07/17/2005: "The Myth of Growth and Taxes"

Almost everywhere you go in the islands it is easy to get into a discussion about growth. Islanders don't like growth. But there is an idea about growth and taxes that has been slowly working its way into public policy decisions. Some people think this idea is a matter of indisputable fact. Proponents of this idea quote a study that they say proves it without a doubt.

The idea is, "Residential development does not pay for itself. Residential land uses receive far more in public services than they contribute in revenues."

The study is entitled, Cost of Community Services, (COCS), published by the American Farmland Trust (AFT). The study was commissioned and paid for by the Friends of the San Juans. The County Commissioners approved our County's participation in the study. The Skagitonians to Preserve Farmland [i] hired AFT to do a similar study for Skagit County that comes to the same conclusion.

To summarize, AFT collected data on tax revenues and expenditures and assigned them to a particular land use category. The land use categories are residential, commercial, and farm/forest/open. The report concludes that their method of assigning costs and revenues to land use proves that building new homes puts the "County's fiscal stability at risk" and that legislators should consider limiting development based on the conclusion that residential growth does not pay its fair share of taxes. The same method has been used in over 60 studies by this organization.

As far as I know this study has not received critical evaluation. It has not been widely distributed. According to the cover page dated 5/24/04, it was sent to "selected public officials and selected candidates for public office." It can be found at the Friends web site [ii].

To begin I think that promoting the idea that growth costs existing residents more than new residents unnecessarily divides our community by pitting long time locals against newcomers. This type of study is misleading and divisive in our small community and for that reason alone deserves a rebuttal.

I will argue that the study is erroneous because it begins with the conclusion that new development does not pay for itself and then sets out to prove it by manipulating data in a non-objective manner.

The Friends try to support their conclusions with a simple example; "A 5-acre parcel of open land pays property taxes but incurs essentially no public service costs; when a home is built on the parcel, the public service costs associated with the residence and its occupants are on the average greater than the increase in taxes due to the ‘improvements' to the land." This example ignores an important fact. As long as the vacant landowner left the parcel undeveloped, existing residents received a big tax subsidy. The study does not give proper credit for the full accumulative amount of past taxes paid by owners of vacant parcels when they decide to build new residences on that land.

For example, two families buy adjacent 5-acre lots at the same time. The owner of parcel A has no immediate plans to develop and is an absentee owner. The owner of parcel B immediately builds a house and moves in. Years go by.

Now the family in parcel B uses all the services of the county. The kids go to school; the family uses the services of the sheriff, fire department, library, parks, port etc. Parcel B pays slightly higher taxes than the undeveloped parcel A (about 30% more on average [iii]). However the owner of vacant parcel A incurs charges for public services that are not used.

The fact that was overlooked in the study is that when a new house is built on vacant parcel A, credit should be given to parcel A for subsidizing the owners of parcel B for all of the years taxes were paid for services not used. Had this been quantified and factored into the study as a credit toward residential development the conclusions would be much different.

Add to the equation that the recent building trend in San Juan County is toward second home and vacation homes built by absentee owners who pay high taxes on trophy homes that dramatically increase the subsidy to current residents. This point was ignored.

A very convincing case can be made that extremely large homes built on waterfront occupied by part-time residents who use few if any county services help to make all those services more affordable for many families living in moderately priced homes [iv]. Following the logic of the AFT study one could conclude that all new residential construction should be limited to extravagant waterfront homes assessed at 3 million dollars or more owned by part-time residents because property taxes are shifted to the higher assessed property whose absentee owners incur few expenses.

The AFT study also ignores the obvious fact that if parcel A has a new home built on it the assessment base is increased thus spreading out the burden for services the community receives. The study dismisses this as "myth". I disagree because in our small county we do not have large residential subdivisions similar to those on the mainland. Here we have single-family custom homes that are constructed at a slow pace compared to mainland standards and they pay their own infrastructure costs with private wells, roads, septic systems etc.

Further, our codes have built-in concurrency costs. For example developers may be required to pay for sidewalk and street repairs or to set aside and maintain open space or green belts as a condition of obtaining a permit. This results in a generous benefit provided by the developer to all residents at no cost to those residents.

Some people complain that if it were not for all the new people coming here our taxes would be lower. The study feeds this false opinion. There are many reasons for taxes to go up. Several include taxes collected from junior taxing districts increase and compound, a new levy is passed by the electorate, and individual assessed values increase due to rising real estate prices.

The Friends have it wrong when they conclude that, "While building more homes increases the County's total tax collections, the added revenues don't cover the cost of additional required services. Even in the most favorable situation, in which new homes are built in existing residential neighborhoods, the effect is to increase taxes, or reduce services, for existing taxpayers."

This conclusion is false. In the last 12-15 years new construction has increased assessed values by approximately 1 billion dollars countywide. The increase in new construction and the rise in real estate prices factored into to the assessment base help disburse the tax burden to all taxpayers. Because of this tax rates have actually decreased per thousand dollars of assessed value. Meanwhile costs for services in all taxing districts have remained about the same. Taxes have been limited to 1% maximum increase and have not changed substantially at all [v].

Further, the ability for the taxing districts to collect the ‘cost of new construction' (3-4%) and add it to revenues is a bonus that would not be possible without new residential construction. Therefore the cost of services has remained fixed while the assessment base has increased.

It is important to understand how AFT assigned revenue and cost numbers to land use. There are 3 categories of land: Residential, Commercial, and Open Land. To each of these categories there is a column for revenue and one for expenditures. I believe that at least 3 significant errors were made in assigning funds to the different categories. The incorrect method in which Sales Tax, Federal Grants, and Land Bank allocations were assigned skewed the results of the study.

For example the 1% Land Bank tax revenue paid by new residents when they purchase land should be added to revenue in the Residential category, not to Open Land, and conversely, at least $2 million in expenditures associated with Land Bank property should be added to the Open Land expenditures category not the Residential category. Had this been credited correctly the results would have been turned upside down.

The explanation for this: >i>"since the Land Bank exists only because residential growth is consuming more and more of the San Juan Islands' open space and shoreline, and since the purpose of the Land Bank is to preserve open space for the enjoyment of County residents, it seems more appropriate to allocate all but the stewardship (maintenance) expenditures to residential."

The sales tax figures were allocated incorrectly in this study. According to AFT, "all revenue from retail sales was allocated to commercial land use. Revenue from contracting was divided between residential and commercial land use based on the relative percentage of assessed value in the county."

The reasoning for the above allocation is wrong. Residents pay most of the sales taxes in San Juan County. Contracting is the single biggest source of sales taxes collected in San Juan County [vi]. If you add other construction related retail sales tax from lumber, building materials, paint, glass, landscaping and nursery supplies, furniture, appliances, etc. the amount is more than half of the total sales tax [vii]. All but the small portion that owners of commercial property pay for their personal purchases should be credited to the Residential revenue category. If this were done correctly the result would be that new development pays more than its fair share, not less.

Federal grants are paid with income tax dollars paid into the system by residents. Therefore, those grants should be credited to Residential revenue. That is not what the AFT did. "Grants from the state and federal government were classified according to the type or purpose of the program that received the income, under the assumption that the revenue was provided to pay for a specific service."The arbitrary and subjective method used to assign costs and revenues undermines the entire study.

I believe most people would agree that open space, forest, and farmland add great value to a community. San Juan County is blessed to have so much of her land in this category [viii]. 31.44% of parcels in this category pay reduced taxes 15.68% are tax-exempt parcels. It is obvious that vacant land requires few if any government services. Therefore it is not surprising that the study concludes that even the amount of reduced revenue collected from vacant land exceeds the cost of services for this category. But it is people who consume the majority of services not land itself. The study confuses the two.

The groups that are promoting this study are not objective about the subject of growth. The American Farmland Trust is an anti-growth non-profit organization based in Washington D.C.[ix] The Friends are also focused on limiting development. Whether you agree with these groups or not, the bottom line is that these groups are not neutral on the subject of growth.

If the study were objective it would be reasonable to expect that results would vary from one community to the next. Not so. In fact the study boasts that in every community they have examined the conclusions are "very similar." If every study leads to the same conclusions then performing the study in San Juan County 50 years ago would have produced the same result. There may never be an instance where the results change given the fact that more than 60 communities of all different sizes and shapes were studied and the same conclusion was always reached. You might expect objective results to be more random because each community is unique.

So the AFT must begin with the assumption that residential development costs more in taxes than vacant land and set out to prove it. That is the reason why the categories are defined in advance, costs are arbitrarily assigned to these categories, and the same subjective assumptions are made about how revenues should be allocated. Instead of letting the evidence lead to conclusions this study collects evidence to support a predetermined conclusion. This explains why the results are always the same.

If it is true that new development puts the "County's fiscal stability at risk" then how have we survived all the growth in our community for the last 50 years? Our system of government should have collapsed long ago. Are we really at risk? I don't think so.

The study cannot really be taken seriously because the logic is flawed. The study claims that there is some inherent unfairness about taxation. But does it follow that we should stop people from building new homes?

Government will always use its power to raise the necessary revenue to pay for the services that people demand. No matter how the tax pie is divided someone will always be disgruntled. People have been complaining about the unfairness of taxes since the beginning of recorded history. So this group complains that new residents don't pay their way. Therefore we should not have new residents.

This may be one of many conclusions that could be drawn from this premise but out of the possible conclusions this one is the most indefensible. Others could be that government should limit spending, cut services, streamline programs to make them more efficient, or find other sources to raise additional revenues. The fact that the AFT's main solution is to limit new construction is evidence of their bias. Except for impact fees on new construction no other conclusions are seriously considered.

The study claims over and over again "San Juan County has grown faster than any other county in the State of Washington, with a 70% increase in the number of residential dwellings." This is extremely misleading. In fact more people moved to King County in the last 6 months than moved here in the last 13 years [x]. The actual percentage of growth in San Juan County averages less than 4% annually. San Juan County's rate of growth by percentage from 1990-2000 was 40% [xi] not 70%.

If you look hard enough you can find a study to prove almost any point of view; and if you cannot find one, then you can do what AFT has done by promoting this same study over 60 times. But to say "new residential development does not pay for itself" is not true no matter how many times it is repeated. Those statements should not go unchallenged.

The farmer feeds us all. The American Farmland Trust and the Friends try to feed us a misleading biased study. This study does nothing to help facilitate the dialog about growth in our community. Instead it is divisive. We should work together honestly to create fair policies to manage growth. In my opinion it is better to live and share in an attractive growing place as opposed to a dying community that people want to leave. How about you?

_[footnotes] ___

i The Skagitonians to Preserve Farmland are best known for their bumper sticker "Pavement is Forever". This slogan is false. There are many excavation contractors who can remove pavement, till the soil and plant crops at the same time. Pavement is not forever as long as there are contractors with heavy equipment.
ii http://www.sanjuans.org/ -
pdf_document/Cost_of_Community_Services_Report_May2004.pdf
iii Assessed values for improvements on land average 30% of raw land value approx. 70% of total tax is for land value.
iv According to the Assessor it is estimated that part-time residents own 25-30% of homes on the tax rolls. The trend is toward high-end vacation homes as second or third homes. A waterfront home on San Juan Island valued from 3-10 million not only pays astronomical taxes for services they also have reduced the overall tax rate so others actually pay less.
v See report SJC Assessments, Interview with Paul Dosset, 7/8/05.
vi See auditors report http://www.co.san-juan.wa.us/auditor/b04index.asp
vii San Juan County Treasurers report, Taxable Retail Sales Comparison, 2/9/05.
viii Statement of 2004 Assessments, Paul Dossett, County Assessor. (www.co.san-juan.wa.us/assessor)
ix Their web site states their goal is to prevent development of farmland (http:www.farmland.org).
x http://quickfacts.census.gov/qfd/states/53/53055.html
xi http://quickfacts.census.gov/qfd/states/53/53055.html