Property Rights Matter: Lessons from a Failing City

Hosting the Preakness Stakes–the second jewel in racing’s Triple Crown, which will take place Saturday–is ordinarily a source of great pride for my hometown of Baltimore. It’s not just a great party but a time to show the city off as an up-and-comer, a desirable destination, a winner.

This year, not so much. Baltimore’s marketing mavens will do their best, but their strategy might be summarized as: “Party on, and pay no attention to all that corruption and crime behind the curtain.” Our mayor has just resigned in disgrace thanks to allegations that she sold roughly $800,000 worth of self-published children’s books to business interests she favored in decisions taken while serving in various political posts. Our homicide rate is the highest of any large American city. And our myriad social problems recently got front-page exposure in the New York Times magazine.

Many Baltimoreans, therefore, are voting with their feet and heading elsewhere. Just in the last year, the city suffered a net loss of over 7,300 residents. Overall, its population has fallen 23 percent since the 1980 census. By contrast, Boston and San Francisco—two other bayside cities that also had been losing residents steadily since the end of the Second World War—have enjoyed genuine revivals, growing by 22 percent and 30 percent, respectively, since 1980. Up-and-coming we are not.

Mishandling the Preakness Stakes

What has my fair city been doing wrong? Many things both great and small, obviously, but a lot of the policy blunders come under a single heading: a failure to understand and appreciate the importance of stable, secure property rights in encouraging the investments that are a key to prosperity and growth.

A recent example of city officials’ cavalier—indeed, hostile—approach to property rights relates to the Preakness itself. Though it has thrilled fans at Pimlico Race Course since 1873, the track’s useful life is over. Indeed, structural problems led to the closure of thousands of grandstand seats just prior to this year’s race. City officials have grumbled about that, and have been fighting to stop Pimlico’s owners from relocating the Preakness to a track in suburban Laurel, Maryland.

The problem is that it makes good sense to do exactly that. Attendance and revenue at most thoroughbred venues have been in decline for years as rival entertainments and gambling options have proliferated. Pimlico’s annual racing calendar has shrunk to a mere 12 days, compared to 159 at Laurel Race Course, which is advantageously situated on a train line connecting the Washington and Baltimore markets. The Maryland Stadium Authority has concluded that the demolition and overhaul of Pimlico would be necessary for racing to continue there, at a cost of $424 million.

Naturally, the track’s owners would prefer not to pay that cost, or a significant part of it, only to be saddled with operating two competing facilities in a shrinking market. A political tug-of-war has ensued, with the owners lobbying for state subsidies to enhance Laurel, and city officials fighting to stymie them.

Most recently, the city has unsheathed what it considers its ultimate weapon: a lawsuit threatening to use eminent domain to seize Pimlico and the Preakness itself in order to keep the race within city limits. That suit comes on top of a 1987 law asserting that the Preakness may not legally be shifted out of the city except “in case of emergency.”

Why the Colts Left Charm City in the Middle of the Night

The message this sends to companies that are in Baltimore (or thinking of being there) is crystal clear: If officials don’t like your business plan, they might just take your property. But the city already tried this strategy with another iconic sports attraction, the Colts of the National Football League, and found that using eminent domain to take intangible property like a sports franchise is a tad more difficult than condemning houses or businesses standing in the way of a new road.

Back in (appropriately) 1984, in pursuit of leverage in negotiations over a new stadium deal with the Colts’ then-owner, Robert Irsay, the city’s delegation to the state legislature wrote two bills authorizing seizure of the team. A panicked Irsay immediately ordered all the team’s possessions packed into moving vans and, in the dark of night, they rolled out to a new home in Indianapolis.

A year-and-a-half and $500,000 in legal fees later, U.S. District Court Judge Walter E. Black, Jr. ruled against the city’s claim—but not because eminent domain law prevented the city from taking intangible property like a football franchise. Rather, by the time the city had formally begun its condemnation proceedings, the key asset they were trying to take (the contract granting the Colts membership in the NFL) was actually outside of Maryland and beyond the court’s reach, headed west on Interstate 70.

What remains to be seen is whether the city’s attempted taking of the Preakness will backfire in similar fashion. Even if a court ultimately rules that a horse race with that name belongs to the city government, there is no particular reason why racing’s “second jewel” must carry its traditional name or be run in Baltimore. Its current owner operates Gulfstream Park in Florida and Santa Anita in California, either of which could easily step up and host a major stakes race in place of Pimlico or Laurel.

If so, it would be one more example of how Baltimore’s long history of disrespect for private property rights has contributed to its decline: consistent losses of population and jobs over nearly seven decades, a shrinking tax base, rising poverty, and all the fiscal and social problems that accompany these trends.

Arguably, the city sealed its doom between 1950 and 1975, a period during which it raised its property tax rate 19 times. Thanks to the economic phenomenon called tax capitalization, each hike reduced the value of residential and business property, expropriating its citizens’ wealth in small but determined bites. Fool me once, shame on you; fool me 19 times, shame on me. Residents and businesses fled; the city’s stock of productive capital decayed, rendering the residents who remained less productive and, so, poorer.

Our Corruption Problem, and Some Needed “Guardrails”

Of course, Baltimore was not alone on this path to perdition. Many cities engaged in similarly destructive tax policies in order to fuel redistributive policies aimed at achieving progressive political ends. Playing Robin Hood at the local level, however, merely invites the “donor classes” to steer clear of Robin’s merry but confiscatory men in Sherwood Forest.

What’s more, the ability to play Robin Hood invites corruption. Two of Baltimore’s last three mayors have exited office amid scandal. But this shouldn’t surprise. When vested with excessive taxing and taking powers, politicians and bureaucrats can turn into “toll collectors,” cashing checks in exchange for the right to do what elsewhere would be ordinary business.

What rescued Boston and San Francisco from their postwar declines—and, in fact, what contributed greatly to the growth and prosperity of cities like Seattle and Portland with similar political cultures—were statewide referenda that capped property taxes and prevented the kinds of “little takings” that will worry anyone pondering investing capital (residential or commercial) in a city run by Robin Hoods. Thanks to Massachusetts’ Proposition 2 ½, California’s Proposition 13, and similar state-imposed caps in Washington, Oregon, and elsewhere, those thinking of investing in fixed and durable capital in those states’ major cities know that no matter how aggressively local politicians might wish to tax their property wealth away, there are limits to how much they can do so. Call these areas’ tax caps “guardrails on the progressive highway.”

Sadly—indeed, tragically for its most economically vulnerable residents—Baltimore has simply refused to recognize the importance of respecting property rights in its efforts to reverse its decline. It continues to pursue failed urban renewal strategies that stress big-footprint, centrally planned projects; it maintains a non-competitive property tax rate that repels investment and fuels flight, offering development incentives only to those prominent enough to get City Hall’s attention and rich enough to “pay to play” in the market for development subsidies.

And despite decades of progressive, one-party rule (no Republican has been elected to the City Council since 1942, or as mayor since 1962) Baltimore officials and opinion leaders consistently blame structural racism or an inadequate commitment to social spending programs for all the city’s ills. This narrative is profoundly disrespectful to those who have worked tirelessly and successfully over many decades to overcome racial obstacles. It also contributes to a sense of hopelessness and division among the city’s residents, all of whom want Baltimore to thrive but are frustrated at its continuing dysfunction.

Most important, that narrative prevents policymakers from seeing that a true and sustainable urban renaissance must start with a commitment to securing citizens’ property rights. This alone invites the amount and kind of investment in physical, human, and social capital that begins a virtuous cycle making a place more prosperous, safer, and conducive to human flourishing.  Baltimore and failing cities like it can be revived, but they need first to recognize this basic fact.