ONE TAKOMA: A tax break for Takoma Park businesses?

Do strong businesses need low taxes?

IMAGE: Main Street Takoma. Photo by Seth Grimes.

ONE TAKOMA SETH GRIMES

Should Takoma Park eliminate its tax on business inventories? An Old Takoma business, S&A Beads, has made just that request to the city council. The council deferred the question to a future worksession, but let’s get a jump on the council and consider it now.

Let’s start with facts

The inventory tax is part of the personal property tax (PPT), paid by businesses on their furniture, equipment, computers, and inventory.

All companies that operate in Takoma Park must pay PPTs on their equipment and inventories, if any, that are located here in Takoma Park. That includes companies incorporated outside Maryland — Walgreens, Aldi, Advance Auto Parts, and Starbucks, for example — and incorporated home businesses. Businesses, including my own consulting company, must file annual returns with the Maryland Department of Assessments and Taxation.

PPTs are the only city tax levied directly on every incorporated city business.

I mined PPT data from the Montgomery County Personal Property Tax Web site — business PPT assessments and bills are public records — and count 557 fiscal year 2016 (FY16) payers.

Of the 557, 180 businesses paid inventory taxes in FY16. Their inventory taxes contributed an estimated $152,323 to the city’s general fund. That’s about 39% of the total FY16 business PPT liability, $387,521 by my calculation if you exclude PPTs paid by public utilities.

Focusing on the inventory tax, five Takoma Park businesses paid inventory tax of over $5,000 in the current fiscal year:

  • Advance Auto Parts: $24,419
  • US Medical Innovations (at Carroll and Eastern Avenues): $14,333
  • Walgreens, $13,439
  • RS Legacy Corporation (Radioshack): $5,611
  • TPSS Co-op: $5,547.61

One more fact – If the city eliminates or reduces the inventory tax, the council will have to either cut programs or make up the revenue through other means.

Where does the money go?

Business property taxes — PPTs and real property taxes paid by commercial real-estate owners — funds city operations and programs that benefit the businesses and their patrons and employees: police, roads and sidewalks, parks, street lights and street cleaning, and so on. They fund city business and economic development activities including the city’s annual subsidies to the Old Takoma Business Association (OTBA) and the Takoma-Langley Crossroads Development Authority (CDA).

OTBA received a $37,000 subsidy in FY16. The CDA’s FY16 subsidy was $30,000.

Is the inventory tax fair? Is it wise?

Here’s where we get into value judgments.

Does Walgreens get fair value from the $16,320.57 the company paid in Takoma Park PPTs in FY16, and for the $15,330.40 (net of a $12,572.35 enterprise-zone tax credit) that landlord JBG Retail paid in real-property taxes? Does the House of Musical Traditions fairly benefit from FY16’s $1,086.40 city PPT payment (of which $1,061.13 is inventory tax) and $2,144.03 in city real-property taxes?

My unquantified reaction is yes.

Personally, my wife and I paid the city $2,860.65 in property taxes on our home this past year. Most residents pay city taxes, and I’m not dissatisfied with the type and level of services delivered. But should homeowners pay more, another three quarters of a cent in real-property tax rate, in order to compensate for elimination of the inventory tax? I’m not feeling that I, personally, should pay to lighten the tax burden of large businesses such as Advance Auto Parts and Walgreens.

Historically, the city council has agreed. This year isn’t the first the inventory tax has come up for discussion.

In 2010, when I was on the OTBA board, I headed an ad-hoc committee that looked into the question. Again mining county tax records, I found that in 2009, the Takoma Park inventory tax totaled $104,544. OTBA used that figure — and real property taxes and non-inventory PPTs — to argue for the annual subsidy that OTBA has now received for several years, and that the CDA now also receives.

There is no convincing argument that the inventory tax harms local businesses. As evidenced by Takoma Park’s low retail vacancy rates — in Old Takoma, along New Hampshire Avenue, and in other, smaller commercial districts — businesses here are generally thriving. Of course there are exceptions, but we should not make policy that applies to hundreds of city businesses based on a handful of exceptions.

Are there alternatives to eliminating the inventory tax?

Yes. The city could cut its personal property tax rate, $1.55 per $100 assessed value in FY16. Councils since FY09’s increased the rate in steps from $1.45/$100 that year which cutting the real-property tax rate from $0.605 per $100 assessed value in FY09 to $0.585 in FY16. I believe the council should realign the PPT rate with the real-property rate.

The city could exempt a certain amount of business inventory from taxation. I wouldn’t do it. A $50,000 exemption would have cost the city $49,623 in FY16. A $100,000 exemption would have cost $75,515. The chief beneficiaries would be the large payers. Personally, I oppose any sort of tax cut that favors Advance Auto Parts, Walgreens, and Aldi, particularly one they haven’t sought! Nor have the vast majority of locally owned businesses.

My call

Certainly, the city council should proceed with an inventory-tax discussion, but any councilmember who proposes reductions should also proposal off-setting service cuts or replacement revenues. That linking of tax cuts and off-sets is fair and reasonable and sound city government. My bet is that councilmembers will reach the same conclusion I did: A near-term inventory-tax reduction is neither desirable nor justified.

About the Author

Seth Grimes

Seth Grimes is a twenty-one year Montgomery County resident. He served on the Takoma Park City Council from 2011 to 2015. Follow him on Twitter at @Seth4MC.

11 Comments on "ONE TAKOMA: A tax break for Takoma Park businesses?"

  1. The city should get _something_ from local businesses, but an inventory tax has no relation to how much profit or loss a business has.

    The city has Payment In Lieu of Taxes (PILOT) arrangements with a number of businesses (public/private landlords of big apartment buildings.) Can it make such an arrangement with retail businesses? They could pledge to “donate” a percentage of their net income to the city in lieu of inventory tax. The city is not legally allowed to tax income, so it would have to be a donation.

    • Seth Grimes | May 25, 2016 at 11:06 am |

      I don’t know whether a PILOT is legally feasible, but there are MANY businesses here and it would be untenable to enter into a large number of agreements.

      • Only one PILOT would be necessary – an agreement to pay a set percentage of net profits. All the businesses who wanted to do that in lieu of inventory tax could sign the same agreement. It wouldn’t be individually negotiated. It would be a voluntary sales tax, basically. The businesses might have to submit a copy of their tax forms to prove the amount was correct, but no paperwork other than that.

  2. Seth buried the lede – his city tax is based on a home valuation that appears to be substantially less than market value, at least according to Zillow.com. The state appears to be using a flawed algorithm that smooths away substantive distinctions between areas. If we used Zillow valuations, then property assessments in my neighborhood would be going up 10% and those in the historic district would be going up 50%, instead of having an across the board 30% hike.

    • Seth Grimes | May 20, 2016 at 8:50 pm |

      Brian, that’s the lede of a story other than the one I wrote. I do recognize the assessment-increase disparity, but I don’t have anything to say on the topic at this moment. It’s a story you could write, and a topic you could pursue, perhaps with the help of elected officials.

  3. Also, it’s good to see that my neighborhood Radio Shack is our 4th largest commercial taxpayer.

  4. “I like to pay taxes. With them, I buy civilization.” Oliver Wendell Holmes, Jr.

    I agree that taxes used for public good are a good thing. But, Seth’s well-written and researched article makes me wonder about this tax. It seems to me that we are taxing current businesses in Takoma Park to partially fund economic development organizations that help recruit new business to Takoma Park. Doesn’t this sound a bit like a Ponzi scheme?

    Also, everyone who owns real property in Takoma Park must pay their proportionate share of property taxes, but this tax is only shared among those who decide to open a business in Takoma Park. When someone decides to open a business the location is an important decision and taxes are just one of many factors. Why make it less desirable to open a business in Takoma Park, when you could simply do it on the DC side or the PG County side?

    The City Council just finalized a budget to hire a new environmental enforcement position to the tune of $150K/year, along with another economic development specialist for about $100K/year. These are the sort of value judgments happening right now in Takoma Park and many are angry about this level of spending at a time when the MoCo Council just agreed to raise property taxes too.

    I love the mix of stores in Takoma Park, but I’m afraid that the opponents are right about this tax. Abolish it and let’s have Takoma Park’s politicians rethink our budget priorities.

    • If you abolished this tax, how will the city make up for the lost income? Raise homeowners’ taxes? The inventory tax is unfair, but that doesn’t mean city businesses shouldn’t pay their share of taxes to take the burden off homeowners. What is needed is a fairer business tax.

      • Seth Grimes | May 24, 2016 at 1:18 pm |

        Delegate Al Carr (D-18) had an interesting suggestion: Replacement with a higher commercial real-property tax rate. I have thought about the idea and will write it up once I’ve looked into a few things. For one, can Takoma Park establish multiple tax classes, based on property use? (Rockville has ’em.) Also, this would have to be a phased-in change, because landlords couldn’t immediately pass on costs to tenants with longer-term, non-net leases. A second thought would be to retain the inventory tax but create a homestead-type exemption for locally owned businesses, if allowed by state law, and again possibly entailing multiple tax classes.

        • These seem like complex and time-consuming solutions that might even require getting changes to state law – which can take years, if ever.

          What about the PILOT idea in the first comment above? The city already makes use of PILOTs and could likely initiate one in lieu of inventory taxes by the next fiscal year.

  5. “It seems to me that we are taxing current businesses in Takoma Park to partially fund economic development organizations that help recruit new business to Takoma Park. Doesn’t this sound a bit like a Ponzi scheme?”

    Not to me. Funding for the business associations is an obvious and direct benefit for businesses from the city. Moreover, the businesses associations themselves regularly poll their members on proposed new businesses and then lobby the city, county, and public based on the results (see, for example, the strikingly divergent opinions put forth by the CDA on the proposed Taco Bell and the OTBA on the proposed Starbucks).

    “I love the mix of stores in Takoma Park.”

    Not me. First, Takoma Park is the rare community that suffers from a lack of business activity, including retail sales, due to its excessively residential nature. The ratio of per capita retail sales in the city to Montgomery County is 0.45, ” indicating the small size of Takoma Park’s commercial sector relative to the County” according to the city’s own assessment – http://documents.takomaparkmd.gov/initiatives/sustainability/2014-sustainable-energy-action-plan.pdf. The retail establishments that we do have are excessively concentrated in specialized boutique uses on one side of town and high volume, low markup uses on the other. Rare are the establishments such as Ace Hardware that provide desirable goods and services to a broad spectrum of the community.

    The obvious improvement would be for localities to receive some portion of the state sales tax, which would implicitly penalize the city for its relatively low retail activity.

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