David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: the most magical tax break on earth.
In April, Florida Governor Ron DeSantis (R) signed legislation that will eliminate the Walt Disney Company's special tax district. The move stems from the fallout over a separate Florida law that restricts discussions of sexual orientation in schools.
Here to talk more about this dispute and what it means for Disney and potentially other companies that stake out positions on social issues is Tax Notes reporter Benjamin Valdez. Ben, welcome to the podcast.
Benjamin Valdez: Thanks for having me.
David D. Stewart: So, let's start with some background. What are these special tax districts in Florida, and how many of them exist?
Benjamin Valdez: So, Florida has over 1,800 special districts, and they're basically miniature local governments that can provide essential services and create their own infrastructure. And they come in different shapes and sizes. But the general idea is that they exist to bring something to the state, whether it's recreation or economic development without necessarily relying on local taxpayers from neighboring counties to kind of fund what goes on in the district.
David D. Stewart: Now, specifically talking about Disney's special tax district, the Reedy Creek Improvement District, when was it created? Why is it there? And what does operating as a special tax district allow Disney to do?
Benjamin Valdez: So, the Reedy Creek Improvement District, it was created by lawmakers in the state in 1967 after Disney made a proposal to build a huge recreational site to contain Walt Disney World on roughly 25,000 acres of land on Orange and Osceola counties.
And the district itself, it has the ability to levy ad valorem taxes at a higher millage rate than the neighboring counties and to issue bonds to fund construction and other kind of projects within the boundaries. And this includes roads, utilities, even fire departments.
And the district is also exempt from building codes and permit requirements that would be present in the counties next door.
David D. Stewart: Now, are these types of arrangements typical for companies?
Benjamin Valdez: I wouldn't say typical in the sense that states are just handing out special districts to any large company that wants to move to the state. But I would say that they're certainly a lot more common. There's a lot more of them than people might realize, especially now that this one has been in the limelight.
I think people are just now realizing how many there are across the country, and in Florida too, just as something that states have been allowing for quite a long time.
David D. Stewart: All right. So, tell us a bit about this legislation that Governor DeSantis signed in April. What led to its passage?
Benjamin Valdez: So the bill itself, it came together very quickly. The governor called a special session to consider eliminating certain districts in the state April 19, and the bill was signed April 22.
And the governor and some lawmakers have made it clear that the bill, the idea for the legislation stemmed from Disney's sort of public statement on the recent law that prohibits classroom discussion on sexual orientation and gender identity in public schools. And they basically, they had clarified that their decision to take another look at these districts was in part because of Disney's statement that they wanted to openly oppose the bill.
David D. Stewart: So, how will this law affect Disney's operations in Florida?
Benjamin Valdez: So, certainly it's going to affect their Orlando operations if the district is dissolved as planned. I think it might take some time for us to see how it'll affect Disney beyond that, if they're going to feel it financially.
But one of the possible changes is that Disney will now have to go through the local counties to do things, to build projects, to pay for things that it normally would do on its own.
And Disney will continue to pay taxes. Disney World has always paid state and local taxes. The district wasn't, it wasn't a tax exemption for Disney in that sense.
David D. Stewart: How does the law change the surrounding counties and local governments?
Benjamin Valdez: Yeah. So, that's one of the kind of bigger issues that's come out of this is if the district is dissolved, Florida state law specifies that the assets and debt from the district will be transferred to neighboring localities. And in this case, that would be Orange and Osceola Counties.
Some local officials, including the mayor of Orange County, Jerry Deming, expressed concern that assuming control of the district's assets might result in the need for additional taxes or tax increases.
Another potential issue is that the statute that created the Reedy Creek District specifies that the state isn't allowed to eliminate it without paying off its bond debt, which is upwards of $1 billion. This has sort of created a bit of confusion around how the whole law will go into effect.
David D. Stewart: Now, you mentioned that the legislature was looking more generally at these special tax districts. Does it affect other districts?
Benjamin Valdez: Yeah. So, while the bill appears to have been aimed at Reedy Creek, because it dissolves any districts created before 1968, it actually applies to five other independent special districts of Florida. And they are now going to have to go through the same process as Reedy Creek if it all comes to pass.
David D. Stewart: When should we expect to see the changes from this law go into effect?
Benjamin Valdez: The official end of Reedy Creek is set to take effect in June 2023. So, this leaves some time for the DeSantis administration and lawmakers to sort of gather a more formal plan on how they want it to take effect and then what might happen.
David D. Stewart: What kind of reactions have we seen on both sides of the aisle to this law?
Benjamin Valdez: So, while this has been a heavily partisan issue with Republicans generally celebrating the end of the special kind of privilege for Disney, I think there has also been a bipartisan sentiment in taking another look at these special districts and whether they're always a good idea and whether or not they always work the way they're intended to.
On the other hand, I think a lot of the criticism, particularly from Democrats and some lobbyists during the special session was directed at the rushed nature of the process and the fact that it sort of appears as a reaction from the state to a company's opinion on legislation.
David D. Stewart: Well, I know in general, whenever legislation gets rushed, we usually see litigation soon after. So, have we seen any lawsuits on this yet?
Benjamin Valdez: Yes. We've actually seen at least one federal lawsuit already that was filed on behalf of a few residents in neighboring Orange and Osceola Counties. And the lawsuit was claiming that the dissolving of Reedy Creek will force local governments to raise taxes on the residents in those counties. And the lawsuit also, on Disney's behalf, claimed that the company's First Amendment right was violated when the bill to dissolve Reedy Creek was passed.
And a federal judge threw out the lawsuit very quickly citing that there were some jurisdictional issues with ruling over a state dispute like this.
The lawsuit had also alleged that given the contract of Reedy Creek requiring the state to pay off its bond debt, that it wasn't allowed to happen. And the federal judge took issue with ruling on that sort of a state-level contract.
The judge also said that basically filing a lawsuit on behalf of Disney's First Amendment rights isn't really appropriate and that the company can do that itself if it wants to.
And basically, they refiled it in the state-level court and they kind of refocused it. They got rid of the First Amendment allegation and they added a little bit more of a state-level context to it to hopefully take it to that level.
And I think that we're going to see, I'm expecting that we're going to see more lawsuits like this potentially even from Disney within the next year.
David D. Stewart: Now, this affects a local tax issue. Have we heard anything about removing corporate tax breaks for Disney or other big companies in Florida?
Benjamin Valdez: As of now, it seems that Disney's other tax breaks in the state, which actually includes tax incentives for a new office complex, haven't been targeted.
But DeSantis has said that he's not interested in taking away what he sees as tax breaks that any corporation would be eligible for.
It seems like they are sort of considering these districts and Reedy Creek in particular to be a unique sort of benefit that doesn't amount to the same kind of corporate tax break that we might see otherwise.
David D. Stewart: So, looking out into the future, what should we be keeping an eye on in the near future regarding this law?
Benjamin Valdez: The main thing we want to watch for is for a detailed plan regarding how the district's going to break down and how this is going to affect local taxpayers.
Governor DeSantis has said him and his administration are planning an extensive outline that they're going to release at some point on how this is all going to pan out. And it could involve more talks with legislators and maybe the public.
He's also recently told reporters that it's possible that the state will assume control of the district rather than the counties so that they can definitely make sure that there are no tax increases.
David D. Stewart: Well, this definitely seems like something worth keeping an eye on. Ben, this has been great. Thank you for being here.
Benjamin Valdez: Yeah. Thanks so much for having me.
David D. Stewart: And now, Coming Attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?
Paige Jones: Thanks, Dave. In Tax Notes Federal, Nathan Richwine and John Werlhof explore how the special five-year statute of limitations for the employee retention credit risk potential whipsaw. Marty Sullivan discusses how fuel taxes could be used to punish Russian aggression. In Tax Notes State, Libin Zhang examines the taxation of collectibles and other actual physical things. Jasper Cummings examines syndicated conservation easement transactions. In Tax Notes International, Robert van Brederode looks at VAT rates in the EU. J. Harold McClure considers the current global state of the intercompany financing litigation, focusing on key cases in France, Germany, and Portugal. And finally, in Featured Analysis, Joe Thorndike argues that the recent criticism of Stanley Surrey's role in tax policymaking is ahistorical, holding him to a standard that didn't exist in his day.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or a review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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