Columbus, Georgia

Georgia's First Consolidated Government

Post Office Box 1340
Columbus, Georgia, 31902-1340
(706) 653-4013
fax (706) 653-4016

Council Members

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But much of H.R. 900 has been superseded by post-Session pronouncements by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



Atlanta Boston Chicago Houston Los Angeles New York Sacramento

San Francisco Washington, D.C. Brussels

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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