An Ikea in Merriam. A giant freight terminal in Edgerton. The development possibilities are there. So tantalizing to Johnson County cities, which have seen their building stats plummet since the Great Recession began. But how to get development going again? Shawnee officials think they may have an answer. For the past three months, they’ve been studying the possibility of temporarily suspending its excise tax as a way to get the jump on other cities in developers’ eyes.
The Shawnee City Council plans to vote early this year on a plan being drawn up by its staff that would suspend the tax for a yet-to-be-determined amount of time, in hopes of getting a competitive advantage over Gardner, Lenexa, Olathe and Overland Park, which continue to levy the tax.
Doing so could start a surge of new development, Lewis “Pete” Heaven, a real estate lawyer, told the council at an workshop.
“In my opinion, if the city came out and said they would just declare a moratorium, you would have a gold rush,” he said.
The plan is proposed by council member Jeff Vaught, a commercial real estate broker and owner of the Vaught Group.
Excise taxes are part of a number of fees the city charges for new developments. They are meant to help pay for such things as new streets when a subdivision gets built, and they are not popular with developers.
“They (developers) have never understood excise taxes. They hate them,” Heaven said.
Not every city charges excise taxes. The Unified Government of Wyandotte County — Shawnee’s neighbor to the north — doesn’t charge them. Neither do most Missouri cities in the area because of a constitutional provision that requires a ballot issue to approve them.
There are signs the excise tax may be falling out of favor in Kansas as well. The Kansas Legislature recently passed a law that keeps any government from imposing a new excise tax. That is the reason Shawnee is only considering a temporary suspension, instead of a total removal of the tax.
“Personally I’d love to get rid of them altogether, but I don’t think there’s support for that,” Vaught said. Some council members have been concerned about removing the excise option for all time.
One of developers’ complaints with the excise tax is that the money doesn’t have to be used specifically to benefit the development. Shawnee’s tax of 21.5 cents per square foot, which developers pay before turning their first shovel of dirt, has been used to pay off debt.
Shawnee’s excise tax costs developers $9,300 an acre. If it were suspended, the developer of a typical 7.5-acre strip mall with a supermarket and a few small shops could save $69,700, Shawnee officials say.
The upfront aspect also makes it difficult to get bank financing, Vaught said, since there is nothing tangible for that loan to be based on. And, in the case of residential developments, excise taxes are passed on to home buyers, he said.
Governments that don’t charge excise taxes typically do charge other types of fees such as “impact fees.” But revenue from impact fees is often more strictly controlled to benefit the development.
Seven years ago, excise taxes brought in more than $1 million to the city of Shawnee, but no more. In 2011, only $1,000 came in from the tax. So far this year, $8,700 has been collected.
The collapse of the housing market has been the main reason, Heaven said. After the financial upheaval of 2008, some developers who had already paid excise taxes went out of business before they could finish. As a result, companies have sought those unfinished developments — on which the tax is already paid — instead of plotting out new land.
Although the building outlook has been bleak since 2008, there are signs of its revival in Shawnee. The city has issued 112 new single-family building permits as of the end of October. That’s twice as many as the average for the past three years.
Still, some council members are frustrated with the city’s progress.
“It’s time to quit throwing bait out there. It’s time to start catching some fish,” said Councilman Neal Sawyer at a recent meeting.
Reducing or suspending the excise tax is not a trend that is taking off elsewhere in Johnson County so far. One of the leaders in new housing, Overland Park, has had no discussions about it.
Olathe isn’t talking about it either, because the City Council needs the tax to keep the costs of growth from being pushed onto the taxpayers in established neighborhoods, said city spokesman Tim Danneberg.
Besides, residential building appears to be on the rebound, he said.
That’s borne out by recent figures from the Homebuilders Association of Greater Kansas City. In 2012, Johnson County and its cities issued 43 percent more housing permits than in all of 2011, according to the association’s statistics. Olathe was the top city, with Overland Park second and Shawnee fifth.
In fact, permits for single-family home construction through October this year top all of 2011 in every city with an excise tax but Gardner. Olathe issued 358 permits for that time period, compared with 311 the previous year; Overland Park issued 313, compared with 274; Lenexa had 105, compared with 85. In Gardner, 30 permits were issued through October, compared with 43 for 2011.