In the Zone: Growth in Downtown Business Has Benefits for Taxpayers

It has long been a matter of conjecture whether the downtown Knoxville Convention Center has been a financial boon to downtown development. But what is not in question is that the success of downtown development has been a financial boon to the convention center—at least when it comes to paying for it.

There is a state law that allows local governments to create Tourism Development Zones. Under the provisions of the law, a project can be funded with bonds and any increase in state sales taxes thereafter can kept at home and used to pay off the debt.

The Ashe administration created a tourism zone as the convention center was being completed. Its boundaries, not coincidentally, are the same as the Central Business Improvement District. The rationale being that the convention center would spur economic development and increases in sales tax that would normally go to the state can be kept by Knoxville and used to pay for the convention center.

The amount of this additional sales tax in fiscal year '05-'06 was $154,000. Well, big whoop.

But the amount for fiscal year '11-'12 totaled over $4 million.

It is a demonstration of the success of business development in downtown Knoxville.

The number of bars, restaurants, and shops opening downtown has spurred a huge increase in the amount of sales tax collected downtown. A big retailer like Mast General Store generates even more. It is also a rationale for the city to provide a loan/grant to locate an Urban Outfitters in the Arnstein Building. Any sales tax generated and kept at home is less money the city must take from its own coffers to pay off the convention center.

It's not quite as straightforward as described, because the amount of the tax is set by determining a base rate for the county each year, based on total tax collections. That makes the amount of the sales taxes vary, depending on sales tax collections county wide. Because of this factor there was no excess amount collected in fiscal year '07-'08. But for the last four years, the amounts are: $1.3 million, $3.7 million, $3.7 million, and $4.1 million.

These funds are not enough to make the debt service payment on the convention center. The city also uses hotel/motel tax funds, admission taxes to events, and the county chips in 2 percent of the hotel/motel tax it collects.

It takes $9.4 million per year to make the debt service payment on the convention center. If the economic activity from all these taxes does not cover it, then the city has to make up the difference.

The convention center debt is $127 million and won't be retired until 2032. Unless it is paid off sooner by additional growth in tax revenues. (A recent refinance of the bonds saves $600,000 a year.)

(Since the tourism zone is the Central Business Improvement District, new retailers like Walmart and Publix, just west of the Cumberland Strip, are not included.)

So the amount of the downtown-generated sales tax is not huge, but it is significant for another reason. The amount increases if downtown sales tax revenue exceeds the rate of countywide collections. (That base rate mentioned earlier.) The amount received by the city grows when the total taxes in downtown grow faster than (or decrease less than) total collections within the county.

Simply put, downtown is doing quite well in relation to countywide tax collections.

The addition of major retailers, like Urban Outfitters, added to Mast General Store, added to a booming restaurant and bar business, is helping to pay for the convention center. And events that put people in downtown hotels increase the motel/hotel tax collections.

You can argue that the convention center has not lived up to its promise of over a decade ago. But the growth and success of downtown development has kept that bonded indebtedness from becoming an albatross.

So if you are a city taxpayer, from Fountain City to Island Home, from Holston Hills to West Hills, you ought to eat, drink, and shop in downtown Knoxville. It will pay off for you in the long run.