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City of Cleveland could see changes to tax abatement program

Posted at 5:05 PM, May 03, 2019

CLEVELAND — The city of Cleveland is looking at possible changes to its tax abatement program, which gives homeowners and developers certain tax breaks when they make property improvements.

Cleveland City Council will consider an ordinance at its upcoming Monday meeting on whether to allow the city’s community development department to apply for and accept a grant to undertake a study that would look at the city’s current property tax policies and abatement program, as well as any alternatives to that program.

All around the city, signs that note “15-year tax abatement” are common at development sites. The city currently forgives any increase in taxes due to property improvements for up to 15 years on eligible properties.

Mark Lastition, a sales manager at the Cleveland City Office of Howard Hanna, said when the program began in the 1990s, it was “truly an incentive that encouraged people to consider living in Cleveland.”

“The city was not as vital and interesting and fun as it is right now,” Lastition said. “And so it took a little extra to convince someone to make that financial commitment to the city.”

Tax abatement, Lastition said, meant “you were paying the taxes on the unimproved land, not on the structure itself.”

Now, though, the city may take another look at whether tax abatement should continue or whether options should be explored.

“As some neighborhoods continue to prosper and continue to get healthier and improve, and more market-rate housing is building, it’s having an effect on long-term residents and poor people who live in those communities,” said Matt Zone, Ward 15 councilman.

Zone said he and other elected officials have been meeting to discuss this issue for a year and a half and want a third-party consultant to come in, look at the data and make recommendations to the city of Cleveland. He said the tax abatement program isn’t just about taxes, but about fair and affordable housing.

“There are some residents who are feeling the appraised value and land value,” Zone said. “Now some people say that’s a good thing. They’re creating wealth. But what happens when you’re that individual who’s on Social Security, who’s on a fixed income making $800 a month, and all of a sudden you’re a renter and your rents go up? Now it becomes unaffordable, and many of these people have lived in these neighborhoods two, three, four generations.”

Lastition agreed that it could be difficult for people who lived in popular neighborhoods before they got that way.

“They are dealing with having much higher taxes,” Lastition said. “Their property values have gone up, which is a good thing. It is good to have a home that is worth more. But if the taxes reach the point where they become problematic for that homeowner, I can see how those homeowners would be really upset.”

Lastition said he has lived in Cleveland since 1993 and has seen tremendous changes in neighborhoods such as Ohio City, Tremont, and Detroit Shoreway. To him, that’s proof that abatements have played a significant role, though he believes they are not the only incentive for people to live in those neighborhoods.

Still, he said he thinks it’s “very responsible of the city to take a moment right now and think about where we’ve come and where we’re going.”

Lastition suggested the city might target tax abatements going forward to certain neighborhoods, such as Old Brooklyn or Slavic Village that haven’t recovered as well. He noted that other programs could work, too.

“I think tax abatement’s one piece to the puzzle,” Lastition said. “I don’t think it’s the only piece.”

Zone said that he and others in the city have been looking at several alternatives to tax abatement that would ensure fair, equitable housing.

“We had, for a long time, a very robust city land bank program where we would give, essentially, land bank lots for a dollar,” Zone said. “As housing markets improved, we need to pay fair market value for them. And then those dollars that the city of Cleveland receives, plow those dollars into supporting affordable housing, so people can continue to live in those communities.”

Zone said he expects city council to approve the ordinance to allow a study to take place and that they hope the study will be completed by the end of the year.

Dr. Daniel Shoag, an associate professor of economics at Case Western Reserve University, wrote via email that the “goal of the tax abatement program is to promote investment in the city by preventing property taxes from rising when homes are built or rehabbed. The city benefits from this if it encourages development that would not have occurred [otherwise]. In those cases, the city loses nothing by forgiving the increase, since the increase would not happen without the tax break. The drawback is that the tax break also must be given to development that would have occurred regardless of whether there was a tax break. In such cases, the city loses revenue but does not spur any construction. Figuring out the balance between these two cases is a challenge for policymakers.”

Shoag noted that the goal of tax abatement is “both to keep people in the city and to provide incentives for maintaining the housing stock. Research has shown that there are important spillovers in housing markets. If a nice home is built or repaired nearby, that is good for your property values as well. There are compelling reasons for the city to use programs like this one.”

He added that tax abatement can either help or hurt a city’s finances and that a consultant could help policymakers figure out “how to better target the abatement.”

If the abatement program was eliminated, Shoag said, “the most likely outcome in the short run is a drop in the value of homes that were benefiting from the program. Those homes cannot be moved, so they are what economists call inelastic, and will bear much of the subsidy reduction. In the longer run, construction will decline, and you may see fewer people in the city.”

RELATED: Cleveland may consider alternative programs instead of tax abatements for new developments