Tax breaks, leases, and "private" public property

Discussion in 'Off-topic' started by GoDores, Apr 20, 2018.

  1. GoDores

    GoDores Like a Boss

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    This may bore everybody to tears, but I've recently done a deep dive into governments giving tax breaks for development. It turns out that there's a lot of overlap with the tax law and cases used to decide GCO vs. Atlanta Botanical Garden. I thought I'd share what I'd learned, and why I think the appeals court screwed up even worse than we already thought they did.

    First, we need as brief an overview as I can manage of tax breaks for development. These are specifically reductions on property or ad valorem taxes on assets a company owns or wants to buy - normally real estate, but it could be any asset subject to a tax on its value. A government can't just say "the tax rate is X, but Acme Co. only has to pay 1/2x if they add some jobs". That's unconstitutional (violates equal protection, I think - IANAL).

    One common way around this is what's called a bond-for-title transaction. Since government doesn't pay taxes on government property, a government itself (commonly development authorities, which are unelected local boards with almost limitless power to make these deals in Georgia) will issue bonds in the amount of the property's value and buy the property with the proceeds. They then lease the property to the company wanting to use it, with the lease payments being equal to the bond payments (in many cases the company itself will buy the bonds, and that actually might be required in Georgia - not sure on that point). The agency will hold the title until the bonds are paid off, at which point title reverts to the company using it.

    So property taxes aren't due on the property itself, because it's owned by a government. But with a couple exceptions not relevant here, agencies can't eliminate 100% of otherwise due property taxes in this manner. So they instead tax the value of the lease itself. One common way (though not the only permissible one) to calculate the value of the lease is to take the value of the underlying property and subtract the balance of the bond payments due. For example, on a ten year bond-for-title deal, at the end of year 1, 10% of the bonds will have been paid off, so the company will pay ad valorem tax on a lease worth 10% of the value of the property. After year 5 they'll pay taxes on 50%, and so on.

    Not all property leased to private entities by governments is part of such a deal to abate property taxes. The Atlanta Botanical Garden has been around far longer than these deals are generally issued for and is probably not part of such a deal (I didn't look it up). Since there's no bond issue reducing the value of the lease, its value would simply be the value of the underlying property, and taxes would be due as though the Garden owned the property. So why is all of the tax abatement stuff relevant?

    Because what's being taxed as private property is the value of the leasehold, not the land itself. When the government leases property to a private entity, a new asset is created - a lease - and the lessee owes ad valorem taxes on the value of that asset. The asset is the private property. The underlying property itself doesn't magically become private and subject to taxation.

    If it were otherwise, bond-for-title deals, which have been well established in Georgia for many decades by statute and case law, wouldn't work. The private lessee would magically make the leased property itself private, and they would owe taxes on the total value of the property from day one. Even if the lessee is paying taxes on the full value of the property, the taxes are being paid on the value of the lease, which is an artificially created financial asset - a line in a spreadsheet - and not a physical piece of real estate, which is owned by the government and not subject to taxation (but rightfully subject to gun laws).

    So not only did the appeals court decide the legislature didn't mean what it said about private property, they also failed to understand the difference between taxation on private property and taxation on a financial asset created based on underlying public property. Their interpretation would negate tax abatement deals that almost every city and county in the state has been making for decades.

    Imagine a town issued bonds to buy space for a new public park. If I bought all those bonds, they would be my private property to sell, hold, or do whatever I want with them. But under the court's interpretation of tax law, the park itself would become my private property until the bonds were paid off.

    Anyway, if you made it through all this, congratulations! You're almost as big a nerd as I am. I thought it was interesting that not only did the appeals court basically declare the legislative change in the gun laws null and void, but it seems they didn't even get the tax law right.
     
    Last edited: Apr 20, 2018
    TimBob likes this.
  2. awanatech

    awanatech Well-Known Member

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    @GoDores, thank you for sharing what you learned. I did make it through your assessment and actually followed along. I'm not sure where that puts me on the nerd spectrum. My wife says I'm pretty high. It is a complicated shell game, but it does look like you're right. The appeals court may have messed up even more than we originally thought.
     
    TimBob likes this.

  3. Malum Prohibitum

    Malum Prohibitum Moderator Staff Member

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    You are exactly correct, but for purposes of 16-11-127, that does not matter anymore. The Court of Appeals has spoken, and the issue is settled against us.

    I reject the notion that the tax statute cases should control the outcome of a gun statute, anyway, but I agree with you that they did not even get that part correct.

    The real issue is that the case involved guns, and the Chamber of Commerce scared the court to death. It really is as simple as that. I would not be looking for a legislative fix anytime soon, either.
     
  4. GoDores

    GoDores Like a Boss

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    I just wish the issue were more of a central point in GCO's filings in the case against the Botanical Gardens. It got a brief mention, almost an aside, in the response brief to the appeals court, and wasn't mentioned at all in the appeal to the Supreme Court that was just filed.

    I'm an idiot, at least in legal matters, compared to the guy who actually wrote that brief. But it seems to me that most courts seem to want to find excuses for a case to lose when it's argued on the merit of gun rights. We seem to win many more court battles when the legal issue is something other than the 2nd Amendment or a gun law.

    In this case, it seems we were predestined to lose when the issue was framed as gun rights vs. what the Chamber of Commerce wants. I thought this misreading of the tax law would have been a prime opportunity to make the case about something other than guns - if the court's reading of the tax law is upheld, millions of dollars of corporate tax incentives disappear - and give the court a reason to rule in our favor that has nothing to do with guns and everything to do with pro-business tax policy.
     
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  5. Nemo

    Nemo Man of Myth and Legend

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    Fake News.

    Nemo
     
  6. OWM

    OWM Well-Known Member

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    Think anne knows the other new girl.
     
  7. moe mensale

    moe mensale Well-Known Member

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    They all sound alike, don't they? Do they all enroll in "Troll Writing 101" before making any posts? Anyway.........TROLL. :righton:
     
  8. Hombre

    Hombre PITA

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    Naw. :mrgreen:
     
  9. moe mensale

    moe mensale Well-Known Member

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    You're only saying that because you're hoping she's not a TROLL and that's really her picture. :lol:
     
  10. Hombre

    Hombre PITA

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    Nah. Think what you may. :cool:
     
  11. Nemo

    Nemo Man of Myth and Legend

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    I started wondering if they work and play well together?

    Nemo