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January 24, 2011

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.

Q: You offer Boston and San Francisco as examples for Baltimore to follow. Are there other cities that were worse off after cutting property-tax rates?

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.

Posted by Jamie Smith Hopkins at 12:01 AM | | Comments (14)
Categories: Property taxes, Q&A
        

Comments

Prof. Walters mentioned that some mayoral candidates have contacted him. Who are the candidates? Would be nice to know for the voters out there!

Good article. I really agree with the one part that discusses taxes compared to services. I wouldn't have such heartburn with the high taxes if I was getting great services in return. However, we have high taxes and high crime, bad roads, and bad schools to name a few. There are very few reasons or situations that people should move to Baltimore. I can not wait to leave. The benefits no longer outweigh the serious issues the city is facing.

Compare houses in any county to the city. You can get triple the house for the same cost and a majority of the reason is taxes. Who would want to spend $8-12K/year on taxes to live in a crime filled city without parking and bad schools? I get it if your single, married without children, or something like that, but otherwise I just don't get it.

"San Francisco spends more than twice as much as Baltimore per resident. So San Francisco's city government is not cheap."

Of that amount...
what percentage is from the city RE taxes?
what percentage is from city income tax?
what percentage is from State resources?
what percentage is from Fed resources?
what percentage is geared toward the rather minimal muni services that employed and responsible people actually use?

And how do those numbers (and percentage) compare to ten or twenty years ago?
---
All that said, the idea of a promised but delayed introduction of lower rates to beckon a similar influx of flush yuppies and dinks... whose illustrious presence would then inflate their property values for the subsequent wave of yuppies and dinks they'll inspire to pay.

Frankly that all sounds a bit too Ponzi for me.

This [lower property tax rate] will never happen because Baltimore City is not interested in attracting middle income people.

Conceding that the city has at least given lip service to the topic, it needs to be much easier to buy city owned property, as well as renovate any property. Buying city owned property is currently near impossible, and renovating any property is delayed by an average of a month due to the myriad of permit requirements.

This would help to lower unemployment due to the complement effect. Viable buildings are a complement (that is they go along with, think hot dogs and buns) to employment. Lower government imposed barriers to renovation, increase renovated, viable buildings, and you increase employment.

I'm also not 100% convinced that the city can "Laffer Curve" its way out of this problem. I read the entire study and while it cites Boston, the it only goes into deep, numerical detail with San Fran. The period of time covered coincides exactly with the Silicon Valley computer explosion that took place in San Jose. This tech boom sent San Jose's population, as well as real estate prices soaring, and San Fran would have benefited from the substitution effect (think Coke and Pepsi) given it's close proximity. San Fran's success story may be more corollary than causal.

It is true that migration is far more sensitive to local tax rates than to state or federal tax rates, but to halve the rate and expect revenue to stay the same or increase long-run is highly optimistic, and would likely require some exogenous factor (something outside the model, such as a world changing tech boom from the city next door).

Cutting the tax rate is a good idea, but in the interest of full disclosure, it's going to need to be balanced with some serious spending cuts.

Does anyone know how the property tax rate can be lowered? Can the mayor or comptroller make the decision, or is it up to the entire city coucil?

Having middle class families living in the city benefits everyone. Politicians need start thinking creatively and this idea is a good place to start. We need middle-class families in the city for it to become more civil, and more attractive. High property taxes discourages people from raising kids in the city. Lets work to change that.

One way or the other, it's GOT to be done. If it's even ONE of the factors contributing to the spiral of decay of Baltimore, at least it's a start and may serve as a calalyst -- force officials to seriously confront other issues on the plate. Bologna to the argument that it's ok for the tax rate to be higher because the housing stock in B is cheaper. People in Howard County don't have to spend thousands of dollars on private schools. Average people, far from being rich, in B make enormous financial sacrifice to avoid the public schools.

Sorry about the late reply, semiconscious. Walters didn't want to say on the record who had contacted him for more details, since (a) they didn't say "feel free to spread the word!" and (b) they're looking for information rather than signing on to the plan at this point.

Because I happened to be chatting recently with Joseph T. "Jody" Landers III, the Greater Baltimore Board of Realtors exec who's considering a mayoral run, I asked him if he was one of the four. He said yes:

"I fully agree with their analysis and the need to lower the property tax rate in order to grow the real property tax base," he wrote me in an email. "The only issue that requires further discussion and debate in my judgement is the means and method used to achieve a lower City tax rate. But I completely agree with their assertion that the rate must come down in order for the City to attract businesses, jobs and new residents."

I hope to do a real estate focused Q&A with mayoral candidates, once the campaign has started in earnest.

If Landers III runs on this platform, I will vote for him. Jamie, continue to interview him and give us more information.

"...the rate must come down in order for the City to attract businesses, jobs and new residents."-JTL

Well gee Jody, Is there is anyone who doesn't recognize this?

As alluded to many times, including within this specific thread, the issue of increasing both the raw number AND the percentage of middle class INCOME tax paying citizens must be the overarching goal and premise to the several tactics that get implemented... even if that does mean displacing non tax paying people (as it inevitably will).

This shift in the demographic is the underlying message of razing 5000 old addresses to rebuild with something that will attract those middle class INCOME tax payers with a choice of where they'll pay RE taxes.

It's time for the shift.

I bet areas like Hamilton would explode if lower taxes are passed.

Hamilton and Lauraville would get a lot of new residents if the taxes became more reasonable. Not to mention Highlandtown, Remington, Bayview, and other areas that have great houses and fun locations.

I only wish, as the post by Mr. Rational implies, that the need for reducing the property tax rate was clearly understood and embraced by everyone. The problem is the top officials in the City, including the Mayors and most of the City Council members elected over the past 20 plus years, have not made it a priority. I intend to make it a priority, along with making the City safer, improving schools, and keeping the City clean.

I do agree that it is time for City government to shift and be more creative and efficient. Continuing to operate the City government as usual, is just not good enough. If the City is going to grow and thrive, reducing the property tax rate for both residents and businesses is imperative.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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