Monday, June 28, 2010

Best tax revenue bang for the buck? Not what you'd think

RED WING, Minn. – If you're worried about local government's fiscal crisis – and if you're not, you should be; it's why hundreds of local teachers are getting laid off, libraries closed and hours slashed – then you should read this.

I'm listening as Peter Katz, a local government official from Sarasota, Fla., shows a series of charts and graphs and talks about property taxes in Florida. In terms of land development in Florida, he says, "It's like we're falling off the edge of the earth. People are completely freaked out."

So he decided to look at exactly where local property tax revenues come from. He shows bar graphs showing residential property tax revenue per acre in Sarasota County. The biggest revenues come from city residential areas.

Next he shows bar graphs showing revenue per acre for retail development. Here comes surprise No. 1. Wal-Mart/Sam's Club development brings in only about as much, per acre, as city residential. (Think of all those acres of parking lots.) The biggest revenues come from Southgate Mall, an upscale shopping center. That's not so surprising.

Then he shows the one that blows away the room – and this is a room of growth policy geeks, remember. He shows a bar graph on a whole different scale. In terms of property tax revenue per acre, high-rise downtown urban mixed use projects bring in more local revenue than even Southgate Mall, by what looks to my eye as a factor of about 10.

Next highest is mid-rise urban mixed use projects.

"From a fiscal standpoint this really puts hair on your chest," Katz says to chuckles in the room.
Less than an acre of downtown high-rise mixed use urban development brings in more property tax revenue than a 21-acre Wal-Mart Supercenter, he says.
Update here, Thursday 7/1, after I get some information from Katz: He says, " Less than an acre (.75 actually) of downtown high-rise mixed use urban development brings in more property tax revenue than a combination of the 21-acre Wal-Mart Supercenter and the 32-acre Southgate Mall, the county’s highest end commercial property with Macy’s, Dillards and Saks Fifth Avenue.

Then they looked at the payback time for the infrastructure costs for the development. The payback time (measured in property tax revenue, I believe) for the urban mixed use development was three years. Want to guess the payback time for infrastructure built for a planned mixed use development out at a highway interchange? It was a whopping 42 years.

Some disclaimers: Katz notes that they weren't measuring sales tax, only property tax. He also notes that there's obviously a limit on the market for high-rise mixed use projects in any downtown. And I'll note that this posting is a real-time one, and I haven't had time to check with Katz to ensure that I've totally gotten his stats correct.

Update No. 2: Katz notes that the tax analysis was done by Joe Minicozzi of Public Interest Projects, Inc., in Asheville.

(The event is a yearly conference among people affiliated with the Citistates Associates, a loose coalition of planners, economists, think-tankers, current and former elected officials, Chamber of Commerce execs, etc., who share an interest in metro region growth issues.)


Sam said...
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Andrew said...
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Stuart said...

Wow, that was a pointless comparison. To clarify, he calculated the ROI using full tax revenue for selection (A) and a fraction of tax revenue for selection (B). For this "study" to have some meaning, the selected sample must be comparable, which it was not in this case. What was the point of this article?

Dr. Horrible said...

So, you stack tons of people on top of each other in a smaller space, and it creates higher per acre revenues?

Who'd have thought.

ThrowDownYourLeavyScreens said...

If the Expert's point was to say what kind of development is most tax-efficient (read: biggest cash cow), he needed to look at gross tax receipts, not just property tax, collected by a city or county:

* Property tax
* Sales tax
* City or county income tax [e.g., New York City]
* Impact fees and other up-front development taxes/fees
* Business licenses

Once all of the city and county taxes and fees are included (in other words, excluding federal and state taxes), then there are grounds for a substantive comparison. If the 25-acre Wallyworld generates less gross taxes than the mixed-use development, so be it and then the expert may have a point.

But my suspicion is that the Bank Of America tower generates a lot more property tax to the Great State of Mecklenburg than the average Wallyworld does, but Wallyworld probably generates more gross tax.

Joseph said...

Dr. Horrible hits the nail on the head. But its a little deeper than that. The study that we did for Sarasota was a bit more broad and we did utilize cost comparisons that are kept by the Department of Energy and other papers that run numbers on development cost. Secondly, for full disclosure, Public Interest Projects is a for-profit real estate development company based in Asheville, NC. We develop buildings and pay their taxes for a living, so we know the costs and how to compare them.

When we ran the model in Asheville, our numbers show that our downtown continually out performs suburban low-density time and time again. A conservative estimate on multi-family services of government (sewers, water, schools, etc.) shows the costs roughly to pencil out to $16k/unit in compact development vs. $28k for low density. The simple way of thinking about it is that mile of pipe picks up more people in compact development, than it does in the low density stuff. Couple that against the amount of property tax (mentioned in the article) and then you're cooking with gas (pardon the pun). The key component with all of this is thinking through land consumption. When you set land as the least common denominator, you can do the comparison. Our model that is run sends everything through it on a per acre basis.

When we run that model in Asheville for instance, we see that the Asheville Wal-Mart is returning an estimated $50k/acre in TOTAL (retail and property) taxes to the city of Asheville, while property on main street in downtown are producing $330k per acre in property taxes alone. Bear in mind that this is a small community of about +70k people, and the buildings on Main Street are no taller than 6 stories. The simple statement with this is, you make more with less land consumption.

Couple that with the aforementioned point on the cost of services and you see that you make more PLUS you also spend less in services. A real estate investor would look at that as a Return on Investment. Peter Katz had called it a "Return on Infrastructure", or to paraphrase, the return for the provision of public infrastructure. The numbers we saw in Sarasota were a 3 year payback on infrastructure for compact development versus a 42 year payback for low density sprawl.

I hope this helps.
Joe Minicozzi, AICP