Financing Urban Revitalization:A Pro-Growth Template

In our fourth article Special Issue on Growth and Innovation the co-authors recommend American cities adopt a particular property-tax rate cutting strategy. They contrast relatively prosperous San Francisco with impoverished Baltimore. Both cities actually raised property taxes frequently between 1950 and 1975 with roughly the same results—falling population and rising crime. During the same period, many other cities also raised tax rates to make up for lower economic output, thereby encouraging more people and businesses to leave.

The change in San Francisco’s economic fortunes did not arise out of either a successful crime-fighting program (it had worse crime than Baltimore in 1975) or through the rising prosperity of Silicon Valley forty miles to its south (still too small and far away to make a difference). Rather, the inflection point for San Francisco was in 1978 when a statewide referendum (“Proposition 13”) limited property taxes to 1% of assessed value. San Francisco’s revenue declined by 18% the next year, 1979, but by 1982, its revenue was 66% higher than before Prop 13, despite the lower rates.

Prop 13 improved cash flows to owners of real property in San Francisco and protected their property rights. Investors bought, built, and improved the city’s residential and commercial capital stock, attracting new residents and creating new job opportunities.

Politicians are reluctant to try to adopt Prop 13-like measures on their own, however, because the short-term consequences for politicians are painful as several years are required for underlying economic activity to grow enough to offset rate cuts.

The key is to build a financial bridge before crossing the river through four-steps:

1. Announce a property tax rate cap that is immediately binding but which would take effect over several years in the future. Rational investors would immediately begin to invest and expand the city’s tax base.
2. During the transition period, the city should limit its spending to a “maintenance of service” level, while allocating any added revenue to an escrow fund.
3. The city should supplement this reserve with the proceeds of sales of assets on its balance sheet via sale-and-leaseback contracts (SLBs).
4. If revenue falls in the short run, cash would be withdrawn from the escrow fund in order to continue to maintain levels of government services at accustomed levels.

Authored by Steve H. Hanke, The Johns Hopkins University and Stephen J.K. Walters, Loyola University Maryland

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