Category Archives: Taxes

Fracking the Mother of Presidents

fracking rigBy Peter Galuszka

Controversial hydraulic fracking appears to becoming a distinct possibility in areas south and east of Fredericksburg on land that is famed for its bucolic and watery splendors along with being the birthplaces of such historical figures as George Washington, James Monroe and Robert E. Lee.

After several years of exploring and buying up 84,000 acres worth of leases from Carolina to Westmoreland Counties, a Dallas-based company that uses a post office box as its headquarters address participated in the first-ever public discussion of what its plans may be.

According to the Free-Lance Star, the meeting was put together by King George County Supervisor Rudy Brabo to air concerns and hear plans of Shore Exploration and Production Co., which is based in Dallas and has offices in Bowling Green. Its headquarters address is registered with the State Corporation Commission as P.O. Box 38101 in Dallas.

About 100 people attended the meeting April 14, but judging from the newspaper’s account, not many questions were answered. Participants repeatedly asked Shore CEO Ed DeJarnette what his plans were regarding fracking and who would be responsible for damages if something went wrong.

DeJarnette responded that his firm is merely buying up leases and is looking to sell them to other gas drillers and operators. The state’s Department of Mines, Minerals and Energy issues permits one at a time and is responsible for enforcing them, he said.

Hydraulic fracking and horizontal drilling have touched off a revolution in the American energy industry in recent years, particularly in the Marcellus Shale gas formations that stretch in the Appalachians from New York State to southwest Virginia. The methods have also been used to reach rich shale oil deposits in North Dakota and other western states.

Fracking has been used as a drilling process for years according to media accounts and authors such as Gregory Zuckerman whose recent book “The Frackers” covers the process’s increasingly widespread use in the past several years.

Among concerns are that the toxic chemicals mixed with water and then pumped hundreds of feet underground could eventually ruin groundwater serving streams and wells. Other concerns are that the inevitable “flowback” in drilling will require surface ponds to handle toxic waste. In places such as Pennsylvania and West Virginia where fracking is permitted, quiet country areas are badly disturbed by the roar of diesel generators at drilling sites and from trucks that are constantly delivering drilling supplies. Methane can leak from drilling rigs, further complicating global warming issues, and flash fires can be problems. Fracking can also consume great amounts of water which often has to be trucked in.

On the plus side, holders of mineral leases can receive great sums in royalties and various taxes and other payments can boost local tax coffers. Natural gas is cleaner and less deadly source of energy than coal, plays a big role in electricity power generation in the Mid-Atlantic.

At the King George meeting, DeJarnette told the audience that he preferred using nitrogen as an element in fracking rather than water, but there were few details in the newspaper story.

While providing scarce details on who would actually handle the drilling, how it would be done and who would be responsible for damages, DeJarnette repeatedly emphasized the monetary benefits and jobs fracking would bring.

If it proceeds, fracking in the Taylorsville Basin would likely be confined to Virginia, which is more business-friendly than Maryland where the basin also extends. The field stretches across the Potomac River into Charles, St. Mary’s, Calvert and Anne Arundel Counties but Maryland has a moratorium on fracking until it can be studied further.

DeJarnette says he wants drilling to start by late this year or in 2015. Major oil firms explored the Northern Neck area and found some evidence of oil and gas deposits there in the 1980s.

Virginia State/Local Tax Take: 30th in Country

alcatrazOne parting shot before the Bacon family departs on spring vacation to a destination very relevant to the smart growth…

The Tax Foundation has published its updated ranking of states where state and local taxes took the greatest share of state income in 2011. No surprise, New York ranked at the top with a grab of 12.1%. New Jersey, Connecticut and California followed in the next three spots.

Virginia ranked 30th. State and local taxes took 9.2% of income in 2011. That’s actually an improvement from the previous two years, when taxes took 9.6% (in 2010) and 9.7% (in 2009). The numbers should change for the worse when 2012 data is considered — that’s the year the McDonnell transportation tax hikes went into effect. Still, Virginia state/local taxes likely will remain within a narrow band of 9.0% to 10.% where, according to Tax Foundation figures, it has stayed since 1977.

Hopefully, we can dispense with the nonsense that Virginia is a “low tax” state that starves its public sector. We’re not out of control like the aforementioned big tax-and-spenders but we’re well within the middle of the pack, with very small percentages differentiating us from those immediately above and below.

– JAB

Richmond’s Huge and Hidden Problem

The Seahawk's Wilson

The Seahawk’s Wilson

 By Peter Galuszka

There’s been plenty of image-building on this blog site in favor of what is perceived to be a “new” Richmond.

In this view, the former Capital of the Confederacy famous for its gentile white elite and, unfortunately, race politics, is being transformed to a major draw for talented young people and active retirees with plenty of diversity. Some evidence bears this out, such as the wealth of arts and culture and increasing upscale apartment rentals in the city.

The image is being pushed along by Richmond Mayor Dwight Jones who wants to anchor his downtown drive by placing a controversial baseball stadium in Shockoe Bottom. There is plenty of angst about his idea given that the city has other, more pressing concerns. They include its 26 percent poverty rate and the fact that the mostly white suburban counties seem to be moving farther from the Richmond sphere of influence.

There’s yet another big and unaddressed problem that may spell the ultimate fate of the city. Its school system is decrepit, as two recent stories in Style Weekly to which I contribute, point out.

One is a deeply reported cover story this week by Tom Nash that takes readers on a horrifying tour of several Richmond schools. Thompson Middle School has ceiling that ooze gunk. Diluted tar falls in classrooms. Fairfield Court Elementary needs a new roof. A tile fell on a student but the fix is $90,000 or one fifth of the district’s school budget for the year. Tom reveals more problems at Carver Elementary and Armstrong High, among others.

Most of Richmond’s school buildings are more than 60 years old. Dana Bedden, the system’s new superintendent, says school buildings are the worst he’s ever seen and that includes a stint in the District of Columbia. Reports say that $26 million is needed just this year to make a corrective dent in the problem.

Another Style story of note is an opinion piece by Carol A.O. Wolf, a former journalist and school board member. It was published in February, just after the Seattle Seahawks crushed the Denver Broncos in the Superbowl. The star was Seahawk quarterback Russell Wilson who grew up in Richmond.

Wilson’s dad placed him at Collegiate, a highly regarded private school in the West End. The Sporting News reported that when Wilson was a ninth grader at Collegiate, Richmond public schools started angling to recruit him to play ball for them. Dad said no. According to him, “I didn’t put Russell in Collegiate for sports, I put Russell in Collegiate to get the best education he could get.”

So much for Richmond’s public schools. It’s really too bad, as well, that the public school system is so neglected and that the mayor and other opinion makers are ignoring huge municipal problems in favor of top-down development like the new baseball stadium of questionable value.

Columbia Pike Streetcars: Delving Deeper into the Value-Capture Scenario

by James A. Bacon

Last week, I made the case that the best way to finance construction of the proposed Columbia Pike street car line in Arlington was to set up an improvement district along the route and impose a real estate tax surcharge on property owners to pay off the bonds. (See “A Second Opinion on the Columbia Pike Streetcar.“) “If the property owners are willing to go along, it’s probably a good idea. If they balk, it’s probably not.”

In response, I received an email from Eric Balliet, a communications specialist with Arlington County. His email is worth reproducing in full:

Your concern that the County is not asking the primary beneficiaries of streetcar – property owners along the streetcar line – to pay for these improvements is not completely accurate. Local funding for the streetcar will come from the Transportation Capital Fund, which is used for major investments in transportation infrastructure throughout the County. The Fund is supported by a commercial real estate tax rate of $0.125 per $100 of assessed value. This tax rate applies to all commercial and industrial properties – including those along the streetcar line. Before the General Assembly provided this funding mechanism for jurisdictions to improve transportation infrastructure, the County used limited general tax revenue for that purpose, including for development of Metrorail in the Rosslyn-Ballston and Route 1 corridors.

The County also has established tax increment financing (TIF) to capture the property value created by redevelopment to fund streetcar and other priorities. The Crystal City-Pentagon City-Potomac Yard TIF is helping to pay for infrastructure improvements such as streetcar in support of the Crystal City Sector Plan. The new Columbia Pike TIF will dedicate up to 25 percent of tax revenue growth generated by new development and property appreciation in the commercial and multi-family residential revitalization districts to affordable housing along the Pike. This ensures that some of the money generated by streetcar will help meet our goal of preserving existing affordable housing along the Pike as property values and rents increase.

One final note – regarding the capacity of streetcar versus bus: Today on Columbia Pike, nearly 600 bus trips per weekday carry more than 16,000 passengers daily. Buses already come every 2-3 minutes in rush hour. Based on updated regional population projections and County-adopted plans, we need transit capacity of 38,000+ daily on Columbia Pike by 2035 to ensure it doesn’t become gridlocked. There is not enough street capacity for buses alone to accommodate that many passengers. A streetcar vehicle can hold 100% more passengers than a regular bus and 40% more than an articulated bus. Accommodating more people in fewer vehicles is key to keeping traffic moving.

I thank Balliet for educating me about the mechanisms being used to finance the street car line, of which I had been unaware. This information enrichens the debate. I must give the Arlington Board credit for recognizing that commercial interests would be major beneficiaries of the county’s roughly $300 million streetcar investment and for creating mechanisms that would capture some of the value created by that investment to lessen the burden on general taxpayers. That alone puts Arlington’s streetcar proposal way ahead of downstate mass transit projects, such as Bus Rapid Transit in downtown Richmond and a light rail extension in Virginia Beach, which have no value-capture elements of any kind. So, I toff my hat to the Arlington Board.

That said, while preferable to funding the entire county share from General Fund revenues, Arlington’s financing mechanism is still deficient. First, by imposing what amounts to a real estate tax surcharge on all commercial and industrial properties, the board is creating what might uncharitably be termed a slush fund for transportation projects which, by their very nature, benefit some commercial interests but not others. While the mechanism is fair to residential taxpayers, it is not necessarily fair to commercial property owners. Second, using tax increment financing (TIF) to tap 25% of the growth in property tax revenue generated by new development is largely a cosmetic measure. Columbia Pike property owners enjoy the blessings of higher leases and rents but don’t pay any more under this scheme.

To my mind, there are two important benefits to a strict value-capture financing scheme. One is that it is fairer, requiring beneficiaries of the public improvement pay for the improvement. Second, it creates an objective and non-political mechanism for weighing the risk-adjusted rate of return on the improvement. Let’s imagine that we set up a special Columbia Pike Streetcar District and tell property owners in that district (picking numbers for purposes of illustration), “We’re going to add a 25% surcharge to cover the full cost of financing construction of the streetcar and pay for operating costs not covered by fares. In return, you will get a streetcar system which, by our calculations, will bolster your rents and leases by 10% over time. There are uncertainties in all these numbers but we think we’re pretty close. Would you vote for or against this idea?”

If presented with this choice, the property owners would engage in a vigorous debate over the merits of streetcars and the assumptions embedded in the proposal, leavened by their own intimate knowledge of business conditions and property values along the route. Unlike planners, politicians and pontificators, they would have skin in the game. They would have the most to gain if the streetcar is a hit and the most to lose if it’s a bust. They, unlike politicians, would be likely to base their preference not on ideology but upon a keen awareness of the bottom line. They would be far less likely to engage in wishful thinking. If a significant majority of property owners agreed — as they did when they set up the special tax district to finance U.S. 28 improvements near Washington Dulles International Airport — then the public can have far more confidence that the project makes sound economic sense. That’s no guarantee, of course; businesses often bet wrong on investments. But they bet wrong a lot less frequently than do politicians playing with others peoples’ money.

One last note: Regarding for the carrying capacity of buses versus street cars, there is a lively discussion on an email thread initiated by Rob Whitfield. Has anyone considered the economics of running double-decker buses along Columbia Pike?

Sprawl’s Hidden Subsidies

perverse_citiesby James A. Bacon

If planning and regulation were the answer to sprawl, then the Toronto metropolitan region ought to be a smart growth paradise. Toronto has a sophisticated, multi-tiered planning process, starting with an regional plan, plans for 30 upper-tier municipalities, and plans for 241 lower-tier municipalities (towns and townships, mostly). Yet outside the city of Toronto itself, which is undergoing a condo boom, there isn’t much to show for it.

The various municipal plans, which are comparable to Virginia’s comprehensive plans, define urban boundaries, control densities and show where growth should take place. The goal is for 40% of all new residential units to be built in already-urbanized areas. “That’s not happening,” says Pamela Blais, a city planner and principle of Toronto-based Metropole Consultants. “All the plans said all the right things. … [But] the regulatory approach isn’t sufficient to bring about the change.”

The failure of regulation to halt sprawling, auto-centric development was the basis for Blais’ 2010 book, “Perverse Cities: Hidden Subsidies, Wonky Policy and Urban Sprawl.” She had researched and written the volume to figure out how the planners’ plans had gone awry. If smart growth made so much sense, and if planners had the power to bring it about, why weren’t developers and home builders doing what they were supposed to do? Something else had to be going on, she reasoned, something that was not commonly recognized.

pamela_blais

Pamela Blais

As she delved into the subject, Blais found that real estate development is guided by massive hidden subsidies that shift costs from inefficient, land-intensive development to efficient, compact development. These invisible subsidies work at cross purposes to the regulations. As it turns out, developers follow the dollar.

Blais describes herself as a pragmatist. “It’s not an ideological argument I’m making,” she told Bacon’s Rebellion. “I’m interested in getting better cities. I’m happy to talk to everybody on the whole spectrum.” But her approach to urban development is one that fiscal and free-market conservatives can appreciate. The system for pricing public goods such as roads, water, sewer, electricity and public services bears little relationship to the cost of providing those services, she argues, with the result that a tangled skein of hidden subsidies incentivizes low-density development.

“Everybody thinks [sprawl] is the the invisible hand of the market. It’s a highly distorted market,” she says. “I’ve been arguing, let’s remove the distortions and take it from there. Remove the distortions and you’ll get a different development pattern. That should be the starting point.”

That is very much the argument that I have made in Bacon’s Rebellion, based largely on the work of EM Risse in his work, “The Shape of the Future” and essays published on this blog several years ago. Risse argued that charges do not reflect their “location-variable costs,” a succinct phrase that captures the spirit of Blais’ argument. In my reporting, I have focused mainly on one set of costs — transportation — but Blais carries the analysis to charges for utilities, municipal services, housing, parking and development charges as well. In “Perverse Cities,” she exhumed an impressive body of research to document her thesis across the board.

When you subsidize sprawl, you get more of it. When you penalize smart growth, you get less of it. To achieve smart growth objectives, Blais argues, what the United States and Canada need is not more regulation, which can create distortions of their own, but prices that reflect the underlying costs of development. 

Blais doesn’t oppose all subsidies. But she thinks they should be transparent and a subject of public discussion. “Right now, we’re not even having those discussions. People aren’t aware those cross subsidies are happening.” Here is a sampling from her book of how hidden biases are built into the system:

Water-sewer. Water-sewer charges typically are applied uniformly across a service area, regardless of how much it costs to provide the service. Sometimes charges vary by the volume of water; sometimes they do not. But charges rarely vary by the capital cost of extending water-sewer pipe longer distances to serve scattered, low-density housing, nor the operating cost of pumping water those greater distances. As a consequence, homeowners living in compact urban areas where the service is inexpensively supplied wind up subsidizing homeowners living in low-density areas where it is more expensive. Those subsidies could be avoided by breaking water charges into two components: a charge based on the volume of water consumed and a location-based charge that reflects the cost of building and maintaining the pipes. Continue reading

The Koch’s Bizarre Meddling in Chesterfield

koch brothersBy Peter Galuszka

The Koch brothers are back in the bucolic suburban tracts of Chesterfield County.

This time, their national group, Americans for Prosperity, has launched a robocall campaign to oppose a proposed real estate tax hike of 4.6 cents to help pay for $304 million renovations to schools or perhaps hire more teachers to bring classroom sizes back to pre-recession levels.

It’s apparently the second time that Americans for Prosperity have been on their case in Chesterfield. Last year, the hard-right group sent out bizarre “report cards” to ordinary citizens bashing them for not registering to vote.

In one famous local case, a recipient was actually a registered and active voter and greatly resented the idea that a multi-million dollar national outfit like the Americans for Prosperity was trying to monitor his personal business.

This time, Sean Lansing, the group’s Virginia director told the Richmond Times-Dispatch, the goal is to “educate” residents on the issues, as if they are too stupid to understand local tax and classroom size problems that they probably know far better than some AEP appartchiki.

Chesterfield has caught itself in a bind because it hasn’t raised real estate taxes since 1990 despite its brisk growth rate. Voters in November voted down a 2 percent meals tax that could have raised money for schools. Henrico County voters, by contrast, narrowly approved a 4 percent meals tax and thus have no budget crisis that another tax hike is needed to resolve.

Admittedly, one of Chesterfield’s problems is bad planning. The staunchly Republican county has a long history of being very friendly to developers. Consequently, the county is in a constant service “catch up” mode. Need schools, such as Cosby High near some of the county’s largest residential developments, was already way overcrowded before it was finished a few years ago.

What is puzzling is what the Koch brothers are so interested in Chesterfield. It is hardly an election battleground. There is no strong Democratic or other opposing party. Yet with consummate arrogance, this cabal believes that residents need robocalls to “educate” them.

“Educate” them for what? If you want good schools and other services, someone has to pay for them. And as a Chesterfield resident for nearly 14 years, I can attest that taxes here are considerably lower than other places I have lived as an adult (Washington, New York, Chicago, suburban Cleveland, etc.).

Cars, User Fees and the Intransigence of Human Nature

Image credit: Thinking Highways

Image credit: Thinking Highways

by James A. Bacon

Bern Grush has been promoting Mileage Based User Fees (MBUFs) as a mechanism for financing roads and highways since 2002 or so. The Toronto native was one of the earliest evangelists of the concept of charging trucks and cars by the mile to raise money to build and maintain roads. The movement built a head of steam in the mid-2000s but it has fizzled since. “I’m finished with the dream,” a frustrated Grush told me in an interview yesterday while we were discussing an essay, “Social Evolution and Road Pricing,” he had written for Thinking Highways.

Well, he’s not really finished with the dream, but Grush does realize that MBUF proponents must adopt a radically different approach. Reformers wishing to alter the auto-centric transportation and land use policies have been flapping their jaws literally and figuratively for years in conferences, debates, presentations, academic journals, textbooks and mass media. Other than a mileage-based tax on heavy trucks in a couple of European countries, it has amounted to naught, Grush lamented in the essay.

Arguments appealing to fairness and economic rationality just won’t work, he says. “People are just stubborn. It’s not that they’re dumb, they don’t get it or they’re Tea Party. They’re responding to their DNA.”

We are biased for automobility by the reproductive advantages that superior autonomous mobility granted ancestral social groups of human nomads, gatherers, hunters, scavengers, warriors and conquerors. Any individual group or group of humans that could travel faster, carry more, range farther, and kill more would tend to eat more, live longer, keep more wives and produce more offspring. This generalized automobility, entrenched long before Karl Benz or Henry Ford, was triggered by the domestication of donkey, horse, camel and elephant. The advantage of superior, power-assisted automobility has been wired into humans for at least 7,000 years.

The desire for autonomous travel operates at the same biological level as our evolutionary proclivity to wage group war and our deep social inclination to engage with religion. … When we ask drivers to use an alternative to the personal car, we are asking something more fundamental than most of us realize.

Cars allow people to drive where they want, when they want. People in cars can travel alone, with passengers or loaded up with grocery bags or loot from Wal-Mart. People can choose whom they travel with. They can cocoon themselves in privacy and listen to music, talk radio or books on tape. At a more fundamental level, cars expand an individual’s range, allowing them to reach more potential work, more potential mates and more goods and services.

As critics of the auto-centric society have pointed out, there are drawbacks to automobility as well. Cars create pollution, kill thousands in accidents, spew CO2 emissions (a concern to those who worry about catastrophic global warming), and create a hostile environment for those who would travel by other means. Ironically, when too many people own cars, the congestion they cause limits the very range and reach they covet when they purchase their cars.

Cultural determinists, who believe that human behavior is infinitely malleable, will object to this way of thinking. But they have to reckon with the fact that in every society on the planet, humans invest personal resources to increase their personal mobility — bicycles in poor countries, motorcycles in somewhat wealthier countries, and automobiles in wealthier countries. They even drive cars in cities where traffic conditions are far more congested and hellish than in the United States. Whenever a human proclivity is universal across all societies, that’s a pretty good indication that it stems from what we colloquially refer to as human nature.

But genes are not destiny. Warlike impulses are embedded in the genome but humans, endowed with the faculty of reason, have created institutions that have drastically reduced the incidence and severity of violence and war compared to that of our primitive forebears. Grush believes the same thing is possible with automobility. Autonomous or Self-Driving Cars, he says, may be the technology that allows us to reconcile our personal need for mobility with our social need to dampen congestion, pollution and the other externalities associated with too many cars.

Many technology trends increasingly push services into the cloud, and away from physicality and ownership. Bus, taxi and carshare are forms of transportation as a service, but each are flawed. The bus is a far cry from automobility, the taxi is expensive and often uncertain, a car-share vehicle still needs the user to operate it. Large, variegated fleets of autonomous vehicles can provide true transportation as a service (TaaS). TaaS from the AV can be far more personalized than bus or tax and somewhat more than the current carshare fleet. And the AV can reach a far larger portion of people requiring automobility than can bus or carshare and much more cheaply and safely than a taxi. … Continue reading

Fixing Our Compromised Interstates and Highways

29north

U.S. 29 north of Charlottesville. Once upon a time, this was a highway. (Photo credit: C-ville.com.)

Over on Strong Towns Chuck Marohn is running a five-part series on how to restructure transportation policy in his home state of Minnesota. Despite a different state/local government structure and different spheres of authority for the two states’ transportation departments, many of his proposals carry over to Virginia. In today’s missive, he tackles three issues that seem particularly pertinent to the Old Dominion.

Interstate highways. Marohn outlines his idea of a “base” Interstate system, which performs the function for which it was originally designed of connecting major cities, or centers of economic activity. A base of two lanes (each direction) should be maintained by federal gas-tax dollars for the purpose of “making high speed connections between productive places.” The purpose of the Interstate system is to move people, goods and materials as quickly and efficiently as possible between economic centers, not moving them as fast as possible within economic centers.

Marohn does not say so explicitly but his commentary implies it: Any lanes built beyond that two-lane base are required for local or regional connectivity, hence, should be the responsibility of state, regional or local authorities, not the federal government. He then suggests that these lanes be subject to congestion pricing. “The revenue from this fee will … be sequestered to fund maintenance of the extra capacity and, where needed, future expansion of the corridor (by whatever mode is most feasible).”

Interstate exchanges. Interstate exchanges should be built and paid for with federal dollars at the rate of no more than one interchange per six miles outside a municipality. Their maintenance should be paid for with the federal gas tax. If someone wants to build additional interchanges, construction should be financed by means of “value capture,” a tax assessment on property owners whose values would rise as a result of the improvement. If value-capture financing cannot support the cost of constructing the interchange, there is no economic justification for it, and building it represents nothing but a wealth transfer from the general public to private property owners.

State highways. Marohn suggests that federal funds should be applied to maintaining the equivalent of one lane (each way) for state highways, with additional lanes to be maintained and expanded as needed by means of congestion charges. That’s an elegant idea in theory but I worry about its applicability in the real world. Not only are there costs associated with administering congestion charges but it would be prohibitively expensive to segregate individual lanes on state highways, especially where those highways have been co-opted by urban transportation systems with lots of traffic lights, cut-throughs, driveways and entry points. I’ll set that aside as a utopian ideal for the moment to focus on what I think is an economically feasible idea.

Under Marohn’s scheme, any private access to a state highway where the speed limit is set at 30 m.p.h. or greater should be subject to an annual access fee.

The fee will be based on a ratio of the traffic on the highway versus the traffic accessing the highway, using methodology currently applied in signal placing and benefit/cost analysis. Under such a system, a farmer with a driveway on a remote state highway might pay $25 per year since the impact of a single home on a low volume roadway would be minimal. A strip mall on a congested corridor may pay thousands (or more) to offset the cost of slowing traffic on the highway. The access fee is compensation to the general taxpayer for degradation of the highway’s capacity, which the general taxpayer funded.

That seems eminently doable. I would argue that existing access points should be grand-fathered, otherwise the political hue and cry would be so deafening that it would be impossible to pass legislation to put the idea into effect. But at the very least, Virginia should begin charging for new access to state highways.

Marohn proposes a more complicated mechanism for urbanized areas where highways have been compromised by a profusion of intersecting streets, traffic signals, cut-throughs, curb-cuts and the like.

Within cities, in areas where the speed limit is less than 30 mph, all properties within half a mile of the highway (measured perpendicularly) shall have a highway surcharge on their property tax. The surcharge will be based on the value of the land (higher valued land will pay more, note it is the land only and not the total improved property value) and is meant to pay for (a) the added costs of constructing and maintaining an urban highway, and (b) compensation to the general taxpayer (who funded the system) for degradation to the highway’s capacity. It should likewise be sequestered for this purpose. Continue reading

Value Capture vs. Slush Funds as Transportation Funding Tool

transcontinental_railroad

America’s trans-continental railroads were financed through value-capture.

by James A. Bacon

Charles Marohn at Strong Towns has penned a fascinating piece comparing the financing of America’s railroad system in the 19th century with the construction of the nation’s Interstate highway system in the 20th. (Read the essay on the Smart Growth for Conservatives blog.) The railroads used a form of “value capture,” which worked extraordinarily well, while the Interstates used public funds, which, in hindsight, we can see hasn’t worked out so well.

The federal government gave trans-continental railroads land along their routes. It was easy to give away — no one lived there (other than the Indians, and they didn’t count back then) so it had no value. Railroads created the value, and they sold off that value in the form of lots and parcels to pay off the railroad bonds they used to finance construction. By contrast, the federal government employed a motor fuels tax to finance construction of the Interstate system. While the tax at least was a rough user-pays system, it created a pool of money — Marohn calls it a “slush fund” — which politicians could allocate without regard to the economic viability of particular projects.

Marohn argues that the 20th-century transportation-funding system created two travesties. First, it severed the correlation between supply and demand.

We all subtly pay into a giant slush fund and then we all expect that slush fund to deliver on its promise and meet our insatiable demand. Members of the engineering profession have called taxpayers “whiners” for not wanting to pay more, but why would anyone pay more for something they don’t really value?

… People do value transportation, but at what price? Nobody really knows. Time and again we see that, when prices are not hidden in a slush fund but instead are paid by the user at the time of consumption, demand drops. For a government-led transportation system, a drop in demand is devastating. Put a toll on that road priced for current usage and fewer people will use it. The drop in demand forces an increase in the toll if the same revenue is to be sustained. An increase in the toll further depresses demand and on and on and on…

The second travesty is that the funding system eliminates valuable feedback regarding a project’s economic viability.

In the railroad era, private investment always led public investment. The railroads would construct the lines, build the towns and the town itself would be somewhat established before any public investments were made. … In the automobile era, the risk taking is reversed. For all but the most local of transportation improvements, governments front the investment capital and take the risk. …

What happened when the private railroad companies overbuilt their system? What happened when they got out in front of market and had too much supply without enough demand? They, of course, got the painful feedback of losing money and watching their assets drop in value. Sometimes entire companies went out of business.

What happens when the government, operating in the automobile era, overbuilds? What happens when we create so much supply, so many miles of roadway, that demand can’t possibly utilize it effectively? Well, the feedback isn’t quite so direct. Budgets start to be frayed. Obligations go unfulfilled. There isn’t enough return on these government investments and so there ultimately isn’t enough money to care for them. These things can be attributed to many causes, of course, most of which appeal to our psyche more than the idea that we’ve overbuilt.

Contrary to the protestations of the special pleaders, who maintain Virginia has an unfunded backlog of tens of billions of dollars of transportation needs and the nation has an underfunded backlog hundreds of billions, Marohn contends that the United States has built more road and highway infrastructure than it can effectively maintain.

Our solution, bizarrely, is to build more. So long as the government has the money to avoid the hardest decisions, any uncomfortable response – land use changes, shifting from automobile trips to walking or biking or modifications to the tax code, to name just three – will remain off the table, or at least relegated to the fringe. More money doesn’t solve any problems. It just forestalls the pain of transition, compounding the imbalances in the process.

Well done, Charles. Very well done.

Don’t Expect Increased Real Estate Assessments to Bail out Local Government

demand_instituteThere’s bad news for local governments in Virginia that rely upon property tax revenues to support schools, public safety and other priorities. Property values for single-family homes, which account for a large majority of most jurisdictions’ total assessed value, will not increase much over the next few years, according to a new study by the Demand Institute.

Nationally, the picture  is dismal enough. “Double-digit increases in U.S. home prices over the past two years are not indicative of future trends,” states the report. “They were driven largely by investors buying up swaths of distressed homes to meet growing rental demand. Over the next five years, prices will grow over a much slower rate. We forecast existing single-family media home prices to grow at an average annual rate of 2.1 percent between 2015 and 2018 as supply and demand move into sustained equilibrium.”

But there will be significant variations among the 50 states. And Virginia drew the short end of the stick. Of the 50 states and District of Columbia, the Demand Institute ranks Virginia third from the bottom (D.C. is at the very bottom) for expected rebound in the median price for a single-family house between 2012 (the market trough) and 2018 — only 14%.

(There is a discrepancy in the numbers that I am at a loss to explain. Nationally, the median price of single family houses is forecast to increase at an annual rate of 2.1% between 2015 and 2018, or 6.3%.  Yet the report’s breakdown of the states shows every state but D.C. showing increases between 7% and 33% over the same period. If anyone can explain the difference, please let me know.)

There is even greater variation in the forecasts for Metropolitan Statistical Areas (MSAs). The Washington metro area ranks dead last, with anticipated price gains of only 7% between 2012 and 2018 — an average gain of little more than 1% a year.

Richmond is a laggard with only a 17% gain over the same period, while Hampton Roads shows a stronger housing market than most, with a forecast gain of 25%.

Bacon’s bottom line. Rising real estate assessments won’t bail out Virginia local governments like they did in the early 2000s. Meanwhile, localities are grappling with the cost of financing public pensions, meeting state and federal storm-water mandates and replacing aging infrastructure. Either tax rates will rise, government services will be cut… or government officials will have to do things differently. Of the three, the latter course of action is the most desirable, though probably the least likely.

What can we do? Move more aggressively to apply smart-city technologies to manage public facilities and infrastructure more efficiently. Encourage more compact development to maximize utilization of existing infrastructure without incurring the obligation to build and maintain more. Begin integrating online and computerized learning into K-12 curricula as appropriate.