To: Honorable Mayor and Members of Town Council
From: David L. Corliss, Town Manager
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Discussion/Direction: Potential Reduction or Elimination of Property Tax and/or Sales Tax on Food for Home Consumption
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Executive Summary
Per Council’s direction, staff is presenting information regarding the potential reduction/elimination of property tax and/or sales tax on food for home consumption (FHC) for the Town. Staff is presenting some basic information on these topics for Council’s consideration. Should Council wish to further consider these or any other options, upon such Council direction, staff would prepare additional research and analysis for a future Council meeting.
In June 2013, Council considered reducing or eliminating certain fees and taxes. Reductions in property tax, and in the tax on food for home consumption, were considered. At that time, Council’s decision was keep these taxes as part of the revenue stream for needed Town services and projects.
Residents who responded to the 2015 Community Survey were asked if they think they’re getting their money’s worth for their tax dollars. Eight out of 10 residents surveyed said they believed they are.
As we work through priorities for the 2017 Budget, the 2017-2019 Balanced Financial Plan and any further updates to the Town’s Strategic Plan, Council may wish to consider reducing or eliminating certain taxes. If Council wishes to proceed in that manner, there will be both policy and financial implications to consider.
At this point, we are sharing information with the Council, responding to questions and seeking Council feedback as to whether there is interest in further considering any of the potential reduction/elimination options presented, or if any other areas not specifically presented herein may be of interest to Council.
Discussion
Reduction of the Town’s Property Tax
Currently, the Town’s property tax mill levy rate is 1.474. On a $300,000 home, the Town portion of
the property tax equates to $35.04 per year. This totals approximately $1.1 million in annual revenue to the Town.
Each 10% reduction in the Town’s property tax rate would, therefore, reduce revenues to the Town by about $110,000 per year and save the owner of a $300,000 home approximately $3.50 per year.
The tax savings of a property tax reduction would be greater to business property owners, given the way the property tax structure works in Colorado. For example, a typical fast food restaurant with an assessed value of $271,600 would have property tax due to the Town of approximately $462 per year. A newer office building with an assessed value of $397,960 would owe $677 in property tax to the Town.
Property tax revenues provide some stability to the Town’s General Fund revenue stream. However, due to the low rate, it is a low total dollar amount and an increasingly lower percentage of General Fund annual revenues. This might not always be the case, as property tax could become a more significant and needed revenue stream as the community matures. If the Town’s property tax is eliminated, it could be very difficult to reinstate if it becomes essential to the Town’s finances someday.
All Town property tax revenues are allocated to the General Fund and, thus, are primarily used to support police, fire, parks and general government services. If the Town’s property tax was eliminated, a reduction in services would be needed to absorb the $1.1 million revenue cut. Examples are shown below:
Rather than permanently eliminating the Town’s property tax, Council might wish to consider temporarily reducing the property tax rate for a specified period of time. If the Town were to consider eliminating only residential property tax, this would still be approximately $715,716 in annual revenue reduction in today’s dollars. If the Town reduces or eliminates the property tax mill levy, any future increase or reinstatement would require voter approval.
It is important to note that a reduction or elimination of property tax would also have an impact on the Castle Rock Downtown Development Authority (DDA). The DDA’s loan capacity is tied to its future revenues; reducing the Town’s property tax would decrease the DDA’s property tax TIF from 76.973 to 75.499 in all possible agreements.
Some Policy Considerations in Reducing Property Tax
The Town’s property tax is paid entirely by the owners of property in Castle Rock, so a property tax reduction would provide a dollar-for-dollar tax reduction to Castle Rock property owners. However, the value of that reduction would not be significant for the average homeowner, due to the Town’s low property tax rate.
A reduction in the property tax rate would be more manageable than the tax’s elimination, from an overall Town financial perspective. As shown in the below chart, this has already been occurring over time as property valuations have increased, due to a provision in the Municipal Code that limits the Town’s property tax revenue growth to 5.5% over the previous year. This “ratchet down” effect will continue with assessment valuation growth, assuming a continuation of higher growth trends, the Town mill levy would be 1.234 mills.
Elimination or Reduction of Sales Tax on Food for Home Consumption (FHC)
Town sales tax is collected at a rate of 4%. These revenues support the General Fund, Transportation Fund and Community Center Fund.
Currently, the Town taxes all food, whether it is for immediate or home consumption. Immediate consumption foods are those that can be consumed right after purchase, such as a single candy bar, or a prepared meal. Foods for home consumption are those bought for future use, such as a gallon of milk or loaf of bread. The taxability can be difficult to explain; there are guidelines used in this area of sales tax administration.
Town staff has worked diligently to gain an accurate number for how much tax revenue the Town collects annually related to the tax on food for home consumption (FHC). Using information from Douglas County’s finance department, staff compared County-specific business remittances to the Town’s remittances. Staff grossed up the County’s collections to account for the rate differences (the County’s sales tax rate is 1%) and then examined the difference in revenue. The only major difference between the County and Town’s tax base in grocery stores is FHC. Thus, the difference in tax revenue between the two figures is the amount the Town collects on FHC.
Staff estimates that the Town tax on FHC generated $5.25 million in 2015, which was 13.7% of the Town’s total annual sales tax revenue (The actual figure was higher, because staff only analyzed prominent FHC business in Town.) Broken out by fund, there was $3.65 million in General Fund revenue, $1.27 million Transportation Fund revenue and $273,000 in Community Center Fund revenue in 2015 attributable to taxing FHC.
Staff estimates that each 1% of the Town’s sales tax on FHC generates more than $1.3 million in revenue annually, based on estimates of sales at grocery and general merchandise stores. FHC is also sold at convenience stores, and at various other retail stores. Grocery stores also have nonfood sales that would still be taxable. Rather than eliminating the tax on FHC altogether, Council could opt to reduce it. Numerous options are available; in the following sections, staff presents four options, in no specific order, for discussion purposes.
Additionally, if Council chooses to eliminate sales tax on FHC, using 2015 revenue, the estimated amount of sales tax revenue lost would be $5.25 million. However, using a 3% inflationary rate, that revenue number would increase to $6.85 million at a 10 year mark and $9.21 at 20 years. These estimates do not account for any continued growth within the Town. So, the revenue reduction would be even larger than stated based on the growth of the Town.
Staff has provided four options for Council to consider concerning the reduction/removal of sales tax on FHC:
1. To remove FHC tax and reduce services
2. To remove FHC tax and supplement with lodging tax
3. To reduce FHC tax by 2% and reduce services
4. To not remove the tax and create a rebate program for specific residents
Remove FHC tax and look into reducing services
Elimination of the tax on FHC would cause reductions in revenues to the General, Transportation and Community Center funds, and corresponding reductions in services may need to be considered. Following are examples.
To absorb a $3.65 million revenue cut in the General Fund, Council would have to consider possible service reductions to accommodate the revenue reductions listed in the chart below:
Within the Transportation Fund, a reduction of $1.27 million per year would further compromise the ability to replace aging facilities, which would diminish resources available for pothole repair and other pavement maintenance needs. By funding growth-related capital projects at a higher level with increased impact fees, and by retaining current sales tax revenues for operations, the Town could reconstruct a backlog of streets that presently need reconstruction, as well as address future pavement maintenance projects.
To absorb a $280,000 cut to the Community Center Fund, Council may choose to consider choices similar to those it made in 2010, when this fund absorbed a similar reduction:
Daily admission fee increase
Pass and punch card fee increase
Elimination of the Corporate Discount Program
Reduced hours of operation in the pools
Increase master swim fees
All customers pay to enter facilities
Increase youth and adult athletic program fees
Close Recreation Center one hour earlier M-Th and two hours earlier on Sun
Reduce hours for the Kids Club Program
Restructure the fee policy for the Kids Club Program
Increase the price of Adventure Club preschool and toddler program
Increase cost of personal trainer sessions
Also worth noting is that a reduction/elimination of FHC tax would impact the payoff of the Sprouts economic development assistance agreement. It is currently projected to pay off in July 2018; if FHC tax is reduced or eliminated, this would push the payoff date out further. A reduction/elimination of FHC tax is contrary to why the Town entered into the agreement with Sprouts.
Another noteworthy item is the effect this would have on the repayment of bonds for the Promenade project. A portion of sales from Sam’s Club will definitely be from tax on FHC and a reduction/elimination will delay the payoff date. All current projections used to pay off bonds on this project include any FHC tax revenues.
Additionally, the Town currently has TAP bonds issued, and a portion of sales tax revenue is pledged to pay on the bonds. There is a covenant indicating that the Town has agreed not to make changes to the sales tax that would “materially adversely affect the security for the Bonds.” Bond counsel has responded and expressed their concern that the elimination of sales tax on food for home consumption would have a material effect on security, and they indicated they would not recommend it. They went on to say that if eliminating the food tax is big priority, all the TAP bonds could be refunded, and the covenant could be removed. From a finance perspective, this would be very expensive, costing approximately $500,000 to refund the currently issued bonds. Additionally, if the Town were to reissue new bonds, this issuance would require a new election.
Much more significant than property tax, a reduction or elimination of FHC tax would have a very large impact on the DDA. The DDA’s loan capacity is tied to its future revenues, and eliminating or reducing FHC tax would drastically decrease the DDA’s ability to use sales tax TIF in all possible agreements. If FHC tax was fully eliminated, it would decrease the DDA’s loan capacity from $5.5 million to $1.6 million. The DDA has planned to borrow $2.5 million to help pay for its portion of the plans for Festival Park. If the tax on FHC is reduced or eliminated, an additional source of revenue for Festival Park would be needed, or the project would be halted.
Remove FHC tax and add a new revenue source - Lodging tax
If Council chooses to remove sales tax on FHC, it might wish to consider a lodging tax to supplement the revenue loss. A lodging tax is a charge on all rooms for accommodation in the Town occupied less than 30 days at a time. To implement such a tax in the Town, Council would need to receive voters’ approval.
Municipal lodging tax rates in the Castle Rock area generally are between 3% and 6%. The chart below shows the estimated annual revenue a lodging tax would generate at those rates. Such revenue could help lessen the impact of revenue reductions associated with the reduction or elimination of FHC tax or property tax.
Respondents to the 2013 Community Survey were asked about their feelings regarding implementation of a lodging tax. About half of the respondents said they favored implementation of a lodging tax, while only one-fourth of respondents indicated they were opposed to such a tax. The remaining quarter of the group was neutral on the subject.
Remove half of the tax on FHC and reduce services
Another option would be to reduce the FHC tax to 2% from 4%, with a lesser service reduction than that listed on the previous page; the total impact for each fund would be reduced by half, as would the need to reduce services.
Not removing the tax and creating a rebate program to help specific residents
Another option would be to keep the tax on FHC and create a rebate program, similar to other municipalities, to provide relief to residents. This rebate could be for sales tax on FHC. More information about a rebate can be provided if Council chooses to move toward this option. Municipalities offering a sales tax rebate program on FHC and general parameters for qualification are listed below:
Focus is often given to the sales tax on FHC, which some argue is the most regressive tax, insofar as families have to purchase food regardless of their household incomes. Therefore, sales tax on food can more negatively impact lower-income households. There is also some anecdotal information suggesting some residents of Castle Rock do their food shopping outside of Castle Rock to avoid the Town’s 4% sales tax on FHC. (In a December 2013 telephone poll conducted on the Town’s behalf, two-thirds of respondents said they make 86% or more of their food purchases within Town limits.) We don’t know the extent that occurs solely for tax purposes, nor are we able to estimate whether a reduction in the Town’s sales tax rate on FHC would influence that customer behavior.
Staff has surveyed many home rule municipalities, and the chart below shows if the jurisdictions tax FHC and at what rate. The Mill Levy is also included to provide more context as to each jurisdiction’s overall taxing structure. It is important to note that Castle Rock’s overall sales tax rate is comparable to many of the jurisdictions below, while our municipal mill levy is one of the lowest across the metro area. This was a strategic move by the Town and its residents to keep the mill levy low for property owners and create a slightly higher sales tax rate and share in the revenue generated by out-of-town shoppers.
*The total mill levy stated is for comparison purposes only. Due to the complexity of multiple jurisdictions in each municipality an apples-to-apples comparison could not be provided. These mill levies listed above are only a representation of an address in each municipality. For these purposes we randomly picked an address in each municipality, which may represent a higher or lower mill levy due to the numerous districts with a boundary. For example the Town of Castle Rock combined mill levies range from 68.331 to 147.477 (Attachment A).
**The state’s 2.9% sales tax rate does not apply to FHC, nor does Douglas County’s 1% rate.
In addition to the four options outlined above, Council might also wish to consider temporarily reducing the sales tax rate on FHC for a specified period of time. Any tax that is reduced would not be increased again without a vote of the people.
Worth mentioning is that every dollar in sales tax revenue paid by nonresidents is a dollar that does not have to be generated by Town residents or businesses through other taxes. Reducing/eliminating the sales tax rate on FHC could, therefore, shift more costs to Town residents and property owners. While staff does not have specific numbers as to how much out-of-town shoppers contribute to sales tax on FHC, it would be safe to say this number would be significant, and the difference would need to be made up in service reductions or more costs to our residents and property owners.
Conclusion
The examples outlined herein show various ways Council could consider reducing taxes and services in Castle Rock. Staff notes that any significant reductions to property or sales tax will have a significant impact in service delivery. Staff is seeking identification by Council of any areas of particular interest and any direction to further research and evaluate any option. Staff would then report back to Council as part of the ongoing financial priorities and policies processes for the 2017 Budget and the 2017-2019 Balanced Financial
Attachments
Attachment A: 2016 Metro Districts
Attachment B: 07/02/13 Agenda Memo - Potential Tax Rate Fee Reductions
Attachment C: WSJ Article