Special Taxation Districts: Use with Care

Business communities looking to improve their infrastructure may consider funding improvements through special taxation districts. These districts go by different names in different states: Special Service Areas, Community Improvement Districts, or—in Tennessee—Central Business Improvement Districts. The basic idea is that property owners create a district and levy a special tax on the properties within the district. The tax revenue is then used to fund improvements, but only improvements within the district. In some versions, the improvements are funded by bonds, and the tax revenue is used to retire the debt. The district is often dissolved after the debt is retired.

Special taxation districts are authorized by state law, and the rules to set them up and operate them are often quite technical. One special taxation district, the Business Loop 70 Community Improvement District in Columbia, Missouri, made the news recently when it was caught in one of these technicalities.

The Missouri special taxation district laws require a vote of all the residents within the district to approve the levy of a sales tax. If there are no residents, the owners of the property within the district vote instead. When the boundaries of the Business Loop 70 Community Improvement District were drawn, care was taken to not include any residents; the property owners wished to maintain control. Their plan backfired. They accidentally included a single resident: a college student who is not sure she is in favor of additional taxes. Now the ability of the district to levy a sales tax rests on her single vote.

Business Improvement Districts can be a great tool for business communities to fund improvements that directly benefit them. However, the state laws governing these districts are precise, and great care must be taken in setting them up and running them.