The Fiscal Fix

Peter Katz

A former planning director proposes analyzing development projects on the basis of how much revenue they generate per acre. The results will astound you.

by James A. Bacon

A discourse about the fiscal impact of low-density vs. high-density development may not seem like riveting subject matter to most people, but Peter Katz has a way of pulling you in. The professorial-looking planner with a salt-and-pepper beard speaks with a measured voice as he piles image upon image, fact upon fact, graph upon graph, until you go, “Wow.”

He starts with a slide of a Walmart in Sarasota, Fla. It’s a familiar image: Identical to hundreds of other Walmarts across the country, the big-box building squats in a vast parking lot. It may look barren but the store generates hundreds of thousands of dollars in property tax revenues for Sarasota County – a seeming bonanza.

Not so fast, Katz says. When you calculate the property tax per acre of land, including the parking lot, there’s nothing extraordinary about it at all. In 2008 the Walmart yielded $8,350 per acre. That’s only a couple hundred dollars per acre more than the county collected from a typical single-family house in the city of Sarasota (a separate municipality; the home owner actually pays city taxes as well).

Next, he mentions the return from a property housing a Burger King near the Interstate. What a surprise: The development yielded $15,500 per acre. And then he flashes a photo of Sarosota’s premier retail destination, Westfield’s Southgate Mall, which generated $21,800 in property taxes per acre.

Just as it dawns on you where he’s heading with the presentation, Katz shows an older two-story, urban mixed-use building with a shop on the ground floor. It’s attractive and well located, but hardly a luxury destination. Yet the tax yield leaps to $91,400 per acre, more than four times that of the swankiest mall in the area and more than 10 times that of the Walmart.

What happens with urban mixed-use mid-rise buildings? Katz clicks to a photo of an older 10-story building with street-level retail, one floor of office space, and condominiums above. The property tax take: $790,000 per acre. (Yes, that’s a number with six digits.) Finally, the piece de resistance: Up pops a slide of a newly constructed, mixed-use high-rise loaded with retail, commercial space and luxury condos. The property tax yield is nearly $1.2 million per acre – or about 140 times that of the Walmart.

Photo credit: New Urban News. (Click for more legible image.)

So simple. Yet so revolutionary. Katz’s information overturns decades of conventional analysis. Planners typically look at the tax take per house, per store or per office building. But that doesn’t tell you anything particularly useful, says Katz, who in the past 20 years has served as the first executive director of the Congress for the New Urbanism, co-founded the Form Based Code Institute and worked as a senior planning official in Sarasota and then Arlington, Va. The cost of providing most government services – water/sewer, roads, sidewalks, police, fire and rescue, almost everything but schools– varies not just by the number of houses, stores or office units being served but by the geographic area being served.

According to Katz’ Sarasota study, the tax yield per acre from a mixed-use urban development runs anywhere from 25 to 100 times that of low-density, single-use developments. Yet local governments have been approving projects at ever-lower densities for the past half-century, deluded by the impression that spreading growth further out onto cheaper land makes it a better deal for the municipality. Spreading out growth may or may not reduce the cost per acre – that’s the subject of considerable debate — but it undeniably consumes many more acres. Is there any wonder, Katz asks, why local governments are facing so much fiscal pressure?

Questions about the cost per acre of providing infrastructure, while important to the analysis, become almost immaterial compared to the difference in the tax yield per acre. Katz says. “When you see such huge revenue disparities between the downtown high rise and the suburban big box; there is simply no way that anything on the cost side will significantly change the equation. We’re not talking about differences of 20 percent or 30 percent here. We’re talking differences of thousands of percentage points!”

The implications of this way of looking at the tax base are profound. Jim Ley, who was Sarasota County administrator when Katz commissioned the study in 2010, said the tax-yield-per-acre perspective helped tear down myths that supported low-density development. It was widely believed that the biggest taxpayer in the county was a mall, he says. “That’s true… but it sprawled over 40 or 50 acres.” The same acreage dedicated to mixed-use development would have generated far more in taxes.

In the 2000s, Sarasota County boomed and revenues increased year after year. But the real estate crash turned the growth paradigm upside down. “In this part of Florida, people have lost 36% of their property value,” says Ley, who describes himself as a bottom-line guy and a fiscal conservative. In other words, the county lost one third of its property tax base. Politically, the board couldn’t raise tax rates while people were hurting. The solution, he suggested, was not authorizing more development – it was authorizing development that yielded more tax revenue per acre.

Katz, who worked under Ley, hired Public Interest Projects to conduct the research. In a smaller exercise, the consulting firm had found that a mixed-use project set in Asheville, N.C.’s downtown district consumed less land, produced more property taxes per acre and supported more jobs per acre than the local Walmart. The really amazing thing was that the downtown project even produced more retail sales tax per acre.

Stimulating mixed-use re-development in downtown districts has dual advantages. Urban cores already have infrastructure such as water, sewer, roads, streetscapes, etc. And when infrastructure needs to be added, water pipes run shorter distances and much of that distance is vertical, paid for by the developer. Often high-rise mixed use in a downtown area requires less new infrastructure investment than if comparable square footage were built in a lower-intensity greenfield location. Combine lower infrastructure investment per acre with a higher tax yield, and the revenue return on the public’s infrastructure investment is far superior.

There are different ways to look at that return. Katz measures the length of time it takes for tax revenues from a project to pay back local government’s initial infrastructure investment. Under his most dramatic positive scenario—a group of close-in, mixed-use high rises—the payback is a mere three years. In the case of low-density multi-family residential development (2- to 3-story garden apartments, like those shown above) at the edge, the payback is more than 40 years — not even counting the interest that ought to be charged on what he regards as a long-term government loan to the developer. He calls this new metric the “fiscal impact quotient.”

Joe Minicozzi with Public Interest Projects translates the same Sarasota data into a Return on Investment (ROI). The downtown Sarasota scenario, he said in a presentation to the 2012 Congress for the New Urbanism, provides an 18% ROI. The low-density suburban scenario is 2%. Or, from yet another perspective, the downtown Sarasota scenario puts the county $34 million in the black after 20 years, but the low-density suburban scenario is still $5.2 million in the hole. “This is a Ponzi scheme,” Minicozzi said. “We can’t pay our way out of this stuff.”

Katz is currently gauging interest in launching a not-for-profit organization to coordinate the efforts of a handful of local governments and regional planning agencies around the United States that are beginning to track such fiscal metrics. He believes that local governments, facing mounting costs related to poorly utilized infrastructure in outlying areas, eventually will start to use this kind of fiscal impact data as a “screen” for granting development approvals. His proposition is that government shouldn’t be writing blank checks for large infrastructure investments that will take decades, if ever, to recoup.

Conceptually, gathering the data is easy. Just go to the assessor’s office (many post the information on the web); find the acreage and tax paid on each parcel, and perform a simple calculation to get the revenue paid on a per-acre, per-year basis.

But this new metric has a few complications: The analysis of property-tax revenue does not take into account sales tax revenues (although, according to Katz and Minicozzi, this is not as big of a factor as one might imagine), nor the fact that tax structures vary significantly from state to state, locality to locality. Also, in some instances, high-rise buildings that spin off a lot of revenue can detract from the value and tax revenue generated by nearby buildings, as when they block views or light, or house large numbers of cars in street-killing parking podiums. Even with fiscal analysis aiding in development decisions, Katz says, the need for good planning remains.

This kind of “tax literacy,” a term that Minicozzi has coined, is desperately needed in Virginia, where fiscal impact analysis remains in the dark ages. An institute like the one Katz proposes could provide clarity to city councils and boards of supervisors as they struggle to understand the revenue implications of different forms of development.

“Smart growth has become highly politicized,” says Katz. “Reducing zoning and permitting decisions to pure dollars and cents may seem cold, but it removes the issues of ideology that people get hung up on. You make it safer for both sides of the aisle to talk to each other, and you end up with better decisions in local government.”

This article was made possible by a Piedmont Environmental Council sponsorship.