Griffin: Who benefits from business district tax?

When Bill Fagi looks across the parking lot at Stratford Square Mall in Bloomingdale, he sees where some of his profits go.

Customers at Fagi's Furniture Connections in the mall are paying higher taxes on their purchases than they would if they shopped at the furniture store on the outskirts of the mall.

"It certainly does put us at a disadvantage, especially at a furniture store because our products are bigger-ticket items," Fagi said. "We have to give extra discounts to bring in customers to make up for the extra taxes they are paying."

Money from the business district sales tax is used to cover the cost of improvements like a facelift in Stratford Square, which are pitched as a way of increasing overall sales.

But unlike most sales taxes that fund government services, much of the business district tax is going to developers or owners of shopping malls.

The business district tax is becoming more common as municipalities struggle to recover from the Great Recession and loss of shoppers to the Internet. Leaders in both Roselle and Villa Park initiated 1 percent business district taxes within the past year, the maximum rate on districts that cannot exceed 1 square mile. In some suburban locations, the additional business district tax can raise the sales tax to 9.25 percent, equal to the sales tax in Chicago.

East Dundee has three different business districts, each charging an extra half-percent in sales taxes. They were created in 2009, 2010 and 2011 to give businesses a portion of the tax money as an incentive to locate there. Only two are generating revenue.

"The money is used to help spur development," said Heather Maieritsch, the village's deputy administrator and clerk. "Each business has to come before the board and we work to negotiate how much they'll receive and for how long, but it's usually no more than 30 percent."

Proponents of these taxes look at them as a way to help sustain and grow a commercial area. Critics argue the additional tax pushes shoppers away and might also limit development in the area.

"It needs to be used like anything else, in moderation," said Bill Brandt, outgoing chairman of the Illinois Finance Authority, a quasi-public state lending agency. "Here's an issue where you have to pause and talk about cannibalization. God love them for trying, but three in one suburb is probably pushing the limit."

Bloomingdale has two such districts. One adds a 1 percent sales tax to purchases inside Stratford Square and another adds the same percentage at Indian Lakes Resort, where it's used to help pay off $4.8 million in village-issued debt that went to the resort for improvements.

At the mall, Stratford Square's owners get almost all of the additional taxes collected.

Last year, the village paid the owners of the mall $1,199,151, which is more than 95 percent of all the money generated by the business district tax. Since the tax was implemented, the village has paid the mall owner more than $8 million. According to village finance records, the mall owner still is owed more than $11 million.

Yet sales haven't rebounded. In 2006, Bloomingdale took in almost $12.4 million in sales tax revenue. Last year, the village tallied just $10.8 million in sales taxes, and more than $1.3 million of that was earmarked business district taxes.

Lombard has a similar deal with its mall owner. The village instituted a 1 percent business district tax almost a decade ago. It helps push the sales tax rate at Yorktown Center mall to 9.25 percent.

Lombard's deal allows up to $25 million in business district taxes to be rebated to Yorktown's owner through 2024, in exchange for an addition that was built onto the mall where an abandoned Montgomery Ward once stood. So far, the mall's owner has received almost $4.2 million from the business tax.

"They are getting back what they generate," Lombard Finance Director Tim Sexton said.

Brandt says the deal gives shopping center owners an incentive to increase sales.

"You want to see the developer with some skin in the game," he said. "The risks deserve to be shared."

Taxpayers in Oakbrook Terrace are the ones with skin in the game. The city borrowed nearly $8.2 million to spur development of the Oakbrook Terrace Square Shopping Center. City officials did not return calls seeking comment about the city's stake in the shopping center. However, according to the city's budget documents, the investment has yet to pay off.

"The lack of retailers will significantly impact the business district's bottom line in fiscal year 2015 because the taxes collected will not be sufficient to cover the cost of principal and interest payments," the budget narrative reads.

Leaders in Oakbrook Terrace will have to dip into reserves to cover the "deficiency," according to the city's budget.

Like Lombard's Yorktown Center, the sales tax rate at Oakbrook Terrace Square is also 9.25 percent. And so is the tax rate at Mount Prospect's Randhurst Village.

But that didn't even make Cindy Adams bat an eye when she opted to locate her business, Nothing Bundt Cakes, in the shopping center.

"It didn't even cross my mind and I can honestly say I have not seen a negative effect from it," Adams said. "People in Cook County expect higher taxes, so they don't even think twice about it."

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Contact Jake at jgriffin@dailyherald.com or (847) 427-4602.