Quick Takes: The state of tax reform in Georgia- ?The Devil is in the details?
The title of this issue of Quick Takes includes the old proverb: ?The Devil is
in the details.? The proverb historically is really a play on an actual
quotation from Gustave Flaubert, who said: ?God is in the details.? It?s
interesting that what started out as one man?s reference to good things, ended
being remembered by posterity for bad things.
That same tension typifies the state of tax reform in Georgia.
What?s this all about? Well, before the end of the 2007 Session of the Georgia
General Assembly, Speaker Richardson introduced H.R. 900. This proposed
amendment to Georgia?s Constitution provided for a flat tax to be known as the
?fair tax.? The bill was also signed by Majority Leader Jerry Keen, Speaker Pro
Tempore Mark Burkhalter, Ways and Means Chairman Larry O?Neal, and Majority
Whip Barry Fleming, among others. So, it has to be taken seriously.
But much of H.R. 900 has been superseded by post-Session pronouncements by
Speaker Richardson and others. So, the plan is a moving target. The release of
a new draft was expected before the end of the year. Now it is very possible
that the plan?s final details will first be unveiled when a new fast-track bill
is filed for the 2008 General Assembly Session.
The Association County Commissioners of Georgia has said that this ?could very
well be the biggest change ever proposed in Georgia, and could forever change
this state.? ACCG is right.
The issue is whether this will be a change for the better or not. There are a
lot of unanswered questions about this plan. In its present form, it has
serious implications for economic development in particular.
In this issue of Quick Takes, we will review the tax reform plan at a high
level. Following issues will take a detailed look at how economic development
and finance in Georgia are carried out now, and how they will be impacted if
this plan becomes law. All comments are subject to change as the tax reform
plan itself changes.
These are the highlights of the plan-
1. The plan?s most important goal is to eliminate all property taxes and
substitute for them sales and use taxes that have practically no exemptions and
that apply to services as well as goods. Local control over property tax
abatement as an incentive will be lost. The familiar sales and use tax
exemptions used to locate projects will no longer exist. An important reason
for a community to pursue economic development will also be lost in the absence
of property taxes, since local revenues will not benefit from them when a
project locates there. The plan would still permit local sales and use taxes of
up to 4% in the aggregate. However, a 60% positive vote would be required to
pass a referendum to implement local sales and use taxes.
2. This is tax transfer, not tax relief. However, local governments are
concerned that there will be revenue shortfalls, and unpredictable revenue
fluctuations, on the community level.
3. Income redistribution is involved, and includes both State and local
revenues. Virtually all taxes will go to the State, which will return certain
revenues to the communities according to a formula pegged to a 2006 base level
(the ?local revenue guarantee?). Any new local revenues from expansion of the
sales and use tax base will offset and reduce the community?s local revenue
guarantee from the State. The State will have discretion over revenues above
the 2006 level (subject to some as-yet-undefined form of escalator of the 2006
base). Some communities will be, in effect, subsidizing other communities. A
procedure-heavy process, requiring action on the State level, for communities
to use bond financing will be provided. State and local bond ratings could be
negatively affected by the new tax system.
4. In its most recent form, the tax reform plan does not envision changes to
the income tax code. This presumably would leave job tax credits and other tax
credits used in economic development unaffected by tax reform. However, the
State already needs changes to its statutory incentives, in order to make them
meaningful. And, as an alternative to eliminating property taxes, Governor
Perdue has recently suggested cutting personal and corporate income tax rates.
5. Other taxes are left in place, which would include hotel/motel taxes.
6. Development authorities would be treated like private corporations for most
state tax purposes under the plan. HR 900 eliminates the exemption from
taxation for development authority ?obligations, properties, activities, [and]
income?. An example of obligations that would be subjected to tax is
development authority revenue bonds. An industrial park is an example of
development authority property that would be subjected to tax (even assuming
all other property taxes were abolished, taxes for pre-existing bonded
indebtedness would continue). An example of development authority income that
would be subjected to tax would be a development authority?s financing fees.
Development authorities would lose much of their financing fee income anyway,
since bond issues, which in Georgia are linked to property tax abatement
programs, would diminish after tax reform. Development authorities, whose
parent governments provide millage to them to finance their economic
development programs, would lose that financial support as well, as a result of
elimination of property taxes. (Pledged millage connected with bonded
indebtedness should be ?grandfathered?.)
7. A number of communities have taken advantage of the ?regional facilities?
amendment to Georgia?s Constitution to jointly develop projects (like an
industrial park) and share the resulting tax revenues. Under HR 900, the
participating communities could still agree among themselves regarding
?allocating the proceeds of the local revenue guarantee? and ?the allocation of
other revenues generated from such regional facilities?. In order to support a
regional facility, would communities really agree to share their local revenue
guarantees? These would be like a community?s ?general fund.?
8. Likewise, the local revenue guarantee would be the only source for repayment
of tax allocation district (?TAD??) bonds, called ?tax increment finance?, or
TIF, bonds in some other states. These bonds finance redevelopment within the
district, and facilitate ?redevelopment paying for itself?. TAD bonds are meant
to be repaid with property taxes from the increment resulting from an increase
in the tax digest in the district. Using the local revenue guarantee would be
like using a community?s ?general fund? to pay for redevelopment of a blighted
area.
9. Enterprise zones would be totally eliminated by HR 900.
10. Increasingly, communities have been taking advantage of the ?self-taxation?
tool represented by community improvement districts (?CID?s?) to address
localized issues such as transportation. Both urban and rural communities have
done so. Under HR 900, CID?s would not be able to use property taxes for this
effort, only fees and assessments. These fees and assessments would be capped
by a general law yet to be drafted.
11. Constitutional authorization for infrastructure development districts
(?IDD?s?) will be addressed in a November 2008 statewide referendum. IDD?s
would be able to issue bonds to finance infrastructure. These bonds would be
repayable through special assessments on the property within the district, and
not by property taxes. Thus, IDD?s might survive tax reform. This would likely
benefit new commercial and residential development.
As you can see, there is a lot to tax reform. We will drill deeper into this in
upcoming issues of Quick Takes. If you have feedback meanwhile, on these or any
other topics, please let me hear from you.
Dan
Daniel M. McRae, Partner
Seyfarth Shaw
Suite 700
1545 Peachtree St., N.E.
Atlanta, GA 30309
404.888.1883
404.892.7056 fax
dmcrae@seyfarth.com
dan@danmcrae.info
General note: This issue of Quick Takes is a quick-reference guide for economic
developers, participants in the real estate and financial industries, company
executives and managers, and their advisors. The information in this issue is
general in nature. Various points that could be important in a particular case
have been condensed or omitted in the interest of readability. Specific
professional advice should be obtained before this information is applied to
any particular case.
This email was sent by:
Daniel M. McRae
Seyfarth Shaw LLP
1545 Peachtree Street, N.E.
Suite 700
Atlanta, GA 30309
Attention: Daniel M. McRae
dmcrae@seyfarth.com
(404) 888-1883 Visit my personal website at danmcrae.info
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CURRENT BOND RATES
EFFECTIVE September 21, 2007
Interest Rates:
tax-exempt-
floating:3.89%
fixed:3.95%
taxable-
floating:5.18%
fixed:5.43%
General notes:
1. Rates are posted weekly. These rates are for the effective date indicated
above, or as otherwise indicated. For intra-week rates, Contact Dan.
2. These are interest rates on revenue bonds that are variable rate demand
bonds; i.e., floating. These can be synthetically fixed via interest rate
swaps, as noted below.
3. Tax-exempt rates are for industrial development revenue bonds (IDB?s?) that
are subject to the AMT and are 7 day general market quotes.
4. Taxable rates are for taxable IDB?s or for taxable ?corporate bonds?.
5. Fixed rates are for 10 year terms via swaps.
6. All rates are market extracted and approximations, and are not guaranteed.
7. These rates do not reflect all-in costs; e.g., annual letter of credit fees
are not included.
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