Saturday, June 02, 2007

 

A Tax Break or Market Reality?

Over at Crablaw Maryland Weekly, our host takes note of an apparent recent Baltimore City deal to get a new building built for Legg Mason, one of the few remaining big-time players still left in Baltimore. Crablaw references a Baltimore Sun article and provides some useful background information. City Council Proposes Tax Relief to Suffering Millionaire Developer, Investment Bankers

He correctly notes that Baltimore City has the state’s highest property tax but concludes:

“It's hard for me to be sympathetic to the idea of giving a massive tax break to a large corporation to move 12 blocks around the harbor when every middle-class homeowner gets no such break. It's literally regressive taxation: the poorer you are, the more you pay, and if you are very rich and have "juice" in the City Council, you come closer to taxing them than the other way around, it appears.”

I echo his lack of sympathy for the developer, John Paterakis. In his defense, though, I don’t think Mr. Paterakis is looking for any. The difference between him and the middle-class homeowner is that Mr. Paterakis got to say up-front to the city “I’m not investing that kind of money with that kind of tax burden.” Many middle-class homeowners would have told the city the same thing but instead had to communicate it with their actions – moving out or just not buying within.

A city with as many inherent advantages as Baltimore should be awash with investment dollars as developers clamor for the opportunity to meet the demands of the thousands seeking to live there. That, with the exception of a few neighborhoods, it is not is a reflection of the city’s poor schools, world famous crime rate, long-standing incompetent governance and yes, a too-high property tax rate that leaves most questioning exactly what they are getting for their money.

Just because a government establishes a certain tax rate doesn’t mean that tax rate is either appropriate or fair. The fact that it seems that every time Baltimore wants to get something built it has to go negotiate a lower effective tax rate is not an indictment of the investors/developers but is rather an obvious clue indicating poor rate setting. Of course, any attempt to change this would run up against the city’s entrenched Democratic Party culture that rails against “tax cuts for the wealthy” as a matter of moral certainty. Instead, Baltimore will probably continue to be the subject of articles describing deals thusly:

“A leading Baltimore developer would receive more than $33 million in city tax breaks to build a landmark headquarters for Legg Mason at an exclusive waterfront address, officials close to the proposed deal confirmed yesterday” Tax break meant to keep Legg Mason - baltimoresun.com

I don’t know if this is a good or bad deal for the city…or for Mr. Paterakis. After all, he still has to invest a lot of money to make the deal work. But since I’m not hearing or reading about a lot of other developers willing to do the same project for less from the city, I’m thinking this is more a market adjustment rather than a tax break. In other words, without the tax adjustment – and, thus, without the project - how much would the city be collecting in taxes? I’m guessing that in doing the deal, the city believes it still comes out ahead despite the so-called “city tax breaks”.

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