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What’s unfolded in the last seven days in Anaheim is flat out embarrassing.
“He’s a liar!”
“She’s a liar!”
“Tell the truth!”
“No, you tell the truth!”
It’s just insane. I can’t imagine discourse on the topic tonight will be anywhere near informative, so I’ll do my best (on short notice) below. This isn’t a perfect piece, but for $158 million bucks, the argument against it ought to be pretty bullet proof.
First, a short narrative on what’s happening:
A developer in Anaheim wants to build two four star hotels on the Gardenwalk parcel near Disneyland in the Anaheim resort district. The developer claims the market economics makes the project not feasible. To assist in making the project feasible, the city will provide economic assistance in the form of $158 million in rerouted tax proceeds after construction of the hotel(s). This equates to roughly $46.6 million in today’s dollars as the total assistance package is expected to run over twenty years (a dollar collected tomorrow isn’t as valuable as a dollar collected today.)
The city’s analysis claims the $46.6 million is roughly 16% of the development cost, which puts the capital required to execute the project at roughly $300 million. That’s quite a bit of money for the private sector to invest in the resort area. From the $300 million, construction jobs will create permanent hospitality jobs including chefs, housekeepers, waiters, valets, office staff, receptionists, engineers, craft persons, salespersons, and of course—management. The investment provides clear and demonstrative public benefit, including increased property tax and sales tax collections, which are all very good things.
The construction will also place additional burden on the public electric utility, the water system, create substantial traffic in and out of the resort district, increase pollution, place additional burden on emergency services, and divert land from alternative uses and taxation (i.e. if you build two hotels you can’t build a Walmart.) All of these items incur a public cost that must be covered by taxes.
Who defines project feasibility and how the term is used is something of an art. The city’s analysis states the project is $63.1 million (today’s dollars) short. The package proposed ($46.6MM) still leaves a gap of $16.5 million. There’s no mention as to how that $16.5 million will be closed.
There’s the first dose of stupidity, right there. Based on what the public has in front of us, we’re being told that someone wants to pony up almost $300 million for a project, even with public assistance, will return 18% below what’s acceptable.
Think about that for a second.
According to the city’s analysis, after construction, the two combined hotels will produce a profit of $27 million a year. Apparently, that’s not good enough.
Why it’s not good enough is a bit of a complicated question, but it has to do with alternative opportunities for capital. Based on a bunch of assumptions, the city’s consultant concludes that a reasonable investor would be willing to pony up $220 million to build this project . . . not the near $300 million our current estimate is. Our public assistance isn’t what’s required to break even . . . it’s what’s required for the investor to get his 13% return.
I don’t know about your 401k, but I’m not getting 13%.
Anyway, let’s get into what the $158 million really is.
Transit Occupancy Tax (TOT) is a relatively painless way for a government agency to make money. We tax people who come to the city to spend money because they can’t vote. If you’re a guest in our town, we’re gonna rake you over the coals as much as we can . . . so long as you don’t decide to go somewhere else instead.
In our case, we’ve got a pretty solid anchor in Disneyland. People are willing to come to Anaheim and spend large amounts of money, including at the gate, for a family friendly location. We can capitalize on their fun times by extracting additional tax revenue while providing temporary and limited government service. TOT has to be pretty high to chase them to a neighboring city to save a buck and even higher to chase them all the way to Florida to see that other magic kingdom.
So, the TOT is really a way of funding your libraries, fire and police, parks, and infrastructure while avoiding increases in sales and property tax. Less TOT means either higher taxes or less service.
What we have to be very careful with is how we’re using the term “less”.
There’s some confusion as to whose money the $158 million is. Today, it doesn’t exist, so it doesn’t belong to anyone. Well, that’s not true. It belongs to you, the taxpayer.
Any allocation of money from the General Fund ought to have the consent of the public. The idea being perpetrated by some that because this funding was never specifically assigned to police, fire, parks, or the library it doesn’t qualify as a diversion is absurd. It’s not “less” because it never was.
No, that’s not absurd. It’s stupid. Someone who tells you that we’re not taking books out of kids’ hands because that money isn’t coming out of the library’s budget thinks you’re pretty damn dumb. Handing a developer $158 million dollars to increase his profit margin is absolutely taking money away from fire, police, libraries, and parks. Don’t believe anyone who tells you otherwise.
Finally, let’s talk about public incentive for private projects and a third kind of stupid.
The idea behind a tax is that everyone pays their fair share in exchange for equal access to public benefit. Reality often helps us define what “fair” means, and for most of us our exposure to this is in terms of progressive income brackets. Other taxes are uniformly applied, like sales and property tax. Everyone pays the same rate, which can go up and down based upon how much one spends.
TOT is that second type of tax. Every guest who comes into Anaheim is supposed to pay the same percentage of their bill directly to the city in exchange for the right to temporarily rent space, pollute the air, drive on the streets, tap into the public water supply, use our electric generators, and to fill our landfills and wastewater plants. You come, you stay; you pay.
Unless you’re well off and staying in a brand new four star hotel! In that case, you come, you stay; you still pay — but you pay someone else. In exchange for the public disposing of all your crap, your tax dollars will instead go to line the pockets of a wealthy developer who has the right connections on the city council.
A poor family staying down at the Motel 6 that was built 30 years ago? Yeah, THEY pay their fair share. The owner of the Motel 6? He can’t afford to improve his facilities because he doesn’t have the right connections on the council . . . so he just gets stuck helping to pay for our library, our fire and police, our parks, and our infrastructure . . . so the rich guy next door can make a couple million bucks.
The city of Anaheim already lost a bet on the Gardenwalk. Now they want to triple down on stupid to make up for it. They want to enrich a wealthy developer, screw over local small business by creating a regressive tax structure to make the market unfairly biased with regard to competition, and they want to do it all while the math says it still doesn’t make good economic sense to do it.
Why? Because they think you’re stupid, too.
What we have in front of us is nothing short of white collar welfare. There’s no penalty for delaying construction, there’s no cap on how much the developer can make before returning unjust public assistance, there’s no guarantee cost estimates and feasibility studies are true and factual, there’s no analysis as to the next six uses of the parcel—including the NPV of the taxes incurred, the resistance of the revenue stream to economic disruption, a study of the city’s revenue stream and its dependence on TOT and tourism, how this project addresses the city’s revenue risks, or even more basically—a simple and frank discussion about how much money the developer is going to make from this project. The only remedy the city has available is to stop cutting assistance checks if the developer screws up. Who thinks that’s likely to happen? No refund for any prior payments. No penalty for lost time. No penalty for deferred opportunity.
According to the city’s analysis (see table 5), the developer is looking at half a billion dollars of investment return over 20 years. Apparently, half a billion dollars isn’t enough and we need to toss in a hundred million or so of public tax rebate.
There are two reasonable solutions to this problem: Let the market decide it for us or let the people vote. If this project really benefits the greater good, then either will push it forward.