PILOT would just subsidize resort

By John K. Mullen
I would like to respond to developer Michael Foxman’s rebuttal to my previous Guest Commentary about the likely tax impacts of the proposed ACR (Adirondack Club and Resort) development. Mr. Foxman implies that I failed to do my homework by his assertion that I didn’t “read the relevant portions” of the APA application and that I don’t understand the “project, the PILOT concept and the benefits of economic development.” I can assure your readers that I am familiar both with the application and the economic development industry; also, I remain in a much better position to assess the fiscal impacts of this and other PILOT proposals. Mr. Foxman may be a shrewd attorney and developer, but I can assure you he is no economist. He makes two fundamental mistakes in defending the project’s fiscal impacts, as explained below.

First, his claim that the project will be “profitable” for taxing jurisdictions reflects an inaccurate use of this concept. The PILOT plan only requires that any revenues beyond those used for bond repayments be given to local jurisdictions; in fact, unlike all other tax levies, there is NO LEGAL OBLIGATION to remit any monies to jurisdictions in the event that all of the new “tax” levies are needed to pay off the bonds. Even if such “variable” payments are made in accordance with the application’s optimistic projections, it is unequivocally wrong to refer to this as “profit.” By doing so, he fails to consider: a) costs associated with the likely expansion in operating budgets of the taxing jurisdictions and b) the fact that new residents will NOT be required to pay property taxes to support EXISTING public services over the life of the PILOT!

Mr. Foxman would like us to believe that, since new residents will be covering the operating costs of (mostly private) services such as water, sewer and electric, additional expenditures on the provision of public services will be unnecessary. Such an unreasonable expectation becomes even more questionable in view of the proposed homeowners association’s lack of enforcement authority (an issue raised by the Hudson Group’s review of the ACR application), imperiling the collection of fees to be imposed for project-related road maintenance. So there is NO guarantee that any ADDITIONAL public spending (no matter how modest) will be covered by the incremental revenue that may be generated; yet it IS assured that the new homeowners’ contribution to the cost of EXISTING public services (via the property tax) will be virtually nonexistent. By arguing that the APA has insisted that the project be “profitable,” his characterization incorrectly labels revenue as profit and mistakenly implies that the “variable” payments are somehow guaranteed.

Secondly, he overlooks a basic economic principle that costs can be hidden or shifted to others, but never avoided. Consider that owners of the newly developed properties will be paying (to the jurisdictions) a rate well below the 100 percent of tax levies paid by everyone else, enabling them to largely “avoid” paying for existing public services. This MUST be the case since most of their tax levies will be used to pay for new infrastructure. (The Hudson Group’s January 2007 review of the application explains that the variable PILOT is “in effect … a backdoor way of getting municipal financing for the capital costs.” This document also raises concerns that the $9 million payment (out of bond proceeds) “for interest costs … provides a direct windfall … to the developer”.) Yet Mr. Foxman continues to maintain that the “PILOT is not a subsidy,” at the same time implying that it is needed because “high NYS tax rates discourage economic development.” If the PILOT is not a subsidy, then nobody would protest it being eliminated!

I can offer a wealth of evidence to support the positions taken above. Consider testimony by the director of the NYS Fiscal Policy Institute (www.fiscalpolicy.org) stating that “the very existence of PILOTs represents a tax break,” noting that they erode the tax base and constitute subsidies to corporate developers. Readers may prefer to view an analysis published in the Economic Development Quarterly (Dalehite, et al, May 2005) that focuses on “how best to limit property tax abatements” because they are “conditionally effective at best” and represent a shifting of burdens to other taxpayers. These studies reflect the prevailing research view that local IDA officials tend to be overly generous in supporting large tax breaks to developers in the name of economic development. As such, it is no surprise that PILOT supporters turn a blind eye to legitimate criticism and concerns.

Developments that are facilitated via PILOTS and similar tax abatement plans have fiscal impacts that are uncertain, irreversible and potentially adverse. Accordingly, the practice of sound financial management would oppose granting such unconditional TAX RELIEF to developers and new residents.



John K. Mullen, Ph.D., is a professor of economics and finance at Clarkson University in Potsdam.