Leonard W. Hamilton, Ph.D.
Rutgers University
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Municipal officials frequently fall into a trap that is set by commercial and industrial companies. The argument is that these types of properties provide a high assessed value, while requiring very limited municipal services. Being nonresidential, they send no children into the schools, they take care of their own garbage collection, and they have more localized requirements for road maintenance and for police and fire protection.
"We can help you balance your budget," they tell local officials, "if you let us come into your community." The argument, in the simple way that is presented to the municipality, suggests that commercial ratables will provide tax relief as follows:
Assume that a new commercial property, valued at $2.5 million, will pay $50,000 per year in taxes, the same rate as 10 residential properties (valued at $250 thousand each with taxes of $5,000 each). The developers will argue that the 10 residential properties will send 15 children into the schools, will require trash pick-up, snow removal, and other municipal services, all of which will more than eat up their tax contribution. By contrast, they will claim that the commercial property's burden on municipal services will be minimal, perhaps $10,000 per year, leaving some $40,000 free and clear for municipal officials to use to balance their budget.
Does this sound too good to be true? It should.
There may have been a time in the 1960's and 1970's when there was evidence (poorly analyzed) to indicate that the strategy of attracting commercial ratables held the key to balancing municipal budgets. As a result, the "ratables chase" was on, and our communities became the laboratories that proved the illusory nature of this quick economic fix.
In 1992, Paul Wehn and I examined the previous 20 years of tax data (1973-1992) and ratables for the 39 municipalities that make up Morris County, New Jersey. The municipalities vary greatly in the amount of commercial and industrial ratables that were added during this period of rapid growth, and so provided a good basis for determining any tax relief that might have resulted from attracting these ratables into a community. The most interesting comparison was between the 13 "Ratable Rich" communities and the 13 "Ratable Poor" communities:
The Ratable Poor communities were 92 percent residential with only 8 percent of their assessed value in commercial property. Although they represented one third of the municipalities, they owned only 16 percent of the county's assets.
The Ratable Rich communities were 65 percent residential with 35 percent of their assets in commercial properties. Although they represented only one third of the municipalities, they owned a whopping 58 percent of the county's assets.
According to the argument for ratables, the commercial properties should be paying taxes at a rate that exceeds their burden on services, with the corresponding tax relief going to the residents of that community. If this is true, then the Ratable Rich communities in general should be paying proportionately less taxes than their Ratable Poor neighbors. But this is not the case: The Ratable Poor municipalities owned 16 percent of the county's assets and paid 16 percent of the taxes; the ratable rich municipalities owned 58 percent of the assets and paid 57 percent of the taxes.
Thus, despite the addition of some $4.2 billion in ratables over a 20-year period, there was no evidence that the ratable rich municipalities had gained a tax advantage--dollar for dollar, their costs of running local government have remained the same as for the towns that preserved their residential character. This was evidenced not only by the overall costs, but by individual tax rates as well. Property tax rates went up, as expected, over the 20-year period, but there was no systematic relationship between the amount of increased residential tax levies and the amount of ratables added.
One possible reason that the taxes did not go down in these ratable rich municipalities is that they spent the extra money to improve their communities, but the evidence argues exactly the opposite. Morristown was one of the biggest players in the ratables chase, adding nearly a half-billion dollars in ratables over the study period. It is the county seat, with a powerful chamber of commerce and excellent infrastructure and transportation. Despite all of this, it does not stack up very favorably among the 39 municipalities of Morris County, ranking 8th in taxes, 3rd in unemployment, 2nd in poverty cases, and 2nd in housing density.
The ratables chase had simply not worked.
The main reason why the ratables chase does not work is because of a miscalculation of the real costs. Whether this is an overly simplistic calculation of the costs or an outright misrepresentation of the data, the proposals that reach local planning boards almost never reflect a realistic appraisal of future costs to the municipality.
The tendency of the fiscal analysis reports is to rely on the same sort of anecdotal fallacy that encourages couples to marry because "two can live as cheaply as one." Perhaps a bit more sophisticated in the case of commercial ratables, but the claim that costs to the municipality will be minimal is always wrong: The notion that a large commercial venture can blend, unnoticed, into the existing services of the community has no basis in fact.
In calculating the costs to the community, I like to use the concept of locating the proposed commercial property on an island. The commercial enterprise cannot function on the island, so must begin to establish services. Let us examine a few:
Even if the commercial property hauls away its own garbage, it is using up valuable dumping capacity and will hasten the day when the municipality must find new locations at a greater cost.
The commercial property may hire its own security force, but the increased traffic and local population during working hours will increase the burden on local police and trigger the need for new cars and new officers sooner than if the commercial property were not there.
The increased traffic will result in additional repairs and improvements to roadways.
The commercial property may pay the same rates or even higher rates for use of these services, but history has shown that expansion of these facilities is always more costly than the initial service, and this increased cost will be passed on sooner because of the extra use.
Many local fire departments are not equipped to serve larger commercial facilities, and new equipment will be needed. Even more costly, the influx of workers and their families into smaller communities may increase the need for services to the point that a paid, multi-shift fire fighting service will be needed to replace a volunteer organization.
Commercial properties are complex. The additional direct administrative requirements to deal with a large commercial venture as well as the indirect requirements for dealing with the additional workers and their families will increase the staffing requirements of the municipality.
Factories may not send children to school, but their workers do. A single, large commercial enterprise may double the size of a small community. The workers and their families have to live somewhere, and most of their children will enter the local school system.
Current estimates from the U. S. Department of Commerce indicate that for each dollar contributed by commercial ratables, the local municipality must spend $2.05 in services. This sounds too bad to be true! But, alas, it is.
One of the premises put forth by the commercial developers is that their property can be dropped into a community without a ripple. Numerous studies have shown that this is not the case. When the open space near residential properties is transformed into commercial or industrial property, the value drops by as much as 30 to 50 percent. In the short term, this means that the property owner is being penalized by continuing to pay the same rate for a property that has decreased significantly in value. In the long term, with property sales and reassessments, the taxes will be adjusted lower to reflect the decline in property value and the overall tax base of the municipality will fall accordingly.
This negative impact of commercial ratables can be seen in the 1993 report of the Morris County Board of Taxation. Overall, the total assets of the county began to decline in 1988, causing some towns to scramble to find new commercial ratables to buttress their budgets. This would probably be ill-advised, because the five towns that showed the biggest decline in value (about -8.5 percent) had added $832 million dollars in commercial ratables during our 20-year study period. By contrast, the five towns that gained the most (about +8.6 percent) had added only $248 million in commercial ratables.
Buying land and leaving it vacant may be one of the best investments for a community. Like commercial ventures, open space does not send children to school either. But unlike commercial ventures, open space does not inflate the requirements for infrastructure and other community services, and it increases the value of adjacent properties.
Paradoxically, commercial ventures are often bad for business. Yours, not theirs. A calculation that is never included in economic forecasts of commercial development is the demise of existing local businesses. Family-owned businesses that serve our local communities flourish in a village or town setting, but they are dwarfed by commercial and industrial giants that move in. In addition to providing unreasonable competition, they often physically obscure these businesses by forcing new traffic patterns, divided highways, and traffic signals that make it difficult to patronize or even see these businesses. In the typical evolution of a community from a village to a heavily commercialized city, business ownership becomes more and more consolidated into the hands of a few large holders, most of whom have no other connection or commitment to the local community.
The increased burden to the municipality and residential property owners does not stop with the initial miscalculations or even with the secondary ripples that are produced by changing the character of the community. With increasing regularity, the commercial ventures themselves are going to court for tax reductions--and winning!
When it becomes apparent that the rosy fiscal projections that were presented to the planning board are not coming true, the owners of the commercial properties submit legal appeals for tax reductions. More than 16,000 such appeals were heard by the New Jersey State Tax Court in 1992, and these are only heard if the challenged assessment exceeds $750,000! Many communities that had been slapped with hidden costs when the commercial venture came on board were forced to turn the other cheek and find a way to meet their increased municipal costs with court-sanctioned decreases in revenue. More than likely, they will look for some new ratables to help them balance the budget.
Many of these re-assessments may be legitimate (there may be unforeseen changes in markets, and countless other variables), but the fact remains that businesses are sharing less and less of the tax burden. In the 1950s, businesses paid about 45 percent of the taxes; now they pay 16 percent.
The character of the community that we live in is one of the most defining aspects of our lives. The more fortunate among us glow with pride when we speak of our house, our neighborhood, our work in the community, our schools, our recreational facilities, and so forth. These are the things that weigh heavily in determining that elusive substance we call our quality of life. If we could "buy" these things by paying more than our share of the tax burden as individuals and let commercial developers off the hook, it might be a small price to pay, but the negative consequences of Morristown's quest for ratables cited above is symptomatic of a more widespread phenomenon.
Recent surveys of residents in the New Jersey, New York and Connecticut tri-state area have revealed deep dissatisfaction with the quality of life, and much of this dissatisfaction is grounded in the increasingly urban/commercial character of the places where people live. Some 47 percent of urban residents and 40 percent of suburban residents would like to move. Where? To less urban and more rural areas. To put a twist on a currrent saying, if you build it, they will leave.
Robert Yaro, Executive Director of the Regional Plan Association that undertook one of these studies, commented that "...we've got to work in a concerted way to make this a better place to live and work, from having more civility in public places to creating more jobs and green space." If we are going to have commercial ventures (and of course, we must), then they should be honest, fully participating members of the community rather than hucksters that are invited in to make the bottom line look better for this year's municipal budget. In this role, they will be much less willing to mortgage the future of their municipality.
There is a strong tendency for most citizens and municipal officials to accept the economic impact reports that are submitted by commercial development proposals at face value. After all, it was prepared by an expert (usually from a consulting firm) and would there be any reason to expect that an average citizen could do better? Well, yes. In fact, the report that appears in Appendix II is a specific example of how some simple recalculations can present a more realistic budget picture. Copperas Ridge, by the way, is now permanently green.
A wag once said that there are liars, damn liars, and statisticians, and we would be wise to bear in mind that the economic impact reports are, in a sense, advertisements for the commercial developer--they will not necessarily point out all the warts and wrinkles. Local officials and citizens are likely to have a much better perspective of how the new neighbor would affect the community.
It will be helpful to know the total population, the number of students in the school system, the number of households, and related information. This may be available through Town Hall, the municipal library, or the local newspaper.
The municipal budget will also be available through Town Hall or the local newspaper. Usually a summary form is sufficient if it outlines the tax revenues and individual budget categories such as schools, police, fire, street department, etc.
Many counties will publish an annual County Data Book that will include comparisons of the county's municipalities on all sorts of interesting measures such as average residential taxes, average income, proportion of citizens in different age groups, poverty levels, number of housing units, and so forth.
This will be a bit more difficult to find, but it may be useful to know such things as the number of miles of roadways in the town, the total and remaining capacity of the municipal sewerage treatment plant, the remaining capacity of the landfill for solid wastes, traffic counts on major roadways, availability of public transportation, recreational facilities, and so forth.
This report will include some of the important data about the size of the project, the number of housing units, the number of workers in a factory, and so forth.
The next step is to begin to make calculations and estimates. It is important to avoid getting trapped in too much detail at this stage--be bold and make rough, but realistic estimates. For example, if a new office building is being proposed with 300 workers, here are some of the estimates that you can make:
Two things will become apparent as you begin to consolidate your calculations into an organized report and compare it point-by-point with that of the developer's consultants: The first will be that your calculations cannot possibly be accurate. The second will be that neither are theirs! The important thing is to examine as many of the financial impacts as possible to determine if the proposed project will benefit the community. Anything else is poor planning.
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