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A solution for Baltimore's property tax problem

Here we go again: Another big real estate developer is promising hundreds of jobs and a "huge boost" to Baltimore's struggling economy.

To win this prize, all City Hall has to do is fork over millions to subsidize construction costs and agree to some generous tax breaks. Then, presto, an office tower will sprout on a vacant lot in West Baltimore, expanding UMB's BioPark complex.

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Sure, it looks like crony capitalism, where the connected get what they want from the ruling elite and the common folk get ignored. But the sad fact is that the cronies have a great argument: Half a loaf is better than none, and without subsidies very little bread gets made in Charm City.

Let's do the math. The new building will be worth $110 million. At the city's current tax rate and without any special breaks, its owners would pay $2.47 million per year in property taxes.

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But if, instead, they build in Baltimore County — say, near UMBC's campus, just six miles away — their annual tax bill would be just $1.21 million. This is a no brainer: They'd bank an extra $1.26 million a year by building in the 'burbs.

And the contrast with D.C.'s tech corridor is even more stark. Montgomery County's property tax rate is one third of our unfair city's. There, the owners' fortunes would improve by $1.68 million annually.

In short, Baltimore City's property tax rate is potent investment repellent. It has been fueling suburban sprawl and sending money, people and jobs to more tax-friendly jurisdictions for six and a half decades.

In 1950, Baltimore housed 950,000 people and had a median household income that was 7 percent above the national average. Then the city hiked property tax rates 19 times over the next 25 years, guaranteeing a slow, steady economic decline. Today it's home to only 623,000 with a median income that is 21 percent below the nation's. Since 2001, the city has lost 52,000 jobs.

So when a developer holds out the prospect of 360 construction jobs followed by 900 permanent ones on completion, as in this case, city officials must be forgiven for opening the vault. Their offer of $17.5 million in construction subsidies plus up to 10 years of property tax abatements will, according to the developer, secure an 8 percent annual return on the investment. Just enough, apparently, to offset the adverse tax arithmetic noted earlier.

The problem is that BioPark is just a few acres, while that punishing arithmetic is at work every day across the rest of the city's 80 square miles. It's not that City Hall's special deals do not work at all, but rather that they do not work enough, and they work for just a privileged few.

Have you scraped together enough to rehab one of the city's thousands of abandoned rowhouses, or to start a business? Good luck asking City Hall for some tax-increment financing. They'll listen if you've got $110 million; if it's just $110,000, you'll soon learn it's better to invest elsewhere.

If Baltimore is to enjoy a genuine renaissance and reverse the job flight that everyone agrees is causing great suffering and occasional "uprisings," we need to make the city's tax rate competitive across the board. It has to make economic sense for anyone to invest anywhere; right now, it simply doesn't.

City Hall knows we have a huge tax competitiveness problem, of course. That's why it cuts so many special deals. But it argues that we simply can't afford a competitive rate for everybody; that a major rate cut would blow a hole in the operating budget. So we have to discriminate, continuing to punish the many while encouraging investment by a favored few.

Even if this is not immoral, it is unwise and, as the aforementioned data show, ineffective.

But there is a practical way to get this done. Amend the city charter (to assure investors that this is not some vague political promise) and cap the property tax rate at a competitive level starting at a date certain six years hence (two full reassessment cycles).

During that phase-in period, spending can be maintained while the tax base grows. Developers will jump in to "buy low," increasing transfer taxes; property values will rise; wage-earners will return to the city and bring added piggy-back income taxes.

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Put all these revenue gains in an escrow fund to bridge any budget gap once the lower rate kicks in. If the fund is short, use tax-increment financing — like that which is common for projects like the BioPark, Harbor East and Harbor Point — to top it off.

Sure, that would require considerable political courage and skill. But that's what elections are for: to find the people who have both.

Stephen J.K. Walters is a professor of economics at Loyola University Maryland and the author of Boom Towns: Restoring the Urban American Dream. His email is swalters@loyola.edu.

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