I have followed with interest the efforts of Portland’s municipal officials to prevent the law firm of Pierce Atwood from leaving the city’s downtown.
Media coverage of negotiations invariably make such bold assertions as “Portland offers multimillion-dollar tax break in bid to keep big law firm.”
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Such juicy simplifications are effective in evoking images of Rod Blagojevich scuttling from a late-night meeting with a thick manila envelope under his arm. But they fail to capture the complexity of the financial considerations involved and don’t do justice to the public costs and benefits being weighed.
The foundation of municipal finance is equal assessment of property values and equal application of a single tax rate.
To say that a business (or anyone else) is getting a “tax break” implies either that its property is being assessed at below fair-market value or that a lower tax rate is being applied to that property.
In fact, under a Tax Increment Financing deal, or TIF, neither of these alternatives is true. A TIF property is assessed at full and fair market value just like any other property. And when the council sets the citywide tax rate required to meet public needs, that rate is applied to the TIF property just as it is to every other property in the city.
The difference in a TIF property lies not in its assessment nor in its tax rate, but in the use of the revenue it generates.
When a municipality and the state (both must agree on the deal) decide to designate a particular property as a TIF property, its value is divided into two parts — the value as of the date of the creation of the TIF and any new value created after that date. In the case of the Cumberland Cold Storage property where the Pierce Atwood location has been proposed, this original value is slightly less than $1 million and the new value to be created by repair and renovation will be $12 million.
Tax revenue collected on the original value goes to the city’s general fund, the same as before. This amounts to just over $17,000 (17.97 mils on $950,900).
Tax revenue collected on any new value created goes into a special TIF account to be used only for the purposes specified in the TIF Development Plan. This, in the first year following completion of the renovation, amounts to just over $215,000 (17.97 mils on $12 million). Of this amount, 63 percent (about $136,000) will go back to the developer to help pay for the renovation.
In short, the TIF agreement is not a tax break but a way for the city and the state to participate in an economic development deal.
It’s bootstraps development.
A business makes an investment. If that investment is successful — i.e., creates new taxable property — we (the city and state) will use some or all of the tax revenue generated by that new property to help pay for it.
In the case of the Cumberland Cold Storage/Pierce Atwood deal, the city will return $136,000 in new property tax revenue to help pay some of the cost of renovation.
To call this decision a tax break is to miss the essential point of the deal — city and state participation in the risk of a new investment.
The deal may or may not be wise. The risk may or may not pay off. But any evaluation of the public interest served or not served should be based not on clucking about a tax break but on hardheaded analysis of the investment.
A second way that the simplistic moniker “tax break” fails to do justice to TIF deals is that it overlooks state participation.
If the Cumberland Cold Storage/Pierce Atwood property was not “TIF’ed,” the $12 million in new property value would be added to the city’s state valuation.
This would have three consequences — the city would lose just over $52,000 in state aid to education; it would lose just under $7,000 in state revenue sharing; and it would pay just over $3,000 in additional county tax.
These “tax shifts” of just over $62,000 represent the state’s financial participation in the deal. It’s like Uncle Sam’s participation in your retirement investment that derives from allowing you to contribute pre-tax dollars to an IRA account.
And here is where there really is a tax break.
In effect, all the other municipalities in the state are “giving” Portland $62,000 (and a progressively larger annual amount over the next 19 years of the TIF agreement) to help the city develop its downtown. Whether this is a wise use of state funds is, of course, a matter of debate. But again, that’s a debate about the wisdom of using state redistribution formulas as an economic development tool, not a debate about a tax break in Portland.
The central question before the citizens of Portland in this case is, “Should we take $74,000 of our future property tax revenues plus $62,000 of money from the state and invest it in a project designed to redevelop a currently underutilized waterfront property and keep an iconic business in our downtown?”
If you think the odds of this investment producing a greater annual return over the 20-year course of the TIF are favorable, then you should support the project. If you don’t, then you should oppose it.
But, from the perspective of a Portland taxpayer, the issue of a “tax break” shouldn’t even enter the discussion.
Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at:
clawton@maine.rr.com
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