06/29/2012 03:07 pm ET Updated Aug 29, 2012

Two Taxes for the Price of One

Denver's Mayor has proposed a four-year suspension of the business personal property tax for new facilities. What the heck does that mean?

Let's suppose one of Denver's telecommunications providers -- Sprint, Comcast, whoever -- finds increased traffic warrants a new switching center. That means computers to do the switching, air conditioners to cool the computers, fiber optic cable in and out and about and electrical transformers and wires to power all the other things. Suppose it costs $30 million to buy all this stuff.

Denver collects a 3.62 percent sales tax on all of this; plus the state, RTD and the SCFD get theirs. 3.62 percent of $30m is just over a million dollars. That helps Denver cover the half billion a year it pays police officers, fire fighters, jailers, criminal prosecutors, etc.

Next January, the company tells the tax assessor it has this stuff worth $30m. It will pay business personal property tax (BPPT) on 29 percent, or $8.7m of it. Denver's tax rate is around 26.6 mills, that is, $26.60/$1,000 of value. So the next January the company will pay Denver another $231,000. The next year that will go down a little since the used equipment isn't worth as much as it was new. Over four years BPPT will be around a million dollars.

Basically, the Mayor proposes to cut Sprint's total tax bill in half. The company still pays the upfront million dollar sales tax, but over the next four years it skips a million dollars in BPPT.

The Mayor is trying to fill a big budget hole. He suggests that cutting these taxes in half will help do that. If cutting Sprint's taxes in half causes them to build a switching station in Denver, they never would otherwise have built, he's right. If Sprint builds and locates switching stations based on the location of the demand, he's wrong.

My guess is Sprint, and every other business, looks at a lot of factors before building a switching station, or anything else: where are my customers, how much will they pay, what's it cost to build or rent a building, can I find good, trainable employees, what's it cost to run fiber optic cables, how much is electricity, etc., etc. I'm also guessing you have to look a long ways down that list before you find a line that asks, how much is my BPPT?

There may be a few businesses that decide to locate a new facility in Denver based on whether they get a four year BPPT break. But on balance, this will end up costing Denver and the people of Denver will have to make up the difference.