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

Judith I. StallmannUniversity of Missouri-Columbia

College of Agriculture, Food and Natural ResourcesMay 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

                                                                                                                                         < P>

Source: National Conference of State Legislatures, 2005.

Figure 2. Legislative Supermajority and Voter Approval to Raise Taxes, 2005 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, 2005Source: National Conference of State Legislatures, 2005

A

L

A

A

A

A Appropriations limited to a % of projected revenuesL 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

Growth trend #1or baseline

Growth with TIF

TIF freeze

Property values

YearsYear TIF formed

Growth trend #2 or baseline

“And would not develop otherwise” is Trend #2

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

Revenues of Local Governments: 2002

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

County Municipal Township SpecialDistrict

School District

Source: US Census Bureau, "Census of Governments 2002"

Pe

rce

nta

ge

Federal & staterevenues

Property tax

Sales tax

Other taxes

Currentcharges

Miscellaneousrevenues

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