Tuesday, October 7, 2008

Selfish City Costs State


By Mark Stewart

For the last two years, as Lorain County auditor, I have felt obligated to fight against the city of Lorain’s retroactive tax-abatement program because it’s illegal, unfair, arbitrary, and harmful to county residents and institutions. The city of Lorain has found a way to shift its tax responsibilities to the rest of the state. Now, I feel obligated to bring this program to broader attention as it threatens to harm to all Ohioans.

In 2006, Lorain’s city council amended its previous tax-abatement ordinance to begin offering 15-year, 100 percent property tax abatements on homes on the city’s west side, most of which were already built and occupied, in return for exorbitant fees averaging $7,000 per home.

Basically, new home owners can pay a one-time application fee in lieu of paying property taxes for 15 years. Good deal, right? For the city it certainly is, because the money paid to get abatement is a "fee" and not a "tax." Under this scheme the city gets its hands on a windfall that doesn't come with requirements to fund services. So that means less money provided for education. Less money provided to libraries. Less money provided to programs serving the developmentally disabled. Property taxes come with specific allocations, but this "application fee" won't. So it's a sweet deal for the city, because without those required allocations they are free to shortchange on public services.

Historically tax abatement programs are intended to encourage new development that benefits the community. A municipality offers the incentive of paying lower property taxes in return for the construction of new homes. This is a tax abatement program’s “public purpose.”

In contradiction to Ohio law, Lorain’s program fulfills no public purpose. Lorain’s program boils down to city officials selling homeowners the opportunity to avoid paying their fair share of property tax. By offering homeowners the choice between paying application fee instead of property taxes on homes that have already been built, the city of Lorain is shifting the tax burden for these properties to the public while giving the public nothing in return. Most of the abatements under this program led to no new homes and no new residents because the homes and residents were already there. The only incentive offered through these tax abatements is to encourage the homeowners to stay in homes they already occupy, without requiring any additional community benefit.

These retroactive abatements are not only illegal; they are also unfair and arbitrary. If you can offer tax abatements on homes that have already been built, how do you choose which previously built homes get tax abatements? What makes one homeowner more worthy than another to have his or her property taxes waived, while the rest of us keep paying?

In a further distortion of our tax system, the fees homeowners are charged through this program are so high that the city of Lorain will take in more revenue by waiving these taxes than it would by having the homeowners pay them. Under this program, the city gets more while the schools, libraries, community college, and programs serving the mentally handicapped and developmentally disabled receive millions of dollars less.

To make matters worse, some of the costs of Lorain’s illegal abatements will be passed on to the state. The state’s school-funding formula requires that the Ohio Department of Education make up some of the losses the affected schools would experience during current and future tax years. In other words the rest of the state will have to subsidize Lorain’s school system. So, even as it raids funds intended for other programs, the city of Lorain also enriches itself at the expense of all Ohio taxpayers.

And this is what scares me. Imagine the impact if Lorain’s program is declared legal and every municipality in Ohio follows suit. After all, what politician wouldn’t want to offer similar abatements in his or her city, while raising city revenue and shifting the cost burden elsewhere?

By itself, Lorain’s program will cost millions of dollars to the rest of Ohio’s taxpayers. It sets a bad precedent of cities shifting local tax responsibilities to the state. If this public policy disaster is allowed to spread, the costs, not just in terms of dollars but also in terms of the damage done to the principle of fair taxation, will be far more than Ohio can afford to pay.

Ohio’s county auditors are responsible for keeping their respective county’s property-tax system legal and fair. As I see it, Lorain’s tax-abatement scheme is neither.

Stewart is Lorain County Auditor.
Copyright (C) 2008 by the Ohio Forum. 10/08


ISmileUponYou said...

We purchased a newly built home in July 2008 with the the promise of an abatement. We configured this amount coming out of our monthly mortgage of our home. It made good sense to build in Lorain-Amherst Schools since it would be more cost effective, but without the promised abatement we feel that we made a mistake and should have built in Amherst! Now we can barely afford to stay in our home already! Many around us are in the the same predicament and some are facing foreclosing because they can not afford their mortgages. Just what Lorain needs....more foreclosed homes! Where is the tax revenue then and who will pay to take care of abandoned properties? The banks? They can barely stay afloat themselves! Just ask National City...or wait, should I say PNC?The city will pick up the burden of the cost! Principles are wonderful but whem they sink an entire city by forcing them to spend millions, that's right millions, fighting a battle where no one wins, no one wins and we all pay for it in the end.