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'If you cut the rate, people will come'

Steve Walters has a modest proposal that makes Baltimore homeowners cheer and government bean-counters wince: slash the city's property tax rate in half.

The Loyola University Maryland economics professor, pointing to the modern rebirths of San Francisco and Boston after tax revolts forced drastic rate cuts three decades ago, has long argued that Baltimore would become a much healthier city if it followed suit voluntarily. More people would move in, he says. More owners would fix up dilapidated properties. In several years, revenue collection would be back to its old levels — and then surpass them, he predicts.

The idea has generated a buzz. Several potential mayoral candidates — Walters won't say who — have contacted him and his research partner for more details.

Few argue that Baltimore's rate, more than twice as high as any county rate in Maryland, is good for the city. But elected officials, loath to severely tighten budgets to make up for revenue shortfalls in the near term for the hope of better times later on, have never permanently reduced the rate in a significant way.

So Walters, in a new paper written with former student Louis Miserendino, lays out a plan aimed at minimizing initial budgetary pain. They've dubbed it "cash on delivery." Amend the city charter to guarantee that the tax rate — now close to 2.3 percent — would drop to 1 percent in three or four years, they suggest. Then set aside the extra revenue as property sales and rehabilitations presumably ratchet upward in anticipation of the tax relief, and spend the revenue only after the rate drops.

Walters, 57, moved to Baltimore in 1981 and lived in South Baltimore and Ednor Gardens before relocating his family to Lutherville in the late 1980s. He was named Loyola's distinguished teacher of the year in 2005.

Question: Why do you think the city should cut its tax rate in such a sweeping way?

Answer: For decades, we have been repelling investment.

Baltimore is kind of unique in the sense that it's surrounded by a jurisdiction with a property tax rate that is less than half of the city's. … If I invest in either residential property or business property, a few miles away I can enjoy many of the same amenities — in terms of access to some of the cultural and sports activities that the city offers — but I don't get dinged by the city's property tax rate.

Q: You believe the city's rate is the key reason for its decades of population loss and disinvestment. Why?

A: We confuse ourselves about all the things that are contributing to the disaster, but we started the snowball rolling downhill when we made the environment hostile to capital.

Our population peaked in 1950 and then after that, essentially, every time there was any budget problem, we responded with the quick, short-run fix.

From 1950 until 1975, the city increased its property tax rate 18 times, by which time the city rate was 90 percent higher than the county rate. It's been more than double the county's rate almost continuously since the early '80s.

Q: What about crime and school quality? Haven't they fueled migration to the suburbs?

A: How much the city can do with respect to school quality and how much the city can do with respect to policing is definitely related to this tax-base issue. We are always under budget stress in this city.

With the exception of the real estate bubble period — when for a couple of brief years, property values were exploding and we sort of thought that was a permanent fixture of not just American life but Baltimore life — I can't remember in 30 years of Baltimore when we weren't saying, "Yeah, the city's budget is a mess."

The reason we're always under stress is the tax base is always moving in the wrong direction. It's not always shrinking, but it's always growing slower than it could or should.

Q: What difference have big tax cuts made in other cities?

A: In the 1970s, Boston was losing population faster than Baltimore, losing jobs faster than Baltimore, and it turned around essentially when it became a more favorable environment for capital. And we can do the same thing.

Q: Become the next Boston or San Francisco?

A: We just don't think we can be a superstar city anymore because we've been sort of withering for so long, but we have a lot of the same natural advantages that those cities have, and we can be just as prosperous.

Yeah, we filmed "The Wire" here and "Homicide" here. But in the 1970s, San Francisco used to be where they filmed all the "Dirty Harry" movies.

Because those cities have made such progress, we forget how many challenges they've faced.

Q: What happened to revenue in San Francisco after voters passed the tax-slashing Proposition 13?

A: Prop. 13 cut property taxes by more than one-half, but … within four years, San Francisco's tax base — not just for property but for other income — had grown sufficiently to offset all of the lost revenue, and then some.

Q: Is now a bad time to be thinking of a big tax-rate cut, with assessment values falling?

A: No, now is when it's more necessary than ever. Unless we do something to attract new residents … the base is going to shrink even more rapidly than it has in the previous era.

If you cut the rate, people will come. Your tax base will grow. And you'll be a healthier city, fiscally.

Q: Tell us about your "cash on delivery" plan.

A: This is really Louis' idea, I should make clear. [He said,] "Why don't we build a bridge before we cross the river?"

You amend the city charter, you impose a binding tax-rate cut to take effect four years after the announcement date, and you really lock this in. You don't just say, "We plan to cut taxes four years from now, we promise, trust us." You can't do that and make the promise credible. But if you amend the charter … the growth would start now.

What you do is start banking the extra tax revenue … and set it aside for the date when property-tax receipts do in fact go down because you've cut the rate in half. This is the Al Gore "lock box" approach.

Q: Do you feel as if you're shouting into a void?

A: For several years, I felt that way.

About a year ago, our grand design was, OK, there's going to be a mayoral election in 2011. Let's try to get this on the radar screen. It may not happen, but merely getting it talked about will contribute to it happening someday. We've heard from four of the possible challengers.

People are starting to listen. And they're acknowledging that, yeah, something's got to change here.

jamie.smith.hopkins@baltsun.com

http://twitter.com/realestatewonk

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