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Tax perks bring new life to declining towns in US interior

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Peter Zito, a 66-year-old computer programmero built his new house (centre) next to his old house (left), on Castle Boulevard in Akron, Ohio. Akron's programme gave him the idea of building a house in his neighbourhood rather than moving elsewhere.

Washington

WHILE a housing crisis rages in high-priced coastal cities, where modest homes can sell for in excess of US$1 million, and governments promote affordable-housing options, an entirely different problem is playing out closer to the country's interior.

In America's Rust Belt and parts of the Northeast, millennials and young professionals are leaving rather than moving in, and populations there are dwindling. Among those who remain, both the residents and the houses are aging.

There is no shortage of homes in Akron, Ohio, for example. But most of them are old, too many sit vacant, and hundreds of abandoned houses are torn down each year. Akron's population has dipped from nearly 300,000 residents in the early 1960s to fewer than 200,000 today.

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Rather than engaging in managed decline, the city last year approved a 100 per cent exemption on the added property value of any new home construction or renovation valued at US$5,000 or more for 15 years. This means that someone who built a new home on a vacant lot would pay taxes only on the value of the land, saving thousands per year in the process.

"People respond to incentives," said Akron Democratic Mayor Dan Horrigan , who grew up in the city and still remembers the vibrant neighbourhoods and bustling streets of his childhood. Major cities such as Detroit, Cleveland and Buffalo, plus parts of Pittsburgh, Philadelphia and other cities, also face home prices that are too low, leaving little financial incentive to build new homes or improve old ones, because money invested can't be recouped.

The low prices also make it difficult to build wealth through equity, a key path to reaching the middle class.

To combat the issue, municipalities have turned to residential tax abatement programmes designed to spur housing development - with or without population growth. Tax incentives are more widely known in commercial projects, such as sports stadiums, but can be created for residential developers and individual homeowners, as well.

Benefits are already being felt in Akron. In 2015, more than 500 Akron homes were torn down, and fewer than 10 were built. Today, there are more than 1,000 units of new housing in some stage of development, which leaders hope will attract higher-income buyers drawn to city life. Planned new projects include a 156-home development in the Kensington neighbourhood, roughly a dozen houses on Dayton Street in the North Hill neighbourhood and a 51-unit development called the Crossing at Auldfarm, with estimated prices from US$180,000 to US$280,000.

The abatements can save thousands in taxes per year. That's a powerful incentive in Akron, where 80 per cent of those who work in the city and earn US$40,000 and above do not live there. Although tax abatement programmes often target only certain underdeveloped neighbourhoods, in Akron, the entire city qualifies.

Huge savings in property taxes

It's difficult to project future housing prices, but Jason Segedy, Akron's director of planning and urban development, estimates that homeowners could save US$100,000 in property taxes over 15 years on a US$300,000 home built over a formerly undeveloped lot. Mr Horrigan has set a goal of rebuilding the city's population to 250,000 by 2050, a number it last saw in the mid-1970s, even if it simply means pulling more affluent residents out of nearby suburbs.

"We expect a lot of units to come online within the next two years," Mr Horrigan said. "We're hopeful that we can get our population above 200,000 in time for the 2020 Census."

Other northeast Ohio towns are taking notice, with the Cleveland suburbs University Heights and Cleveland Heights each having gotten approval for their own citywide residential tax abatement programmes this autumn. In the case of Cleveland Heights, a shrinking city of 45,000, abatements are available for new and remodelled residential buildings and for commercial projects. Tim Boland, the city's economic development director, called it a "game-changer" in a news release announcing the programme's approval.

Indianola, Iowa, also approved a residential tax abatement initiative this year. The town of 15,000 is 20 miles south of Des Moines and offers a smaller incentive than the communities in Ohio: 100 per cent abatement in year one, then falling by 20 per cent annually until reaching zero at the end of five years. City leaders said they hope it spurs the construction of more high-end houses.

Real estate agents, hoping so, as well, are plugging tax abatement programmes in their marketing. "Tax abatement programmes here have been very successful," said John Corral, a lifetime northeast Ohio resident and an agent with Howard Hanna Real Estate Services.

"It's one of the first things people ask about when they're looking for a home," he said. "With a 15-year tax abatement, a homeowner can easily save US$4,000 per year in taxes. Do the math. Over a 15-year period that's a US$60,000 savings." Mr Corral himself is taking advantage by restoring a historic home in Akron. He added that for young locals, the dream is typically to move elsewhere - to Chicago or maybe New York City. But the affordability and incentives might be enough to keep a few more at home.

Younger people and downsizing seniors

"I'm not hearing as much of the dreaded 'brain drain' conversation as I did a few years ago," he said. "The new construction has helped bring in new commercial development, which attracts younger people."

At the other end of the spectrum, downsizing seniors are another group who can benefit. Peter Zito, 66, a computer programmer, said Akron's programme gave him the idea of building a house in his neighbourhood rather than moving elsewhere. He said the rest of the homes on his block were built between the 1920s and the 1950s. "Since I already owned the lot, the abatement allowed me to stay in the city, which was desirable to me," he said. "There's been quite a bit of new development in the area, and it's nice to see that happening in Akron." Mr Zito estimates he's saving between US$4,000 and US$5,000 annually in property taxes.

Residential tax abatement programmes first took root three decades ago, as the population of major cities across the country began to decline. "In the 1980s, cities were focusing all the tools they had on stemming the movement out to the suburbs," said Mike Rosentraub, a University of Michigan professor who has studied the incentives.

At the time, cities across the map were losing population. Atlanta lost 14.1 per cent of its residents between 1970 and 1980, Philadelphia lost 13.4 per cent, and Indianapolis lost 6 per cent, even after consolidating with Marion County.

Effects of the abatements might not be massive, but they can be crucial. Mr Rosentraub said that one reason Detroit was forced to file for bankruptcy protection, whereas Cleveland did not, was because Ohio law allows for more aggressive residential tax abatements that helped keep the city financially afloat.

It can be a difficult decision for a municipality already facing a declining tax base to give up more money through abatements, especially because they benefit future residents rather than current ones. The concept is for cities to regain lost revenue through other means, including income taxes, sales taxes, money paid by new businesses springing up and, eventually, increased property tax rolls, once the incentives phase out.

Cleveland has continued to lose population since it first created an incentive in 1987, although not as rapidly as it did between 1970 and 1980, when it shed nearly one in four residents. Mr Rosentraub's research found that Cleveland's residential tax abatement has been a net positive.

Pittsburgh also created an abatement programme in the 1980s, after losing nearly 20 per cent of its population in the 1970s. The move came just in time, according to Dan Gilman, chief of staff for Pittsburgh Democratic Mayor Bill Peduto.

"Our tax abatements were created at a time when Pittsburgh was economically at rock bottom," Mr Gilman said. "We experienced as great an economic collapse as any city in American history." Today, Pittsburgh enjoys a shimmering downtown, and its population is close to levelling out. The city is now working to revitalise its abatements, hoping to simplify the application process and spur development only in parts of town still needing the boost.

Larger cities, including St Louis, Columbus, Kansas City, and Philadelphia find themselves in similar situations and are re-evaluating tax abatements, now that select neighbourhoods have become more desirable. WP