Detroit’s corporate welfare binge
December 12, 2011 - Detroit city officials are hyping a downtown turnaround by touting the recent purchases of several downtown office buildings. Indeed, there is more than just perception of a dying retail and business market in the Central Business District. And this has happened despite a policy of doling out lavish property tax abatements and other corporate welfare incentives for business to locate in the city. So even as the city raves about new business entrants, it has trouble keeping the ones it has.
Quicken Loans Inc. founder and Chairman Dan Gilbert is seeking 15-year extension on a Renaissance Zone designation on the city-owned old Hudson's site in downtown Detroit. It is potentially worth millions. Gilbert's firms already have development rights and the zone designation at the site through 2017, which has stood vacant since 1998.
Businesses within Renaissance Zones don't have to pay most city, county, state or business taxes. The record is clear that the long-range cost of such abatements is more than the benefits they were designed to provide. Officials need only examine their experience with other high profile projects to discover that abatements are an inefficient and costly process for business and job retention.
There have been too many to count over the years, but a classic example is the Riverfront West high-rise apartment complex located just west of the Joe Louis Arena on the Detroit River. When construction began in 1982, industrialist Max Fisher and developer A. Alfred Taubman received a $40 million mortgage with a below-market interest rate guaranteed by the federal government. It was also awarded some $50 million in tax-exempt construction bonds in addition to millions in Urban Development Action Grants (UDAG) and Urban Mass Transit Authority grants for two towers.
The city chipped in a 100-percent tax break totaling more than $4 million, removing from the tax rolls $700,000 annually for a 12-year period. A third residential tower received $3.5 million toward its construction at the complex. Another $8 million (UDAG) came with the development package that was widely seen as an effort to revive the riverfront by featuring market-rate housing, attractive to a tax-paying middle class with disposable income.
As it turned out, the subsidies and massive corporate giveaways didn’t help the complex live up to its billing. And now that the subsidy has expired, the icon of the Detroit riverfront faces foreclosure.
At best, the city’s liberal corporate tax policy provides firms that receive them with another opportunity to legally avoid paying a full tax load. The revenue loss totals in the millions and is shared by already overburdened taxpayers. As money is drained from the private marketplace, those left to shoulder a larger share of the tax load may feel the city needlessly mortgages their future.
The head of Quicken Loans may be trying to show he a good corporate citizen. He is, after all, putting some of his own money at risk and shouldn’t be faulted for taking advantage of tax breaks and interest subsidies. But the tax breaks may also suggest that the sum of the tax incentives is worth temporarily enduring some of the city’s vast social problems.
The fact that most newcomers to the city feel the need to demand huge tax abatements as the price for locating in Detroit is evidence that the property tax rates are simply too high. The incentives are also sought as compensation for the “taxes” of high crime rates and low quality schools.
At worse, giving subsidies to a few favored commercial giants place competing businesses at a disadvantage and perilously tests the loyalty of the remaining retailers and employers. Abandonment is often the consequence. And not even extensive use of the tax abatement option has caused businesses and developers to rush back into Detroit in large numbers.
Expect the mayor, city council and Detroit Economic Growth Corporation (DEGC) to stay the course, even in the face of mounting evidence that doling out tax abatements amounts to putting the city’s economy on a life-support system. The practice may attract a few jobs in the short term, but history reveals it can’t restore the city’s long-term economic health.