The gradual obsolescence of old facilities combined with the growing demands of an expanding population mean that, at one point or another, counties such as Fayette face the need to build newer and bigger facilities. That's true for schools, administrative offices, the courthouse and the jail. These items require more money than it is reasonable to raise through a one-time tax, and the traditional alternative has been the issuance of bonds. The bonds are then gradually amortized by equal annual payments over 20, 25 or 30 years.

The Georgia legislature has recently given counties the alternative of raising the necessary funds through a so-called Special Purpose Local Option Sales Tax (SPLOST). In either case, the county voters are asked for their approval. Unfortunately, voters are not given a choice between bonds or a sales tax: the choice that is presented to them is between Yes (to whatever financing method the county commissioners or school board have selected) or No (which for all intents and purposes prevents the project from going forward).

When certain projects are badly needed to serve the public good, it is important that the best financing method be offered to the voters and taxpayers. Because it is the latest alternative, the sales tax, like a new toy, seems to have a lot of appeal for some people. This note compares features of the old-fashioned bonds method of financing capital expenditures with the newer SPLOST tool.

Some Features of Bonds

Bonds need to be repaid, of course, and that's normally done through the county property tax.

The property tax for bonds is payable over 20, 25 or 30 years, like a mortgage. That presents four special advantages.

(1) It gives us the benefit of paying for our schools, courthouse, jail, or other buildings, as we make use of them, just as we do with our homes, and it makes the annual payments lower and easier to take. Moreover, as the number of households and businesses grows year by year the payments will be spread over more of them, and thus each one's burden will get ever smaller, year by year.

(2) We get a special deal on the interest rate because the lenders receive their interest free of federal and state income tax. Rates have recently come down and we should currently get a rate of about 4.75 percent. To borrow now would be good timing.

(3) We get another special deal because the property tax payments we make to pay off these bonds are deductible as an itemized deduction on our own federal and state income tax returns. For many taxpayers, that's like a 33% discount.

(4) We get the benefit of being helped by businesses located in the county, because they pay property tax too. In fact, when one considers the value of all the stores in Fayette Pavilion, all the large industrial plants in Peachtree City, all the drugstores, the grocery stores, the banks, etc., it is likely that homeowners pay not too much more than half of all the property taxes.

Some Features of the Sales Tax

The sales tax of 1 percent would most likely be payable for five years.

(1) Businesses don't pay much of it. The sales tax is payable on food, clothing and, importantly, cars. Businesses spend almost no money on that, which leaves the burden of the sales tax pretty much on people (much more so than the property tax used to pay back bonds).

(2) Visitors don't help much. Since the county has virtually no special attractions to make it a destination for conventions, vacations or shopping, the people who'll pay the tax are pretty much the county's residents. In fact, the higher our sales tax the more other counties' residents will avoid shopping here, and some of our own residents will feel less disincentive to shop out of the county. (Perhaps as much as 50 percent of the tax comes from motor vehicle sales, and nothing is received from visitors on that part.)

(3) There is shrinkage. The state keeps 1 percent of our sales tax as an administrative fee, and the merchants keep one-half of one percent, so we net only 98.5 percent if all the money is accounted for properly by the state. That's a big if, as many counties are currently complaining that the state is cheating them out of some of their local sales tax.

(4) Those who pay the tax are not those who'll enjoy the buildings. Residents of the county in the years 2000-04 end up paying for buildings used by the residents in years 2000-24 (or so). It seems unfair to make current residents bear the burden of pre-paying for buildings which future residents will enjoy for 20 or more years beyond the years of tax sacrifice. (Offering prepaid buildings to future generations invites growth after the tax has stopped, when newcomers can freeload with what prior residents bought for them.)

(5) Individuals cannot deduct the sales tax on their federal and state income tax returns. (Businesses can, but they buy little of what the sales tax is imposed on.)

(6) The net burden to residents is much greater. Each taxpayer will, on average, pay five times as much in sales tax as he might otherwise have had to pay through a property tax. Since everyone must eat and clothe oneself, including the young, the old, and the poor, the sales tax has a harsher effect on people than the property tax.

Dollars and Cents Comparison

Let us assume (as has been represented in local newspapers) that an extra 1 percent sales tax as a SPLOST would raise $11 million a year for five years. That's $55 million over five years, but since the money would not be available right away, its value must be discounted to a present value which (at 4.75 percent annual interest) is computed as $49,080,892. This $49,080,892 could be obtained through a bond issue with an annual interest rate of 4.75 percent, with annual payments (property tax) of $3,317,784 for 25 years.

One can immediately see that the taxpayers would replace an $11 million tax with a $3.3 million tax (per year). That eases the burden considerably, and re-spreads it over the years of use of the buildings.

Let us assume (from recent census figures) that Fayette has 85,000 residents and 23,000 households (3.7 persons, on average). If we further assume that 10 percent of the sales tax is paid by businesses and non-residents, and 40 percent of the property tax is paid by businesses, the tax picture looks like this: sales tax per resident, $116.47, but only $23.42 for bonds. For each household, it would be $430.43 in sales tax vs. $86.55 in bonds.

The smaller amount, which is one-fifth of the larger amount, can be further be reduced if it can be taken as an itemized deduction on federal and Georgia income tax returns. The sales tax (the larger amount) cannot be offset by any income tax reduction (except on business returns).

Summary and Conclusion

The traditional method of financing large public capital expenditures with bonds offers benefits which are unmatched by the burdensome, and more stealthy than clever, sales tax.

Bonds let businesses share in the tax burden, and they spread the burden over the generations which enjoy the expenditures' benefits, thus making it much easier to swallow (and vote for). Not only are bonds fairer between generations but, by not being a direct burden on the food, clothing and means of transportation that people of modest means are forced to acquire, they are also fairer to people.

The sales tax deprives the county of a competitive advantage, and the shrinkage from the state and merchant collection fees (1.5 percent plus) robs the taxpayers of $825,000 over five years. The tax burden from a bond issue is about one-fifth that of the sales tax, at the onset, and as the property tax base increases over the years the tax burden for each household decreases steadily.

To offer the people a choice of a sales tax or no capital expenditures is to offer them a very bad choice. Where capital expenditures are essential, bonds are the solution and a fairer answer.

(Note: The author, a Fayette county resident, has no connections whatever with any firm interested in the issuance of bonds and no financial interest at stake other than as a normal taxpayer resident of the county.)