Feds take a leaf out of Chicago's play book with tax benefits for wealthy neighborhoods

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If you've heard complaints about Chicago's Tax Increment Financing program, it's probably this: a measures designed to help "blighted" neighborhoods is used to line the pockets of wealthy businessmen.

But a new investigation from Bloomberg news says this kind of corruption isn't just the Chicago way. Uncle Sam has now followed suit, shows Bloomberg, with a program called the New Markets Tax Credit. It's designed to get people to invest money in projects in high-poverty neighborhoods, but instead, the rules have been stretched to include some pretty swanky pieces of real estate.

What kind of projects have been raising eyebrows? Here are just a few:

  • A $116 million restoration of Michigan Avenue's Blackstone Hotel
  • Another luxury hotel and theater in a high-end neighborhood, both in Portland, Ore.
  • An antique car museum in Tacoma, Wa.

How did this happen? Well, like TIFs in Chicago, it's easy to bend the rules of the New Markets program to make them work in your favor. The basis of the program is census data. If a census tract has more than 20 percent poverty, it qualifies for the program. That means that banks and investors who put money into the project get a large kickback from the federal government - 39 cents back for every dollar they put in.

It might seem like using census data wouldn't be controversial, but the measure they use to calculate whether a tract is deserving or not - total poverty rate - doesn't always show what's really going on in a neighborhood.

Take the South Loop, where Prudential Financial Inc., the world's second largest life insurance company,  made $15.6 million helping to rehab the Blackstone. The official individual poverty rate there according to the 2000 census is 26 percent. Of course, says Janet Smith, professor of urban planning at University of Illinois at Chicago, the South Loop is a very different place now than it was 10 years ago. Plus, that number is skewed by the large population of students who live in the area.

"You have to make a distinction between family-level poverty and individual-level poverty," says Smith. "The problem with a
subsidy program like this is that we give away money where we
don't really need to and usually in markets where development is
already there."

What percentage of families live in poverty in the South Loop? Just 3.9 percent, said Smith. 

So what companies do is look for a census tract that technically qualifies under the rules, says Virginia Parks, a social services
professor at the University of Chicago. "It's so easy to
qualify that all you need to do is hire a good demographer. It's
not rocket science," says Parks.

A spokesman for JPMorgan Chase, which made money by lending and monitoring the Blackstone project, says these kinds of projects create jobs and "help the community." The Blackstone hired over 200 workers when it reopened.

But who's really benefiting from those jobs? If the New Markets program is anything like Chicago's TIF districts, we should be skeptical. The Chicago Reporter's latest investigation showed that millions of dollars of city investment of TIF dollars yielded little, if any, progress for many Chicagoans. Ninety-four percent of the over 12,000 jobs that were lost in the loop between 2002 and 2008 were jobs held by Chicagoans. Worse yet, suburban residents from Will County got more of the Loop's high paying jobs than residents in 23 Chicago communities. For a $1.2 billion dollar investment in the Loop, most Chicago residents got nothing in return.

The New Markets program costs the public $10.1 billion, says Bloomberg, despite the fact that nearly half of the investments it funds aren't in the poor neighborhoods it was intended to help.

Is there a name for these reverse-Robin-Hood programs that take money intended for the poor and give it to the rich? I haven't heard of one, but maybe we should think one up before more tax dollars disappear into the wallets of wealthy CEOs. At least we'd have a name for how we're getting fleeced. Any suggestions?

Photo credit: Chad Magiera


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