Bond conflict to cost city $1 million

November 23, 2006|By John Fritze | John Fritze,Sun reporter

The city of Baltimore must pay the Internal Revenue Service nearly $1 million in back taxes because it has allowed its publicly funded garages to enter into agreements with private businesses, city officials confirmed yesterday.

The $958,448 payment, approved yesterday by the Board of Estimates, will pay the taxes on bonds originally issued in 1987 to construct several city-owned garages. At the time, officials issued tax-exempt bonds, which carry a lower interest rate and are therefore less expensive for the city.

But the IRS sets guidelines on how cities may spend tax-exempt bond proceeds, limiting their use for governmental or public purposes. To spur economic development, the city has allowed its garages to be leased by private businesses downtown, an arrangement the IRS prohibits.

"We recognized that we had a growing amount of lease activity," said Stanley J. Milesky, chief of the city's bureau of treasury management. "All the IRS really asks is that we make the treasury whole."

Milesky said the city contacted the IRS after it discovered the conflict on its own. He said Baltimore no longer issues tax-exempt bonds to build parking garages. The tax payment must be made before Dec. 1 or, like a private citizen, the city will incur penalties.

State and local governments have been allowed to issue tax-free debt since 1913, though the practice has been heavily regulated since then. Under the arrangement, bond holders are not required to pay income tax on the interest earnings of the bonds, and are therefore willing to pay a lower interest rate.

For years, the city has offered large employers discounts on parking in city-owned garages as a way to encourage downtown development. A major complaint of businesses that are weighing whether to locate in Baltimore, city officials have said, is a lack of parking.

With the taxes paid, the leasing will continue, Milesky said.

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