Submitted by Roldo on Sat, 05/16/2009 - 17:25.

What’s the problem with tax abatements, tax exemptions and tax incremental financing (TIF), all incentives that reduce property taxes?

Why shouldn’t Cleveland give developers as much property tax relief as they want? After all, developers are producing something in return. They are producing what should result in economic development, right? Making jobs. Revving up economic activity, right?
There has been an argument about this issue in comments to a couple of items I’ve written here for RealNEO, particularly on the Wolstein East Bank Flats project. The stalled project is loaded with freebies.
 - Tax abatement results in taxes being forgiven for a period of time at a certain rate.
 - Tax exemption means the property NEVER pays property taxes. However, in all cases the land upon which the property is located does pay taxes. Typically the rate paid on the land is the rate before the development. However, Gateway’s property taxes on land did increase because County Auditor Tim McCormack ruled it became more valuable,
 - Tax incremental finance works this way: A developer will rehab or construct new buildings. The developer will pay taxes on its project at the same as others pay.
However, the TIF taxes evade the purposes provided by normal payment of property taxes.
In Cleveland, the taxes on TIF properties - rather than going to support the schools, County, City and city libraries in Cleveland - will be used otherwise. The taxes will be used for some aspect of private development. TIF taxes evade the normal channels.
Typically, I’ve been told that Cleveland schools get some 60 percent of property taxes paid on Cleveland property. That’s not exactly correct.
Here’s how property taxes in the City of Cleveland alone presently works, according to Bryan Dunn, budget analyst for Cleveland at the County Auditor’s office:
- Commercial and Industrial property taxes are broken down in the following manner: Of the total taxes collected, Cleveland schools get 55.12 percent; Cuyahoga County gets 21.24 percent; the city itself gets 15.68 percent; and finally city libraries get 7.96 percent.
- Residential property is broken down differently. Of the taxes collected, Cleveland schools get 44.89 percent; Cuyahoga County gets 25.97 percent; the city itself gets 19.61 percent and city library system gets 9.53 percent.
When taxes are abated, the flow of revenue to these governing bodies stops. The money goes elsewhere. Typically, into the pocket of a developer or its tenant. Or some of both.
The problem with all these tax subsidies is that others have to pick up the slack of lost tax revenue. The Cleveland schools, of course, take the biggest hit. You’ll notice that on Saturday the Plain Dealer reported the Cleveland School of the Arts will have to lay off instructors. Reason: lack of money.
Cleveland, with its downtown and many non-profit facilities (as Gateway), loses the most revenue. This is quite unfair since most of these facilities and institutions serve the entire region.
Typically, the projects that receive these extra tax benefits are further subsidized by other financial incentives from all levels of government, including the state and federal.
This gives developers with new projects a double advantage that those businesses that are not new usually cannot get. So a new retail or housing outlet gets preferential treatment that older retail buildings or housing don’t get.
In fact, they may have to make up the difference. That puts them at a double disadvantage.
For instance, in the proposed Wolstein project both tax abatement and TIF abatement are bestowed. That’s not enough. There are added incentives - low interest loans by the Port Authority ($11-million value), by the city ($6 million value), parking revenue bonds (estimated at $8.5 million value) and on and on.
The Wolstein project will enjoy a TIF estimated to divert $11.1 million and tax abatement at 100 percent for 15 years for some 300 housing units. The city put no price tag on how much revenue it will lose on these abatements.
These to me are give-aways that should not be necessary. The city has enough problems providing needed services without throwing money into private businesses. This kind of welfare should stop.
Why? Here’s the catch. Despite the subsidies and the forgiven taxes, the city will be obligated to provide all the city services it provides elsewhere.
Everything will need to be provided from EMS service and fire and police protection to garbage collection, from building inspections (hopefully honestly) to street sweeping and snow removal. All the range of other services provided by other entities of government – schools, RTA, County – will also have to respond to serve this project.
Indeed, because this will attract a higher income clientele – both as workers and residents – my guess is that services will be better than what ordinary citizens get in the rest of the city.
You can walk in the Gateway and Warehouse districts and you will see pricy curbing you don’t see in neighborhoods. Paving stones not seen in ordinary part of the city.
The city cannot afford to continue to abate the property taxes of new construction to the detriment of older neighborhoods and existing downtown buildings. City revenue needs demand that everyone pay his or her fair share.
If business can demand these added incentives, why not homeowners? Wouldn’t it increase economic activity if the homeowner could decide not to pay a portion of his or her property taxes and use the savings for a new porch, roof, sidewalk or even garden?  Why should those maintaining their properties not get the same treatment?
That doesn’t sound feasible to you? Well, maybe that’s the way to think about the wholesale tax forgiving going on in Cleveland for many years now.
It’s a matter of values. Our values have been out of whack. We keep enriching new development. We keep expediting the death of existing development.
We are wasteful to our own demise. Politicians serve those with wealth. It is to the dire detriment of the community.
You would think that the desperate situation we’ve gotten ourselves into would have us thinking differently. However, I see us on the same disastrous course.
Freebies continue to be demanded by the wealthy. The rest of us seem to have no leverage to stop it. This despite evidence it is not working to the benefit of almost all of us. We see it in the continuing steep decline in Cleveland.
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