How to Drain a City: A Story of Uneven Taxation
taxes: Who pays them, who doesn't, and who reaps their benefits
The government can’t seem to stop handing out tax breaks.
In 2018, after Amazon announced plans to build a new headquarters, twenty cities between the US and Canada offered an upwards of $4 billion in tax incentives to try and garner its favor. Back in June of this year, the Trump administrations ‘Big Beautiful Bill’ offered credits for private equity firms and luxury car purchases, while cutting existing incentives for green energy. Local to myself, the Real News Network’s documentary “Tax Broke” describes the $106M ‘TIF’ tax break offered to Under Armour CEO Kevin Plank and developer Michael S. Beatty to develop Baltimore’s Harbor Point back in 2012. With hundreds of millions in taxes waved away for corporations, CEOs, and the like, I feel it necessary ask what exactly is a tax break, why are they so popular in construction and development, and are they doing us any good?
A Brief Explanation
In simple terms, tax breaks are the governments way of offering you a coupon for shopping at their store. While generally averse towards handing out ‘free money’ outright (remember the stimulus check debacle?), the government instead takes advantage of our legal tax obligation to offer reductions, waivers, or repayment to qualifying individuals and businesses. By tying these breaks to certain conditions, such as having kids or pursuing a degree, they can incentivize actions from taxpayers and thus turn the entire system into a major economic motivator.
Take large businesses and property developers: If you are looking to build a new office or franchise in a city, you’ll soon find that land is scarce, regulations are plentiful, and, of course, it’s unbelievably expensive. So, in order to spur development in the face of such a steep cost of entry, governments often respond by waiving what appears to be one of the biggest financial hurdles for development, that being property taxes.
For big money capitalists, property taxes are simply streams of money being sucked from their wallets, which just so happen to scale upwards with the property values that they themselves are raising. So, by offering to lower these costs, cities ensure that developers can keep their profits in the long-term, thus incentivizing them to build, build, build.
This is where you get programs like Baltimore’s Tax Increment Financing (as described in Tax Broke), wherein a municipality identifies a ‘blighted’ area and then waives property taxes for new developments, while also paying upfront for future property tax increases, and PILOTS (Pay In Lieu of Taxes), where taxes for development are in part or completely waived, often in exchange for ‘public benefits’, i.e affordable housing, green energy, etc. These programs look to balance the wider goals of development and redevelopment with the material costs of forgoing tax.
But to understand if the trade-off is worthwhile, we must understand what the value of taxes really are.
To Tax or Not to Tax
You don’t have to be a developer to feel apprehensive towards paying taxes. Living in Baltimore, I lose about a third of my paycheck before it ever reaches me, and I often raise my fist in anger wondering just what I’m getting for my troubles.
Well, it turns out a lot of ‘what’, in fact. See, the reason that it’s so expensive to build in cities is the same reason that it’s so expensive to live in one: it’s not cheap to maintain a developed society. There are roads, services, education, maintenance, and a whole lot more people to keep healthy and happy as compared to less dense areas.
Let’s look at transportation as an easy example: I don’t own a car (one of those city luxuries), but did you know that buying just one new bus could cost your city anywhere from $700,000 to $1.4M? And whether you bus or drive, the roads you move on have a cost as well; According to Maryland DOTs 2025 -2030 Consolidated Transportation Program, it’ll cost $80M to simply maintain all of the state’s roads for the next five years, and a total of $44.5 BILLION to cover the department’s total capital and operating costs. If Maryland were to tax me a full 100% of my paycheck, and it would take me the same length of time to earn $44.5B as it took for the Neanderthals to arrive at the internet (something like 140,000 years if you’re curious).
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But obviously it’s not just my paycheck funding these services Over a more realistic timeframe, from my job alone I’m on track to pay about $750,000 in taxes by the time I retire. If I bought a house, you could add another $100,000 or so based on current house prices and tax rates, bring that total up to $850,000. A few neighborhoods over from me though is the Marriot Hotel in downtown Baltimore. In 1997, the Marriott struck a deal with Baltimore to pay $1 in property taxes a year for 25 years, meaning that they avoided about $61.5M in tax payments. That’s the equivalent of ten residents paying their proper tax dues for their entire working lives, freely waived away for a multi-billion dollar company. While this special TIF was not offered to every business with big plans, a 2020 study by Ernest & Young calculated that, on a per year basis, the city is losing out on $126.7 due to tax breaks, with almost half of that coming from large development breaks.
That’s no cheap cost, and of course the city knows this. For them, the working theory is losing the steady stream of tax dollars is a reasonable price to pay, because that incentivized business is going to bring with it a multi-layered package of new business revenue, job creation, consumer spending, and more that will cover the difference…unless it doesn’t.
A 2014 paper by Nathan M. Jensen from the Ewing Marion Kauffman Foundation compared incentivized and unincentivized firms in the Kansas City area and found that there seems to no strong correlation between giving a business tax incentives and that business creating new jobs. A similar paper by Timothy J. Bartik from the W.E. Upjohn Institute for Employment Research found that incentive programs only ‘tipped the scales’ in something like 2-25% of business decisions, meaning that at best, 75% of companies being offered incentives would’ve made similar locational decisions with or without the break. Even in Baltimore alone, several incentivized developments made large promises on budgets and benefits, and resulted in displacement and unmet employment and economic goals.
It’s hard to calculate the entire trickle-down of a new development in comparison to the easy to digest big scary numbers found in tax agreements. But you would think that, considering the lack of strong evidence in favor of tax breaks, cities would become less eager about them. So what should be done instead?
A More Creative City
When it comes to the realities of business and property development, here’s a little secret: property taxes, and construction costs as a whole, are not as much of a dealbreaker to major companies and developers as they make it seem. People and economics are very complex, and while it’s easy to assume that charging taxes is going to push away all of the big employers in your area, let’s think it through:
States like Arizona, Florida, New Mexico have much lower, if not almost half, the property and income tax rate as a place like Maryland. These three are not tiny rural states--they have major population centers, large cities, and valuable economic potential. So why haven’t the likes of Under Armour, T. Rowe Price, McCormick, and other local corporations fled farther south or west in order to take advantage of this? Even looking at a place like NYC, how do they keep building new supertalls, Hudson Yards, and even one of those aforementioned Amazon HQs, despite the astronomical cost of property there? Well in reality, expensive cities are so expensive because they’re so desirable, and when you have millions of dollars to play around with, it’s easy to play coy about that while fearmongering about price tag.
So, what that means is that one of the prime alternatives to tax breaks is simply to not give them out.
Okay, yes, I know that it’s not that simple. But it should still be said before anything else because, if we forget that it’s an option, then we will always be working from a place of powerlessness. It’s easy to assume that your elected officials are working people like you who just know the math better, but you are looking towards people with biases, interests, and funders, and if you don’t question the basic assumptions behind their decisions, you might keep walking yourself into bad policy.
The presence of ‘big business’ is not a necessary component or key indicator of a city’s prosperity, and while a handful of international brands with deep pockets might fill your city’s coffers, whisking away hundreds of millions will drain it just as fast, and nothing drives away business and population like a city that can’t pay for basic services and infrastructure.
But say we do need to cede some power, and that the situation is a bit too desperate to simply put our foot down. Then maybe another option is to act in moderation and get creative. In our current society, where tax breaks are already legal and, on the table, it’s fair to say that they can be used for good. For every $1 luxury hotel deal, there are also programs to incentivize affordable housing, green energy, and local business. So why take billion dollars gambles on hotels when you just don’t have to? Sixteen years before Baltimore offered the Marriot its property tax break, it offered the Hyatt a tax break with a typical property tax rate, as well as a 66% revenue sharing scheme (as opposed to the 10% for the Marriot). Now, this wasn’t a cheap deal, and the city lost out on a portion of that bus funding stream, but in exchange, it secured a high-value business and a higher direct revenue source, while not leaving millions on the floor in favor of an abstract, difficult to calculate ‘trickle-down’ funding effect.
City financing is thin and difficult to navigate, but frankly, there’s always another option when it comes to funding billionaires. There’s always a creative way to raise millions for tax cuts but somehow never a workaround when it’s time to cut education and transportation. It’s time to put that creative energy towards the city’s citizens.
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At the end of the day, it is hard to be a city in the 21st Century. You’re looking down the barrel of higher government costs, lower federal funding, and a much more diverse set of problems in the face of a largely globalized economy, so perhaps landing that billion-dollar business seems like a good solution. But the tax break is at best a bandaid, and its one that we need to scrutinize if we are going to help our cities heal, grow, and hope for more than a billionaire coming along and choosing us.
Sources
The Real News Network. Tax Broke.
CBS News. Amazon's $1 billion in tax breaks: Does it pay off for cities?
Jacobin. Trump’s Budget May Give Private Equity a Giant Tax Break.
CNBC. Getting Trump’s full tax break on car loans may mean buying a $130,000 vehicle.
Sustainability Magazine. How Trump’s Budget Bill is Slashing Green Energy Incentives.
Baltimore Brew. A taxing tale of two Baltimore hotels.
Key Questions to Ask when Evaluating Economic Development Incentive Programs | EBP
Ernst & Young. Property Tax Credit Analysis (Prepared for the City of Baltimore April 2022)
Maryland Center on Economic Policy. Baltimore City Leaders Should Examine Costs of Tax Breaks for Developers to Guide Future Decisions.
Good Jobs First. Subsidizing the Low Road: Economic Development in Baltimore.
Maryland Department of Transportation. Consolidated Transportation Program 2025.
Nathan M. Jensen. Evaluating Firm Specific Location Incentives: An Application to the Kansas PEAK Program.