All Watched Over By Tax Breaks Of Loving Grace

economic-4

Although I know that I have a facility for talking pretty, I also know that I’m rarely the smartest guy in the room.

To compensate, I work on discerning “the heart of the matter,” that one small thing that unlocks the meaning of a much larger thing. Understand the most essential question at play on any issue, and 90% of the chatter swirling around it sounds like Charlie Brown’s teacher.

These days Baltimore is as much a metropolis as it is a national stage for some of The American City’s most entrenched and, sadly, sensational problems, several of them on a thin line separating the tragic from the ridiculous.

Against this backdrop of urban stagnation at best and anarchy at worst is a promise of renewal called Port Covington, the largest real estate development project the city has ever considered.

Here are the basics:

Sagamore Development, a private real estate firm owned by billionaire Under Armour CEO Kevin Plank, has proposed a plan to redevelop Port Covington, a mostly industrial waterfront area in South Baltimore. Over the next two decades, the ambitious plan would remake the area with offices, homes, shopping, restaurants, waterfront parks and a new state-of-the-art campus for Under Armour.

Sagamore has requested $1.1 billion in support from local, state and federal governments for needed infrastructure for the roughly $5.5 billion project. This includes $535 million in tax increment financing from Baltimore City, with the money coming from municipal bonds and repaid through new property taxes generated by the project. This is by far the largest tax-increment financing deal, or TIF, ever proposed in Baltimore and among the largest in the country. The developers of Harbor Point, for example, received $107 million in TIF funding for a roughly $1 billion project.

SOURCE: “Port Covington Redevelopment Examined” | The Baltimore Sun | Adam Marton, et al

The total price tag for the city would be “$658.6 million in 30-year bonds, including $5 million for insurance costs and $65.8 million for a reserve fund.”

MuniCap, a Maryland consulting firm hired by Baltimore City to assess the TIF proposal, projects 35,000 permanent jobs once the project is completed (as well as 14,000 temporary construction jobs over the expected 20-year life of the building project) and $1.7 billion in revenue for the city over the next 41 years. Of the permanent jobs, MuniCap projects:

[T]he equivalent of about 22,602 full-time positions on site, of which 17,521 would be office positions; 4,857 in retail; and 139 in manufacturing. Those estimates include the 10,000 employees Under Armour expects to fill its new campus. (About 2,000 currently work in its Locust Point headquarters.)

SOURCE: “17 things to know about the Port Covington TIF” | The Baltimore Sun | Natalie Sherman | 4/29/2016

How are we to judge if Port Covington is a good deal for the city and/or its citizens?

Some support the project, which means supporting the massive tax financing it requires from the city:

The problem is the potent investment repellent that is Baltimore’s property tax rate. According to Mr. Plank’s plan, Port Covington will eventually have an assessed value of $2.6 billion, putting him on the hook for $59 million in annual property taxes.

If, instead, he built a similar project in Baltimore County, his tax bill would fall by $30 million. Every year. Forever.

SOURCE: “Think Bigger Than Port Covington” | The Baltimore Sun | Stephen J. K. Walters | 8/26/2016

I’m skeptical that any of the projected benefits of the project—the real estate development, the jobs, the tax revenue—are adequate for evaluating if what the city will get in the future will be worth what it’s expected to give up now, a substantial portion of its future tax base.

To me, the heart of the matter is real median household income (RMHI):

Household income is measured in various ways. One key measure is the real median level, meaning half of households have income above that level and half below, adjusted for inflation.

SOURCE: “Household Incoe In The United States” | Wikipedia

In Baltimore, RMHI has been flat since 2005:

Trends in Baltimore, MD Real Median Household Income since 2005

The current median household income for Baltimore is $71,501. Real median household income peaked in 2007 at $72,733 and is now $1,232 (1.69%) lower. From a post peak low of $68,910 in 2011, real median household income for Baltimore has now grown by $2,591 (3.76%).

Real Median Household Income: Baltimore, Maryland, National

SOURCE: Department Of Numbers, Baltimore / Towson / Maryland Household Income

Nationwide, for most families and households, RMHI hasn’t moved much since the 1970s:

Our study of the Census Bureau’s historical data shows a 651% growth in median household incomes from 1967 through 2014. Sounds impressive, but if you adjust for inflation using the Census Bureau’s method, that nominal 651% total growth shrinks to about 21%.

But if we dig a bit deeper into the method of inflation adjustment, the American Dream looks more like an illusion, as in “money illusion“.

SOURCE: “Median Household Income Growth: Deflating The American Dream” by Doug Short

Because it adjusts for inflation, real median household income is a measure of real purchasing power over time. In any American city (especially one like Baltimore) that since the 80s has often needed complexly structured incentives to attract business, the real purchasing power of citizens is the context within which any discussion of trading tax subsidies for real estate development should be understood.

Given how stagnant RMHI has been (particularly for the the bottom 75% of households) if there’s any indication that a all-or-nothing project like Port Covington can move income trends upward, then the average citizen has a good reason to support it. If not, then every Baltimorean has every reason to ask “what’s in it for me?” until (s)he gets a satisfying answer.

Instead, we get projections of future jobs that will be created (if they’re not automated out of existence by the time that the project is finished) and the millions of (un-adjusted for inflation) dollars that will flow into the city if we pull the trigger. Accompanying these are vague and well-worn threats that if Baltimore City doesn’t build Port Covington, a more amenable locale like Baltimore County will.

All of this is a distraction. If moving the needle on real median household income in Baltimore is apples, Municap’s projections and Plank’s threats are oranges, as no one talks or has the slightest clue about the net benefits of Port Covington in real terms.

Instead, in reference to Baltimore City’s “punishing tax rate,” we get this from Walters’ opinion piece:

This tax gap [between Baltimore County and City] has fueled suburban sprawl and urban decay for decades — and has disparate impact on Baltimore’s majority-minority population. Just in Freddie Gray’s tragically short life [from 1989 to 2015], the city lost 111,000 jobs and 164,000 residents.

Which is followed by this:

This is why every major redevelopment project since Charles Center in the ’60s has been subsidized, whether via TIFs (tax-increment financing for infrastructure that, out in the counties, is customarily paid for by developers), PILOTs (payments in lieu of taxes) or other tax credit programs.

This kind of thinking should sound eerily familiar. It’s from the Book of Trickle Down Economics. Unfortunately, in this post-financial crisis and perhaps post-globalization age, the gospel according to Ronald Reagan doesn’t move us the way it used to, and sometimes leads to self-refuting arguments.

For instance, per the Bureau of Labor Statistics, in January 1990, total jobs in Baltimore totaled approximately 459,000, then declined steadily over the years to 357,000 by January 2016. (1) If various forms of tax subsidy schemes have been a part of major real estate development in Baltimore since the 1960s, and Baltimore City has lost “111,000 jobs and 164,000 residents,” as Walters points out, in just a 25-year segment of that time, then perhaps we should also question just how effective those tax subsidy schemes in particular and tax breaks as such can be as ways of generating broad-based growth in post-industrial American cities where the manufacturing and tax base have been hollowed out, wealth inequality has increased, real wages for many are stagnant, and GDP growth is anemic.

No one has even attempted to make a sound argument that giving away or “investing” $660 million for Port Covington will do anything to juice the purchasing power of the typical Baltimore household, which really means that no one has given a sound argument that Port Covington will do anything for Baltimore City as a whole.

Indeed, Walters admits that Port Covington won’t have much economic impact beyond what I like to call “the enclave effect”:

[I]t’s hard to imagine Covington’s economic dominoes toppling to the other side of the tracks in South Baltimore, much less to the city’s destitute east and west sides.

He then adds:

[T]his subsidy will no more reverse the city’s decades-long economic decline than did previous ones for Harbor East or Harbor Point. This is weak medicine at best, and terribly inequitable because it is being withheld from those most in need.

For too long, city leaders have dismissed broad-based tax relief as unaffordable. But their eager embrace of Mr. Plank’s audacious request itself challenges this claim.

Walters’ solution is cutting Baltimore property taxes in half:

Cutting the city’s property tax rate in half would, indeed, cut receipts by about $400 million this year. The contemplated $1.2 billion in city, state and federal subsidies for Mr. Plank’s project alone would cover three years of such losses.

But, of course, with a competitive tax rate the city would not only be attractive to Mr. Plank but to untold numbers of others who would like to invest in Baltimore but lack political muscle to win the concessions that would make this worthwhile. The city’s tax base — its property values, its piggy-back income taxes from new residents and much else — would grow in exactly the way described by Port Covington’s advocates. Just much more, faster and beyond “rich enclaves.”

This idea sounds a little better, but I have doubts, as it still depends on us accepting the ideology of the trickle down effect from haves to have-nots, despite little evidence that it has ever actually lived up to its hype.

If cutting taxes really works as advertised, then perhaps Baltimore would be better off giving the citizens (including those who don’t own property) who pay taxes and fees to support city services a $660 million break over the next 20 years. If tax breaks really work for the few, why not try them for the many? It just might happen that the city would see such an increase in growth and GDP that we wouldn’t have to pay large companies to stay. Likewise, the sort of veiled threats that Under Armor would move somewhere else if Baltimore didn’t play ball would be so much dirt off the city’s shoulder. Indeed, it just might happen that large companies might compete with each other to come here.

Taxes, surprisingly perhaps, are like children. Both are claims on what we believe to be a better future, else we wouldn’t go through the work of producing either. That’s the true heart of the matter here. Just as no good parent would send a child into an uncertain world, no one who understands the demands and responsibilities of citizenship should send his city into as uncertain a future as one in which Port Covington offers dreamy promises in exchange for real world cash.

@dexterkflowers

NOTES:

(1) To get this data, follow this link, then enter 1990 and 2016 as output options.

IMAGE SOURCES: economic-4.jpg

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