Should Muni Bonds Pay To Demolish Buildings?

By :: April 5th, 2012

Two Ohio Members of Congress have introduced a bill to allow states to issue tax-exempt bonds to demolish buildings. Not to build them, but to destroy them.

Score this one as a bad solution to a real problem.

The lawmakers, Republican Steve LaTourette and Democrat Marcia Fudge, want to allow state governments to issue up to $4 billion in revenue bonds to flatten abandoned buildings. Half would be divided among all states, the other half would be allocated only to states that Congress designates as hardest hit by the housing crisis (of which, I assume, Ohio will be one). Thanks to The Bond Buyer’s Jennifer DePaul for finding this one.   

The problem is serious. Cities in Ohio and Michigan struggle with entire neighborhoods that have been nearly depopulated by the combination of foreclosures and disappearing jobs. Abandoned houses and commercial strips are magnets for crime and blight and may discourage future redevelopment. Tearing down often-gutted structures might sometimes make sense.

But why should the federal government subsidize what is the most local of activities? While teardowns may be the answer in some communities, why encourage the activity even when it is not appropriate?

Grassroots solutions are sprouting. In Flint, MI, the Genesee County Land Bank is acquiring foreclosed properties and returning them to productive use.  In some neighborhoods of Detroit, cheap housing and low cost commercial space is beginning to attract trendy artists, designers, and high-tech types. Local markets will sort this out.

But with targeted demolition bonds, it would not be hard to imagine a developer getting a bigger subsidy for nuking a house than restoring it. And, of course, there is the matter of who will benefit: well-connected local construction firms, to say nothing of investment bankers and bond lawyers.

Trust me, it won’t often be the couple who want to do a tear-down or the three business partners who want to buy and repair a couple of houses at a time.  

In the end, it may not be local taxpayers either. Investors in revenue bonds demand a steady stream of cash to repay the debt, such as a bridge toll. But it is hard to imagine an empty lot generating much revenue.

Supporters of the bill say the funds would come from non-profits, appropriated state and local dollars, or perhaps local land banks.  This is not, shall we say, the kind of predictable revenue stream investors like. It will drive up interest costs. And guess who may end up holding the bag if the bonds crater.         

State and local governments have been using tax-exempt bonds to pick winners and losers in the housing and commercial development markets since the 1970s. When the abuses became too egregious, Congress cracked down by limiting the purposes for which these revenue bonds can be used or capping the amount of this debt that can be sold.

Still, tax-exempt mortgage bonds for private housing have been so ubiquitous that I can’t help but wonder how many of those now-vacant homes were subsidized with tax-exempt dollars in the first place.

What a deal. First taxpayers pay to build them. Then we pay to flatten them. Then…. Well, you know what will come next.

5Comments

  1. Ralph H  ::  4:22 pm on April 5th, 2012:

    Frankly I feel all Munis should be ended. Why should wealthy people be able to buy them? We are constantly disgussing about “tax expenditures” and raising the effective rate of higher incme payers, so what is the possible benefit of keeping this joke practice? The tax exempt status just encourages local governments to make bad decisions becuse financing is cheap.

  2. Could the Federal Reserve Actually be Right? | LearnBonds.com  ::  7:38 pm on April 5th, 2012:

    […] Should Muni Bonds Pay to Demolish Buildings? – Our Take: As the article mentions this was a story broken by Bond Buyer’s Jennifer DePaul and the Tax Policy Center has done a good job of summing up the two sides of the argument.  If this weren’t so sad it would be funny as the article puts it here: […]

  3. Michael Bindner  ::  11:58 pm on April 5th, 2012:

    Frankly, TARP funds should have been used for demolition costs – with the requirement that the land then be converted to parkland until the housing market comes back, if it does. Of course, that would mean rolling back the requiremetn that TARP make a profit, but that would not be such a bad thing. Requiring more revenue does not make any sense at all.

  4. Tax Roundup, 4/6/2012 « Roth & Company, P.C  ::  8:09 am on April 6th, 2012:

    […] luck getting rent from the tenants to pay them off: Should Muni Bonds Pay To Demolish Buildings? […]

  5. Cameron  ::  12:24 pm on April 6th, 2012:

    I respect your intelligence too much to think you truly believe that bohemians are the expedient solution for a market failure of Detroit’s magnitude. Exactly how many brigades of suburban-parent-subsidized art school graduates would it take to make productive use out of 40 square miles of vacant land? Excess of thirty thousand vacant homes? What about the vacancies that will be left once the next 100,000 people to move out of Detroit? You prescribe a flyswatter for a job that needs a sledgehammer.

    Second, you overlook the savings that could be generated by decommissioning large segments of shrinking cities. You call for a market solution, but you forget that urban development is hardly a free market. When corporation sees demand fall, they can do some pruning or leave. But utilities, arguably for good reason, can’t pack up and leave just because there is only one customer left on the block. In areas where revenue density is far lower than service costs, bond funds for buyouts, demolition, and decommissioning can reduce a significant amount of operating costs on a permanent basis. And this financial benefit extends to state and local government for similar reasons.

    Finally, you miss another big point about how bonds in shrinking cities could correct market failures in cities like Detroit. Let’s turn the analysis from the moribund parts of the city to the parts that are stable or recovering. Demolishing vacancies is a no-brainer for raising property values (read: more property tax receipts) and attracting commuters to move in (read: more income tax receipts). And this makes tax-reverted and REO property more marketable, another source of revenue to the treasury.

    This isn’t really a matter of picking winners and losers. The losers in Detroit were picked a long time ago. This is about clearing losers off the field. You should know better.