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Carolina Beat

No. 753: Some 'Fellow Behind a Tree' Pays for Bonds

May. 7th, 2004
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“Under current law, if local government officials want to borrow money to finance an “economic development project” they must first get approval from voters. The problem for spending-hungry politicians has been that their constituents typically vote the projects down. Local citizens make their position clear by regularly defeating bond referendums to subsidize stadiums, civic centers, and similar ventures. Voters understand that when governments at any level borrow money it has to be paid back through higher taxes in the future.

This November, North Carolina voters will be asked to give up their right to “just say no.” There will be a constitutional amendment on the ballot that would allow local governments to borrow money without voter approval through what supporters euphemistically call “self-financed bonds.” The sales pitch being used by supporters is that the bonds are a form of free money—i.e. they will be “self-financed.” As amendment supporter and former Republican Gov. Jim Martin was recently quoted as saying: “No tax increase would be needed” to pay off the bonds.

Clearly this defies logic. No government bond has ever been or ever can be “self-financing,” if indeed this expression has any meaning at all. The reality is that these bonds will be financed by future taxes on someone. The question is on whom. Martin’s statement contains a sleight-of-hand answer to this question. “The taxes created from the new industry or development would be allocated to pay off the bond,” he said. In other words, these bonds won’t really be “self-financing,” they will be paid back with taxes from “somebody else.” But the reality is different.

The logic behind the bonds, traditionally known as “tax increment financing” or TIFs, is that the government will use the borrowed money to subsidize new business ventures. This will increase property values in the area and higher property-tax revenues. Bondholders will be repaid with revenues from all taxpayers whose property values are enhanced, not just from the “new industry or development,” as implied by Martin.

First, the entire premise of this approach is that businesses that are subsidized will not only succeed and stay in business over the long run, but that property values will increase by enough to meet the local government’s obligations. If this doesn’t happen, then the bonds still have to be paid back out of the existing tax base. But more important, for the plan to work, even if everything goes as expected, existing property owners in the area, i.e., homeowners and businesses, will end up having to pay higher taxes.

The fact is that the assessed valuation of properties is likely to go up not only on the newly developed parcels but also for previously existing businesses and homeowners. This means that the existing residents of the area will have to pay additional property taxes while not receiving the benefits of the program. These higher tax payments are not going to improve schools in the area or provide better services, but to pay back the bondholders. Two Iowa State University economists who studied Iowa’s program, which is nearly identical to the one being proposed in North Carolina, concluded that, “existing taxpayers, its householders, wage earners, and retirees are aggressively subsidizing business growth and population via this practice…the overall expected benefits do not exceed the public’s costs.”

What this implies is that the subsidized businesses will thrive at the expense of those who are already living, owning businesses, and paying property taxes in the area. As Louisiana Sen. Russell Long said, “Don’t tax you, don’t tax me—tax that fellow behind the tree.” What Martin and other amendment supporters are trying to do is persuade us that these are “fellow behind the tree” financed bonds. But in fact the fellow behind the tree is you and me.

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