Despite drop in revenue, NIZ can pay bills
Amid a lack of activity last year in downtown Allentown during the COVID-19 pandemic, the Neighborhood Improvement Zone sustained a moderate drop in total tax revenue, but steered clear of financial calamity.
Businesses in Allentown’s one-of-a-kind tax subsidy zone generated $78.3 million in state and local tax revenue in 2020. That’s down about 9% from a record high in 2019, but it’s enough money to cover various development project debt payments and to reimburse the Pennsylvania Department of Treasury about $20 million.
The 130-acre zone downtown and along the Lehigh river
front was producing $22 million in state tax revenue before the NIZ went into effect a decade ago. The Allentown Neighborhood Improvement Zone Development Authority is legally required to return that full amount when the NIZ generates enough revenue beyond what’s needed to make debt payments, as it had in three of the past four years.
The NIZ allows developers to tap virtually all the state and local tax revenue (excluding property taxes) created by their new projects to pay off construction loans. It also allows ANIZDA to cover a $15 million annual debt payment related to the construction of the $280 million PPL Center.
In total, the NIZ has spurred more than a billion dollars in new and planned development, primarily by J.B. Reilly’s City Center Investment Corp. Nearly half of the 2020 tax revenue, $38 million, will go toward City Center project debt. Another $5.3 million will cover the debt payments of the NIZ’s other developers, including nearly $4 million to Jaindl Enterprises for its Waterfront project.
“COVID-19 certainly caused uncertainty and unprecedented challenges,” ANIZDA Executive Director Steve Bamford said. “Although total NIZ revenue declined, we are pleased with the result for program year 2020 given that the businesses generating these taxes were operating in a pandemic.”
NIZ revenue proved volatile pre-COVID. It experienced an 11% overall drop in 2018. Avoiding a double-digit-percentage decline in 2020 “is a pretty satisfactory result for one of the worst economic years in the nation’s history,” agreed state Sen. Pat Browne, the Allentown Republican who created the NIZ.
There were 647 tax reports filed by entities within the NIZ by the Jan. 31 deadline, down from 704 last year. About 5% of businesses failed to report on time or at all, similar to the previous year’s delinquency rate.
Browne chalked up the reduction to the loss of transient vendors operating at the PPL Center during events.
State tax revenue came in at
$74.6 million, down 10% yearover-year, but only 3.5% less than the average over the past four years. Employer withholding tax, accounting for about 18% of total revenue, actually increased year over year, perhaps because 2020 reflects the first full year ADP’s regional headquarters were based at Eighth and Hamilton.
Also somewhat surprisingly, sales and use tax revenue increased about 7.5%, to $3.4 million. That represents about 4.5% of total NIZ state tax revenue.
More than 70% of state tax revenue is derived from eight taxes paid by relatively few businesses in the NIZ. These taxes produced 12%, or $7.6 million, less in 2020 than in 2019.
The state Department of Revenue has declined to provide a more detailed breakdown because of confidentiality concerns. Pennsylvania Commonwealth Court in February ordered the revenue department to disclose NIZ revenue totals for taxes paid by three or more businesses, but the department has since asked the court to reconsider its decision.
Among those is the liquor and beer tax paid by 19 restaurants and bars, and the utilities gross receipts tax paid by Talen Energy, the PPL spinoff that has reduced its downtown workforce but maintains a presence in an office building at Sixth and Hamilton streets.
Also included is cigarette tax, paid in recent years by three NIZ-based wholesalers (or cigarette stamping agents) that were all among the top five largest tax contributors to the NIZ from 2016-19, according to records shared annually with bondholders. During those years, the top five taxpayers collectively produced 76% to 81% of all NIZ money. There are now two cigarette stamping agents; City Center Wholesale in January acquired T&B Wholesale. The other is Vantage Wholesale, a Jaindl affiliate that operates on the riverfront.
Browne said the drop is likely attributable to the closure of restaurants and bars as well as reduced commercial electric purchasing, impacting utilities gross receipts tax revenue.
NIZ businesses generated $3.7 million in local taxes that would otherwise go to the city of Allentown.
That actually represents a 15% increase compared to 2019 despite the pandemic. That sum includes a record $1.9 million in business privilege tax, levied on all transactions of NIZ-based businesses occurring within the city.
Those businesses also generated $1.5 million of earned income tax, up from the previous year.
Review a breakdown of state NIZ tax revenue here. Review a breakdown of local NIZ tax revenue here.
Moody’s, the credit rating agency, has expressed concerns for years about narrow base of taxpayers generating most of the revenue dedicated to bond payments, particularly City Center’s. In 2019, its 10 largest taxpayers accounted for 88% of all revenue.
The pandemic exacerbated those concerns. In a December report, Moody’s correctly anticipated NIZ tax revenues would only be moderately affected by the pandemic; however, it still assigned a negative outlook to the bonds’ credit ratings because of the potential impact of a more significant drop. Should key taxpayers take a significant economic hit, City Center would struggle to make bond payments, Moody’s wrote in the report.
With the worst-case scenario behind, Browne said he’s optimistic the economic growth anticipated nationwide over the next year will be reflected in the NIZ, leading to a sunnier credit rating outlook.
The Allentown School District has, in particular, benefited from NIZ property tax growth. City Center alone generated $5.2 million in school property tax revenue in 2020, up from about $1.4 million in 2014, according to a report by the Downtown Allentown Community Development Initiative.
City Center generates nearly $3 million in combined annual real estate tax revenue and parking revenue to the city, a roughly five-fold increase from 2014. Its county property tax bill has more than doubled during that period, to roughly $1 million, according to DACDI.