What city with no money can afford to give it away?
Ypsilanti apparently can.
The city council recently voted to award the owners of the Thompson Block property tax abatement.
Tax abatement is offered to commercial, industrial and residential properties by municipalities in order to lower tax liability. This is done in order to provide financial relief or increase desired economic activity. The exact subsidy that Thompson Block’s owners received is known as the Obsolete Property Rehabilitation Act (OPRA).
The tax abatement awarded under OPRA would “effectively freeze the value of the improvements on the combined property at the 2014 taxable value for improvements, approximately $109,308,” say city records.
What troubles me about this news, is that even after the city has drawn up its Master Plan, which charts its way forward, its economic plan still appears to be reliant on tax abatement.
“As you are aware, Ypsilanti has a very high millage rate due to traditionally low property values in the City,” wrote the owners of Thompson Block in their application for tax abatement. “This high millage rate acts as a powerful disincentive to new investment such as the property improvements proposed here, contributing to continued low property values and again high millage rates.”
In this respect, Thompson Block’s owners have a point. Taxes should be commensurate to the level of services provided. Ypsilanti has high taxes but does not provide many services. A substantial portion of its tax revenue is dedicated to debt reduction. Moreover, the city has tax rates near that of Detroit, which has the highest property taxes in the country according to the Lincoln Institute of Land Policy. And data from the Michigan Department of Treasury show the jurisdictions surrounding Ypsilanti all have lower taxes.
Surely, the city’s priority after its debt from the Water Street Project has been paid back should be tax reduction. Until then, the city cannot afford to waste money. This expenditure helps one business owner and will not create numerous jobs. In fact, if the city did not waste so much money on economic schemes like the Water Street project and profligate use of tax abatement, it may be able to fix its crumbling roads.
Much of the academic literature is not favorable towards this kind of subsidization of business and industry. The tax abatement the city council is set to award is not for research and development. Nor is it for capital investments, which will improve manufacturing.
More to the point, the financial documents included in Thompson Block’s request for tax abatement are even more troublesome. The company will receive more tax incentives in addition to the benefit from tax abatement awarded by the city. Thompson Block will benefit from historic tax credits allotted at the state and federal level, and more money will come from the Michigan Community Revitalization Program. Washtenaw County also intends to offer the company a financial award.
According to city records, redevelopment of the property has been in fits and starts and much of the financing has been dependent on government largesse. So dependent is this venture on taxpayer dollars, that without them its net cash flow is shown to be negative in its formative years. Many businesses do not make money early on, but many survive without expense by the public treasury.
And this should be understood as an expense – that is how financial analyst in the public sector and those in academia understand tax abatement and other tax credits, deductions and exemptions. These exemptions cost money – they stop money that ordinarily would have flowed into the public treasury. More specifically, the tax abatement to Thompson Block will not capture the revenue that would have been created from the increased value in the property after repairs have been made.
From reporting I did in 2013, the city has awarded tax abatement to six other properties before Thompson Block since 2007. It appears it is the same old, same old, from the city council of Ypsilanti.
