Where has the City’s tax money gone?

By Bill Bozarth

Executive Director, Common Cause Georgia

City of Atlanta residents continue to reel from the service cutbacks forced by revenue shortfalls. There are long term pension debt obligations looming that we haven’t had to face yet, but that factor, along with the lack of sufficient revenue to deliver the basic menu of services has led to a downgraded bond rating. That’s a bad thing to happen to a municipality, since all subsequent borrowing becomes more expensive, making it more difficult to ever get back on an even keel. So why are we in such dire straits?

Setting aside the airport, which is its own enterprise, and watershed management, which is likewise a separate operation, the City must deliver all of its services on the money it collects. That includes fire and police, roads and other public works, parks, plus debt servicing, and a variety of administrative services. There are three main sources to draw on:

· A portion of the property taxes we pay

· A portion of the sales taxes paid for items bought in the City

· Various fees and other miscellaneous revenue generating activity

The City depends on property and sales tax revenue to deliver the bulk of the funding it needs. When the economy goes bad, people buy less, so you would expect to take a hit on sales tax revenue. However, even before the Great Recession came upon us, sales tax revenues were not increasing as much as one might expect, rising only 9% between 2002 and 2008. This bears looking into, since common sense would tell us that surely with the rise in consumerism during that period, we should see the revenues from sales tax to grow faster than the rate of inflation.

Hard times also force some property owners to default on their property tax payments. The City reported it had $30M of unpaid property tax in 2007, before times got tough, so that challenge only gets harder when we see so many homes, apartments, and commercial properties standing empty. Liens should make collections easier. We have a right to expect a better collection rate than we do.

Putting aside the questions on stagnant sales tax revenues and uncollected property tax for a moment, perhaps the biggest unanswered question is why didn’t the City’s growth spurt over the last decade bring much more property tax revenue into the coffers? The answer to this question is hard to come by. City reports showing property tax revenue over the past seven years are hard to decipher. At best, the revenue generated by the Atlanta building boom seems to have added about 4% annual growth in revenue from 2002 to 2008 while during this same period of time, the population was increasing over 20%, and the property digest rose by about 50%. There were millage rollbacks during this time, but so much of the growth was in new construction that it is hard to believe we wouldn’t see a more significant increase in property taxes going to the City. So what’s going on here?

Part of the answer lies in some of Atlanta’s most prestigious commercial properties, both old and new. Through use of bond financing mechanisms sanctioned by the Development Authority of Fulton County, a number of high-end developments in Buckhead and elsewhere in the City have had their property taxes reduced to half of what they would be if appraised at market value. The typical deal is to set the value of the property at 50% of what it is assumed to be worth, and raise the appraised value 5% a year so that after ten years, it returns to the original value of the property. Properties receiving this generous tax abatement include

· The Mansion on Peachtree

· The InterContinental Hotel Buckhead

· St. Regis Buckhead

· 3344 Peachtree Buckhead

· Terminus Buckhead.

Development Authorities, with the assistance of the local county board of tax assessors, promote the use of lowered property taxes as an incentive to spur development in areas where it would not otherwise occur, but it has become commonplace for projects with no hardship case to receive the tax break put into law to reward risk takers. The bond lawyers structure the deals as a “sale” to the Development Authority coupled with a simultaneous lease back of the property to the project owner/developer. The Development Authority approves, and the county board of tax assessors provides the key ingredient by applying the arbitrary 50% valuation formula to determine “fair market value” of the developer’s lease interest, instead of a traditional appraisal methodology which would produce a much higher valuation of the lease interest. . A bond validation hearing is held before a superior court judge, and if no one raises an issue, which they hardly ever do, the project goes forth, and the lowered tax takes effect. This has been going on for years, and no one knows the full impact.

In an article in the business section of the November 30 AJC, reporter Kevin Duffy described how developers work through the Development Authority of Fulton County to arrange bond financing for their projects. The developer of the St. Regis Hotel project was quoted as saying that they would have had trouble pulling it off without development authority help. We need to see once and for all that development authority help essentially equals tax payer subsidy. Tax forgiveness reduces revenues, and these deals are likely a large part of why City property tax revenues stay flat during periods of spectacular growth.

The tax abatement through development authority bonding is not limited to Buckhead properties. Owners of midtown and downtown buildings have also reaped the benefits. Bond financing has reduced property taxes on The Mandarin Oriental Midtown, 1180 Peachtree, 55 Allen Plaza, 191 Peachtree, Peachtree Center, and others.

The use of development authority bonds for financing these projects goes much deeper than most people know, and there is no check on whether a project is deserving of the subsidy. Development Authority of Fulton County board member Jim Garcia has spoken out against the practices of the Authority as having no criteria by which to judge projects brought to it by its own attorneys. “The board itself is poorly managed and approves nearly every deal that its attorneys recommend. The more tax breaks the board approves, the greater the burden on Fulton's other businesses and homeowners.”

The Atlanta Development Authority has also structured similar deals, and more recently the DeKalb County Development Authority has been in the news as it was forced to back down on a 20 year total tax abatement requested by mega-developer Sembler on a portion of its Brookhaven Town development. Fulton County’s development authority remains in the eye of the hurricane as the #1 grantor of lower taxes on commercial properties. A suit filed by the Fulton County Taxpayer’s Foundation has resulted in a moratorium on new bond deals by the Development Authority of Fulton County for the time being.

With revenue shortfalls resulting in dangerously low kevels of service for essentials, citizens of the city should be asking why so much of our tax digest has been whittled away by an unelected body. Few of us would resent Development Authorities using taxes to incent development where it is needed for the greater good of the community, such as creating new jobs. However, after years of acting with little oversight, the abuse has taken its toll.

Every three years, most Buckhead homeowners see increases in the appraised values on their homes, meaning, in most cases increased property taxes. There is no bond deal for us. With our homes appraised at near market value, shouldn’t the City apply the same standard to high end commercial properties? At the very least, the taxing authorities owe us a clear picture of how much tax revenue we are losing through tax forgiveness schemes. That should be an election year issue.

Bill Bozarth is the Executive Director of Common Cause Georgia

Common Cause Georgia is a non-partisan good government advocacy group based in Atlanta

www.commoncause.org/ga