Creeping & hidden taxes nibble at profits

Image of taxmanMike Cotton is a true All-American.

He won the USA pole vault championship in 1973, was named a track All-American that year and in 2009 was inducted into the University of Florida Athletic Hall of Fame.

In the years since his athletic accomplishments, you might say he’s been an All-American businessman too, having built a successful insurance agency and acquired five rental properties.

These days, though, he doesn’t feel special, just put-upon by his tax burden.

“My revenue is down, but my taxes aren’t,” he says. “I had a lot of boom years, and I put money in the bank, but I didn’t see government saving for the future when taxes were rising fast.”

From property taxes to sales taxes to gas taxes and beyond, businesspeople face a vast array of charges for government and community services. Some of these are clearly evident, like property taxes, for which you get a bill and write a check. Others are less visible.

All, though, nibble away at profits in a tough economy.

To get a better sense of what the average businessperson faces, we looked at both the well-known and the less prominent taxes at the city and county level and how they impact businesses.

Property Taxes

Much of the first decade of this century was a boom time for Alachua County.

Countywide property tax collections for all taxing units—including the school district—rose from $158 million for the 2001 fiscal year to $306.2 million in the 2010 fiscal year, a 93 percent increase.

Collections rose for two reasons: land development and rising property values. Increased development, primarily outside the City of Gainesville, resulted in total taxable parcels increasing from about 85,000 to 100,000 from 2001 through 2010.

Existing properties increased too with single-family homes appreciating in value and multi-family properties rising dramatically when a number of apartment communities were converted to condominiums.

With new growth and appreciation, property values more than doubled from $5.22 billion in 2000 to $10.94 billion in 2010.

While many residential property owners were insulated from high increases by homestead exemptions and the recent Amendment 1 initiative, commercial property owners didn’t have protection.

Cotton uses one of his single-family rental homes as an example of how property taxes have impacted commercial structures. Taxes on the property rose from $2,019 in 2002 to $3,299 in 2006, a 63 percent increase.

The taxes on that home have declined $398 since 2006, due to reappraisal and a slight reduction in the city’s millage rate, but then the city’s new fire assessment kicked in this year, raising his bill by $115.

Gainesville’s property taxes are tough on landlords, Cotton says. If he assumes a 100 percent occupancy rate, which is unlikely, taxes on his rental properties range from 21 to 28 percent of his gross rent.

“My first two to three months of rent each year go to taxes,” he says. “That’s unacceptable.”

Worse, rents aren’t keeping up with taxes, and actually have dropped the last couple years, due to the glut of rental units, Cotton notes.

While some may complain that county government misused property tax revenues during the boom years, it actually did put away some of its added cash as protection against bad times, says Assistant County Manager Richelle Sucara.

The county increased the balance in its general fund, which relies heavily on property taxes, during the robust years as follows:

  • Fiscal year 2004 general fund balance: $10.9 million
  • Fiscal year 2005: $14.1 million
  • Fiscal year 2006: $17.5 million
  • Fiscal year 2007: $20.2 million

This de facto savings account came in handy as the economy turned downward, Sucara says. County government drew down the balance by $1.6 million in fiscal year 2008 to maintain services and by $8.6 million in fiscal year 2009.

“The balance was a huge benefit as we saw the impact of state property tax reform and decreasing property values,” county Finance Director Todd Hutchinson says.

Sales Taxes

Three times in the last decade the county increased local sales taxes above the state level to fund initiatives approved by local voters.

In 2001, voters approved a one-cent sales tax that ran one year to fund the new Criminal Justice Center and the city’s downtown parking garage.

Then, in 2004, voters approved a quarter-center CHOICES sales tax to help provide health care for the working poor. The CHOICES tax, which will expire Dec. 31, has collected $58.8 million so far.

Finally, the county collected a “Wild Spaces, Public Places” half-cent sales tax to fund land conservation and park projects. That two-year tax, which ended this past Dec. 31, raised $31 million.

Other than the local option taxes, sales tax collections over the last decade ended up essentially where they started a decade ago, if you look just at the 6-cent state sales tax, which remained constant over that period.

In 2001, the collections in the county were $168.7 million. For 2010, collections were $182.3 million, but when you factor for inflation, that’s comparable to the amount collected in 2001.

The sales tax collections in the county certainly were higher during the boom years, with a peak of $233.5 million in 2007. But most of that went to the state.

Fire Assessment

The city’s fire assessment isn’t hidden, but it’s a new government fee this year.

It is raising $4.9 million, covering one-third of the cost of the city’s fire department.

To partially mitigate the new fee, the city commission rolled back property taxes .1419 mills. That reduced revenue by $700,000, but the city still ended up with an additional $4.2 million.

From a business standpoint, if you own an office building you pay the assessment at the same rate as someone who owns a comparably sized home. However, commercial buildings are taxed on a formula that includes square footage and potential fire risk, so if you own, say, an auto repair shop, you are paying more than residential property owners.

City Manager Russ Blackburn says the fire assessment was needed because the state’s Amendment 1 (passed in 2008) limited local government’s ability to increase property taxes. Also, revenue from other sources fell, he says.

“We had decreases from every revenue source, except parking fines,” Blackburn says. “They went up because we changed enforcement from the police department to the public works department.”

Without the fire assessment, city revenues would have fallen $8.3 million this year.

“We would have had to cut 90 employees and make reductions in every department,” Blackburn says. “With the fire assessment, we cut 41 positions, all but five of which were vacant, and we avoided cuts in fire and rescue funding.”

Businessman Cotton actually applauds the fire assessment, which hits nonprofit organizations as well as businesses and homes. “The fire assessment provides a better distribution of costs,” he says. “It’s redeeming.”

The Cost of Communications

It seems that with every wave of new technology comes a new wave of taxes, as the phone and Internet bills of one local businessperson illustrate.

The Cox Communications bill for Internet and three phone lines at this person’s business breaks down as follows:

  • Cox charges—$176.61
  • Federal excise tax—$2.93
  • Local telephone communications tax—$5.82
  • State telephone communications services tax—$9.25
  • Lifeline and relay fee—33 cents
  • E-911 tax—$1.50
  • Federal universal service fund—$3.22

Total taxes and fees—$23.05, or roughly 13 percent.

  • The AT&T iPhone bill for the owner of the same business shows the following:
  • AT&T charges—$94.99
  • Regulatory cost recovery charge—38 cents
  • Federal universal service charge—$3.11
  • 911 service fee—50 cents
  • Florida communications tax—$6.25
  • Gainesville communications tax—$3.93

Total taxes and fees—$13.79 or roughly 14.5 percent

The local government portion of communications taxes go to general government services, including police, parks and public works, City Manager Russ Blackburn says.

Gasoline Tax

Gasoline taxes are 53.4 cents per gallon in Alachua County. While those taxes affect all drivers, businesspeople who do deliveries, provide services in the field and handle freight certainly pay a larger amount than an average commuter.

Twenty of the state’s 67 counties, including Marion and Putnam, charge the same rate as Alachua County. Bradford County is at 47.4 cents, and Gilchrist County is at 48.4 cents.

Of the amount collected here:

18.4 cents goes to the federal government

23 cents goes to state government, some of which is returned to local government

12 cents is directly sent to local government

Alachua County increased its local gas tax by 5 cents per gallon in 2008 to help fund the backlog in local road improvement projects.

All gas taxes fund transportation of some sort, from building interstate highways to maintaining rural roads. But locally, government has used a portion is its gas taxes to buy buses and add bike paths.

The city is proud of the RTS bus system, which nearly doubled in riders from 5.2 million in 2000 to 9.4 million in 2010. “We have the second highest per capita ridership in the state, which is remarkable when you think of all the large cities such as Miami, Orlando and Tampa,” Blackburn says.

However, 75 percent of the riders are University of Florida students, who receive free service because student fees provide more than $10 million annually to subsidize buses.

Utility Tax

If you’re a GRU customer in the city, you’re paying a 10 percent utility tax on your consumption of electricity, natural gas and water.

That tax is actually held down by two facts, says GRU spokesman Dan Jesse. First the city’s fuel adjustment, which covers changes in fuel costs, isn’t taxed. Second, sewer service isn’t taxed.

The city’s utility tax generates $10.4 million a year, which is 10 percent of the city’s general fund revenue of $102.8 million.

Some argue that the utility rates themselves are a form of taxation since city commissioners, acting as GRU’s board, set the rates. GRU will provide $35.2 million to the city this year. But Blackburn argues that that money still benefits the local community.

“If the city didn’t own GRU, some other utility, such as Clay Electric or Progress Energy, would collect the charges, and the money wouldn’t stay in the community,” Blackburn says.

If you’re a GRU commercial customer outside the Gainesville city limits, you are not so lucky. You pay the regular utility tax, plus a 10 percent GRU surcharge on electricity and natural gas and a 25 percent surcharge on water and gas service.

In the past, Mayor Craig Lowe has justified the surcharge on the unincorporated area, saying, “The residents of the city own the system. The city provides many services to people who don’t live here.”

On top of the surcharge, GRU customers outside the city limits pay a 10 percent county utility tax on electricity, natural gas and water.

The county received $6.6 million in utility taxes on electricity alone last year.

Hidden Fees

Along with the more evident taxes, businesspeople in the city also face a variety of fees. Charges for false fire alarms on commercial buildings and apartments, for example, are $117 for the third and fourth call; $270 each for fifth, sixth and $680 for the eighth call and above. Also building permits, fire inspections and other fees and charges have grown over the last few years.

A Taxing Challenge

High taxes, and especially creeping taxes make it tough on business, says Tommy McIntosh, chairman of the Gainesville Area Chamber of Commerce and owner of Prudential Trend Realty.

Yet there is no easy and perfect solution. Even the chamber has a tough time taking a position opposing some taxes, McIntosh says.

The five-cent hike in gas taxes that went into effect to fund road repairs is an example. “Some chamber members understood the need for it, and some were vehemently opposed to it,” McIntosh says.

Even he has mixed feelings about taxes, such as the relatively high property tax rates in Alachua County.

City and county officials note that about half of the property is off the tax rolls, including the UF, Shands Hospital and the Malcolm Randall VA Medical Center. With so much untaxed property, businesspeople and residents have to pay relatively high property taxes to make up the difference. But consider the trade-off.

“The state and federal government have made a tremendous investment in Gainesville,” McIntosh says. “It’s hard to blast them, since they created so many jobs.”

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