Cleveland Tax Abatement Study recommendations stir policy debate

by Bruce Checefsky                                                                              

(Plain Press, September 2020)       Michael H. Norton, Chief Policy Analyst at Reinvestment Fund, summarized the 109-page Cleveland Tax Abatement Study at the Committee of the Whole Council Meeting streamed live on July 29 on YouTube. He concluded the presentation with six broad recommendations: Cleveland should continue to offer tax abatement for residential properties tied to green construction standards; cap the maximum abated value for single family abatements at $300,000; implement a “but-for” requirement for market rate multi-family projects with abatement values above $5 million; establish a framework for community benefits agreements (CBAs) for developers of multi-family market rate in block groups experiencing high displacement pressure; develop a specific housing market displacement pressure threshold under which the City would automatically trigger adjustments to the tax abatement time period and percentage by block group; and implement process improvements to enhance transparency and streamline the application timelines.(https://www.reinvestment.com/wpcontent/uploads/2020/07/ReinvestmentFund_Report-ClevelandTaxAbatements-July2020.pdf)

NEWS ANALYSIS

   When it came to housing displacement concerns in high construction areas like Tremont, Ohio City, and Detroit Shoreway, Ward 12 Councilman Anthony Brancatelli was quick to point out the study showed ‘little effect’ of displacement due to new construction. However, Norton and his research team at Reinvestment Fund revealed that property tax bills are impacted by changing property assessments “which could be influenced by abatement-induced renovations or new construction” or changing millage rates from the City, County, and school district.

   Whether abatement construction has ‘little effect’ on changing property assessments as expressed by Brancatelli, or property tax bills are “influenced” by abatement as identified by Norton in the Cleveland Tax Abatement Study may be a matter of semantics. But what’s clear from residents living in those areas serviced by residential tax abatement is property taxes have risen as much as 300% forcing some long-term residents to sell their homes and move from the city.

   “I had a good friend who was living in one of the trendy neighborhoods put their house up for sale and move to Copley,” Ward 8 Councilman Michael D. Polensek said. “There’s a direct correlation with properties increasing in value and quality of life including crime and public safety. It’s not just about tax abatement anymore. We have to give people quality of life. Very few neighborhoods are stabilized.”

   “We have some very big challenges in front of us,” he added.

   Ward 1 Councilman Joseph T. Jones asked council members why billions of dollars were being invested in downtown Cleveland and University Circle, and hundreds of millions invested in select westside neighborhoods while investments in his neighborhood were nonexistent.

   “We didn’t even get an Opportunity Zone in Ward 1,” Jones said. “I’d like to see fair and equitable investments. How do we begin the process of having a strong investment program across the entire city?”

   “I’ve had developers come into my neighborhood, but they couldn’t find any investors or financial institutions to invest in housing. They couldn’t find anyone in the state of Ohio to help with financing. We invest millions of taxpayers’ dollars in these financial institutions, and they should invest in our city,” he added.

   More than 35% of Cleveland lives in poverty and 45% of its property value is tied to nonprofit and other institutions, such as schools and hospitals, paying no property taxes. Cleveland ranks second in working-age adults living in poverty and third in older-adult poverty, according to the U.S. Census and Community Solutions.

   In some of the Cleveland’s poorest neighborhoods it’s hard to find a home or business in the tax abatement program. While supporters of property tax abatements including developers, trade unions and city officials are quick to point out the programs spur economic growth and increase revenues as abatements expire, these tax breaks draw money away from public schools. Policy Matters Ohio, a non-profit policy research institute dedicated to improving the lives of Ohio families and strengthen Ohio communities, found that Cleveland-Elyria reported the forgone revenue of $53.8 million in Fiscal Year 2017.  The actual total amount of property tax revenue lost to abatements and incentives is likely far more.

   “If the program is successful it can create economic diversity in city neighborhoods,” said Terry Schwarz, Director of Kent State University’s Cleveland Urban Design Collaborative, in a phone interview with the Plain Press. “The amount of abated taxes is staggering given that our public schools are in such dire need of financial support.”

   Researchers from Reinvestment Fund, Public Financial Management, Greater Ohio Policy Center, Neighborhood Connections and Leverage Point Development, did not make any specific recommendations in their study to address the needs of longtime residents or residents on fixed incomes that may be experiencing high tax increases relative to new development in their neighborhoods. Schwarz believes residents that have lived in the city for many years need some type of tax relief.

   She suggested a more nuanced tactic is needed when it comes to abatement policy.  A 15-year, 100% tax abatement is unusual in cities similar in size and population to Cleveland. The term for tax abatement in St. Louis ranges from up to 10 years at 50% or 5 years at 95% in some sections of the city to up to 10 years at 95% + 5 years at 50% for others.  In the City of Des Moines, Iowa, new construction and rehabilitation projects of more than $40,000 are eligible for 100% abatement for five years anywhere in the city; properties in specified locations are eligible for a 10-year abatement.

   “A surgical strategy is needed for effective tax abatement. Housing values haven’t recovered from the last recession and we are heading deep into another recession,” added Schwarz. “Developers should demonstrate the need for tax abatement to determine whether the project would or wouldn’t happen without the subsidy.”

   In a community virtual meeting organized by Neighborhood Connections to review the Cleveland Tax Abatement Policy Study, Kaela Geschke, Community Network Manager, said the number one concern people have with tax abatement was rising property taxes and long-time resident displacement for those living in high density areas where most of the abatements have taken place.  Those areas include Ohio City, Tremont, and Detroit-Shoreway.

   Norton reiterated the conundrum. “In roughly 2% of the city, increasing home prices are also creating challenges to affordability for long-time residents because of increased property tax burdens,” he said.

   The report also found an increasing concentration of tax abatements in a very limited number of higher-priced and higher-pressure housing markets. This is in opposition to the expressed interests of residents and institutional stakeholders who participated in the study. Those stakeholders said they would like to see abatement serve as a tool to incentivize reinvestment and redevelopment across Cleveland.

   With Cleveland’s abatement policy set to expire in 2022, Ward 3 Councilman Kerry McCormack is ready to see a new tax policy put into place without delay.

   “I fully agree that we shouldn’t delay these recommendations,” said McCormack in a chat room breakout during the community virtual meeting organized by Neighborhood Connections. “     I see no reason for delay. There’s been almost two years of hard work put into this with residents and developers. The community is ready to implement these changes.”

   At the closing moments of the City of Cleveland Committee of the Whole Council virtual meeting, Councilman Brancatelli said millions of tax dollars will flow back into the city once the abatements expire. Resident displacement wasn’t significant, according to him.

    “Resident displacement isn’t a significant factor in deterring tax incentives,” Brancatelli said. He added, “To re-emphasize the point, there is no constant relationship to displacement. The notion that we are displacing lots of people is not real. Only 2% of the market faces displacement.”

   Tell that to over 8,000 Cleveland residents.