Cutting property taxes is essential to city’s future, top developer says

Michael Beatty says City Hall must commit to a lower tax rate to stabilize Baltimore.

michael beatty at desk

Michael Beatty, president of Harbor East Development Group, at his office at Harbor East.

Photo by: Mark Reuttr

To grow the city, Baltimore should reduce its “prohibitively high” property tax rate and stop giving tax breaks to lure new development, says the city’s biggest and most successful developer.

“No subsidies, no breaks, an equal playing field for everybody, but have the tax rate be similar to what it is in the surrounding counties” is the prescription of Michael S. Beatty, whose Harbor East Development Group received $9.4 million in payment in lieu of taxes, or PILOT, tax breaks from the city last year.

“The bottom line is that targeted subsidies is challenging to the developer, challenging to the city and challenging politically,” he told The Brew. “It would be much better if the tax rate was cut in half, and we figure out a way to get there.”

While many businessmen privately complain that the city’s tax rate of $2.268 per $100 valuation – double that of Baltimore County and 149% higher than Anne Arundel County – discourages new investment, Beatty is willing to go on record because lowering the tax rate is “really the only long-term solution” to the city’s economic woes.

His comments are significant because the $1-billion Harbor East project has been acclaimed as a commercial success that has lured both upscale businesses and residents into a once derelict section of the waterfront. Last month, his group won a coveted opportunity to build the $120 million regional headquarters of Exelon Corp. on the site of the former Allied Chemical factory.

How to Encourage Investment

Beatty has been president of the development group, owned by H&S Bakery mogul John Paterakis, since 1993. In a wide-ranging interview, the 46-year-old New York native said, “Are there other challenges facing the city? Absolutely. There are real challenges in the school system, for example. But I strongly believe that if the tax rate was cut, what you will see is a major investment back into the city.”

Without the PILOT breaks given to Harbor East, the Legg Mason Tower and Baltimore Marriott Waterfront would not have been built “because the [city’s] tax rate is prohibitive,” Beatty asserted.

But, he added, PILOTs and the Enterprise Zone tax credit (which wipes out 80% of property taxes for the first five years of development) are not the most efficient means to spur overall investment in Baltimore.

“Look around downtown. There are a bunch of good sites with approved PILOTS that aren’t developed. About 40% of the land in the city is entitled to enterprise tax credits. But you don’t see much [development] there.

“Why? Because it’s very challenging building in the city. It takes huge capital, huge risks. And if there’s no reward at the end of the day, people won’t invest. I think this gets misunderstood.” (Harbor East has been picketed by a citizen group saying it is not paying its fair share of taxes.)

City Neighborhoods Would Benefit Most

Beatty said the chief beneficiary of a property tax reduction would not be developers like himself and Paterakis, but homeowners and neighborhoods. Especially in city communities bordering Baltimore and Anne Arundel counties, the current rate structure suppresses property values and discourages investment.

Lower the tax rate, Beatty said, and those properties would become more valuable. “The assessments of those neighborhoods will go up right away. You go to Roland Park and the properties [are valued] at a lower rate than the same houses right across the line. Reduce the tax rate, and the value will go up. People will invest more. The city will get more revenue.”

Mayor Stephanie Rawlings-Blake is opposed to reducing the city’s tax rate to approach the $1.10 rate of Baltimore County – an idea endorsed by her three main opponents (Catherine Pugh, Otis Rolley and Jody Landers) in last year’s mayoral election.

She has been equally dismissive of a similar tax plan by City Councilman Carl Stokes, chair of the Council’s taxation committee, saying it would force a doomsday reduction of basic city services such as fire and police protection.

She points out the city is facing a $52-million budget shortfall in the upcoming fiscal year.

Scale model of Harbor East with the real McCoy in the background. (Photo by Mark Reutter)

Scale model of Harbor East with The Promenade apartments in the background. (Photo by Mark Reutter)

Instead, she has proposed a two-cent-a-year (0.08%) reduction in the tax rate over eight years, which would cut property taxes for an owner-occupied home valued at $200,000 by $40 the first year and $400 by 2020. Much of this reduction would be paid for by revenues from a still-unapproved and un-built slots casino.

Asked if halving the tax rate over the space of three or four years would create havoc, Beatty said, “We also have to run the city more efficiently. That is another long-term solution.”

Pressed to be more specific, he said, “The cost of running the city is expensive for what we’re getting out of it.”

Defends TIF Program

Adding an asterisk to his tax ideas, Beatty said that tax increment financing, or TIFs, are essential for major redevelopment projects such as Harbor East and Harbor Point.

Unlike PILOTs, which are essentially a tax forgiveness program, TIFs are targeted to use the increased property taxes gained from a redevelopment project to provide infrastructure for the project.

In the case of Harbor Point, Beatty said, the site is without roads, sewers or other infrastructure. “Time has gone by, and the city hasn’t paid for the improvements and infrastructure that would normally be built by the public sector,” Beatty said.

So in return for a TIF currently valued at $155 million, the Beatty group will build the roads, an underground parking garage and other infrastructure on the site.

Only 11 of the 30 acres are slated for the Exelon headquarters and other buildings; the rest of the site will be used for streets, a central plaza, waterfront promenade and other public spaces.

While he would prefer the city to build the infrastructure, when it can’t afford such expenditures, TIFs are a good investment, Beatty said, because “the city can invest $1 million and get $1 million back.”

Not Focused on Tourism

Beatty said that the Rawlings-Blake administration needs to review other costs of investing in Baltimore, especially parking and energy taxes that have risen sharply to help balance the city’s budget.

Parking in a garage can add as much as $8 per square foot to a downtown development, he said, compared to the costs of a suburban office complex where land for parking is readily available.

While some tenants are willing to pay “a premium” to be located in the central city, “if the overall investment risks in Baltimore were similar to suburbia, it would be easier to attract businesses and build up the tax base.”

Beatty also said that, unlike the Inner Harbor, the Paterakis group has not been focused on tourism. Harbor East was designed to lure suburban residents and businesses to the city based on the premise that providing “a dense, diverse urban environment” was highly attractive and met an unfulfilled need.

Thus, Beatty said, his group has concentrated on “great convenience amenities” at Harbor East, such as a Whole Foods grocery, full-service drug store, dry cleaner and health club, rather than the “entertainment retail” found in the Inner Harbor.

The developer said he’s now on the lookout for a hardware store “because every neighborhood needs a good place to buy a hammer and nails.”

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  • Edfitz

    If city residents were truly concerned about their tax rate they would have been busting down the election polls in September to vote.  Besides bad management and services, of which city residents have become accustom, apathy is the death of any city. 

  • Mair

    No one in City administration has paid any attention to us. Hopefully Mr. 
    Paterakis and Mr. Beatty won’t be brushed off as quickly and easily as those that  have said this before.

  • Ktrueheart

    Wow!  If our Mayor is truly in Paterakis’ pocket then she should pay attention when this guy, Mr. Beaty, is in the room.  I have only one request of Mr. Beaty:  Go to the City Council and Board of Estimates to present a comprehensive briefing on your TIF request before our officials are asked to vote on it … full public disclosure is absolutely necessary.  I’ll be in attendance to hear the details Sir.

  • Marc

    In the case of Harbor Point, Beatty said, the site is without roads,
    sewers or other infrastructure. “Time has gone by, and the city hasn’t
    paid for the improvements and infrastructure that would normally be
    built by the public sector,” Beatty said.
    So in return for a TIF
    currently valued at $155 million, the Beatty group will build the roads,
    an underground parking garage and other infrastructure on the site.

    Didn’t Baltimore’s 19th century rowhouse builders have to do the same thing – improve/pave the public roads that went through their parcels? It’s not an unreasonable concept. (I wonder if the 19th century builders got TIF, had to shoulder the cost themselves, or even had to pay some sort of impact fee?)

  • CB

    The mayor shouldn’t unilaterally make these decisions especially as she ignores sound advice from city council members, business leaders, developers, and economists. This should be a public referendum.

    I don’t buy SRB’s doomsday scenario. If property taxes are cut, Baltimore would actually increase its tax base by stemming the outflow of residents.

    You can thank the 12.5% of Baltimore voters who reelected her.

  • Baltimoreplaces

    A Simple Plan:  10 year tax phase-in for all new city home buyers (much like the new construction tax credit).  Reduce the property tax by $.05 per year for 20 years and phase out or reduce the homestead tax credit after 10 years.   This is so totally painless and will be effective.  This would create a ton of postive PR and reduce taxes to near county levels for 1st time buyers (large market) and is 100% gain and would increase near term revenue through transfer taxes.  It will also encourage others to stay.  Again it increases tax base and population,  addresses short & long budget issues.  

  • Dojani30

    An influx of new residents would surely mean the end to the lifelong political careers of those that currently hold office…young and educated don’t typically vote for public service lifers with questionable ethics…that’s got to play a part in the decisions to keep the tax rate where it is.

  • Unellu

    The man is right to say the city should be run more efficiently.  The way the city awards its contracts — the highest favored bidders walking away with plum projects and the lowest bidders kicked in their behinds– needs major reform.  The city should lower its tax rates to lure the middle class and to accommodate essential workers like policemen and firefighters.  But Michael Beatty is wrong about developers.  Most of them are hung up on constructing office buildings with adjacent shopping malls, gyms and upscale restaurants to cater to a high end clientele.  I don’t see what big risks the Paterakis group has taken with the Harbor East development project.  As far as I am concerned they are sitting pretty with a win-win on their hands.  Beatty ain’t a Louis Kahn or a Frank Lloyd Wright.  He is not into beautifying this city nor into making it user friendly for its daily inhabitants.  He is no visionary.  He wants large clients who can guarantee him large profits and he believes he can get that if the city lowers its taxes across the board for everyone.  But think about how clever that is–if a man pays 5000$ real estate taxes to the city now–slash his taxes by 50%–he’ll pay 2500$.  A fellow like Paterakis pays, let’s postulate, 2 million dollars to the city in taxes.  Cut his taxes 50%–he’ll pay 1 million and keep a cool million to himself.  His 50 % is not the small guy’s 50%.  I say cut the small guy’s taxes by 50%.  Keep developers’ taxes just the same.  See where the city goes–it will run OK.  People will move into vacant houses–rahab them.  They will plant gardens and trees.  They will start their mom and pop stores and little restaurants.  Long before mega developers came into being there were cities.  Most mega developers, it seems to me, are a greedy bunch.  They are environmental disasters and they are back scratchers for the political class.  Michael Beatty’s seemingly democratic tax cut program is a self serving ploy.   We need more of the middle class in the city.  We need the poor already here to be uplifted.  By the way, Beatty’s claim that when real estate taxes are lowered, property values will automatically fly upward is preposterous and presumptuous.  Terrific schools, great govt. services, wonderful neighborhood parks as well as playgrounds, general safety, good hospitals and well kept, well lit, tree lined streets–these are also things that determine property values.  Lower taxes and deteriorating govt. services will not increase property values.            

  • Flint Arthur

    Baltimore should change the real property tax code to be based on classes of property, not a high flat tax for all real property. Something similar to DC’s real property tax structure: 0.85% Residential, 1.65% small business, 1.85% big business, 5% vacant, 10% blighted. Very quickly the vacant properties would have occupancy and the blighted properties would either become owned by the city (and suitable for homesteading) or developed.

  • Richard

    Yes, the City should be more efficient. And yes, property taxes are too high. But Baltimore is home to the vast majority of the region’s poor. This means that we are home to a population that is more in need of public  assistance and less likely to contribute to the tax base. Add to this the fact that the city is riddled with crumbling pre-1900 infrastructure and you have a very expensive place to run effectively. The solution I would like to see is by far the most controversial, but may have the most positive overall effect. The book “Baltimore Unbound” came out over a decade ago and it advocated for more effectively spreading the urban poor into the suburban areas. This means more use of Section 8, but also more construction of housing for low income families in places like Harford, Carroll and Anne Arundel Counties. This concept of managing poverty works  in some metro areas of Canada and Europe to great effect. (The book also called for a more regional government, such as combining the city and Baltimore County into one entity, which I think is an interesting idea). Now, I know – the likelihood of suburban populations going along with the concept of absorbing more of our region’s poor is close to nil. But face it – as long as Baltimore is the sinkhole of poverty, and the burdens cannot be effectively spread out, the city can’t reduce taxes in a meaningful way. 

    • Barnadine the Pirate

      Actually, I think that Baltimore City should use the nuclear option in state-level negotiations. Say to the legislators from Baltimore County and Anne Arundel County, “you know, you’re right. We’re a hopeless basket case. So we’re going to hold a referendum to dissolve as a separate political entity, and just be an incorporated municipality. As of October 1 of next year, Baltimore City’s problems are now your problems. Have fun!”

      Faced with that threat, the surrounding counties would offer up anything in order to keep the city as a going concern. They depend on the city to be a sponge for soaking up regional poverty and crime. The existence of Baltimore City as a separate political entity is a godsend for the surrounding counties.

  • Flint Arthur

    For the environment, the last thing we need to do is to spread more of the population to suburbia.  If it’s a question of distributing the tax base, maybe more funds from the State of Maryland need to go to Baltimore City.  The suburban tax dodge has gone on too long.

  • Brian

    I’m glad Harbor East was built, it really showed what flawed government subidies can build – 3 million square feet of new space on the harbor – away from transit – furthering that classic Baltimore ‘island’ neighborhood effect. Why is he asking for reduced property taxes? Because his company wants to finish the Four Seasons condos on top of the Four Seasons hotel. I guess they are finding it tough to sell on a condos with such a high property tax. Please, Harbor East got enough.

  • Barnadine the Pirate

    Let’s stop subsidizing endless suburban sprawl and put the money into viable, meaningful, non-bus-based transit for the city and inner suburbs.

    Let’s fix the school system — the REAL reason people leave Baltimore.

    Let’s have a viable two-party system so that the crooks, carpetbaggers, and dynastic nitwits can be voted out of office.

    Then we won’t need to worry about property taxes.

    I would love to pay lower taxes, but if you fixed transit and schools, the property taxes would cease to be an issue. Living in the city my family can afford to have only one car, which sits idle five or six days a week. If I moved to the ‘burbs, I might save $4,000 a year in taxes, but I would pay more than that in increased transportation costs. The real problem isn’t the extra $4,000 a year in taxes, it’s the extra $25,000 a year I will have to pay in private school tuition if I don’t want my kid in a collapsing building, with a teacher who can’t speak standard English, in a classroom with 30 kids.

  • Cwals99

    The primary driver of high property taxes in Baltimore is the failure to tax private non-profits like Johns Hopkins with its huge real estate holdings and the Catholic Church; churches being exempt but non-profit organizations not.  The next driver of high property taxes is the failure of the State of Maryland to have equity in its distribution of taxes.  Having a ring-fence around wealthy Montgomery and Prince George Counties, like the ring-fences around the luxury developments Michael Beatty represents here in Baltimore is the problem.  If you address these two issues, property taxes in Baltimore could fall and we would still have an increase in revenue for our schools.

    • UpperFells

      You have the causality wrong.

      Property taxes aren’t high because Hopkins, UMB, Morgan State and non-profits such as the Catholic Church own a lot of land in the city and don’t pay taxes.  The contrary is true. Only organizations that don’t pay property taxes can afford to own land in the city because the property tax rate is too high for private citizens and for-profit entities. 

      At some point the citizens will start asking why taxes go up every year in Baltimore, but every year we have another budget crisis. There are structural problems in the city’s budget that need to be fixed.  The city spends far too much money paying for retiree obligations and union contract required benefits.  Those costs continue to rise every year while the actual money spent to run the city, its services and schools is squeezed every year.

      The problem is a structural deficit.  I think the city leaders know that this is the problem, but they don’t want to make the unions angry and risk losing their seats. 

      • Cindy Walsh

        UpperFells….pushing people into poverty with cuts in wages and benefits does nothing good for the city.  We have the crime and violence now just for that reason.  We are preparing to bring the country back to a middle-class quality of life so the government and public employees would, of course lead the way.  Some renegotiation is needed….much oversight of investment and pesnion funding.  None of which has to do with property taxes. 

         Talking about structural deficits, that comes from the loss of 35% of corporate tax reveue and the handing out of business tax credits.

  • Sedg

    Speaking as an individual, I agree.  Schools are most important.  I’d rather live in a vibrant city, pay the extra property tax, and have good schools.  There’s one problem:  I’m paying twice the property taxes and the public schools are dismal.  Oh yeah, and everything else kind of sucks.

    OK, so what makes good schools?  It can’t just be spending per pupil, which Baltimore City actually doesn’t fare that bad on . . . about 50% above the national average, I think.  Personal behavior, school culture, the % of kids who do their homework, % who strive to get an A . . . they all raise or pull down a school and how much gets taught.   

    More kids from middle and upper-middle classes (regardless of race) and the schools get better and the disciplinary problems drop.  Excuse my oversimplification; I don’t have time to delve.  It’s statistically guaranteed. How do you get more of these kids?  You attract their parents and the values they espouse at home.  And how do you attract them?  Follow the bread crumbs and it all comes down to jobs and where those jobs are located.  Taxes aren’t everything, but they matter.  In Baltimore’s case they matter a whole lot. 

  • Thasler

    A recent, March 27, op-ed in the Sun by Louis Miserendino pointed out that Boston passed a proposition in 1980 reducing property taxes by 75% which attracted private investment, new residents, and the city is thriving.  A lesson for Baltimore?

  • Bc1ret

    “The city spends far too much money paying for retiree obligations and union contract required benefits.”  Upper Fells Point
    Wrong!  In recent years, city employees have become the whipping boys for the uninformed, but the facts paint a different picture.
    After running into burning homes in Upper Fells Point and other Baltimore neighborhoods for 38 years, I retired from the Baltimore City Fire Department as a battalion chief.  At that time, a battalion chief right across the line in Baltimore County was making 50% more than I.  In fact, all of the surrounding counties make much, much more in salary and benefits than Baltimore fire fighters, who are the lowest paid in the state. The higher salaries in the counties also result in more lucrative pensions for their retirees. The same is true is for Baltimore’s police officers and teachers.
    Employee costs are not the cause for Baltimore’s fiscal woes.  Mismanagement and an over reliance on property taxes are. Spending $440,000 on tee shirts is but a microcosm of the type of poor financial decisions being made every day in Baltimore. And it’s not surprising that the revenue from property taxes is insufficient when huge amounts of property are not subject to taxation.
    I never expected to get rich as a Baltimore fire fighter, and I’m fully aware of the city’s fiscal problems.  I do, however, resent it when people like Upper Fells Point falsely claim that the benefits I earned are the reason for the city’s fiscal problems.

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