How Baltimore's Tax System Reinforces Poverty

  January 27, 2016

How Baltimore's Tax System Reinforces Poverty

TRNN REPLAY: As Baltimore gives preliminary approval to the biggest corporate tax break in US history, TRNN revisits an interview with Maryland Public Policy Visiting Fellow Louis Miserendino, who says tax breaks exacerbate the inequality that drives many of the city's social ills
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How Baltimore's Tax System Reinforces PovertySTEPHEN JANIS, TRNN: Hello. My name is Stephen Janis, and I'm reporting for the Real News Network in Baltimore.

Baltimore's reputation as a city with entrenched poverty is unquestioned. Since the death of Freddie Gray in police custody, the plight of the city's poorest residents has been national news. But what drives this inequity is not as clear, and what gets little attention among the litany of ills is something that our next guest said needs more. That is, and I'm talking about, the city's property tax system. Not only does Baltimore have the highest property tax in the state, nearly twice the rate of our closest jurisdiction, it's a system that is rife with perks for the wealthiest. Special tax breaks for developers and businesses abound. Meanwhile, the poorest residents pay full fare.

To help us break down how it works is a man who has been studying this problem in detail. His name is Louis Miserendino, and he is a fellow for the Maryland Public Policy Institute. Thank you for joining us.

LOUIS MISERENDINO: Thank you, Stephen, for inviting me.

JANIS: Yeah, I appreciate it. You had a very interesting debate a couple months ago about the poverty tax in Baltimore City, and you talked about some of the intrinsic inequities in the system. And could you tell us a little bit about what you've learned about Baltimore City property tax, and how those inequities break down?

MISERENDINO: Yes. The property tax structure in Baltimore is rather complex, and generally speaking if you don't receive some kind of special break or some kind of subsidy, some kind of de facto property tax break, the property tax rates in Baltimore are roughly double every other place in Maryland. Now, there are some exceptions with some specific municipalities. But I think it's safe to say that Baltimore's rate is very high, absolutely. And the rates are also very high relative to just about all of Maryland and to many cities around the country.

But the high rate, the 2.248 real property tax rate, and the 5.62 percent personal property tax rate, are not applied evenly and fairly throughout the city. So this complex structure divides our city into a property tax-privileged Baltimore and a property tax-punished Baltimore. Those in property tax-privileged Baltimore can often be wealthy, well-connected developers, maybe developing downtown or along the waterfront. But there are various other examples of property tax-privileged Baltimore, and it includes many wealthy, well-connected individuals, and then others who maybe you could argue are not nearly as rich or as well-connected.

But property tax-punished Baltimore, I'd say, is most of Baltimore. It's the ordinary Baltimore. It does include many individuals who are not wealthy, who are not well-connected.

JANIS: Well, you talked about--one thing you talked about in the debate was how, I think, the historic tax credits were applied between predominantly white neighborhoods and predominantly African-American neighborhoods. Can you talk a little bit about that?

MISERENDINO: That's right. One of the many examples of the inequitable tax structure, I believe, involves the historic tax credit. It's a really complicated credit. You have to go through a lot of different hoops. There's a lot of bureaucracy involved. There are a lot of properties that aren't even eligible for it.

JANIS: But basically you have to have an historic property that, you know--.

MISERENDINO: Right. You--you have certain areas that are eligible for it, and then certain properties. There has to be a certain amount of investment. And you have to go through a lot of different hoops. You have to be willing to do the work to get it.

Well, if we look at where these are distributed, they are distributed much more in communities that are not majority African-American. And if you look at the demographic extremes, the more African-American you get, the less likely you are to get it, relative to a community that becomes less African-American. So that if we look at the absolute extremes, say the five most African-American communities compared to the five least African-American communities, the least African-American communities are more than 200 times more likely to receive a historic tax credit than an area that's more African-American.

JANIS: What does that break down to, like, financially--I know you probably don't have the aggregate numbers. But what can a historic tax rate mean to someone's property tax rate, or to the building--or what is it, how does it break down in terms of fiscal outcome?

MISERENDINO: It's a ten-year credit, and the value of the credit diminishes over time, but it could easily result in thousands of dollars in the tax break in a given year for the property owner who receives the credit. It could even be more than thousands of dollars, depending on the value of the property.

JANIS: I'm sorry, go ahead.

MISERENDINO: That's all right. The city boasts, though, that the credit has saved a very significant amount of money, in the millions, if I'm not mistaken. I could get you the figure.

JANIS: Right. In the millions in terms of saving, saving taxpayers who--so that's a significant--.

MISERENDINO: Those who receive the credit. It is significant.

JANIS: One of the things the city has, there's been some controversy over the past couple years, has been TIFs, which is Tax Increment Financing. And you know, we just had a huge TIF down at Harbor Point. How do TIFs impact the city's property tax base? They seem to be mostly distributed to Inner Harbor development. But what do you think about the TIF as an instrument and how it's applied, in terms of equally or not equally?

MISERENDINO: Well the TIF represents an example of how we give de facto property tax breaks to usually wealthy and well-connected developers, often downtown and by the water. So the TIF is another complicated structure that requires you to go through a lot of hoops to get it. But the TIF is a de facto property tax break. So Harbor Point, if you look--.

JANIS: And that's controversial, because people have said, well, it's not a tax break. But you're saying it is a tax break.

MISERENDINO: It is. Because if you look at the amount of money that the recipient of the TIF gives to the city each year after the property is developed, it doesn't work out to be what the full rate would demand.

Now, it's complicated. If you look at the numbers you could make your head spin. But I think it's safe to say it's a de facto tax break. And there are plenty of people who receive them who would admit as much.

JANIS: Yeah. I mean, when we had a [inaud.] Michael Beatty, who is a developer of Harbor Point, which was like $100 million. But what's interesting that he said, so maybe you can comment, is it's not just the face value, it's the money paid on the interest on the bonds. So these TIFs can be much more in the--.

MISERENDINO: Sure. Sometimes they're even infrastructure deals that are part of it. The city builds certain infrastructure that it might not build for another property owner. And sometimes the city even maintains ownership of it, which deflates the value of the property to the owner. So his property taxes are less, and his liability is less, as well. It's one thing for a municipality to build a street that has houses on it, but it's another thing to build your driveway or your garage. And we see some complex deals that involve infrastructure in things like TIFs, and even PILOTs.

JANIS: Yeah. And PILOTs and TIFs--so basically at this point we have sort of, not just a two-tiered tax system, but--.

MISERENDINO: It's multitiered. It's very multitiered, yes.

JANIS: It's multitiered. But the bottom line is, you know, your average homeowner, you know, in a poor neighborhood, is going to be paying the full rate.

MISERENDINO: Sure. Now, there is a homestead credit. So an owner-occupied rate might not have the rate grow as quickly. There are some things for very low-income families. But these are typically provided by the state, not the city. And they're available in other jurisdictions, as well. Nevertheless, it's not unusual to see properties in very poor areas that have owners paying the full rate, without any break at all.

JANIS: Now, one thing that always strikes me as interesting or troubling is that Baltimore City's a predominantly African-American city, and it seems very hard for any of our political state leaders to address this inequity. How did we get here, and what can we do to, in any sense, address this in a way that will make Baltimore more viable going forward?

MISERENDINO: It was not unusual for cities after World War II to increase their property tax rates. There was this feeling that property is immobile, the houses can't flee the tax, and that the tax revenue was needed to make for cleaner streets, safer streets, better schools, the usual city services that we need.

Well, by the mid-20th century Baltimore City's property tax rate was roughly double the county's, and as people left the city, for a variety of reasons, I wouldn't reduce the flight, even the white flight, just to property taxes. But as people left it simply exasperated some of the budgetary concerns that precipitated other property tax increases. So move forward several decades. As we've realized that the property tax rates are a problem, and as we've realized that we're repelling investment, residents, businesses, we've decided that we need to bring them back with special incentives. That's when you see TIFs, that's when you see PILOTs, that's when you see subsidies, that's when you see a variety of special deals.

One recent example that I think is interesting is how we're responding to the crisis of food deserts. Food deserts, of course, are areas that lack a lot of basic access to healthy foods. So we have a lot of areas that don't have enough corner stores selling fruits and vegetables. We have areas that don't have enough grocery stores. And a question that should be asked is, well, why do these stores stay away? And there are many reasons. Again, I wouldn't reduce it just to property tax rates. But just last year the city has decided that to bring grocery stores in, to alleviate the problem of food deserts, we need, basically, special tax incentives to get these food stores to come in and alleviate the food desert. And that, that makes sense. The tax is an obstacle. So the tax is partly responsible for even things like food deserts, that create all kinds of other health problems and exacerbate poverty.

So if we realize that we need some kind of exclusive and specialized tax break to bring food stores into neighborhoods to cure food deserts, then we should acknowledge that we have other kinds of deserts, too. We have healthcare deserts. It's very hard to bring a pharmacy into certain neighborhoods. We have clothing deserts. We have occupied house deserts. And every kind of desert you can name could be alleviated with a property tax break, just as is being done now with certain grocery stores.

So instead of giving property tax breaks to the wealthy, the well-connected, to specialized groups, I think it would be more equitable to more universally apply some kind of property tax cut. Instead of having a property tax-privileged Baltimore that sometimes gets extreme discounts, maybe we should have all of Baltimore be property tax-privileged, with everyone paying one reasonable rate that's more equitably applied.

JANIS: Well, here's a question. I mean, you know, we talked before about a proposal by Dr. Stephen Walters at Loyola University, which says, you know, say five years from now we'll cut the property tax rate by a dollar, and then allow sort of the economics of the situation to run its course. Is that politically possible? I mean, could a mayoral candidate, or some politician run and make the case for this kind of change? Will that actually work?

MISERENDINO: I think it's obvious to everyone that we can't cut the rate overnight. For every penny that you cut the rate, in the following fiscal year you can expect a loss in city revenue of more than $3 million. So it would not only be politically impossible to cut the rate immediately overnight without warning, but it would be fiscally irresponsible.

So there are many ways, I think, that we could improve on the status quo, that we could lower the rate in a way that doesn't create some sort of budgetary crisis. One of many reforms that could work is announcing the tax cut before it takes effect. So there are some similarities here to things that other professors have said, and to things that certain mayoral candidates have even said.

But let's--let me speak only for myself.

JANIS: Of course. Yeah, yeah, thank you.

MISERENDINO: If--if we announce, say, six years in advance that we will cut Baltimore City's property tax rate half, date certain six years from today, and we make it a legally binding promise, then we would have six years to collect revenue on the full rate in anticipation of when the lower rate takes effect. During that six-year period--and I picked the number six arbitrarily. Someone might pick three years or eight years. But during the interim, the city could prepare by putting money in some sort of lock box, by putting money in escrow, for the arrival of the tax cut.

And then you could have a very democratic discussion about how to fill that lock box. There are other taxes that you could increase. The political viability of that and the economic soundness of that could be debated. But perhaps the city could sell vacant properties that would suddenly have value in a lower property tax environment. Sales revenues could go into the lock box. And the properties would be restored to the tax roles. So they would pay property taxes every year. And of course, we would no longer have an expense in demolishing them. The city incurs an enormous expense on property that really should be a source of revenue. Perhaps we could have a discussion about whether or not there's other city property that should be sold. For instance, golf courses are owned by the city. We could have a discussion about whether or not it's in the best interest of the city to continue to own them.

So you could have a really complex discussion about how to fill this lock box. But one of the ways that it would fill is with the recapitalization that occurs in anticipation of the tax cut. People would move in. We don't know exactly how many. They would bring incomes that are subject to the piggyback income tax. We don't know exactly how wealthy the people moving in will be. But we could forecast different, different options and different contingencies in different scenarios. The people who come in would need to purchase permits and licenses to do certain construction. They would also be involved in paying parking meters. There are all kinds of little things that they would be doing, as well.

So if somebody wanted to offer a really sound, detailed plan they could figure out all the different ways to fund the lock box, anticipate how much money would be needed in it, and maybe even the state could be involved in helping, because I think that it's in the best interest of the state to have a healthy Baltimore City. It even coincides with a lot of our smart growth efforts that are really undermined by Baltimore City, that repels investment in residents and property.

JANIS: Bottom line, of all the, you know, as I said, [inaud.] comes of poverty, how important is this property tax question to the future of the city?

MISERENDINO: I think it's very important. I would never minimize the importance of better schools and less crime and cleaner streets. But I think that those issues are intertwined with the property tax issue. I think that when you look at the food desert example that we talked about, we see that property tax structure is what we turn to to try and cure those specific ills. And if we turn to tax incentives to try and cure those ills that are associated with poverty, that are associated with blight, that are associated with a very poor quality of life for many of our communities, then we have to look at the entire property tax structure to see if addressing it can help us address issues of poverty, and some of the other ones that have concerned us for decades.

JANIS: Well, listen, I really appreciate you joining us. Hopefully as the mayoral race unfolds we can come in and have you talk about this issue, in terms of the context of what people are talking about right now. So thank you very much for joining us, I appreciate it.

MISERENDINO: Thank you, it was my pleasure.

JANIS: My name is Stephen Janis. I'm a reporter for the Real News Network in Baltimore.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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