Wealthy Benefit Most From Cleveland Abatement Policy

Tax abatement is a plague upon the body politic. It favors developers and those with higher incomes.

Once allowed, it becomes epidemic. Since 1977 when Squire, Sanders & Dempsey wrote the state law for abatements, beginning with National City Bank’s office building on E. 9th & Euclid, almost all major building in Cleveland has depended on property tax free status.

Indeed, Cleveland’s policy toward abatement, I would suggest, “teaches” people, especially developers, to expect abatement as a right of doing business.

It has become the narcotic of developers.

By June, Cleveland City Council has to decide on reforming or keeping legislation that allows 100 percent abatement for 15 years for new housing and 100 percent for 10 years for rehabilitated housing.

Churches, hospitals, universities, countless nonprofits and all our major league sports facilities, along with many major downtown buildings, are tax abated or exempted. The loss of property tax income skyrockets to the hundreds of millions of dollars of lost revenue each year.

How pervasive the abatement problem has become apparent was when Wal-Mart automatically, under a little-known state law, received a $10 million tax abatement at the Steelyard project. City officials did not even know of the abatement, which Wal-Mart has been relinquished under public pressure. Doesn’t this easy surrender show that the abatement was unnecessary in the first place?

Abated housing is applauded by the report. However, it forces ordinary homeowners to pick up the tax load of the subsidized abated housing for 15 years.

It is particular onerous to consider that 26 of the units are worth more than $1 million each. Why should a long-time homeowner in West Park or Harvard-Lee subsidize million-dollar housing?

Another 131 abated units are worth more than $300,000 a unit – free from property taxes for 15 years. The average abated unit is $250,000.

When one citizen pays no taxes, it means another citizen pays more taxes.

That is unjust.

Cleveland State University’s School of Urban Affairs has published a study of housing tax abatement as testimony to the effectiveness of such tax gifts for the community.

It is a detailed 57-page study with plenty of data, much based on the responses of people now receiving abatements or those who might in the future. (See CSU study here).

It tells the story in a manner that makes it hard to be against tax abatement if you want to help Cleveland. Abatement, the report implies strongly, is a great asset to the city.

Mark Rosentraub, CSU’s $171,257 a year Urban Center Dean, works as the chief mouthpiece of the Cleveland Establishment on a number of urban issues. He is selling a continuation of the abatement program, as it exists. His deanship gives what he says an academic imprimatur. This allows him to speak with some authority, though it is conflicted.

Rosentraub lectured me on Gateway taxes in an early morning e-mail note (6:27 a.m.) on the day that Cool Cleveland published my recent anti-abatement column. He’s such a defender of abatements.

I responded to Rosentraub that he should read Chapter 7 of Major League Lo$ers (correct title), written by Mark Rosentraub. Oh, that’s him.

He apparently forgot what a critic of Gateway he was.

I told him especially to read the first sentence of his Chapter 7. It reads, “It is probably safe to conclude that Cleveland has spent more for and on professional sports teams and their playing facilities than any other community in the United States.”

I wrote him back, “The chapter will give you some insights that you may have forgotten prior to your employment at CSU and membership on the board of Gateway and unpaid spokesperson for certain interests.”

“Your book,” I wrote, “is replete with information on how well the two team owners made out. You wrote this, of course, before your employment in Cleveland as a Cleveland State University dean. I guess you’ve changed your mind, or you have different interests to push these days.”

Rosentraub has appeared before Council selling abatements and on WCPN’s “After Nine” program with downtown Councilman Joe Cimperman. Cimperman, who chatters like an agitated chipmunk, spends much of his time echoing powerful downtown interests. The two echo each other on tax give-aways to developers.

County Treasurer Jim Rokakis also was an abatement supporter as WCPN guest (no opponents, unfortunately, were guests on the one-hour show) about the CSU report. Rokakis possibly did not read the report since it notes that 20 percent of abated properties are foreclosed, a situation Rokakis abhors.

That fact is very disturbing because it means that many of the lowest income new homeowners are being lured into buying housing they can’t afford by the tax abatements. Other more prosperous buyers are being lured into building much larger houses than they otherwise would, the report indicates. This also makes city housing more suburban-like and lowers density, which a thriving city needs.

The CSU report doesn’t spend time on the possible negatives of abatement.

It doesn’t provide the total lost revenue due to the abatements over the years.

It never questions giving free taxes via abatements for $1-million houses – obviously housing for people who can afford to pay their taxes.

It never totals the lost income to the schools since some 60 percent of property taxes typically fund the Cleveland schools.

It doesn’t attempt to assess how much new Cleveland housing results from the build-out of land in Cuyahoga County, lower interest rates in recent years, or a cyclical trend, particularly for downtown living among the young.

(Calls to Tom Bier, CSU’s housing numbers expert and listed on the report, to discuss the report went unanswered.)

The city doesn’t benefit from much new income from the abatement, according to the study. It says that 49 percent of the subsidized already earned 100 percent of their income in Cleveland and another 24.6 percent did not earn anything. That means that 73 percent of residents of abated housing do not pay a penny more to Cleveland in income taxes at their new homes or condominiums.

It also suggests that most of the households are single occupant owners. The report says, “Almost three-quarters (73 percent) of the respondents (the study is based on questionnaires, written or oral) did not have any children under the age of 18 living with them.”

Another 13.2 percent had only one child under the age of 18, meaning that the two categories – no children or only one child under 18 – account for 86.9 of the abated housing.

It does not address the possibility of backlash from the many residents who have to pay full freight on taxes when the schools seek a property tax increase, or alternatively, whether abated households with no children would look favorably or unfavorably on school tax levies.

Fairness of the program isn’t addressed.

The report does mention that developers might increase the cost of the housing because it is tax-abated, thus in reality giving developers at least a portion of the tax break.

However, the report shows the abatements hardly are a bonanza when it comes to income taxes.

It suggests that the housing tax abatements now in effect – 100 percent tax free for 15 years – are a boon for Cleveland and raises tax revenue. However, the Cleveland city budget suggests a different story. The amount of tax revenue for the city from property taxes was $48.7 million in 2004; $47.7 million in 2005; and $47.5 million in 2006. That appears to be the wrong direction.

The report says that for every $1 a $1.50 will be realized. Well, it has not happened yet. Of course, the gain is based on properties coming back onto the tax roles as late as 2020, a promise that might be tenuous for many reasons.

If you would consider the inflation factor, those figures suggest an even steeper decline in property tax revenue for the city in recent years when tax abatements have flourished.

The CSU study claims that property values for housing in areas near abated houses rises. These increases benefit the entire community with rising property values, it says. The figures, however, are not impressive.

The study says that this nearness to abated housing produces $672,000 a year in new taxes, particularly for the schools, which get the bulk of property tax revenue.

When you consider that 6,435 units of housing are so abated, however, that means that each abatement awarded will produce $104 in new revenue, even if the study’s figures are correct.

The study also suggests that the abatements raise other’s property values but this means those WITHOUT abatements pay more, and it’s also questionable how much the schools get because of House Bill 90 reduces extra value on property so that the schools don’t benefit from inflationary trends.

Although the report says some 60 percent receiving abatements wouldn’t have if there were no abatement. It’s surprising to me that some 40 percent would admit they would still invest in the housing without abatement.

Is it worth the unfairness of allowing the wealthier in the community to pay no taxes for such a measly gain? The study itself says that occupants of abated housing have higher median incomes. The median for those receiving benefits is $83,529 to $24,000 a year for those without abatements.

Is that fair at all?

Of course, the report doesn’t attempt to assess the possibility that non-abated households cannot afford housing improvements because their taxes have risen too high, thus possibly creating deteriorating housing or – as the city suffers from abandonment – more empty, substandard housing.

The report also notes that the abatement of the 6,435 units raises income tax revenue for Cleveland. The increase says the report is $509,044 a year. That is even more meager. It is $79 a year per abatement.

The report fails to give a figure of the lost income due to tax abatement. In other words, how much revenue is lost on the abated properties?

There are other points that need to be questioned.

For example, the report makes note of the dearth of housing construction in Cleveland in the past. “From 1980 through 1983, there was almost no construction of new residential units, with 20 or fewer added in each year. There were modest increments in 1984 and 1985, but the first substantial increment in the complement of new housing building did not occur until the passage of the first property tax abatement in 1987.”

That certainly appears very worrisome. It was and is a worry.

However, I looked back to the early 1980s. First, you might remember that Cleveland was nearly on its back, trying to come back from default caused in large part by major Cleveland banks.

I also check mortgage rates during that period and use this quote from a professor of real estate, as noted in bankrate.com. It suggests that Cleveland was not alone in struggling for new housing during that period.

“Memories may be short. I remember when mortgage rates were 21 percent,” said the professor. The article adds, “That was in 1979-1980.”

Therefore, it was not only Cleveland hurting. High interest rates weighed heavily on the housing market.

Even into 1983 and l984 interests rates were above 13 percent. The rate this January (all figures for the first month of the year, 30-year mortgages) was 6.33, less than half the rate of interest of the years of the CSU Urban Affairs report. (Source: HSH Associate Firm Publishers.)

Of course, we have been in a housing boom, or as some believe, a bubble, which could be the cause of more foreclosures.

At the least, abatement should be cut back to housing $150,000 or under and with a cap on income. This would allow abatement on housing for struggling moderate-income people and rule out those who are simply taking a gift because, well, it’s there, not because of real need.

From Cool Cleveland contributor Roldo Bartimole roldoATadelphia.net
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