Special Tax Deals for Developers Cost Providence $15 Million Since 2013

Thursday, August 21, 2014

Stephen Beale, GoLocalProv News Contributor

 Tax breaks for developers of some of the biggest projects in Providence have totaled more than $15.1 million since 2013, according to a GoLocalProv analysis of city data for the controversial economic development program.

In tax year 2013, the deals, known as tax stabilization agreements, meant the city received at least $8.4 million less in tax revenue. For 2014, the loss in direct tax revenue was at least $6.6 million.

In fact, both figures are likely higher. But current figures for some properties cannot be calculated because the current assessments do not reflect the actual values. In some instances, assessors passed over properties that were under a TSA agreement during the last revaluation, declining to update their assessments, according to city Internal Auditor Matt Clarkin.

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The data offers a snapshot at deals that can become costly over time. In 2013, GTECH normally would have paid $2 million in property taxes on its corporate headquarters, located at 10 Memorial Boulevard across from the Providence Place Mall. Instead it paid about half that under a TSA agreement that has been in place since 2003 and is not set to expire until 2026, according to a January 2014 report issued by Clarkin’s office.

City data shows that GTECH paid its taxes at a similar discounted rate for 2014, according to preliminary data Clarkin provided to GoLocalProv.

In theory, a tax stabilization agreement should spur economic development: lowering taxes becomes an incentive to revitalize a depressed property or break new ground on long-vacant land. Over time, once the development has been completed the property is supposed to go back onto the tax rolls.

 Developers seeking costly extensions

Instead, some developers who have had TSAs in place a decade—or even longer—are now coming back to the city seeking extensions on more properties, raising questions about the economic rationale behind them.

City records show that one prominent developer, Cornish Associates, has at least three current tax deals with Providence for 210, 220, and 236 Westminster Street. The three deals were struck between December 2001 and November 2002 and were originally set to expire after ten years. Instead, thanks to largely overlooked-2010 state law they were extended by another ten years.

Now, Cornish Associates is seeking yet another extension of the TSAs, according to John Jacobson, an investor who teaches at RISD.

“It is not only Cornish who needs another 5 years it is all the 2001-2002 TSAs who need them. Their numbers don't work without them. It is a very scary situation and every politician has kicked the can on this,” Jacobson said. “You see developers aren’t following the market. They are feeding at the city and state trough.”

As of 2013, a fourth of all the TSA agreements dated back to 2001 or 2002. Their tax breaks totaled more than $1.5 million that year alone.

 “The problem with the business model is when the TSA expires the project might be economically unsustainable,” said Ric Santurri, a local real estate investor.

TSAs also don’t work in the current tax environment, according to Santurri. He says taxpayers cannot afford the tax agreements when roughly 40 percent of property in Providence is already exempted from taxes because it is owned by a hospital, university, or other tax-exempt organization or government entity.

Santurri has roughly estimated the TSAs cost the city $10 million in 2013. (The GoLocalProv figure is lower because it incorporates updated data.) That amounts to 3 percent of the $330 million the city levies in taxes, which means that a homeowner who owes $4,000 a year in taxes to the city is paying an additional $120 to subsidize the tax breaks for developers, according to Santurri.

“It just adds to the burden of the residential component, the car tax, and everything else,” Santurri said. “Someone has to make up for these people who don’t pay.”

Taxes aside, Santurri also questions the economic theory behind the agreements. Other large Rhode Island cities, he said, manage to have large developments without the aid of TSAs. One is a six-story boutique hotel in Apponaug in Warwick. Another is an apartment building behind the Garden City Center in Cranston.

“Some Providence politicians are easy marks when it comes to giving away TSAs,” Santurri said.

 Council leader defends TSAs

When asked if the tax agreements are costing too much—as some critics allege—Council President Michael Solomon defended them as a vitally needed economic development tool.

“Tax stabilizations are a critical tool in a city or town’s economic development toolkit. I have proposed a comprehensive tax predictability program to spur economic development along our main streets. We need to grow our tax base and revitalize our neighborhoods. The ordinance also outlines benchmarks that need to be met to qualify for this administrative, apolitical process,” said Solomon, also a candidate for city mayor.  

Solomon said the latest deals approved by the council are revenue neutral. “The City Council recently approved several tax stabilizations, which are revenue neutral to the city. Because of these agreements hundreds of millions of dollars are being invested, jobs are being created, and our tax base is expanding.”

(Solomon did not elaborate on why the deals were revenue neutral but supporters of TSAs argue that the developments would not happen without the deals. The argument is that the properties when developed are not paying any less in taxes than they are now as undeveloped land or unused buildings.)

Solomon’s opponents in the Democratic primary for mayor took a more skeptical approach.

 “My plan is for a system that is predicated on the principles of transparency and predictability. Everyone should have equal access to TSAs and we need to remove as many political barriers as possible. City investment in development is absolutely necessary, but it only works if it reaches businesses of all types in every neighborhood and not just those with connections in City Hall,” said Brett Smiley.

Smiley added: “I also believe that no TSA should end with a cliff. It’s unrealistic to expect that a business owner can afford to pay no taxes one year and full taxes the next. Any TSA granted in my administration will have a gradual increase over several years until the business is paying the full tax rate. By creating a TSA system that’s predictable, fair and transparent, we can get back to the work of investing in the right city businesses to create jobs and grow our economy.”

Jorge Elorza likewise has called for more comprehensive reform of the tax-incentive program.

“TSAs are an extremely useful tool to spur development in the City, but they have been misused and mismanaged. This is the rare example of a single program that has been both over­utilized and under-­utilized. TSAs have been over­utilized in the sense that some developers have gotten agreements that essentially amounted to tax breaks; these agreements are meant to stabilize taxes, not eliminate them. Many of these TSAs are poorly supervised, overly generous, and ultimately cost the City money,” Elorza states in a position statement on TSAs forwarded by a campaign spokesperson.

Elorza added: “They are under-­utilized in the sense that our lack of accountability and long-­term vision in granting TSAs has prevented us from unleashing their full potential as an economic development tool.”

 The campaign for independent Buddy Cianci did not respond to a request for comment. Republican Dan Harrop did not respond to a call in time for publication.

Calls for reform, but little action

TSAs have come under greater scrutiny over the past year. Last January, Clarkin issues a report revealing that a number of businesses receiving the deals were behind on the taxes they did owe and had other potential compliance issues. Clarkin’s report also showed that the city currently has a disorganized system for tracking the agreements and enforcing their conditions, with about half a dozen separate departments and agencies sharing in the responsibility.

In all Clarkin made nine recommendations for the city in his January report. When asked what action the has been taken since then, a leading city official identified just one.

“The City Council has made it a priority to review tax stabilizations and tax stabilization policies. Since the Special Committee on Ways and Means began studying TSAs earlier this year, several changes have been implemented. We are now requiring that developers have pre-construction meetings with representatives from First Source and Building Futures to ensure compliance with the hiring requirements included in their TSAs,” said Councilman David Salvatore, Chairman of the Special Committee on Ways and Means.

In the meantime, Salvatore said the council is also taking a deeper look at the issue, reviewing the economic ramifications of the tax deals.

“We will be finalizing a report that will include a recommendation to conduct an economic impact study to determine the short- and long-term economic benefits associated with tax stabilizations. Additionally, we are pursuing a recommendation made by the Economic Development Task Force for the City to conduct a cluster analysis to create an economic development strategy based on the strengths and growth areas in Providence. The results of this analysis also will help determine the types of tax stabilizations, or other economic investments the City should make in the future,” Salvatore added.

Clarkin is now planning a follow-up report to be released in September. 

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