Ann Arbor’s Prop A, adverbs, and DDA tax capture

Voters in Ann Arbor, Michigan, will decide on Nov. 6 whether a publicly owned parcel atop an underground parking structure in the downtown should be reserved in perpetuity as public land and developed as a parklike amenity, a civic commons of sorts. It’s Prop A on the ballot.

An alternative use for the parcel is queued up in the form of a privately developed 17-story building that is not yet built, but has been approved by the city council, which was divided on the issue.

This is a good spot to say that I will not be voting in the Ann Arbor election, because I am, for now, a resident of Kerrville, Texas. But I lived in Ann Arbor for a while and do have some kind stake in the outcome, because I still own property there and pay taxes on it.

I recall encountering Alan Haber outside the polls after I voted a few years ago—I think it was November 2014—when he asked me to sign a petition to put the city center commons question on the ballot. I told Alan I would probably vote against it, if it ever came to a vote, but would sign the petition, because a vote of the people would put the matter to rest. That round of petitioning didn’t achieve enough signatures, but a subsequent one did. I have not put in enough effort to form an opinion on the question that appears on the ballot this year.

Anyhow, the parcel in question lies inside the Ann Arbor Downtown Development Authority district. That means the taxes that a new building could generate would—all other things being equal—be captured by the DDA under the tax increment financing mechanism on which it relies.

Here’s a quick explainer. The difference in a property’s value before and after new construction is called the increment. Taxes on the increment are captured by the Ann Arbor DDA, instead of going to the some of the entities that levy them. Those entities include the city, county, transportation authority, and library, but not the schools.

But all other things are not equal. The taxable increment in the district, on which the DDA can capture taxes, is subject to a cap, which was implemented a few years ago. The new cap replaced an old cap, which had been in place previously for almost three decades. The taxable value on the Ann Arbor DDA’s increment is currently above the new cap.

So what happens to the additional taxable value on the increment, which the construction of a new building would yield? Do taxes levied on the portion of the increment that’s above the cap just go to the entities that levied the tax, as if no TIF capture existed?

Yes. For now.

Why isn’t the answer a simple yes? It’s because the new cap, as defined in local law, increases by 3.5 percent every year. Even if the taxable value of the increment this year is below the cap, the cap will eventually grow to exceed this year’s number for taxable value on the increment. At whatever point in the future that happens, say Year X, the taxes generated by a new parking structure building would start to add to the amount captured by the DDA as TIF (tax increment finance) revenue.

It would be fair say something like: Not until Year X will the DDA’s TIF revenue increase as a result of the capture of taxes generated by this new parking structure building. Or from the perspective of the taxing entities whose taxes get captured: Until Year X, all the taxes on the new building that would otherwise be captured by the DDA will go to the entities that levy the taxes.

If I wanted to inform myself about Prop A, I’d at least want to know: What is Year X? Maybe it’s so far into the future that it doesn’t impact someone’s decision on Prop A. I would still want to know when Year X falls, so I could decide for myself if Year X is too far into the future to matter for my Prop A vote.

But the pro-con arguments in my stream of social media haven’t included much mention of the Ann Arbor DDA. (It’s possible I’m just missing it, or that my stream is not diverse enough. I didn’t undertake a research project.) The anti-Prop-A campaign launched a website without a single mention of the Ann Arbor DDA.

The text on the anti-Prop-A website reflects not much concern for what Year X might be: Why is DDA tax capture not a part of the conversation? A tweeted reply from Ann Arbor councilmember Zach Ackerman to a question from Ann Arbor resident Vivienne Armentrout gives some insight:

Zachary Ackerman @A2Ackerman
Replying to @localinannarbor @chronicallydave @jeremypeters
The DDA reached its tax revenue cap in 2016. Functionally, no new taxes downtown will go to DDA. …

The word in Ackerman’s response that should draw a reader’s attention is “functionally.” It’s an adverb. When it comes to adverbs, I rely on a quote attributed to Mark Twain: “If you see an adverb, kill it.” Adverbs invite skepticism.

Would the sentence be true if you left out the adverb? I don’t think Ackerman’s claim would be true without the word “functionally” and I think the expanse of meaning that the word has to cover—which is a long story about the cap and its ever-increasing nature—is a little too vast for any one word, in particular “functionally.”

Over the course of about a week, I did not receive an answer to a question tweeted at Ackerman: What is Year X?

So I used this one weird journalist trick: I asked an authoritative source. Tom Crawford, the city’s chief financial officer, sent me a quick email that included the basic facts: (1) The current taxable value of the increment is about $273 million; (2) The cap for fiscal year 2019 is about $240 million. So the value of the increment is above the cap. (Those figures relate to the value on which taxes are captured, not TIF revenue itself. The TIF revenue to the DDA is around $6.7 million for 2019.)

Calculating an additional 3.5 percent per year on a cap of $240 million works out to $275,405,520 by 2023, which exceeds the current taxable value of the increment. That means taxes generated by new construction now would start to add to the amount captured by the DDA after 2023. (The calculation and conclusion are both mine, not Crawford’s.)

That doesn’t mean 2023 is Year X for the building on top of the underground parking structure. Any buildings constructed in the downtown district between now and the next couple years would add to the taxable value of the increment before the parking structure building does, which would push Year X farther into the future. Crawford said information on downtown construction that could be completed before the parking structure building wasn’t readily available.

But it’s possible to spitball some numbers. The 3.5 percent increase per year for the cap works out to maybe an additional $8.5 million a year in taxable value that’s subject to DDA capture. So a couple of $50-million projects completed before the parking structure building—or a handful of smaller projects—could conceivably push Year X another decade past 2023, or sometime around 2033.

That’s a year that should sound familiar to anyone who’s well informed on Ann Arbor downtown issues: It’s when the Ann Arbor DDA ends. The current DDA plan was enacted in 2003 for the maximum period of 30 years. This year marks the mid-point of the DDA’s current life.

Back to the question: What is Year X? A reasonable way to phrase an answer could be: No sooner than 2023, and possibly not even within the remaining life of the DDA.

That’s a useful way to phrase the answer, because it puts the remaining life of the DDA front and center in the civic conversation. Why should a time 15 years in the future be front and center now? Isn’t it a little soon to be thinking about that?

It’s maybe a little early, but not too much. Here’s why. When the 2003 DDA plan was enacted, it was an extension of a plan first approved in 1982. The conversation on the extension predated the then-scheduled end date of the DDA by 10 years.

If a similar timeframe is followed for another extension, the community conversation about whether to extend the life of the DDA would start around 2023. That’s only five years away. The next mayoral election is four years away. Surely candidate positions on a possible DDA extension will be of interest to voters in 2022. Campaign issues could start to gel maybe a year before that.

That puts the conversation about a possible DDA extension maybe three years away. Three years could go by fast.

 

 

 

 

 

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