should amend the city charter to ensure that the rate will drop in, say, 2015, giving people a reason to buy while prices are still depressed (compared with the suburbs) by the current rate. Then bank the extra money that flows in and spend it only after the rate is cut.
Walters believes that "cash on delivery" plan would be a bridge over the initial budgetary chasm of a halved tax rate. Cities that were forced by tax revolts to slash rates 30 years ago saw revenues surpass their original levels pretty quickly, he said -- within four years in San Francisco, for instance.
Here's a Q&A with Walters about the plan, the political reaction and why he thinks the property-tax rate is the key reason for Baltimore's decades-long population loss.
But if you've seen that already, I figured you might like to hear more of what he had to say and offer your feedback. Read on:
Question: Some have argued that the city's tax rate isn't so very bad because property prices are lower in the city than the suburbs, and thus city residents' total costs aren't necessarily higher. What are your thoughts?
Answer: Even economists have been, I would say, complicit in this policy disaster, because that's exactly the argument that economists made back in the '50s and '60s. And this is called tax capitalization: If taxes go up, your property values go down, so it's a wash. And yeah, it's true; the purchase price of a house is cheaper in Baltimore, all else the same, than it would be in the lower tax environment in the suburbs, but that's looking at all of this housing and business property as if it's completely static and never depreciates. But it does.
If you're a homeowner, you know it depreciates. ... We need new kitchens, we need new roofs. ... You have to put money into it. Once the property tax here is higher than in the county, every new investment exposes you to that capital loss that county residents don't pay. ... So what happens is city property decays. People who were thinking of making these investments make them in more favorable tax environments. It leads to more decay in the city; it leads to more out migration.
A: I don’t know of any. ... I just have not found cities that have a property-tax rate of 3 percent, 2 1/2 percent, getting into the punitive range, that are doing very well. Just about every city that people identify as fiscal basket cases are high-tax jurisdictions.
I had one guy write to me from West Chester in New York, and apparently their property taxes are high, and his claim is, "We're happy with our property taxes because we know we have the best schools in the New York area and the safest streets in the New York area." That's fine. If your high property taxes are efficiently delivering high levels of service, then you probably won't see this high level of out migration. Because people are saying, "I’m probably getting value for my money." But I don't think people would say in the same in Baltimore.
Q: How do Baltimore's spending levels compare with San Francisco and Boston?
A: San Francisco spends more than twice as much as Baltimore per resident. So San Francisco's city government is not cheap. Prop. 13 isn't choking the city -- because the tax base has grown so robustly, San Francisco spends much more per capita than we do on city services. Boston spends about 25 percent more than Baltimore does. (I think it was the 2005 budget year I looked at.) Both Boston and San Francisco have the wherewithal to address some of the issues like schools and crime ... that we don't.
Q: What do you say to those who argue that the city should focus on schools and crime before it tackles the property-tax rate?
A: This is not something you can compartmentalize and say, well, first, we have to do something about the schools. ... This is something that will contribute to all those concerns. I just don't see the city joining the superstar ranks without this fundamental change. Unless it does this, unless it creates a more favorable environment for capital investment, I see the city limping along as it has in recent decades, always wondering why ... it's having a tough time with population loss and other issues. It should be no mystery.
When you change the property rate, the property-tax base changes over time. If you raise the property tax, the base shrinks. People stop making investments. Frustrated residents move out and sales fall. These dynamic effects, they can work for you or they can work against you. For decades, they’ve worked against us.
Neighborhoods become safer when you've got more people in them. Schools become better when enrollments are rising and parents are concerned. When you attract new residents to the city, you'll bring not only their tax receipts, but you'll bring more eyes on the streets to make the streets safer.
Q: How has the property-tax rate affected Baltimore's business base?
A: It made employers want to leave. And as we depopulated and impoverished ourselves by this capital scarcity, then all these other problems began to get out of hand. ... The businesses that we have hung onto aren't capital-intensive businesses. They're human-capital intensive.
Q: What would you suggest voters do if they want to see a large property-tax cut?
A: It's like in any market. You have to send a signal to producers about what you want produced, and when somebody comes up with something you want, you have to buy it.
My point has long been, the candidate that actually does this is going to change the destiny of the city so dramatically that this person becomes not just a successful mayor but a national figure. ... If you're thinking of a way to distinguish yourself from the herd, you'd say, "I'm going to reform the property-tax system, and that's actually going to save the city."
Q: Would you move back to the city if elected officials take your tax advice? (Note to readers: Walters relocated to Lutherville in the late '80s after living in Baltimore.)
A: Oh, sure -- I've been trying to get my wife to move back for a while. But she has friends and other entanglements in our area. She's starting to crack, though.