The Catch 22 of Growth

by Randy Salzman

With municipalities across America questioning the value of business tax incentives, one Virginia community is completing its sixth study illustrating the true costs and benefits of the prevailing political mantra, “Growth is good.”

Backed by Advocates for a Sustainable Albemarle Population (ASAP), this latest work, “Counting the Costs and Benefits of Growth,” finds that to cover the cost of new roads, schools, water and services with tax revenue every future house sold in Albemarle County must have a $668,761 price tag. To compensate for previous growth, the next two thousand homes in the central Virginia county must average selling for $2.7 million.

The price of a typical residence in and around Charlottesville sold so far in 2012? $301,000.

While other communities might have different experiences, if they do the calculations they will likely discover a similar financial discrepancy between myth and reality. Even before realizing that businesses often fail to create the jobs they projected for tax incentives, growth rarely, and perhaps never, pays for itself.

At the same moment Uncle Sam is $16 trillion in debt and facing the fiscal cliff, better than one third of Virginia’s entire Gross Domestic Product today comes from federal sources. With the Commonwealth endorsing four-percent budget cuts and the governor scaling back his still-optimistic budget figures, there is no one left to pick up slack stemming from any community’s failure to honestly address the cost and benefits of growth.

ASAP’s goal is to calculate an “optimum sustainable population” number that answers a fundamental question: “How populated do we want our area’s 736 square miles to be?” Albemarle County and Charlottesville are certainly not alone in neglecting to include this “ultimate goal” in their comprehensive planning processes.

Prior ASAP studies, paid for through small municipal and foundation grants, indicate that at 144,000 people our region already teeters on the edge of nature’s capacity for human habitation. Albemarle County filters significant amounts of clean water and air through 486 square miles of forest and produces tons of human food on 166 square miles of crop and pasture land. To support the present population of Albemarle County and Charlottesville without importing clean air, water and food from other locations, ASAP’s biocapacity study indicates the region would need almost four times its present physical landmass.

For every Charlottesville, there are population centers like Richmond, Washington, D.C., Norfolk, New York and Chicago that are even less likely to live and grow within their monetary and environmental means.

No doubt, pro-growth proponents will argue with researcher Craig Evans’ analysis but even if the respective economic and ecological models fail to cover every eventuality, the 66 percent discrepancy between tax income and service outgo and the 370 percent difference between landmass and population should cause even the most dedicated developer pause.

Albemarle County is a microcosm of the global dilemma. As the human population climbs to a projected 9.2 billion by 2050, putting the planet under even greater stress, when will people reassess their desires? When do we begin to consider how many of us humans can survive on this good Earth – even if we learn to live with less-consumptive lifestyles?

With the economics so out of balance, when do we begin to reappraise that resounding, “Growth is Good” mantra?

Randy Salzman is a Charlottesville writer and transportation researcher. You can find his work at www.thinkinghighways.com, www.intransition- magazine.org and www.randysalzman.com.

17 Responses to The Catch 22 of Growth

  1. Not sure I really understand his point. Most communities want GROWTH – of More Jobs, more good schools and recreation, more shopping choices, more of all the things that make a place a desirable place to live and work.

    I cannot imagine a place like C-Ville telling a prospective new company that they cannot afford them.

    but in reading this, I did not get that perspective at all.

    In fact.. the thread connecting an unsustainable C-ville with world population seems pretty tenuous … although I do tend to agree – we have more people on earth than we seem to be able to have enough to provide for them to live beyond a minimal subsistence.

    Perhaps we can get a sharper focus on the Cville issue.

    for instance what if Cville had to produce all the electricity it needs inside the MSA. Could it do that without importing fuel? Is Randy saying that to be truly self-sustaining that Cville needs to generate power within it’s own boundaries?

  2. “to cover the cost of new roads, schools, water and services with tax revenue every future house sold in Albemarle County must have a $668,761 price tag. ”

    Somewhere way back in the archives years ago, I made the same point about Hampton Roads. City governments were setting the price tag for new developments at around 450 grand per house. This increased the size of the house, which raised assessments, and fueled the housing bubble as Wall street sold off the risk to the unsuspecting investors. But that’s old news now in a world where local officials quest for growth has been collateralized into a quadrillion dollar government backed derivative universe.

  3. I think how this issue is framed can either lead to a better appreciation of the infrastructure and services costs associated with housing or it can lead to a perspective that we cannot afford housing which is patently absurd.

    Take one issue for instance, kids, who need schools and 12 years of education.

    One kid in one house will need a school seat that costs roughly 10K plus 12 years of instruction at roughly 10K per year. Add it up and you get well over 100K for one kid. Do it for 2 kids and you double it.

    you can go through the same calculations for other infrastructure and services for law enforcement, libraries, fire & rescue, etc.

    If you pay taxes on a house for your entire life, plus taxes on your cars, sales taxes, other taxes and add them all up – they’re likely going to come close to the seemingly unaffordable number that was cited.

    Because the State and Local governments cannot run a deficit (but they can sell bonds) – by definition growth DOES pay for itself but perhaps not without deficits to quality-of-life if your priorities are not aligned with needs instead of wants.

    When you spend all of your tranpo money to serve commercial businesses instead of residents – you get a mismatch but that does not mean you cannot afford it. It means you chose wrong priorities.

    The problem has always been and will remain that we all want more than we can afford – both in our own lives and in our towns and cities.

    we live beyond our means. People in Canada and Europe live much more modestly than us – and they live longer too so their priorities seem better than ours at times.

  4. This kind of analysis tends to push you quickly toward conservative style thinking:

    1. Illegal immigration must stop. In fact, with the economics put forth in this article the monetary benefit of deporting undocumented workers may be vastly higher than previously thought.

    2. Roads, schools and water services must cost far too much. Therefore, spending yet more on education will only exacerbate the problem. Cut school budgets now.

    3. Albemarle’s real estate tax rate of only $0.76 per $100 of assessed value is too low. Immediately raise it to $1.075 per $100 of assessed value.

    4. Agricultural exemptions or discounts to real estate taxes need to be re-examined in a county with substantial farmland.

    5. Copy Maryland’s approach to locality-based income taxes. For example, Montgomery County, MD imposes a 3.2% income tax on all its residents (in addition to the state income tax of 5.0 – 5.75% for at $100,000 and above.

    So, we have the following options:

    1. Reduce / reverse growth.
    2. Lower the cost of government.
    3. Raise taxes.

    Option 1. may sound appealing but the population of the United States is growing. If Albemarle stops growth where will the additional people live? Kind of like a game of musical chairs? The last localities to stop growth get screwed?

    As an aside, here is a list of newly constructed homes on sale in Albemarle – none of them reach your minimum sales threshold.

    http://www.homefinder.com/VA/county/Albemarle/new-construction/

  5. There is an old argument about the cost-benefit comparison of development and the cost of services provided to that development that points out that for every dollar of revenue from a residental unit, the community has to put out well over a dollar for services – schools, utilities, police and fire, etc. But for commercial development, the cost of services for each dollar of revenue is usually less than a dollar. So, why do jurisdictions in Virginia keep thinking in terms of houses, and not aim for business development?

  6. Randy – Excellent new angle at the opening for looking at tax incentives.

    It seems most commenters are missing the mark. The tax abatements/incentives provided to companies in order to attract them to a given locale are costing that locale far more than what the compannies are returning. For example, all too often a locale attracts a new business, which promises 400 new jobs over the next X years, in return for $Y dollars in tax abatements.

    What happens is that the new company only hires 100 workers in X years, and the local or state government does not hold the company responsible for reneging on their promise of 300 more jobs. With the deficit of 300 jobs, those tax-revenue generators are lost (income and property taxes), the tax revenues are lost from the company due to the initial tax abatements provided, and the local infrastructure deteriorates because the locale has accumulated, in the aggregate of many such tax abatements, a very large deficit in tax revenues. Randy wraps this deficit back on the property values needed to cover the increasing deficit, which only grows worse over time due to inflation.

    What is needed is more accountability, wherein when tax abatements are provided to a company in return for future job growth, if those employment benchmarks are not met, some or all of the tax abatements can be clawed back by the locale or state in question.

    The problem is that local and state politicians do not care. All they desire is the headline stating a new company has moved into a locale, and the promise of jobs has been met. In order to provide clawback clauses within a tax abatement, states and localities everywhere must be in unison to make this effective. One locality may draw a line in the sand and insist on clawbacks, but another will provide the tax abatements regardless. The locality with the clawback provisions then suffers form a lack of job growth, and local politicians fail in re-election bids. So now we have a “beggar thy neighbor” situation blooming across the U.S.

    Great post.

    • EL Beck:

      Your points are well taken. However, they do not seem to directly address Mr. Salzman’s article. The body of Mr. Salzman’s article does not mention ill-conceived or poorly managed economic incentives. Rather, the article decries a growing population and, perhaps, the attractiveness of Albemarle County as a place to live.

  7. Pingback: The Catch 22 of Growth | Bacon’s Rebellion « The Small "r"

  8. Don’t offer the incentives then.. but do make sure you remove the impediments so that businesses WANT to VOLUNTARILY choose to locate in your area ….

    The idea that businesses “help pay for residential” is misguided in my view.

    Businesses do not print money. They get money for providing goods and services and whatever they provide to the locality in the way of taxes basically is derived from what they add on to the costs of goods and services. They just function as tax collectors for the locality.

    And if you make it unprofitable for a business to operate in your area – they’ll do as you please and go somewhere else.

    What businesses do provide is jobs and the more jobs a locality has the more taxpayers it has and the less people on the dole.

    That’s why you want businesses – not because they help pay for residential.

    • The analysis is correct wearing the blinders of the locality but not necessary when thinking as a state or nation. The ASAP study is heavily slanted toward local taxes, local revenues and local costs. While there is nothing wrong with this viewpoint it can’t be expanded to a state-wide or national level.

      I have always maintained that the allocation of revenue among the federal, state and local governments is wrong. If Albemarle County kept all of the federal income taxes paid by its residents, all of the state income taxes paid by its residents and all of the sales taxes paid by its residents it would be awash in money. Yes, this is an extreme argument. We’d have no US Navy for example. However, the question of whether growth is affordable at the local level is heavily dependent on the allocation of the total tax burden to localities.

      Using 2010 population and per capita income levels for Albemarle County (not including the City of Charlottesville) a 3.2% income tax would generate over $91M per year for the county. Montgomery County, MD has a 3.2% county income tax. Admittedly, I am not taking into account deductions, exemptions, etc.

      Should people in Abemarle County pay a county income tax like in Maryland? I don’t know. Should Albemarle County have a real estate tax rate that is 3/4 of the rate charged in Fairfax County? I don’t know. Should Albemarle get a bigger share of the state or federal state tax receipts? I don’t know.

      The one thing I do know is that the financial health of localities is a whole lot more complicated than the question of whether people are moving into the jurisdiction or not.

      I suspect that Mr. Salzman knows this too. He would just prefer to see fewer people in his once bucolic neck of the woods.

  9. One issue that has gone unaddressed in the post and comments is that different patterns and densities of land use have different costs associated with them. A $200,000 townhouse with a postage-stamp backyard may generate one quarter the taxes of an $800,000 McMansion on a two-acre lot, but it will most likely will cost far less for the county to provide with utilities and public services. Unless a tax analysis takes into account the pattern and density of land use, it’s not worth very much at all. I have not looked closely at the ASAP report, so I don’t know if it considers pattern/density or not.

    • Jim:

      I am lost on the utilities point. New construction has to pay for utility connections, no? And people “pay by the drink” for utilities like water (pun intended), no? So, how do utilities figure in at all?

      Public services is a pretty broad category. Police? Not really. While you can argue that higher density makes patrolling less expensive, I can argue that higher density is associated with higher crime rates. Roads? Maybe. Schools? Probably. However, the person buying an $800,000 house is probably paying a whole lot more in income and sales taxes than a person buying a $200,000 house.

      Finally, let go to the math.

      In Fairfax County the $800,000 house pays $14,000 per year in real estate taxes. The $200,000 house pays $3,500.

      Each and every year, you need to find $10,500 of cost difference between the $800,000 home and the $200,000 home.

      Also, if high densities are efficient then why are the highest real estate tax rates in Virginia found in the highest density locales while the lowest real estate tax rates are found in the lowest density tax locales.

      You have never demonstrated the “higher density living is more efficient” theory and I doubt you ever will.

  10. While we’re talking about Albemarle County, let us not forget that Albemarle zoned for most of its development to be concentrated in the U.S. 29 corridor. That decision took advantage of a seemingly free good — excess capacity in the U.S. highway that could be used for local traffic. However, as local development and traffic clogged the corridor, we now find that the cost of upgrading the road is hideously expensive. Fortunately for Albemarle taxpayers (but not Virginia taxpayers), the state is taking over that obligation.

  11. Jim makes a good point. A 300 million dollar road would cost the MSA per capita a pretty penny .. 20-30 years worth of paying it off.

    But then if Cville people had to decide what they could afford they’d not pick a 300 million road anyhow.

    VDOT says that the taxpayers of Virginia want that road and that’s why they should pay for it.

    re: if Cville kept ALL of the money…

    they’d not have I-65
    they’d not have State Police
    they’d not have UVA as a public institution
    etc, etc.

    Cville would likely have remained a mountainous farm hamlet with a much smaller and feeble economy without the good citizens of Va and USA’s “help”.

  12. I think localities should have the right to decide whether or not being part of the state of Virginia is cost beneficial. The alternative is to be an autonomous locality in the United States. In other words, you’d be an American but not part of any state.

    It wouldn’t take me long to vote. There is no way that the overhead of being part of the Commonwealth of Virginia is matched by the benefits of being part of the Commonwealth of Virginia.

    States are an anachronism other than in their function as a check on the powers of the federal government. They are administratively inefficient – simultaneously too small to have a global impact and too large to govern efficiently at the local level.

  13. This article is akin to the couple saying “We’re not having children in order to Protect the Planet”. They then tally up all the costs of a child (the child’s carbon imprint and the like) and none of the benefits that their own child brings into the world.

    Such negative habits of zero sum prognostication go back into history as far as the mind and historic record can travel. And they’ve all been proven wrong, and wildly so, again and again. Generations that follow never learn, its hardwired.

    Of course, growth creates wealth, if it’s built by a dynamic creative society, that learns from mistakes. In numerous past posts on this website, I’ve given many urban growth examples. Both how it can work positively using certain lessons learned and how negatively too if such growth is “mindless.” Smart Growth is only one simplistic banner. I need not repeat those posts. But the principals go far beyond development, whether urban, rural, or otherwise.

    The real question in my mind is whether we are rapidly losing the dynamic creative society necessary to grow properly though lessons learned. I my view we’re rapidly losing that kind of society.

    And I suggest that the attitudes and misunderstandings that underpin this article are further evidence of this loss – one of the many reasons that, absent a course correction, we’re headed for ruination.

  14. re: “States are an anachronism other than in their function as a check on the powers of the federal government. They are administratively inefficient – simultaneously too small to have a global impact and too large to govern efficiently at the local level”

    Most countries have the administrative equivalent of states though and I’m quite sure State’s Rights affectionatoes in this country would give you a tongue lashing…. or soap mouth wash….

    I would AGREE that the boundaries were arbitrarily drawn but I kind of like the idea of 50 different sub-divisions.

    I WILL admit that when it comes to things like Interstate Highways and health care – the Federal approach has standardization benefits.

    For instance, one might agree or disagree about the “correctness” of Medicare – but one of the little known things about Medicare is it helped to institute standardized medical diagnostic and treatment codes now virtually universally adopted.

    Things like environment standards for air and water especially near states borders… etc.

    now.. I’m agreeing with DJ…. maybe he has a point!

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