CCCCCooooommmmmmmmmmiiiiissssssssssiiiiiooooonnnnn RRRRReeeeepppppooooorrrrrttttt Property Tax Abatements and Payments in Lieu of Taxes: Impact on Public Education Commission Report to the 103rd General Assembly Tennessee Advisory Commission on Intergovernmental Relations February 2004 State of Tennessee Tennessee Advisory Commission on Intergovernmental Relations 226 Capitol Blvd. Bldg., Suite 508 Nashville, TN 37243 Legislative Members Representative Randy Rinks, Chair Savannah February 2004 Senator Mae Beavers Mt. Juliet Senator Ward Crutchfield Chattanooga The Honorable John S. Wilder Senator Jo Ann Graves Gallatin Speaker of the Senate Senator Mark Norris Collierville The Honorable Jimmy Naifeh Representative Tre Hargett Bartlett Speaker, House of Representatives Representative Kim McMillan Clarksville Members of the General Assembly Representative Larry Turner Memphis State Capitol Statutory Members Senator Douglas Henry Nashville, TN 37243 Nashville Representative Tommy Head Ladies and Gentlemen: Clarksville John Morgan Comptroller of Treasury Public Chapter 815 (2002) directed the Tennessee Advisory Commission on County Members Intergovernmental Relations (TACIR) to perform a study of the overall effect on Mayor Nancy Allen local public education when property taxes or in lieu of tax payments Rutherford County earmarked for education are abated or reduced, and whether the effect on local Mayor Jeff Huffman Tipton County public education is offset by enhanced economic development. Mayor Richard Venable Sullivan County Transmitted herewith is the report of TACIR’s study which includes an analysis of Mayor Ken Yager the available data and general estimates of losses in funding to local education Roane County agencies resulting from property tax abatements and reductions, or waivers of Municipal Members Mayor Tommy Bragg payments in lieu of taxes (PILOTs). At the present time, because of Murfreesboro inadequate and incomplete reporting, the data are not available to Mayor Sharon Goldsworthy determine the costs and benefits of tax abatements and the specific impact Germantown on education. Bob Kirk, Alderman Dyersburg Mayor Tom Rowland, Vice Chair If the recommendations in this report are implemented and the responsible Cleveland agencies identified in Public Chapter 815 report as required, a second attempt Other Local Gov’t Members at determining the “overall effect on local public education” should be Mayor Brent Greer TN Development District Association undertaken. Charles Cardwell County Officials Assn. of Tennessee Sincerely, Executive Branch Members Paula Davis Dept. of Economic & Community Dev. Drew Kim Governor’s Office Private Citizen Members Representative Randy Rinks Harry A. Green, Ph.D. John Johnson Chairman Executive Director Morristown TACIR Harry Green, Executive Director COMMISSION REPORT PPPPPrrrrrooooopppppeeeeerrrrrtttttyyyyy TTTTTaaaaaxxxxx AAAAAbbbbbaaaaattttteeeeemmmmmeeeeennnnntttttsssss aaaaannnnnddddd PPPPPaaaaayyyyymmmmmeeeeennnnntttttsssss iiiiinnnnn LLLLLiiiiieeeeeuuuuu ooooofffff TTTTTaaaaaxxxxxeeeeesssss::::: IIIIImmmmmpppppaaaaacccccttttt ooooonnnnn PPPPPuuuuubbbbbllllliiiiiccccc EEEEEddddduuuuucccccaaaaatttttiiiiiooooonnnnn TTTTThhhhheeeee fffffooooollllllllllooooowwwwwiiiiinnnnnggggg pppppeeeeerrrrrsssssooooonnnnnsssss hhhhhaaaaavvvvveeeee cccccooooonnnnntttttrrrrriiiiibbbbbuuuuuttttteeeeeddddd tttttooooo ttttthhhhhiiiiisssss rrrrreeeeepppppooooorrrrrttttt::::: Harry A. Green, Ph.D. Executive Director Project Director Editor ! Ed Young, Ph.D. Research Consultant Principal Author ! Teresa Gibson Publications Associate FFFFFeeeeebbbbbrrrrruuuuuaaaaarrrrryyyyy 22222000000000044444 T C ABLE OF ONTENTS EXECUTIVE SUMMARY........................................................................................................................ iii Findings..............................................................................................................................................................................iv Recommendations........................................................................................................................................................v BACKGROUND............................................................................................................................................1 STUDY ESSENTIALS...............................................................................................................................1 Research Scope and Targets..................................................................................................................................1 Current Reporting Requirements.......................................................................................................................3 DATA LIMITATIONS..................................................................................................................................6 Coverage..............................................................................................................................................................................6 Reporting Periods..........................................................................................................................................................6 Failure to File...................................................................................................................................................................6 Reliability/Completeness of Reported Data................................................................................................7 Procedural Problems ..................................................................................................................................................8 SUMMARY OF DATA .............................................................................................................................10 TAX ABATEMENTS IN OTHER STATES ..................................................................................15 THE NEED FOR A FOLLOW-UP....................................................................................................19 Cost-Benefit Analysis...............................................................................................................................................19 Recent Economic Development Agreements..........................................................................................20 Economic Modeling..................................................................................................................................................21 APPENDICES.............................................................................................................................................23 i E S XECUTIVE UMMARY ii E S XECUTIVE UMMARY Impact of Property Tax Abatements on Education Public Chapter 815 (2002) directed the Tennessee Advisory Commission on Intergovernmental Relations (TACIR) to “perform a study of the overall effect on local public education when property taxes or in lieu of tax payments earmarked for education are abated or reduced, and whether the effect on local public education is offset by enhanced economic development. This study shall be conducted from TACIR’s existing resources. TACIR shall report its findings and recommendations, including any proposed legislation or interim reports, upon conclusion of its study.” This report is an initial analysis of the available data and general estimates of losses in funding to local education agencies resulting from property tax abatements and reductions, or waivers of payments in lieu of taxes (PILOTs). At the present time, because of inadequate and incomplete reporting, the data are not available to determine the costs and benefits of tax abatements and the specific impact on education. Therefore, it is impossible to fulfill the charge of determining the “overall effect on local public education”. If the recommendations in this report are implemented and the responsible agencies identified in Public Chapter 815 report as required, a second attempt at determining the “overall effect on local public education” should be undertaken. The Current Process of Reporting Abatements Tax abatements occur in Tennessee when public entities grant the use of property to private entities. Frequently, this property has been acquired by public entities through the use of public bond capacity for the express purpose of economic development. Private entities that then lease the property are frequently required to make payments in lieu of taxes (PILOTs) to appropriate local governmental entities. Current law requires private lessees of such property to file a report with the State Board of Equalization each year with essential information about the lease. Additionally, all economic development agreements are required to be filed with the Comptroller of the Treasury, Division of Property Assessments. iii E S XECUTIVE UMMARY Major Findings !According to information collected, 809 economic development agreements have been filed with the Division of Property Assessments (DPA) since reporting began in 1993. Based on lessee reports to the State Board of Equalization (SBE), others are believed to exist. Potentially, each of these agreements could have an adverse effect on local education revenue. !Data, though incomplete, show estimated reductions in property tax revenues to cities and counties as a result of economic development agreements of $105.2 million in 2001 and $104.3 million in 2002. !While much information remains unavailable, 2002 abatements resulted in a loss of at least $33 million in county school system revenue. !Reporting on tax abatements by cities, counties, local economic development entities and lessees is inconsistent, incomplete, and often incorrect. !No one governmental unit collects aggregate data on the allocation of PILOTs. !No one governmental unit possesses all of the information necessary to determine the impact of tax abatements. !Lessee reporting forms do not require enough information to make them useful data tools. !There is no statutory reporting requirement for lessees of public building authorities, sports authorities, enterprise zone development corporations, tax increment financing projects, or city and county property. !The cost-benefit analyses attached to economic development agreements play no role in the decision to grant an abatement, or to reduce or waive a PILOT, because the final computation is usually conducted after the agreements are already executed. iv E S XECUTIVE UMMARY !The cost benefit analyses that are required for major agreements do not include all community impact factors; they are limited to economic factors. !The SBE and the DPA do not have adequate authority to enforce filing requirements and to audit and report their findings. !County Property Assessors have no statutory role in the reporting of leases, despite their unique knowledge of the properties and owners. !Neither the SBE nor the DPA is required to compile or publish data on economic development agreements and/ or lessee reports. !An increasing number of states are granting local school boards a role in economic development decisions involving abatements. In Michigan, North Dakota and Ohio, school boards have the opportunity to comment, and in Kansas, Minnesota, Pennsylvania and Texas, they have the right to veto any abatement of the school property tax. In Florida, abatements that negatively impact school revenues are prohibited. Recommendations ! Amend TCA § 4-17-303 to specify which party is responsible for filing economic development agreements, and to impose a penalty for failure to file. Data Improvement ! State agencies and local economic development entities should share information to ensure that all economic development agreements and lessee reports are being filed in accordance with law. No one governmental unit seems to possess all the information needed to accurately determine the impact of PILOTs. Collaboration among local assessors, development boards of all types and other tax abatement v E S XECUTIVE UMMARY granting authorities and state agencies like the SBE and DPA would greatly aid in determining the true impact of tax abatement decisions. ! Revise lessee reporting forms to secure key information on: • exact location of the property; • any pro-rating of the PILOT; • rents; • leasehold taxes; • actual property taxes paid; • changes of name since the last filing; and • how the PILOTs are allocated according to the agreement. Information currently required on the lessee reporting forms is incomplete and may not reflect the true value of a tax abatement. Clarifying what is reported by lessees will enhance the value of these data and better allow the state and local governments to estimate the taxes lost through abatement. Reporting ! Publish an annual summary of economic development agreements and cost-benefit analyses filed, similar to the summary of lessee reports compiled by the SBE. At the present time, there are no statutory provisions for compiling or publishing data collected by the SBE and the DPA. The laws only require the filing of economic development agreements and lessee reports and are silent on what the agencies are to do with that information. The SBE, on its own, compiles and makes available on its website all annual data reported to them by lessees. The DPA maintains a spreadsheet summary, for internal use, of all agreements filed. That information is made available upon request, but there is no annual compilation of the information therein, and no cross-checking of the vi E S XECUTIVE UMMARY agreements with lessee reports. There is no statutory provision for submitting any of this information to any policymaking body outside of the Comptroller’s office. ! Improve the “tax expenditure” section of the state budget document to include: total local property tax revenue losses from statutory exemptions, special valuations, and abatements as a way to inform state and local government officials about the revenue impacts of tax abatements. Reporting this information in the state budget provides a public acknowledgement of the impact of PILOTs that may be more widely available to the public and local governments. ! In 2002, TCA § 7-53-305 was amended to prohibit negotiation of PILOTs at less than the amount of county property tax due unless the county is a party to the negotiation. At the present time, that provision applies only to Shelby and Roane counties. It should be extended to cover all counties. ! Extend statutory reporting requirements to lessees of public building authorities, sports authorities, enterprise zone development corporations, tax increment financing projects, and city and county property. It is not possible at the present time to determine the total cost or effectiveness of tax abatements because not all lessees of public property are required to file reports. When all lessees are reporting their activities, policymakers can determine the true scope of tax abatements. ! Amend TCA § 7-53-305(b) to require the completion of a cost-benefit analysis before the economic development agreement is executed. Since January 2002, completion of a cost benefit analysis is required for all economic development agreements; however, it is only required for the first year of the agreement and completed by the staff of the DPA after the agreement has already been executed. At the time the agreement is signed, the governmental party often has no idea whether the deal has a positive or negative vii