Hancock Amendment and local governments in Missouri: The practice of economic development

Hancock Amendment and local governments in Missouri: The practice of economic development Judith I. Stallmann University of Missouri-Columbia College of Agriculture, Food and Natural Resources May 3, 2006

Tax and Expenditure Limitations • Balanced budget • Supermajority to raise taxes • Revenue Limitation • Expenditure Limitation (TABOR) • Expenditure and Revenue Limitation • Combinations • TEL usually refers to expenditure and revenue limitations

Balanced Budget Requirement • Balance budget submitted based on projections • Balance budget passed (based on projections) • Actual balance • Legislative act • Governor acts if legislature not in session

Figure 2. Legislative Supermajority and Voter Approval to Raise Taxes, 2005 Source: National Conference of State Legislatures, 2005. < P> Source: National Conference of State Legislatures, 2005. /// Supermajority rule only

TEL based on • Tied to: • Population • CPI • Income • Baseline or previous year? • Excess revenues • Rainy day or other fund • Refunded

Figure 1. State Tax and Expenditure Limits, 2005 Source: National Conference of State Legislatures, 2005 . L A A A A A Appropriations limited to a % of projected revenues L Some appropriations limited to rate of personal income growth

Hancock--state • Revenues limited to 5.64% of personal income • Any tax, or combination of taxes, over $70 million (adjusted annually) must be approved by voters • Excess revenues must be refunded • Income tax rolls are used for refunds—challenged and upheld in court seven though sales taxes are almost equally important in state revenues • Balanced budget empowers governor to cut funding when legislature not in session

TELs and Local Governments • Traditional restrictions • Types of taxes limited • Caps on tax rates • TEL restrictions on local governments • Citizen vote to raise taxes • Restrictions on increase in assessed values • Tax rate rollback to revenue neutral level if assessed values increase beyond some rate • Restrictions on increase of the tax paid on the property

Missouri local • All taxes must be approved by voters • Taxes to payback bonds approved by 4/7s • Other taxes approved by majority • If assessed values of existing properties increase by more than the previous year CPI, tax rates must be rolled back to revenue neutral amount. • In Missouri this results in now having different tax rates for different types of property in some jurisdictions • Many properties are reassessed only every 2-years but restricted to one-year CPI

Research • Limited research on states • TELs not binding with strong economic growth • Many are new and do not yet have a track record that allows research • Colorado cities.

Research limited • Local government data problems • Only consistent set is census of government every 5 years • Data in some states are not reliable • If the local governments do not have to report fiscal data to the state, the census of governments date are not necessarily reliable

Colorado Cities (Brown) • Property tax amendment in 1982 • TABOR (1992)—all taxes by voters • 356 local votes with 325 approvals • In two rural regions revenues per capita have fallen • Use of fees and permits has increased • Increased number of special taxing districts • State budget cuts seem to hurt rural regions more

Research questions • Control the growth of government—implicit assumption that this is good • Causes a ratcheting-down effect—depends on wording of law • The petition currently being circulated seems to have a ratcheting down effect

Research questions • Are excess revenues refunded equitably? • Often use the income tax mechanism when sales taxes may be nearly as important in state revenues. • Use of income tax biases refund to higher income households.

Research questions • Force government to prioritize • Assumes they have not • Ignores that mandates may not allow priorities • Cuts will be in non-mandated programs • Make government more efficient—difficult research question given that it is not a “market”

Research questions • Governments use more creative financing—creative can have good or bad effects—need to look at what has been done and impacts • States have substituted other revenues • Fees (can see this in University fees) • One-time revenues, such as the tobacco settlement (Generally would suggest these should be used for assets, not operating) • MOHELA

Missouri--local • Increase in special taxing districts • Seem more willing to vote for local tax increases than state. No state vote has passed but the majority of local votes pass. • Use of fees by local governments up 238% compared with 27% nationally

Research question • Shift decisions from elected officials • What new decision-making mechanisms have evolved? • What mechanisms are now used more often than in the past? • More citizen control—assumes they have the information to make decisions • Likely to have more information at the local than the state level

Missouri local • Tax increment financing • Way for cities (mainly) to increase tax revenues without a vote • Creative financing • Decreases citizen input • Definition of blight is mixed with the issue of the use of eminent domain to increase tax revenues • Pole Town in Michigan 20 years was an example of the eminent domain issue • The use for ED seems to have become more common—is it because of TELs?

Tax Increment Financing • TIF commission includes 6 appointed by municipality, rest represent the overlaying taxing authorities and it votes on the plan • For: Blighted area, conservation area (50% of buildings over 35 years old and in danger of blight), or economic development • And that would not develop otherwise • There can be county TIFs and county-city TIFs—but are mainly city

Tax Increment Financing, cont. • For up to 23 years • Taxes on increased assessed value of real property go to TIF district • 50% of taxes generated by increased economic activities in the project area—mainly sales taxes, but also utility taxes • Excludes personal property taxes, hotel/motel taxes, special assessments and others

“And would not develop otherwise” is Trend #2 Property values Growth with TIF Growth trend #1or baseline TIF freeze Growth trend #2 or baseline Years Year TIF formed

Tax Increment Financing, cont. • Raises that jurisdiction’s tax revenues without raising its taxes • Does not take into account that other jurisdictions might have increased costs because of the project that are outside the project area. • How they are affected in that case depends on their reliance on different taxes

Tax Increment Financing, cont. • The district can also receive up to 50% of new state revenues (personal income and general revenues sales tax) if the project is located in • enterprise zone, • federal empowerment zone, • central business district (MODESTA), or • urban core area

Missouri local • Transportation Development Districts (TDD) • Contiguous with boundaries of a political jurisdiction and by a vote of the people • There were 0 TDDs • Law changed and use growing rapidly • Can be smaller than a political jurisdiction • If no voters in the district, all business owners can apply to the Circuit Court, which approves district and tax

Transportation Development Districts, cont. • Financed by new special assessments, property taxes, sales taxes or tolls • May issue revenue bonds and TDD owns project until bonds paid • All properties in TDD must benefit, even if project not located in TDD (interchange) • Improvements in past paid for by developers are now financed by taxes

Chapter 100 bonds • Originally were Industrial Revenue Bonds but in 1986 federal government cracked down on the use of such bonds • City holds the property, so it is not taxable by city or any overlaying jurisdiction • Bond paid by rent on the property • Rent below market value, is taxable • Can include both real and personal property • Cannot be used for retail

Hancock Amendment and local governments in Missouri: The practice of economic development