Clarity essential to understanding cost of bonds

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Nate

When taxpayers are asked to vote on a $70 million school bond, they deserve accurate facts and honest disclosures about costs from their school board. I’m aware of the discussion about the cost to taxpayers of the Aug. 27 Lakeland School bond issue. I sponsored the legislation requiring new disclosures on the ballot for bonds.

I live in southeast Idaho and offer no opinion on the merits of this bond — that’s for local voters to decide. I’m writing to clear up misinformation about the tax consequences of the ballot question.

Taxing authorities, to garner support for bond elections, use three methods to make costs look small or even free:

• Claim the bond will be paid for by growth in the tax base.

• Claim the bond’s costs will replace existing bond payments and thus not increase taxes.

• Backloading bond payments so the real costs come later.

For years, firms selling school bonds in Idaho would sometimes help taxing authorities create “growth” projections to make an expensive bond seem low cost or no cost. If the numbers didn’t paint a rosy picture, they would ask the bond company to use different assumptions to come up with a more favorable figure. To some, this seemed like smoke and mirrors.

Another tactic: Bond sellers use growth projections in their financial forecasts — without explaining that almost all the growth would come from increased property valuations. Taxpayers were told “growth” would pay for a proposal, without revealing the growth referred to was almost always growth in current property owners’ tax bills.

In some cases, the annual collection of taxes from new construction is less than 5%, meaning that 95% of new taxes came from the increased valuation of current homes — not from new taxpayers. Homeowners would almost entirely see “growth” as their own “out of pocket” taxes going up. To be sure, “growth” often means the growth in your property tax bill. A homeowner might see the cost per $100,000 go down over the future years, but because the home goes up in value, the owner could very well see total out-of-pocket taxes rise.

Taxing districts sometimes would make up a sales pitch to their patrons where they would combine all their bonds and levies and the associated annual payments for them. Next, they would concoct a taxing plan that would include a huge new bond proposal with what is known as “backloading.” Essentially, very little would be paid up front for the new proposal and most of it would be paid in the final few years.

Further, most blackloaded plans would reflect not only what the tax people were paying for the new proposal, but also take the amounts taxpayers were paying to current bonds, saying current taxes won’t increase. To be clear, as current bonds were paid off, instead of taxpayers seeing a reduction in their taxes, the same tax amount would be collected and redirected toward a new proposal. Boards were essentially hiding the fact that taxes would be much lower in later years were it not for the bond being approved now.

Some say packaging new tax proposals in this way is dishonest because, years ago, when the already existing bond was proposed to taxpayers, it was for a set number of years, say 15 or 20, and taxpayers thought when the bond was finally paid their rates would go back down. But the way some bond proposals were designed, the tax collections for current bonds wouldn’t really go away. Instead, the ongoing taxes people were paying would simply continue and be redirected toward new bonds. Hence, passing the first bond often was simply creating a tax that would just go on and on and on, often with a never-ending stream of future bond requests — while giving the false impression that when bonds are retired the associated tax would go away.

A legal remedy was clearly called for. The first round of new state disclosure laws was H.B. 626 in 2018, a bipartsian bill. The second, H.B. 103, passed unanimously in the House and Senate this year. Both bills put simple language on the ballot to clearly describe what a taxing proposal, be it a bond or a levy, would cost a taxpayer. The idea was to use clear language normal people could understand. A standard consumer disclosure, such as what you see when you buy a car, was the model. Now, the law says the “average cost of the bond per year” cannot be monkeyed with or disguised to build support for an election. Taxpayers have the right to know what a proposal will cost them on average under current conditions.

Always be skeptical when someone claims “growth will pay for it” because it’s often the growth is in your own “out of pocket” taxes. No bond is free. When a bond or levy passes, this is certain: Taxpayers will either see their taxes go up, or will be denied a tax decrease that was coming their way. The disclosure law ensures taxpayers have at least a basic understanding of the average impact they will feel over the life of the bond.

The bond is a question for voters. I offer no opinion on the merits of the current ballot proposal but merely explaining some of the history, reasons, and methodology used in these new ballot disclosures. Because of this legislation, voters are now armed with the simple truth.

•••

Ronald Nate was the former state representative from Rexburg who sponsored the bill that changed language requirements on ballot language. He holds a doctorate in economics from the University of Connecticut and is a senior fellow at The Madison Liberty Institute.

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