A Council in Economic Oblivion

At our weekly meeting something completely unsurprising happened: Yet another real property tax abatement was granted by the city to a real estate developer.

These have become a regular part of the proceedings of any council meeting. This particular abatement was in the form of a 10-year phase-in of real property tax.

The prevailing property tax rate in the city is about 3.125 percent on commercial real estate, depending on one’s exact location because of the various school districts having their own referendums that allow the rate to creep above the state-mandated caps.

The abatement allows the grantee to pay no taxes their first year, one-tenth of the taxes the second year and so on until the full rate is implemented. In this case, the grantee is a firm that has built multiple speculative buildings, this $11 million, 100,000-square-foot example being only the latest to receive tax subsidy.

This forbearance of tax on this property results in a roughly $1.9 million or 17 percent advantage against any similar property competing in this space. This means the developer could, in theory, charge 10 percent less than the seller of a similar property and still come away with a 7 percent arbitrage profit as a result of differentials in tax treatment. In this case, that would be more than three fourths of a million dollars of excess profit while selling the building for over a million less than a competitor with the same building.

There are benefits to having people in the right government offices, and no slam on the developer but any rational businessman would do the same given the available choices.

However, one part of the equation that is not public is what the developer has to pay the local economic development cartel, Greater Fort Wayne Inc., for this privilege.

Now that the mechanics of the operation are out of the way, we can ask ourselves how this all plays out.

While I’ve written extensively about the economics of this in the pages of The Indiana Policy Review over the years, we need not trust solely in my work on the topic.

In a timely piece in the National Review on Dec. 13, John Mozena writes that despite the propaganda of the boosters at the chambers of commerce, targeted tax subsidies do not do anything to attract or retain jobs, and are usually detrimental to the local economies of the communities where they are distributed.

Mozena quotes the once-prominent Richard Florida, who says these economic development incentives are simply “useless.” He cites research in the Journal of the American Planning Association that shows that 90 percent of the time it’s just a waste of money.

In this most recent episode, I didn’t go through my old spiel of telling the petitioner why I was voting no or putting up any discussion. I’ve done that — many times.

At one council meeting, discussing the real property tax abatement for a new Amazon warehouse, I had one of the most preeminent economists in the country (Michael Farren of the Mercatus Institute at George Mason) join us by Zoom to inform the council how these incentives don’t make any difference. Council ignored him and approved the measure.

The following month, after a good bit of public uproar about a trillion-dollar company getting tax breaks, council declined the abatement for Amazon’s equipment. The project went ahead, just as Farren had said it would.

I could go on citing Adam Smith, Fredric Bastiat, Nobel laureate James Buchanan, or anyone else. I’m doubtful my colleagues have read “The Wealth of Nations” or any other economic text from the free-market perspective.

What’s good economically for the city doesn’t matter. It’s what is good for politicians and the cartels that promote them. But I can still vote against them, and proudly be in the minority in a 7-2 or 8-1 vote count.

This article appeared in the Journal Gazette and the Indiana Policy Review