Baltimore tax credit system is ‘highly inequitable,’ city budget office report says

Baltimore City’s distribution of tax credits is both inefficient and highly skewed in favor of wealthier neighborhoods, according to a review of the city’s tax credit programs by the city’s Bureau of the Budget and Management Research.

Developers and homeowners in economically strong neighborhoods such as Canton and Riverside received a disproportionate share of the $126.7 million granted by the city in property tax breaks this year, the report found, while many historically neglected neighborhoods received little of that investment.

The report, which was released this week, found the tax credits are being applied not only inequitably, but inefficiently, providing overly generous tax breaks. Adopting “even modest reforms” would save money and allow the city to cut the average residential property tax rate by nearly 8%, the report says.

Tax credits — payment breaks given to individuals, businesses and other organizations — can be used to generate growth, and to protect certain classes of homeowners, the report states. But if their use is “left unchecked,” the city “risks diverting precious General Fund resources” from city agencies and from homeowners who may need them most, the report says. The bureau is part of the city’s Department of Finance.

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Developers have received tax credits at increasingly high volumes in recent years. In 2010, development tax credit programs cost the city $13.6 million, or 1.7 percent of city property tax revenues. By 2021, the cost had shot up to $62.6 million, or 6.8% of such revenues. Without reforms, the budget office estimates that the cost will grow to 9% by 2031. Baltimore City Budget Director Robert Cenamme declined to comment on his office’s report.

Some said they were not surprised by the findings.

“I’m glad that there’s the data to show what a lot of us have been saying for a long time,” said Councilwoman Odette Ramos, who argued that developers are already sufficiently encouraged to build in the wealthiest and most commercially friendly parts of the city.

“They’re gonna say, ‘If we don’t get these credits, we’re gonna leave the city,’” said Ramos, who represents District 14. But such ultimatums have proved empty in the past, she said.

Some developers, though, question whether it’s worth the risk for the city to pull back tax credits.

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“If they take these credits away, I doubt if many developers will develop in Baltimore,” said Richard Naing, president of RWN Development Group, which builds high-end projects in Washington, D.C., and Baltimore, citing the city’s lofty property tax rates. “They need to start solving the problems in Baltimore before they start taking these tax incentives away.”

The credits amount to an effectively higher tax rate for homeowners in poorer neighborhoods, the report concludes. In Carrollton Ridge, a low-income, predominantly Black neighborhood in West Baltimore, the effective tax rate is 2.18%. In high-income, predominately white Canton, the rate is 1.85%.

While subsidies are granted to support expensive apartment complexes in wealthier neighborhoods, few such subsidies are available to do the type of development that the city’s low-income neighborhoods need, like rehabilitating vacant housing, said John Kern, program manager with the Stop Oppressive Seizures Fund, which works to maintain Black homeownership in Baltimore.

“The city’s really catering to them and helping them and giving them what they need,” Kern said, referring to developers in the city’s wealthier neighborhoods. “Whereas in East and West Baltimore, [homeowners] are overtaxed and they just don’t feel like the services work as well.”

The city also spends more on tax credits overall than its surrounding counties do; while tax credits totaled nearly 14% of the city’s real property revenue, they accounted for less than 11% in Anne Arundel County and just 4% in Baltimore County.

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The report’s publication comes amid tense debates over the city’s investment priorities and tax rates.

Last week, a group seeking a referendum that would have cut homeowners’ property tax rates failed to garner enough signatures to get the measure on November’s ballot. In mid-July, a homeowner in the Poppleton neighborhood won a yearslong fight to protect her home from a controversial development funded through a deal that temporarily suspends tax payments.

A reevaluation of the city’s tax incentives was first proposed as part of a 10-year financial plan in 2013, but the city didn’t contract with the consulting firm that compiled the report, Ernst & Young, until five years later.

And now, that reevaluation process has spawned a recommendation by the budget office to cap the cost of tax credits to the city’s property tax revenues at 6%.

Recognizing inequities in taxation policies, some cities across the country have similarly undertaken reforms to tip the scale, said Kasia Tarczynska, a research analyst at Good Jobs First, a group that studies tax incentives across the country.

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“Some cities try to go outside of the box that the only way you can create growth is through building buildings and providing tax abatements,” said Tarczynska. “More and more cities are trying to put equity in the driving seat.”

Baltimore, on the other hand, has thus far maintained a more traditional approach.

Among the issues highlighted in the report is a policy that allows any project that qualifies for a tax credit to receive it, without review of whether the incentive was necessary to spur development. The report recommends conducting such a review for the highest-cost projects.

The report examines a roster of tax incentives that account for more than 99% of the city’s tax credit portfolio. The ballooning cost was primarily driven by a handful of incentives, and the report directs the greatest scrutiny at two.

The first, a credit designed to encourage the restoration of historic properties, grew steadily over much of the last 15 years as the city designated more historic districts, according to the report, which suggests the program be scaled back. The Historic Restoration and Rehabilitation Tax Credit cost the city $10.9 million in fiscal year 2019, most of which went to projects in the well-to-do Canton, Patterson Park, South Baltimore, Riverside and Upper Fells Point neighborhoods.

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Because Baltimore’s historic districts tend to fall in wealthier parts of the city, the report says, the tax credit has “served as a tool for renovation projects in these healthier neighborhoods.”

Eric Holcomb, director of the city’s Commission for Historical and Architectural Preservation, defended the incentive. “The CHAP credit saves and rehabs communities — very distressed communities,” Holcomb said, pointing to a 2020 report commissioned by the department that found the tax credit had been “essential to the revitalization” of communities such as Oliver, Collington Square and Reservoir Hill.

The budget department recommends the complete elimination of a tax credit aimed at redeveloping the contaminated and abandoned industrial sites known as “brownfields.” Eligibility for the credit, which cost Baltimore $17.1 million in fiscal 2019, overlaps with other tax incentives that come at a lower cost to the city, but developers have leaped at the brownfields credit in huge numbers in recent years, the report shows.

Baltimore’s industrial legacy means that most of the city can technically qualify for brownfields use, according to the report. A mapping of recipients shows a concentration of brownfield tax breaks in the highly developed harbor area.

These and other reforms should be implemented by a tax credit work group announced by Mayor Brandon Scott in 2021. The membership of that committee has been finalized, according to Jack French, a spokesperson for the mayor, and work is slated to start later this fall.

The mayor’s office supports the budget office recommendations, French said.

Ramos said that while she was excited to finally have the report and its findings in hand, its recommendations don’t go far enough. Tax credits have been concentrated in whiter, more affluent precincts of Baltimore in part because those areas also account for most of the city’s home ownership and development, she said. That dynamic won’t change without more aggressive disruptions, such as fees for developing in affluent parts of the city.

“We’ve got to do some shaking up in order to have true equity,” said Ramos.

adam.willis@thebaltimorebanner.com

sophie.kasakove@thebaltimorebanner.com

Reporter Hallie Miller contributed to this story.