Modesto will pursue annexing north McHenry and its auto dealers

Modesto will move forward with trying to annex about 300 acres along north McHenry Avenue, which is home to auto dealerships and other businesses as well as two mobile home parks.

The City Council voted 4-3 Tuesday night to proceed, with council members Jenny Kenoyer, Doug Ridenour and Bill Zoslocki voting “no.” But the city could face difficulties over what is called the mill tax.

American Chevrolet owner and president Dave Halvorson told council members the tax is not equitable. He said an auto dealership could pay $40,000 to $60,000 in annual mill taxes, while a manufacturer or wholesaler could pay $300 in business taxes. He said he wants to pay his fair share, but “let’s be fair to all the businesses in the community.”

While all businesses pay for an annual business license, which typically is $50, the city only charges retail and service businesses the mill tax. The tax is $1 for every $1,000 in gross receipts for a retailer and $2 for every $1,000 in gross receipts for a service business. Wholesalers and manufacturers don’t pay the tax because they sell goods to retailers and service businesses so charging them would amount to double taxation, according to the city.

Business licenses and mill taxes bring in nearly $12 million annually to Modesto’s general fund, according to the city, with about $11 million of that coming from mill taxes. These taxes make up about 10 percent of the general fund, which primarily pays for public safety.

Ridenour said Modesto needs to address the mill tax before it considers the annexation. Kenoyer was concerned about adding to staff’s heavy workload. It should take about a year of work before the city can bring the annexation request to the Local Agency Formation Commission, which rules on annexation requests.

Zoslocki questioned the economic benefit of annexation. The city expects to net nearly $500,000 annually from the annexation but is looking at $8.5 million in costs for sewer and other infrastructure, according to the city’s cost benefit analysis.

But acting Utilities Director Will Wong said Modesto recoups its water and sewer costs through connection fees customers pay. About $6.3 million of the infrastructure costs are for extending a major sewer line from Carver Road along Bangs Avenue to the annexation area. Wong said the line would serve other development in north Modesto.

The annexation area’s rough boundaries are the east and west sides of McHenry from the city limits to Kiernan Avenue-Claribel Road. And it includes the area from the city limits north to Bangs Avenue and bordered on the west by the former Tidewater Southern railroad line. A city official has estimated the area is about 300 acres.

The cost benefit analysis estimates the annexation would bring in about $1.2 million in revenue annually against about $714,000 in expenses, netting the city the nearly $500,000.

The revenue would come from Modesto receiving a larger share of the taxes it now splits with Stanislaus County through a 1998 tax sharing agreement and from new business and utility users taxes. Those new taxes are expected to be about $800,000 annually, though more than a third would go to the county under the tax sharing agreement.

City staff will meet with registered voters and property and business owners in the annexation area to gauge their interest. If support is low, the council could decide to stop pursuing annexation.

This story was originally published February 7, 2018 at 2:55 PM with the headline "Modesto will pursue annexing north McHenry and its auto dealers."