Picket Fences and Iron Gates: The Ethics and Impacts of Business Improvement Districts

By Sajan Srivastava

Sajan Srivastava is a sophomore from Piedmont, California, studying Economics.

The path to overcoming the longstanding issue of urban decline undoubtedly begins with individualized critical investments. Contributions to infrastructure, security, and sanitation can help uplift city neighborhoods and gradually propel them collectively towards renewal. Doing so in a sustainable way – without overlooking consequential gentrification and undermining a common subsistence of equitability – remains a challenge that cities across the nation are forced to confront. ​

​Following World War II, President Franklin D. Roosevelt’s New Deal established the Regional Planning Association of America, which incentivized migration from inner cities to new “satellite towns,” causing widespread suburbanization of the Rust Belt and entrenching city districts in issues of poverty, disinvestment, and abandonment [1]. As a means to combat this, inner-city districts initiated aggressive redevelopment campaigns beginning in the 1950s. However, due to the lack of tax revenue, such campaigns were predominantly underfunded and proved fruitless. 

The reasons for the failure of these urban revival projects lie in the insufficiency of property tax legislation. Local governments generate 61% of revenue through property taxes, which are raised at percentage rates that do not increase with the value of the home, leaving untapped funds in wealthy property owners’ assets [2]. Furthermore, these taxes only apply to property value assessments, which are imprecise and often undervalue high-value property while overvaluing low-value property [3]. These inadequacies not only prevent cities from sustaining holistic regrowth, but they also dramatically imbue cities with inequitable payment rates. Moreover, they have led city governments to resort to alternative measures to support their respective jurisdictions in reestablishing stable economic activity. This historical pressure has yielded a unique workaround through which city neighborhoods have begun to thrive over the last 50 years: the Business Improvement District (BID). 

A BID serves as a source of increased funding towards public works projects within a small geographic region. To implement them, property owners petition the local government to establish a shared mandatory assessment of real estate values. Should this petition be supported by 51% of the constituency and approved by the city government, the government collects the assessed funds from the owners of all property within the region and distributes it to private corporations that aim to augment the desirability of the land. This could include increased street cleaning, heightened security patrols, light installments, additional walkways, greenery, water features, and retail infrastructure [4]. It may also constitute the removal of urban blight, such as abandoned lots and buildings, to encourage further investment and garner the attention of risk-averse real estate developers [5].

Due to higher regionalized allocations of private funding, these improvements have, on average, imputed a 15% increase in commercial real estate values across all BIDs [4]. Furthermore, since the funds raised through BIDS are used to improve public land, BIDs intrinsically increase the city’s asset position. Generally, increased economic activity and overall neighborhood improvement have positive revenue implications for the city as a whole; public works initiatives – even when implemented privately – create employment opportunities, and increased security on streets reduces the risk associated with holding residential and commercial assets within a given area. As such, BIDs seemingly lend an efficacious approach to increasing the overall welfare of a city. However, the broad powers of local governments in BIDs have far murkier implications for entire cities. 

In theory, a BID does not inherently obligate the government to favor a specific city region. After all, the power of government in a BID is limited by the funds it receives specifically from property owners within the district itself, and the government’s central role fundamentally remains to aggregate residents’ additional taxes and reappropriate them to private firms for investment. However, Richardson Dilworth, a professor of urban development at Drexel University, remarks that BIDs occasionally receive additional funding that extends beyond the scope of the mandatory assessment, thus drawing from resources obtained through general tax acquisitions. As a result, the impacts of BIDs can undoubtedly extend beyond the district at hand, which may convolute the long-term interests of the city’s population with the short-term interests of the city government. Furthermore, in Pennsylvania, city governments under the influence of a BID have the authority to lower parking fees and other transportation costs to and within the BID as a means to “improve the ability of commercial establishments…to serve the consumer,” thus pulling economic activity away from other urban centers of the city [5]. This is particularly evident in Philadelphia’s Fishtown district, which has seen rapid redevelopment since it became a BID, while the nearby Kensington neighborhood remains blighted and impoverished. While it is nearly impossible to measure the systemic impact of this shift in commercial concentration, this statute clarifies that improvements to a given district can provoke negative externalities, regardless of the long-term prospects for holistic urban revitalization. 

Beyond the far-reaching, unbalanced impact of BIDs within a city as a whole, the process by which BIDs are proposed also raises ethical questions regarding the power of city residents. In practice, BIDs essentially equate to hyper-localized suburbs, as the residents are subjected to a different tax assessment than the neighboring regions. Yet this evaluation provides a gross oversimplification of this unique institution. For one, suburb boundaries are generally defined on some geographic or topographic basis, which, over time, pressures cities to develop a degree of homogeneity in their residents’ wealth. By contrast, neighborhood boundaries – often determined by an artificially imposed grid system – can abstract away from the innate differences between specific blocks and street segments, particularly in high-density cities. As a result, even when BIDs are implemented on a location-specific basis, they can ‘capture’ residents who do not wish – or are financially unable – to be subjected to additional tax payments. Furthermore, the Pennsylvania BID legislation allows for the additional mandatory assessment of properties on the outskirts of BIDs even when they are not technically part of the district. This practice, known as the front-foot method, imposes an additional tax assessment on BID-adjacent properties in proportion to the perceived benefit they may receive from the BID’s investment. Naturally, though, this reasoning is flawed, as the ultimate impact of a BID should, in theory, impose benefits throughout a city and perhaps even the state, yet BIDs do not increase direct property taxes on all of these indirectly affected property owners. 

Moreover, while the threshold for establishing a BID is a 51% majority, this is stratified on the basis of wealth in Pennsylvania, meaning that BIDs merely require the support of residents who control 51% of the property value. This gives a disproportionately louder voice to those few individuals who maintain a larger asset stake in the district. As a result, this method of “voting” can leave much of the constituency’s population at the periphery during the consequential decision-making process. 

Yet another ethical dichotomy in the institution of BIDs lies in the perpetual contract to which local governments and district residents must adhere. After a BID is established, the mandatory tax assessment remains in place for all future years unless additional legislation is passed to nullify the ongoing agreement between residents and the local government. This can subject the region to unneeded long-term investment when other city neighborhoods would benefit far more from external funding. Since the tax assessments increase with the rising property values, over time, this effect may compound and lead to overinvestment and wasted funding, constrained from equitable distribution across all city neighborhoods. While this may seem like a potential source of major urban disparities, Professor Dilworth contends that “BIDs [do not] have much of an impact on deepening inequality,” in part because they may have “unique social programs that help with inequality.” However, the fact that some city residents in wealthier neighborhoods can comfortably increase their tax payments through a BID raises the question of whether cities should consider adapting the tax policy to better exploit this wealth, in much the same way as income taxes are collected according to a progressive tax policy based on income brackets. In order to most rapidly and effectively spur meaningful advancements within a city, it would seem more impactful to do so. However, given the inequitable manner by which BIDs are established and subsequently implemented, this practice may have harsh consequences on the underrepresented population that composes the BID and could, in turn, deny poorer property owners their due equal protection under the 14th Amendment to the Constitution [6].

BIDs have demonstrated that positive social and economic impacts can be derived from small-scale investments in ways that would be unfeasible at city-wide levels. Their unique, quasi-public structure enables property owners to reliably improve their respective communities by developing public land, and city governments can use them as a means to regulate private development. In many respects, they provide urban environments with an efficient strategy towards uplifting themselves from decades of decline and disinvestment. As population concentrations shift and urban environments become more central to the economy, BIDs have allowed specific neighborhoods to attract residents and visitors back towards the city. Yet, without nuanced public policy that limits the capabilities of BIDs, these districts will begin to develop in an unsustainable manner that does little more than segregate poor communities and put an iron gate around the few with resources. BIDs may be the impetus for city growth and revival, but left unchecked, they could essentially result in yet another vast suburbanization, a return to struggles of the 1950s, again with no clear solution. 

References
[1] https://digitalcommons.lasalle.edu/cgi/viewcontent.cgi?article=1099&context=the_histories 
[2]https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2021/how-local-governments-raise-their-tax-dollars 
[3]https://www.washingtonpost.com/business/2021/03/12/property-tax-regressive
[4] https://urban-regeneration.worldbank.org/node/16 
[5]https://www.legis.state.pa.us/cfdocs/legis/LI/consCheck.cfm?txtType=HTM&ttl=53&div=0&%20chpt=54 
[6]https://repository.uchastings.edu/cgi/viewcontent.cgi?article=1882&context=hastings_constitutional_law_quaterly

The opinions and views expressed in this publication are the opinions of the designated authors and do not reflect the opinions or views of the Penn Undergraduate Law Journal, our staff, or our clients.