Wednesday, January 8, 2014

A Troubling Trend in Tax Policy

As school boards and the state both begin developing their annual budgets, the awareness of fiscal need is unrelenting.  Everyone will struggle to make the best use of limited tax revenues.

In this climate, there is an alarming new trend among developers of retail properties to request, and for Industrial Development Authority Boards to award, exceptionally long periods of time for Payment in Lieu of Taxes (PILOT) dispensations on property taxes.   Although the typical duration of a PILOT has been ten years, developers are now asking for PILOTS that will run for 20, 25, and even 35 years.  These requests to be relieved of normal property tax obligations for such lengthy periods represent a fundamental change in the expectations of developers for how they would run their businesses.

Admittedly starting a new business is risky.  25% of new businesses fail in their first year and only 47% of retail operations are still operating four years after they open.  So one can understand why developers would seek to leverage every possible financial advantage.

But discounting taxes for a quarter century is more than a tax break to help a business get started – it is a primary change in how businesses operate. 

Giving a 25-year tax break to build a store or restaurant makes questionable sense when so much can change in a quarter century, especially purchasing patterns.  Consider that 25 years ago a first class stamp cost 25 cents, a gallon of regular gas cost $1.12, the US population had 67 million fewer people, and the Dow Jones Average was in the 2,000’s (compared to the current 16,000).  25 years ago Kodak employed over 50,000 people locally.  
And Google, on-line shopping, social media, and all the other elements of an Internet driven world were not yet part of anyone’s plan, even among the small number of scientists who understood the newly invented information sharing system called the Wide Area Information Server.

Considering the potential for changes in demographics and economic structures, the arguments that motivate a decision in 2013 may cause an unreasonable public burden by 2038.  Whenever a PILOT is granted, taxes are shifted from a singular business to all the other taxpayers in the community.  And one has to wonder, if a business claims it cannot operate unless its property taxes are reduced for such a long period of time, perhaps it needs to rethink its business model.  

So far only a few MCSBA member districts in towns with large shopping malls have had to deal with a request for an extended PILOT, and their experiences have not been encouraging. Although school districts are informed about these requests and are allowed to provide information at public hearings about the impact, school districts do not have any official role in the final decisions of Industrial Development Authorities. 

The lack of a legal role for the schools in making decisions about extended PILOTS is a serious omission and should be changed if this trend continues.  School districts set tax rates with the concerns of the entire community in mind, and a community can hold a school board accountable for their decisions.   In contrast when IDA’s make their decisions, they are looking at a single request, and basing much of their decision on the claims of a self-interested business.  IDA boards do not have any direct accountability to the larger community.
Business interests can change over time but a community’s need for an equitable financial foundation does not.  Other factors, not extended PILOTS, are what will determine whether or not a given business survives over time.  In the meantime, the community’s residents and the businesses with long standing will bear the shift in the tax burden without any similar access to tax relief.  
School systems are seeing more and more limits put on their state and local revenues.  This emergence of requests for extended PILOTS becomes another constraint.  School finance is difficult enough but in this instance, long-term decisions that impact district finances are being made by a separate appointed board, not elected leaders whose primary responsibility is the well being of the school district.