Studies minimize benefits of tax cut Property taxes: The opinions of several urban economists tend to bolster Mayor Schmoke's decision against a 5-cent cut in the rate.

January 09, 1996|By Eric Siegel | Eric Siegel,SUN STAFF Sun staff writer JoAnna Daemmrich contributed to this article.

Baltimore Mayor Kurt L. Schmoke's decision not to lower property taxes has again raised the question: How important is a minimal tax cut in making cities attractive to middle-class homeowners and business?

Not very, agree several specialists on urban affairs and economics.

"Overall, I would say that incremental changes would have very little impact," said David P. Varady, a distinguished senior scholar at the Center for Urban Policy Research at Rutgers University and co-author of the recent book "Selling Cities: Attracting Homebuyers Through Schools and Housing Programs."

Baltimore has struggled for years to balance services with the desire to reduce property taxes. The scales tilted toward services Thursday, when Mr. Schmoke announced that he will not make a promised nickel cut in the property tax rate of $5.85 per $100 of assessed value, thereby reneging on a campaign pledge made in his bid for a third term.

Coupled with a declaration that Baltimore will not give raises to its workers in the next fiscal year, a warning that the city might have to lay off some workers and coming on the eve of the 1996 General Assembly session, Mr. Schmoke's announcement seemed timed to impress upon state legislators the city's dismal fiscal picture.

In his announcement, the mayor said he would not seek another 5-cent cut in the property tax rate because the city could not afford the $4 million loss the cut would cost. Though a small fraction of the city's $2.3 billion annual operating budget, the money is equivalent to the cost of salaries and benefits for about 100 new police officers or about a fifth of the entire budget for the library system.

Mr. Schmoke -- who approved nickel reductions in the property tax rate in 1989, 1991 and 1994 under pressure from the City Council and a taxpayer group -- is also backing off on a long-term pledge to chop 20 cents off the city's property tax rate by 2000.

The rationale for that goal to reduce the property tax, which is twice that of surrounding jurisdictions, was summed up in an updated strategic financial plan the mayor released a year ago: "This will make the City of Baltimore a more affordable place in which to live and locate a business."

'We're hemorrhaging'

By backing off on his property tax pledges, critics say, the mayor is sacrificing the long-term future of the city at the altar of expediency.

"We're hemorrhaging with a number of people leaving the city who are in middle- and high-income brackets," said David B. Rudow, executive vice president of the Baltimore Homeowners' Coalition, a staunch advocate of tax cuts. "What we're trying to do is find ways of not only keeping people here but re-attracting people here."

If Baltimore could attract 25,000 residents making $40,000 to $50,000 a year, the city would receive an additional $30 to $40 million in state piggyback income tax revenue, Mr. Rudow calculates.

But urban specialists question the premise that such cuts would spur a return to the cities.

John Yinger, professor of economics and urban administration at Syracuse University, calls the idea "misguided."

Mr. Yinger, author of the 1982 book "America's Ailing Cities," said such tax cuts would more likely cause services to decline.

"There's another side of this which is fairly important," he said. "In some cases, cities are being inefficient. But they should be more efficient, no matter what the taxes are."

Nancy A. Williams, associate professor of economics at Loyola College, said the small cuts "make very little difference" in people's decisions on where to live.

"Most people are looking at the bigger picture -- schools, crime and commuting," she said.

In his book "Selling Cities," Mr. Varady wrote: "First and foremost, school quality must be improved in order to retain and attract middle class families to the city."

In the meantime, Mr. Varady said, cities should encourage home-buying and promote themselves to groups such as gays and Orthodox Jews, which tend to be attracted to urban living.

In Baltimore, the city offers cash incentives to city employees, helps with settlement expenses for first-time homebuyers and has initiated a phase-in of property taxes for newly built homes.

These programs have not stemmed the decline in property tax revenues, but they have contributed to a good sales year for homes in Baltimore. There were 2 percent more settlements on houses in the city in 1995 than in 1994, while settlements in Baltimore, Carroll, Harford and Howard counties were down between 6 and 16 percent, according to figures released last week by the Greater Baltimore Board of Realtors. Pending sales in the city were up 17 percent, far more than in the other jurisdictions, according to real estate board figures.

One reason may be the cost: The average home in Baltimore sold for $75,852 in 1995, compared with $136,174 to $204,836 for the other jurisdictions.

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