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Enterprise zone tax breaks flow to Baltimore waterfront, other prosperous neighborhoods

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In 1982, Mayor William Donald Schaefer persuaded state lawmakers to try a different approach to urban revitalization. To lure companies to poorer parts of Baltimore and elsewhere in Maryland, the government would dangle a 10-year property tax discount and hiring rebates.

Baltimore's first so-called Enterprise Zone was carved from a depressed section of Lower Park Heights called Park Circle, where a sausage plant and other businesses opened their doors.

Thirty years later, Baltimore has greatly expanded its program, offering multimillion-dollar tax breaks to developers in many of the city's most desirable neighborhoods.

Nearly two-thirds of this year's $17.2 million in enterprise zone property tax credits citywide went to projects downtown, in upscale Harbor East and in established waterfront neighborhoods from Canton to Locust Point, according to a Baltimore Sun analysis of city tax records.

A quarter of the total, $4.4 million, was claimed by just two Harbor East sites: complexes housing the headquarters of the investment firm Legg Mason and the high-end Four Seasons Hotel.

Current and former city officials say the discounts have been a huge help to Baltimore by spurring major development, which has generated jobs and revenue through an array of taxes. And they say the subsidies have been necessary, given the city's high property tax rate and the dearth of federal money for urban renewal.

"My philosophy was, Baltimore City needs all the incentive help it can get," said M.J. "Jay" Brodie, who retired last year after 16 years as head of the Baltimore Development Corp., the city's economic development arm.

But some lawmakers say The Sun's analysis shows that the enterprise zone program in Baltimore has strayed from its purpose of aiding impoverished areas and become another subsidy for developers in thriving districts near the waterfront.

"I believe we have to look for a new approach in terms of how the enterprise zones are drawn and go back to what it was originally intended to do — help spur development in areas that wouldn't normally see development," said Del. Keiffer J. Mitchell Jr., a Baltimore Democrat.

The program's expansion has had an impact on taxpayers, not just in the city but across Maryland, because the state reimburses local governments for half the cost of the property tax breaks.

As credits have flowed to high-dollar projects in Baltimore, the state's costs for the city's enterprise zone program have increased from $2.7 million seven years ago to more than $8 million this year. And the city's share of state payments to all jurisdictions has risen to about 60 percent from 27 percent.

Baltimore's oddly contoured enterprise zone looks like the product of "gerrymandering" to Daphne A. Kenyon, a visiting fellow at the Lincoln Institute of Land Policy in Cambridge, Mass. She said such zones should be targeted to distressed areas. But politicians face pressure to expand them because developers, often reliable political contributors, want the benefits in more places, she said.

"If these things are spread too broadly, then the advantage that you create in one area is canceled by the advantage you give in another area," Kenyon said. "You're trying to level the playing field, but if ... the better-off areas also get a boost, then the harder-off area is relatively no better off."

Todd Dolbin, who coordinates the enterprise zone at the BDC, disagrees. "We're looking to create jobs for the entire city and attracting development and businesses for the city as a whole," he said. Projects at Harbor East, downtown and in waterfront neighborhoods have done that, he said.

From 2009 to 2011, he said, businesses in the zone projected that they would add 7,000 jobs as a result of the credit. He said last year's projection and final figures are not available.

Because the program isn't capped, Harbor East projects do not keep tax credits from going to eligible businesses elsewhere in Baltimore or, for that matter, the state. Dolbin pointed out that in struggling parts of the city, the program has enabled mom-and-pop stores and other small businesses to renovate or expand.

Baltimore's zone covers more than 13,000 acres, spanning much of the city and the socioeconomic spectrum. The 276 discounts on this year's property tax bills range from $3 million for the Legg Mason tower to barely $2 for a corner store in Southwest Baltimore. Most are worth less than $7,000.

The credit reduces a company's local property taxes on the value added by new construction or improvements to an existing building. The break wipes out the tax on 80 percent of that added value for five years. Then the credit diminishes until reaching 30 percent in year 10.

Businesses can also get a state income tax credit for each new hire. The state won't say who gets those credits, citing confidentiality laws, but officials say the cost is far lower than for property tax breaks.

In Baltimore, five of the 10 biggest property tax credits this year are in Harbor East. Recipients include the owner of the Four Seasons development, which has an $826,000 credit this year and will qualify for six-figure property tax breaks until 2021.

Also receiving a credit is a major building in the traditional downtown, where some property owners say the incentives offered to Harbor East have created unfair competition. One Charles Center, a renovated 51-year-old office tower controlled by Orioles majority owner Peter G. Angelos, has a tax break of about $141,840. The credit is not among the top 10.

Developers who have benefited from the enterprise zone say it helps offset the city's disadvantages, chiefly its high tax rate. They say it is misguided to focus on the zone's boundaries, because all city residents share a goal of attracting economic activity.

"It is not about incentivizing development on one piece of land as opposed to one across the street — it's about attracting investment into Baltimore City and expanding the city's tax base," developer Marco Greenberg said in an email. He helped develop Harbor East and is working with Michael S. Beatty on a $1.8 billion project at nearby Harbor Point, which will be home to the regional headquarters of energy giant Exelon.

The BDC's Brodie had long supported having Harbor East within the zone's boundaries to induce investment. Beginning in the mid-1990s, baker-turned-developer John Paterakis Sr. transformed the area east of the Inner Harbor from a no-man's land of warehouses and vacant lots into a prosperous district brimming with offices, apartments, condos, hotels, shops and restaurants.

But in early 2012, just before retiring, Brodie removed Harbor East — the bulk of which has been developed and will continue to receive 10-year credits — and Harbor Point from the zone. Some people felt the area had become successful and no longer needed development incentives. Brodie said recently that he acted only because the state wanted the zone shrunk.

He said he told Beatty and Paterakis, who has two sites he wants to develop on the edge of Harbor East, they could ask to have them restored. They did, and after Brodie's departure, BDC officials acceded. The change stirred controversy in part because it put the 27-acre Harbor Point project back in line for an estimated $88 million in enterprise zone property tax breaks in coming years. The project is also up for $107 million in public financing for infrastructure and parks.

In restoring the zone's boundaries, BDC officials argued that the mostly vacant Harbor Point site needed enterprise zone incentives. And they noted that an estimated $500 million in development was on the drawing board for the two Paterakis properties on Central Avenue between Lancaster and Fleet streets. Paterakis has since said he hopes to put a huge new Whole Foods market there.

In an interview, Paterakis hailed the role of the enterprise zone and other subsidies in boosting Harbor East over the years. "If we didn't have the benefits at the time, it would have been a nice, empty piece of land there for years because nobody wanted to develop it," he said

Yet the senior owner of H&S Bakery and H&S Properties Development Corp. suggested that the Central Avenue sites might be developed even without the tax breaks.

"Let me put it this way: We probably would have sold the land if we didn't have the enterprise zone," Paterakis said. "Somebody might have wanted to build on it without that. Why do we have to stretch ourselves? I don't think we would have built. It's a help. That's the only thing we were looking for, a small help. And God bless [the] enterprise zone."

Subsidizing development in areas on an economic upswing is questionable policy, said Robert Stoker, a George Washington University political scientist who has studied tax incentive programs.

"It's a difficult thing to justify if you look at the program as one that is supposed to assist people in need," he said. "You see the tax benefits flowing to people who are developing large-scale commercial projects. You say, 'That doesn't make sense.'"

Still, he understands public officials wanting to encourage projects in areas with momentum.

"In the long run, maybe Baltimore will be better off with the sort of development that's occurring and forgiving taxes for a while, in anticipation of collecting taxes later down the line," Stoker said. "That's at least a coherent rationale. It may not be a compelling rationale."

Maryland law clearly lays out the objective of the enterprise zones: "the encouragement of economic growth in economically distressed areas and employment of the chronically unemployed."

Outside the city, enterprise zones are in place in 12 counties, including Harford and Baltimore.

Baltimore County's approach resembles the city's original strategy. Zones in the Lansdowne and North Point areas are meant to shore up industrial districts, while one in Woodlawn aims to spur upgrades to old offices and warehouses near the Social Security Administration.

Each zone must meet at least one of four criteria based on population loss, unemployment or poverty. Baltimore's sprawling zone meets just one condition: at least 12.6 percent of families are poor.

But the rules apply to the overall zone, not each part. In fact, roughly a quarter of the 147 census tracts in the city's zone do not meet any of the criteria. That includes the Fells Point tract, which encompasses Harbor Point.

Del. Michael J. Hough, a Republican from Western Maryland, said he doesn't object to tax credits for distressed areas but was surprised to hear that about 60 percent of the state's enterprise zone reimbursement is going to Baltimore this year.

"There's other distressed areas," he said. "In Western Maryland, there's a lot of poverty."

Hough represents parts of Washington and Frederick counties. Frederick County has no enterprise zones, but his town of Brunswick could use the help, he said. "Almost the whole Main Street's vacant, so it is seriously economically depressed."

Beyond that, he said, his constituents are frustrated with the level of state aid going to Baltimore. And in this case they are being forced to foot part of the bill for the city's decision to subsidize high-priced waterfront development.

"For every dollar that citizens in Frederick County send to Annapolis, we get roughly a little over 40 cents back," he said. "And they know that Baltimore City is surviving off of subsidies from the rest of the state."

Critics say those subsidies are not evenly spread and have made little difference in parts of the city, including the Jonestown neighborhood, home to many poor families, a few blocks north of Harbor East.

"The big surge in employment that we were promised has never materialized," said the Rev. Richard Lawrence, pastor of St. Vincent de Paul Church and founder of the Jonestown Planning Council. "Harbor East was not intended to do anything for the working-class population in Baltimore."

Thirty years ago, Schaefer had a very focused view of the enterprise zone. The goal was to target "places in need of investment where it was halting, if it existed at all," former aide Mark Wasserman recalled.

Schaefer embraced the enterprise zone concept in part because of the election of Republican Ronald Reagan as president in 1980, signaling a sharp decline in Washington's decades-long support for urban renewal, Wasserman said. Schaefer saw local property tax breaks as a way to help make up for a drop-off in federal grants and other assistance.

Bernard L. Berkowitz, who in the 1980s led a predecessor organization to the BDC, said Schaefer thought incentives could make a difference in industrial or commercial areas that were "in or adjacent to low-income communities to spur growth in those communities, help bring jobs and so forth."

Park Circle, a derelict former amusement park, fit the bill. By the early '80s, the area sat fallow in a community with an acute job shortage. And the incentives worked, Berkowitz said, if "not to the extent we would have liked." At least one building is now vacant, but the sausage plant remains open — once Parks Sausage, it's now Dietz & Watson — as do an office park and other businesses.

But Berkowitz doesn't fault city officials for expanding the zone, given the drying up of federal aid and the economy's shift away from industry to business services, whose firms want to be downtown and on the waterfront.

"It's not what we had in mind in terms of enterprise zone development, but the economy is very different than it was 30 years ago," he said.

Mark Vulcan, who oversees the program for the Maryland Department of Business and Economic Development, said Baltimore officials "absolutely" have used the enterprise zone well.

"But for it, Harbor East might not have occurred and we'd be looking at vacant land over there, possibly," he said. "The jobs are there, the capital investment is there. I think it worked."

Sen. Verna Jones-Rodwell, a Baltimore Democrat with a background in community development, disagreed. She said the outsized flow of benefits to waterfront areas is "absolutely not" what should be happening. She's not arguing for those areas to be off-limits for incentives, just that worse-off communities should receive more than they have been getting.

"Really, looking back in retrospect, how good were those programs for the people they were meant to serve?" she asked.

Because of incorrect information provided by the Baltimore City Finance Department, an article published in the Aug. 25 editions of The Baltimore Sun exaggerated the size of this year's enterprise zone tax credit for One Charles Center.

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How the tax break works

Businesses get a 10-year property tax credit for new construction or renovations. The credit is based on new taxes generated as a result of the investment.

The city forgives 80 percent of the taxes for five years, then the credit diminishes over the next five years. The discount in the 10th year is 30 percent.

The state of Maryland reimburses local governments for half the taxes forgone.

Copyright © 2014, The Baltimore Sun
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