Highest and Best Use?

By Hannah Wallace September 30, 2007

Take your time-traveling DeLorean on a road trip to the future. In 10 or 20 years, Florida’s Gulf coast islands will be bedroom communities. Wall-to-wall condos. No mom-and-pop motels, restaurants or boutiques. Don’t even think about stopping for gas; there’s no place to stop. The funky Florida island lifestyle is history.

It hasn’t happened yet. But island entrepreneurs are worried—and these days, there are fewer of them around.

Take today’s Longboat Key. The Holiday Inn has been replaced by luxury condominiums. The Poseidon Restaurant is an empty lot awaiting a similar fate. On the north end, Dr. Robert Gordon took his dentist’s drill and went home, the Chevron station shut off its pumps, and Moore’s, the popular bayfront seafood restaurant, is up for sale. The island’s resort and hospitality industry has clearly taken a hit—along with the businesses and professionals that depend on them.

As far as the tourism industry goes, Longboat—like Anna Maria Island to the north and Florida’s other island resort communities—is starting to look like paradise lost.

Who’s at fault?

Some blame Mother Nature for red tide and wicked hurricanes that have kept tourists away and forced insurance rates skyward. Others blame high gas prices and the housing bubble.

Island entrepreneurs point to what they see as a bad law that targets them unfairly: Florida’s “highest and best use” tax assessment on property values. And they blame Florida lawmakers for failing to change the law last June, when they convened in a special section, promising tax reform and relief for all. Island businesses got their hopes up. In the end, they got nothing.

Highest and best for whom?

What does highest and best use mean, exactly? Simply put, it is one of eight guidelines used by local tax assessors, part of a Florida state law that applies to city and county property taxes.

This guideline bases your property’s value on its maximum potential use, not on what it is being used for today. Assessors figure this out by comparing it to similar properties in the surrounding area—the most developed and most valuable. If your humble diner is next to a luxury condo, your property is taxed like a luxury condo. In the eyes of the assessor, that’s its “highest and best use.” It’s not the county’s fault you haven’t converted yet.

“It’s ludicrous,” says Holmes Beach realtor and highly vocal fair-tax advocate Don Schroeder, who started CART (Citizens Against Runaway Taxation) in 2004 with motel owner Nigel Brown, and is now its president. “It’s like saying, ‘Your stock isn’t worth much now, but we know it’s going to be a blue chip stock in the future. And that’s how we’ll tax you.’”

Schroeder is down on highest and best use for several reasons. The state decides what’s best for your property; the state’s assessment is based on speculation; the law forces small businesses to pay a disproportionate share of the property tax burden and often puts them out of business. And what’s more, he adds, whatever the tax’s original intent, it now encourages something that’s not in Anna Maria Island’s best interest: unchecked condo development and the loss of the community’s character. “It’s creating a sterile future for the island,” Schroeder says.

CART director Barry Gould, a realtor and property manager who’s affiliated with Island Vacation Properties, says he sees firsthand the tax policy’s negative impact on the smaller island resorts.

“Many mom-and-pop motels have second or third generation owners,” he says. “They just want to satisfy their guests, like their parents and grandparents did. Then their taxes go up and they’re forced to sell out because the tax man’s decided the property is more valuable as a condo conversion. It’s unjust. If your income is the same from year to year, why should your taxes go up? They should have the right to keep up the family business.”

Gould sees another injustice: The assessor’s idea of what’s best for your property isn’t always right.

“The man who bought the Siam Garden Resort on Anna Maria around 2000 put in spectacular improvements and [by] 2004 his property taxes shot up 68 percent,” Gould explains. “Why? According to ‘highest and best use,’ he should be doing what the other resorts were doing in the area—namely, converting the 16 units to condos. He figured, ‘If I¹m going to be taxed like a condo, I might as well convert.’ He started the process, then found an intermediate buyer who said he’d finish the process. The housing bubble burst. So far, he’s only sold four units.”

Tales from the front

Sisters Ginny and Jane Dutton run Ginny and Jane E’s at the Old IGA on north Anna Maria Island. Their funky curiosity shop, a popular local hangout, is a combination Internet café, bakery, gourmet grocery store and collectibles and vintage furnishings boutique.

They love their business. They also loved Ginny's Antiques & Art on Holmes Beach. They had to close it last May. “We had to make a decision,” Ginny Dutton says. “It was one or the other.”

The landlords at both properties had passed along their costs, after property taxes had shot up. “It’s what landlords do,” says Dutton.

After 12 years, Robert Self recently vacated the Chevron station on north Longboat Key and set up shop as Robert’s Garage in Ellenton. Self had been a business renter. He lists a spike in his rent costs and a drop in the number of customers as his reasons. He blames both on the effects of commercial property taxes.

“On Longboat Key, we’ve had the hotels close up and change to condos,” he says. “The domino effect pretty much killed our summer business. Our season’s been getting shorter and shorter. We went down from an eight-month-a-year business to three and a half profitable months, and we couldn’t survive like that. I feel sorry for my customers on the Key.”

So long, Mom and Pop.

Let’s say the laid-back Florida island lifestyle is going under. Beachy, small motels, freaky tiki bars and beach-gear boutiques are gone, along with most of the island tourists. If Jimmy Buffett wants to cry into a margarita, he’ll have to find a bar in town. What difference does it make?

“All the difference in the world,” says Gould. “Directly or indirectly, most of the income on Anna Maria Island comes from tourism. Tourists come, spend money and fall in love. Eventually, many come back to stay.”

Schroeder agrees. “Tourism is the economic engine behind growth,” he says. “If you kill it, the machine stops. I’m not just talking about the hospitality industry on Anna Maria Island and Longboat Key. Florida itself depends on tourism.”

We can’t change the perfect storm of hurricanes, red tide and gas prices that have affected Florida, Schroeder says. “But we can change our tax structure. We’ve got to.”

In theory

The highest and best use concept isn’t new. According to State Rep. Keith Fitzgerald, a New College of Florida political science professor, the law was developed in the 1700s as an economic stimulus. “In the early stages of capitalism, lawmakers began to look on taxes as more than a source of state revenue,” he says. “It became a means by which the state could influence economic behavior for the better. Highest and best use taxation was one way to do it.”

The theory? Consider two property holders: the grasshopper and the ant. The lazy grasshopper lets his land go to waste. The busy ant does his highest and best with it. Tax the grasshopper like an ant and you’ll force him to work like an ant. He’ll do his highest and best.

That’s the way it’s supposed to work.

In reality

But then, back in 1995, the Save Our Homes amendment became Florida state law, capping annual property tax increases on homesteaded properties at 3 percent.

If you think of property taxes as a form of rent to local governments, all of Florida’s homesteaded properties became rent-controlled. So when property values began to soar in the last few years of the real estate boom, taxes on the homesteaded properties did not. But everybody else—those without Save Our Homes protection—suddenly faced big jumps every year in their assessments and values. And local governments had never needed those tax dollars more. “Gov. Jeb Bush bragged about cutting state taxation by cutting state spending. What he was really doing was shifting more tax expenditures to the locals, with one unfunded mandate after another,” says Fitzgerald. “Then the real estate boom hit, and a binge of speculation. To cash-strapped local governments, it seemed like free money.”

Nothing’s free, he adds. Now, Florida’s small businesses are picking up the tab—especially those on its islands. “It’s unfair,” he says. “And it can’t go on forever.”

Sarasota County Commissioner Jon Thaxton agrees. “The current system is inequitable,” he says. “I’d like to see it changed, but not blindly. Local governments need tax money—they spend it for the public good. People forget that. Their taxes go for schools, police, librarians, firemen and parks. They help create the quality of life our voters want. Across-the-board tax cuts that eliminate vital public services aren’t the answer. California tried it and nearly went bankrupt.”

Thaxton doesn’t favor budget cuts. But he does favor tax reform. “It won’t be easy,” he says. “Florida’s taxation problems are deep and structural, the result of generations of lobbyists imposing loopholes and calling in favors. Vested interests fight every change.”

Fitzgerald adds blame to political theater. “The legislature promised instant results,” he says. “‘Tax relief now! Mission accomplished in 10 days or less!’ But serious debate leading to serious reform was impossible on that timetable. What they did instead was keep the voters happy—those they depend on. They gave tax relief to people who didn’t need it—voters with homestead exemption. They gave no relief to businesses who desperately needed it. It’s exactly backwards. We have met the special interests and he is us.”

So what’s the solution?

Keep the status quo. Nobody’s saying that. Both left and right agree: the system is broken.

Cut property taxes. Make up the difference with a Florida state income tax. Nobody is saying that, either.

Cut property taxes, and cut local government spending, too. Gould and Schroeder start from this position, along with CART, the tax-reform organization they belong to. Local government spends too much money. Put it on a diet and it won’t raid Mom and Pop’s refrigerator. But many others insist that Sarasota’s city and county budgets are pretty lean, and that taxes provide essential services and amenities that citizens value.

Kill—or at least cage—the “highest and best use” guideline. In other words, restrict it to Florida’s major metropolitan areas where it makes sense. Use annual income to determine the value of commercial properties on the barrier islands. Gould and Schroeder agree with this, too, but want to go further.

Reduce inequitable property taxes. Make up the difference by eliminating sales tax loopholes. Thaxton and Fitzgerald share this view. Thaxton says he’d like to give each of Florida’s sales tax exemptions a “straight face” test. “If you don’t bust out laughing, keep the exemption,” he says. “Kill the loopholes, and local governments will get the budgets they need without killing the mom-and-pop business that drive our economy.”

The specific solutions may differ. But entrepreneurs, activists and public servants all agree on the problem. Thanks to our current property tax system, the small island mom-and-pop businesses that give Florida its character and drive its economy could soon history.

“Tourism is the goose that laid the golden egg,” says Schroeder. “We’re on the verge of eating it for Christmas.”

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