A look behind 2 pro-SPLOST arguments

The work of science is to substitute facts for appearances, and demonstrations for impressions.

— John Ruskin, English author and social critic, 1819-1900

Two of the favorite arguments of SPLOST promoters are that a sales tax makes it possible to avoid paying interest on bonds and visitors contribute a lot of sales tax. Let’s take a look at that.

Have you ever borrowed money at a 3 percent annual interest rate? If you had, would you consider yourself smart, or at least lucky?

Well, congratulations! As a Fayette taxpayer you have borrowed money at 3 percent, and you were smart or lucky.

The latest Financial Report from the Fayette Board of Education, published last December, shows (as of June 30, 2007, at page 54) that you, and all the other Fayette taxpayers, borrowed money through school bonds at interest rates ranging from 3 percent to 5.25 percent tops.

Would you consider that I am doing you a favor by suggesting you give up a loan with, say, a 4 percent interest rate by paying it off early? Or would you consider me sleazy for suggesting it?

Giving up a loan very favorable to you is precisely what the board of education wants you to do when it suggests you pay extra sales tax to retire its school bonds early.

It was not until I read an AJC editorial promoting a third consecutive Cobb County school SPLOST that I realized how some people simply don’t get it. On Aug. 30, Mike King, an AJC editor, claimed it was great for Cobb County to have paid off all its outstanding school bonds and to be paying no interest.

Many large corporations, like Coca-Cola for instance, go out of their way to borrow money at 6 percent, which they then use for projects that return 12 percent or more to their shareholders. (I studied techniques like this when, as an actuarial student, I took a standard university course called Corporate Finance.) People don’t always borrow because they are desperate; some do it because they are smart.

School bonds come with very favorable interest rates, in part because the interest income is exempt from income tax for investors. Virtually none of us, as individuals, could ever borrow at good low rates like this.

In a growing county where new schools are being built, taxpayers are obviously better off paying between 3 and 5 percent interest on their school bonds, rather than 18 percent on their credit card.

Even those with a 6 percent mortgage would be better off. If they wanted to, they could take 1 percent of everything they’ve spent each day and put it in a jar. They can think of it as their private SPLOST. Every three months, they could use the money in the jar to prepay their mortgage. They’d save more interest than by prepaying school bonds.

It is commonly known that the U.S. accounting profession has adopted generally accepted accounting principles which strive to reflect logic and fairness.

Following these principles, accountants insist that pension costs be counted as expenses for the years when people work and earn these pensions. To an employer, employees contribute to its making money and they also cost money. The revenue they produce and the cost they occasion should be counted at the same time.

For buildings, accountants want their construction cost to be capitalized, with depreciation to be taken year by year afterwards while the building is being used. The expense is charged as the building is being used.

Using the same kind of common sense, the cost of school buildings ought to be charged to those who use them, year by year. It is unfair to ask some pioneers or early settlers to sacrifice by advancing their entire cost. Bonds can achieve this pay-as-you-use goal, keep the payments reasonable, and promote inter-generational equity.

Some people take the interest amounts in a loan and add them all up. Then they say, see what you’ll save by avoiding the loan!

At the time of my presentation to the special school committee on July 27, 2000, Janet Smola, now a board of education member but then a strong influence on the committee, asked me how much money was payable as interest on a bond.

The trick part of that question is the disregard for the time value of money. Intuitively, everyone knows that a dollar receivable in five years is not worth the same as a dollar in hand today. The existence of inflation alone tells us that. The difference is called interest.

Adding dollars from different periods is adding dollars that do not have the same value. It is delusive, and frankly dumb. Financially savvy people simply don’t do it. Lotteries try to pull that trick by proclaiming that the winner of $1 million a year for 20 consecutive years has won $20 million, when in fact he’ll collect only about $13 million (before taxes) if he takes a lump sum.

Many who promote SPLOST add up the interest the way lotteries add up their pay-outs, across many years, as if those dollars all had the same value, and they claim a big savings from eliminating the interest. It’s like saying the lottery has saved $7 million when the winner takes the lump sum equivalent of $1 million for 20 years.

In many states, if the winner does not take the lump sum, the lottery simply pays the $13 million to an insurance company which converts it into 20 annual payments of $1 million. Imagine Homer Simpson telling the Springfield Life Insurance Company, hey, yoo-hoo, y’all could have saved yourselves $7 million by not accepting this deal. Duh!

At an annual interest rate of 5.0871 percent, the 20 annual payments of $1 million are actuarially equivalent to the $13 million, and the insurance company makes money if it can invest at more than 5.0871 percent.

So I ask myself, why should we let the people who write editorials for the largest newspaper in Georgia, or anyone else, spread insidious misinformation unchallenged?

Let’s talk now about visitors. There is no doubt that visitors who come to Fayette County to eat or shop will contribute a bit more if we raise our sales tax.

The first question one might ask, however, is whether we’ll have as many visitors as before. By offering a slightly lower sales tax rate than surrounding counties, Fayette is a bit of a magnet for nearby residents. The attraction goes out when the sales tax goes up.

The really big question, however, is how much of a contribution visitors really make.

The sales tax is payable at the point of delivery, except for cars where it is payable at the rate of the county in which they are registered. Thus Fayette residents will pay the Fayette tax rate no matter where they buy their vehicle, and people who buy Fords in Fayetteville will pay their own county’s tax rate. No gain from visitors there, and we do not subsidize other counties either when we buy cars.

The SPLOST advocates who argue someone else will come to Fayette and pay our tax rely on informal surveys of car tags in shopping areas’ parking lot. (Board of education member Janet Smola and Commissioner Herb Frady have reportedly made such surveys.) But is this where a lot of the sales tax comes from?

Fayette is considered to have fairly expensive housing, and we have been told repeatedly that many of the people who perform services for the county government or work as store clerks, positions which can pay modest wages, come from outside our county. It is not unreasonable to think that many cars with out-of-county tags belong to store employees who are not shopping at all. They are earning a living.

For some people, shopping is a bit of a sport. They go to four different shoe stores to find one pair of shoes, for instance, and when all is said and done they have spent quite a bit of time but not that much money. Thus not a lot of sales tax. Unless it’s jewelry, if it fits in a bag there’s probably not a lot of sales tax involved.

Sales tax revenues come mostly from construction materials, motor vehicles, furniture and large appliances, and food. Local sales taxes apply to unprepared food even though the state sales tax does not.

Large expensive items are generally delivered. They do not come in a bag and won’t be seen in shopping centers. When a roof or heat pump is replaced, when a kitchen is remodeled, when a tractor, golf cart, refrigerator, washer or dryer is bought, there is a large sales tax. That sales tax is invisible to the people who look at shopping bags with shoes in them, but it can be quite large. For most people, a car purchase will show the greatest sales tax burden.

A study I made eight years ago showed that visitors are likely to pay about 4 percent of all the Fayette local sales taxes, largely because Fayette is not a tourist destination. Some counties, like Clayton, can have an advantage from charging sales tax to airlines on their fuel or to airport passengers, but Fayette is not in that position.

There is also no interstate highway going through Fayette, and we don’t get much trade from snowbirds and other Florida-bound tourists.

In my study, I considered all the motels in Fayette, the number of rooms for each one, and the daily rate. Relying on published data, I assumed a reasonable occupancy rate for each one of them, and also added an allowance for the food these tourists might eat during their stay in Fayette County. Then I multiplied by one percent to get an idea of the sales tax derived from a SPLOST.

Then I looked at the financial statements of Wal-Mart and Home Depot, the only stores I considered as possible major magnet stores. (Today I might add Lowe’s and Target.)

I looked at their overall U.S. revenue and the number of U.S. stores, and came to an average annual sales amount per store (over $36 million; it would now be $72 million for Wal-Mart). I believe it was most generous of me to assume that 30 percent of their Fayette sales might be to out-of-county people, but that’s what I did. Again I multiplied by one percent.

I did not do that for grocery stores, because logic tells us grocery shoppers are local.

When I compared the sales tax amount my calculations produced with the current revenue from the Local Option Sales Tax, it came to 3.5 percent of the total. If all the small stores in the county would collectively produce the same sales tax as giants Wal-Mart and Home Depot, the percentage of sales to out-of-county people would go up to 5.2 percent.

One could work and work and work at making this more precise, and it’s inconceivable the percentage of sales tax from visitors would ever reach 10 percent. Our magnet stores simply don’t have all that much pull. Call “the visitors will pay it” argument an urban legend.

[Claude Y. Paquin, a Fayette County resident, is a retired lawyer and actuary.]