September 2006 Volume 32 No 5 Incentive Taxation

Download a PDF version here.

• Billboards, Bullies, & Blight  Fighting the signage fight
• Tutorial: New Jersey, Property Tax, & A Way Out  How the Garden State can put the bloom on its rose
• Transit Financing  Third in a series detailing LVT applications
• How Government Shortchanges Itself: The Story of A Vacant Lot"/b>  It's a high tally when you add up the lost revenue.

Billboards, Bullies, & Blight

Urban decline is back on the front burner now that the real estate markets are cooling, and cities are still losing population and tax base (relative to the ‘burbs). Without a reform like LVT, city governments tend to bow and scrape to any source of revenue, no matter how terrible the land-use or how deleterious to the struggling citizens in blasted blocks. A city, like a patient etherized upon a table, is weakened and susceptible to invasive and parasitic organisms.

CASE IN POINT, BILLBOARDS

Let’s compare scenarios: On a suburban residential or semi-commercial street, billboards – legal or not – are nearly non-existent. Eyepolluting ads selling 40-oz malt liquor are not an issue, no buccaneer outdoor ad companies would dare attempt to battle community boards, council s , and citizens.
However, in a city like Philadelphia, the business model aggressively erects billboards and building wraps at will. Weakened neighborhoods have a hard time fighting the corrosive effects of the ads and the poisons that they peddle. City government actually fights against its own citizens in order to get money.

SCRUB

In Philly, a very active and pugnacious group, www.urbanblight.org, defends those neighborhoods that can’t fight the deep-pockets and hammerhead attorneys that the billboard “industry” unleashes. Recent court rulings have limited the right of SCRUB to have standing in cases involving billboards.

So, the vultures descend. Readers of IT know that lack of LVT leads to a weakened city. They know LVT specifically encourages residential and business uses that generate tax revenue and are appropriate for the city. But too often, our readers don’t know how the weakness of the city is exploited. SCRUB knows, and they need our help and assistance.

Tutorial: New Jersey, Property Tax, and The Way Out

Once again, in 2006, property taxes are at the forefront of political angst and citizen anger in the Garden State.¹ Also jostling for position for the public’s attention are schools, sprawl and the sad state of New Jersey’s formerly grand cities.² Are these issues interconnected? How can property tax reform play a major role in addressing these issues?

New Jersey does indeed have high property taxes, when compared to the rest of the nation. Yet, like most property tax intensive states, its economy is going fairly well. Like New Hampshire or Connecticut, it has avoided the economic drag of other high tax states such as New York, California or Rhode Island. Why?

Reliance ON the property tax is a prime factor in maintaining economic strength in older US states. Although the traditional property tax does cause an insidious drag on economic activity and can be burdensome to those that can least afford it, there is an existing method to transform the property tax into something very different indeed. This essay will conclude with that transformation.

Right now, conventional wisdom says the only issue is the fight to reduce property taxes. The face of that fighter is the angry retired senior citizen. Unbound by former ties to place and community, they see taxes increasing to pay for schools they don’t use. They get angry, and they attend meetings.

Swayed by the voices of seniors – who both tug at our hearts and who vote – we try to assuage them, with the assumption that all will benefit. Maybe. Seniors in distress – often very real distress – are an effective image to portray the property tax as some sort of corrosive evil, never mind that our nation, from its inception, used property tax as the main resource for local tax dollars during its unprecedented climb to prosperity.

Yet, New Jersey has some of the more robust senior citizens property tax relief programs going. Currently, there are substantial tax caps³ that have significantly cut seniors property taxes. That then begs the question: what about everyone else’s taxes?

Although the average property tax bill is $6,000⁴ annually (local, school, county) the average rebate is about $350.

What Happened?

In a nutshell, New Jersey’s problems began just after World War II. The sprawling of suburbs, made possible by cheap land, cheap loans and cheap roads and gas led to loss of investment. The people that moved were the ones that hold cities together: families, workers, and the middle class. 

Retail and other commercial support also left the cities. Industry closed and left, first to the South, then overseas. Emptied cities meant poor people without jobs, struggling to pay the tax bills previous shared by fellow citizens. New suburbs meant higher and higher taxes to pay for the services demanded by the middle class. When an older suburb became too expensive, those that could moved on, filling up the Garden Sate.⁵

There is not enough space here to trace the web of band-aids, dead ends and stopgaps that block the door to the way out of New Jersey’s tax and other troubles.

Past Efforts

There have been attempts in the past to get a handle on the tax issues facing New Jersey. The 1972 Cahill Commission made over 100 recommendations, including a state-wide property tax to replace local education funding, state assessment bureaus, and a land value tax.⁶

The Glaser Commission of 1988 again hammered home the reality that assessments have to be addressed; they also urged state control of assessments. For example, in Passaic County the city of Paterson has not re-assessed since the early 1970s. This results in Paterson having a tax rate of 24.99 mills with the next highest jurisdiction (North Haledon borough) at 5.16 mills⁷. In reality, the effective tax rates are similar, but a shortsighted city administration doesn’t see the terrible image and publicity that such a high tax rate communicates. 

The Glaser commission also made a pitch – a complicated one – for differential tax rates among land, old construction, and new construction. 

The Whitman Commission of 1998 did not recommend much; much recommends the report. Its stark analysis of the available options muted, for a time, the mad dash to sales and income taxes as a replacement for property taxes. Not only did they acknowledge the danger to the economy with high taxes on labor, commerce, and economic activity, they explained it simply.

  "To raise the additional $7 billion required to replace the local school tax solely through the sales tax, which generated $4.75 billion in Fiscal Year 1998, the State would have to increase the tax from 6 cents per dollar to more than 14.5 cents per dollar – more than double the current sales tax rate.⁸"

As for income taxes:

"The state income tax generated $5.59 billion in Fiscal Year 1998. As indicated above, the income tax would have to yield an additional $7 billion per year to compensate fully for the elimination of the local school tax. To reach this increase, the State would have to generate 221 percent of the current amount raised by the income tax. If the rate schedules were simply increased proportionally, the lowest rate would increase from 1.4 percent to 3.09 percent, while the top rate would increase from 6.37 percent to 14.08 percent.⁹"

The report also cautioned against over-enthusiastic acceptance of “circuit breakers” to provide tax relief for seniors at the expense of young home owning families and renters.

In 1999 and 2000, New Jersey’s Local Government Committee of the Assembly attempted to permit land value taxation for New Jersey’s cities. Political opposition was narrow but powerful,¹⁰ led by developers who depend on tax abatements for their own projects.

Current Efforts Have LVT in the Mix

Now, the Regional Plan Association, a highly respected research foundation in the New York Metro area has delved deeply in the various options for tax reform in New Jersey.¹¹  LVT is given its due, and the subject has been broached at the state level.

RPA’s report notes that LVT rates highly in such factors as progressivity, stability, and accordance with the State Plan on land use and smart growth.

How far will LVT get this time? It’s hard to say. The usual suspects, developers who depend on private land banking and tax breaks to do their work will oppose. The New Jersey Sierra Club inexplicably opposes LVT, support by the National Sierra Club, other anti-sprawl, Green Parties, and environmental groups not withstanding.¹² Yet, the new Newark reform team led by Corey Booker seems to have at least some interest, and politics dictate they’ll get at least some of what they want to turn around that great city.

1   www.bizjournals.com/philadelphia/stories/2006/06/05/daily19.html?from_rss=1

2   A good exposition on public opinion in NJ on this nexus of sprawl, decay and taxes:   http://crab.rutgers.edu/~goertzel/sjgrowth.htm

3   These include, but are not limited to, a freeze for seniors, determined by the base year, 100% (or $10,000, whichever is less) deduction from state income tax, or the FAIR rebate for homeowners and renters. www.state.nj.us/treasury/taxation/index.html

4   www.app.com/apps/pbcs.dll/article?AID=/20060606/NEWS/606060385/1001/rss

5   http://users.rowan.edu/~hasse/sprawl/dep_sprawl_presentation1.pdf

6   See www.urbantools.org for an explanation of land value taxation.

7   www.state.nj.us/treasury/taxation/pdf/lpt/gtr05pas.pdf

8   http://home.att.net/~n.j.pfopt/The1998Rpt.htm

9   Ibid 

10   www.urbantools.org/policy-papers/tax-reform/new-jersey/1999-bill/

11   www.rpa.org/pdf/RPAproptaxreform072606.pdf

12   www.urbantools.org/land-value-tax-in-policy/LVT%20Endorsements%202005.htm

LVT Applications, the Third in a Series Transit financing

There is general agreement that public transit is a necessary component of a healthy urban structure. Although road building and maintenance have seen the advent of some privatization to cover costs, the vast majority of projects are still government work.

One overarching truth about transit projects is they make the land around them more valuable. Transit barons like August Belmont made sure the New York subways of the last century went through land they had already purchased for cheap. They got rich from privatizing the increase in land values. 

There are some established ways of paying for these projects. Can LVT, or in this case LVC (Land Value Capture) complement or supersede these funding mechanisms? Let’s compare:

Traditional Funding Mechanisms

• Sales Taxes bear little relation to the rationale of the project (“dedicated” is the mot du jour); hence there is little connection between payers and users. Sales taxes are regressive.
• Gasoline Taxes are closer to the rationale for the project, but are not dedicated to a particular project. Like sales taxes, they are very regressive and unfair to the poor, who often need their own vehicles no matter how slick the local public transit system is.
• Tolls provide close relationship between project and use. Tolls are a cousin of LVC; they also have the benefit of capturing revenue from transient (i.e. out of state) users.
• Lotteries, Hotel Taxes, Cigarette Taxes bear little relation to a project, its users, or its beneficiaries.
• Bonds (borrowing) are still popular, because you can have your shiny highway now with no tax hike for anyone, and let your kids worry about paying it off 15 years down the road. There is a huge shoe waiting to drop, however: if a government chooses to pay the bond out of the general fund, that limits either current spending or tax reductions (depending on what your politics are) for years. If you have a dedicated source for the bond pay-down (like a gas tax), there’s no guarantee that revenue stream will be at the level needed in the future. The risks to taxpayers with bonded road projects are too high.

Land Value Capture

• Returns the community/government cost of the construction phase of the project.
• Removes tax barriers to expected market interest in the site.
• Encourages the use or sale of the site by raising holding cost, preventing private land banking/speculation.
• Puts a substantial share of project cost on those who benefit most.
• Targets costs in a site-specific way, making the viability of the project itself a subject for debate.
• Links project to cost. (A Bridge to Nowhere becomes problematic if there is small projected site value increase).

Since the clear cause-and-effect result of a new highway interchange or new subway stop is higher land values, the capturing of those same land values provides a clean, efficient, and fair way to pay for their construction.

LVC reduces the fog and vagueness of other funding mechanisms. Proper pre-construction research can determine to what degree land values will rise. Therefore, the appropriateness of the project can be judged before first dirt is dug.

How government shortchanges itself: the story of a vacant lot

“Show me how to pay for it, and we’ll do it.” I remember when then-governor Mario Cuomo said that, and it stuck with me. Older and, so help me, wiser, I know that government can pay for most things under the sun, by tapping the resource under its feet: land.

In September 2006, a group that wants to build a casino bought a vacant lot on the Atlantic City beach for $11 million. The lot, on the 3700 block of Atlantic Avenue sat vacant for 20 years minimum. It’s owned by something called “Colony Capital” in LA, whose web page touts, among other items, that they know how to capitalize on the “exploitation of inefficiencies.” And how.

The property’s last valuation was $6 million. Given the current tax rate in AC of $3.502, this means that this extremely valuable lot pays about $181,000 annually in tax, as opposed to a more realistic $332,000.

For how many years has poor, blighted Atlantic City been losing $151,000 annually? How could that lost $150K been used? Well, the annual grant to Habitat for Humanity from Atlantic City is $50K. The salaries for the utilities crew for the Housing
Authority are about $100K annually. How can a city many say is a lost cause allow this much money to be lost?

There are no good arguments for bad property assessments, but be assured that in the real-life game of Atlantic City (Land) Monopoly, Baltic and Mediterranean Avenues may be low-rent, but they are subsidizing Boardwalk and Park Place.