At Lincoln House May 2017

Our new initiative to find water solutions in land

The Lincoln Institute today announced the establishment of the Babbitt Center for Land and Water Policy, the centerpiece of a new initiative to integrate land use planning and the management of an increasingly scarce resource.

The Center, based in Phoenix, is named for Bruce Babbitt, former Arizona governor, Interior secretary, and longtime board member of the Lincoln Institute of Land Policy. Jim Holway, who has years of experience in water and land use issues in Arizona and throughout the Intermountain West, will serve as the first director.

“It’s been said that water is the new oil, and if we want to ensure that future generations have adequate supplies, we have to understand the intimate connection between land and water,” said George W. “Mac” McCarthy, president and CEO of the Lincoln Institute. “It’s a two-way street: how we plan and use land has an impact on water, and water availability has an increasing impact on how we can use land. We seek to bridge these two worlds to better meet the needs of people, agriculture, and nature.”

The Babbitt Center will gather data, develop indicators, and build and test new tools for fair, efficient, and sustainable management of water resources. An initial activity will be to develop a map, using satellite imagery, for selected tributaries of the Colorado River Basin. The aim is to provide a foundation – potentially scaled up to the entire basin, serving seven states and some 30 million people – that illustrates the relationship between land and water, and can be used for better projections, modeling, and scenario planning.

“We hope that conversations with communities and decision-makers throughout the basin might bring together stakeholders who don't necessarily talk to each other,” said McCarthy. “We seek to help state and local officials integrate land and water policies across an entire geography, to imagine better futures.”

At the same time the Babbitt Center is launched, the longstanding joint program between the Lincoln Institute and the Sonoran Institute, previously known as Western Lands and Communities and now renamed Resilient Communities and Watersheds, will aim to better integrate land use planning and water management at the local level. The partnership with the Sonoran Institute will be an important part of the work of the Center.

Ultimately, it is hoped that the Babbitt Center will become a hub that connects the people and practices of the arid American West to people and practices in the rest of the world.  By 2025, the United Nations predicts that 1.8 billion people – nearly one-quarter of the planet’s population by that time – will be living in regions with severe water scarcity.

The Center will become part of the emerging global footprint of the Lincoln Institute, from Beijing, where long aqueducts are planned as the sprawling city confronts rapidly draining aquifers, to the megacities of Latin America, which struggle to provide water to citizens through cycles of drought and floods.

“I am honored to be associated with this initiative and vision,” said Bruce Babbitt, who is currently advising state government in California on water issues. “The Lincoln Institute has emphasized the importance of land and land policy in addressing the world’s toughest problems, and the stewardship of water resources is at the top of the list. We all need to be aware of the connection between water and land.”

“We are optimistic as we all share the goal of ensuring water for future generations,” said Holway, formerly director of the Lincoln Institute-Sonoran Institute joint program and assistant director of the Arizona Department of Water Resources, who currently serves on the board of the Central Arizona Project.

Lincoln Institute releases annual 50-state property tax report

For the 12th year in a row, New York City has a larger discrepancy in property tax rates for multi-family rental apartment buildings compared to owner-occupied homes than any other U.S. city, according to the annual 50-State Property Tax Comparison Study by the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence.

Because of assessment limits, valuation practices, and other factors, the result is that the effective tax rate on a typical owner-occupied home is just one-fifth of the rate paid by the owner of an apartment building – costs that are in many cases passed along to renters.

The discrepancies in the New York City system emerge in a comprehensive analysis of the effective property tax rate – the tax payment as a percentage of market value – for residential, commercial, industrial, and apartment properties in more than 100 U.S. cities.

The report underscores the importance of the property tax as a stable source of revenue for cities, and the challenges of fine-tuning property tax systems in widely varying market conditions across the country.

Many of the cities with the highest property tax rates are struggling to make ends meet, dealing with a low tax base that requires higher tax rates to bring in enough revenue -- and constrained by state laws that restrict their access to other revenue sources that would allow them to reduce their reliance on property taxes. Detroit, which has the highest effective tax rate on a median valued home, has by far the lowest median home value of the cities covered in the report. In Bridgeport, which has the second highest rate on a median valued home, the city relies more heavily on the property tax to fund local government than any of the other cities covered in the report because of state laws restricting their access to other broad-based taxes.

But in other places, high or low property tax rates are largely the result of other policy decisions made by local governments. Nowhere is that more true than in New York City, which has one of the nation’s lowest tax rates on owner-occupied homes, while also having the highest tax rate on apartment buildings and the 2nd highest rate on commercial properties. There, a $1 million commercial property faces an effective tax rate that is 4.1 times higher than a median valued home, while a $600,000 apartment building has an effective tax rate that is 5.0 times higher. These are larger discrepancies than are found in any other city in the report.

The disparities in the New York City system, brought to light in many recent media reports, are the subject of ongoing research by the Lincoln Institute and the Regional Plan Association. That work will review the existing evidence, explore policy reforms that improve property tax efficiency and equity, and conduct empirical analysis to determine the incidence of proposed reforms on different groups of taxpayers, as well as their effect on tax revenues.

As the largest source of revenue raised by local governments, a well-functioning property tax system is critical for promoting municipal fiscal health. The 50-State Property Tax Comparison Study includes data for 73 large U.S. cities and a rural municipality in each state, plus an analysis that explains why tax rates vary so widely. This context is important because high property tax rates usually reflect some combination of heavy property tax reliance, with low sales and income taxes; low home values that drive up the tax rate needed to raise enough revenue; or higher local government spending and better public services. In addition, some cities use property tax classification, which can result in considerably higher tax rates on business and apartment properties than on owner-occupied homes, called homesteads.

Property tax reliance is one of the main reasons why tax rates vary across cities. While some cities raise most of their revenue from property taxes, others rely more on alternative revenue sources.  Cities with high local sales or income taxes do not need to raise as much revenue from the property tax, and thus have lower property tax rates on average. For example, the report shows that Bridgeport, Connecticut has one of the highest effective tax rates on a median valued home, while Birmingham, Alabama has one of the lowest rates. However, in Bridgeport, city residents pay no local sales or income taxes, whereas Birmingham residents pay both sales and income taxes to local governments. Consequently, despite the fact that Bridgeport has much higher property taxes, total local taxes are higher in Birmingham ($2,560 vs. $2,010 per capita).

Property values are the other crucial factor explaining differences in property tax rates. Cities with high property values can impose a lower tax rate and still raise at least as much property tax revenue as a city with low property values. The average property tax bill on a median valued home for the large cities in this report is $2,871. Raising that amount in Detroit, which has the lowest median home values in the study, would require an effective tax rate more than 20 times higher than in San Francisco, which has the highest median home values.

There are wide variations across the country in property taxes on owner-occupied primary residences, otherwise known as homesteads. An analysis of the largest city in each state shows that the average effective tax rate on a median-valued homestead was 1.50 percent in 2016.  On the high end, there are three cities with effective tax rates that are roughly 2.5 times higher than the average – Detroit, Bridgeport, and Aurora (IL). Conversely, there are six cities where tax rates are less than half of the study average – Honolulu, Boston, Denver, Cheyenne (WY), Birmingham (AL), and Washington DC.

There are also significant variations across cities in commercial property taxes, which include taxes on office buildings and similar properties. In 2016, the effective tax rate on a commercial property worth $1 million averaged 2.10 percent across the largest cities in each state. The highest rates were in Detroit, New York City, Chicago, Bridgeport, and Providence, all of which had effective tax rates that were at least three-quarters higher than the average for these cities. On the other hand, rates were less than half of the average in Cheyenne, Seattle, Honolulu, Fargo, Billings (MT), and Virginia Beach.

Many cities have preferences built into their property tax systems that result in lower effective tax rates for certain classes of property, with these features usually designed to benefit homeowners. The “classification ratio” describes these preferences by comparing the effective tax rate on land and buildings for two types of property. For example, if a city has a 3.0% effective tax rate on commercial properties and a 1.5% effective tax rate on homestead properties, then the commercial-homestead classification ratio is 2.0 (3.0% divided by 1.5%).

An analysis of the largest cities in each state shows an average commercial-homestead classification ratio of 1.67, meaning that on average commercial properties experience an effective tax rate that is 67% higher than homesteads. Roughly a fourth of the cities have classification ratios above 2.0, meaning that commercial properties face an effective tax rate that is at least double that for homesteads.

The average apartment-homestead classification ratio is significantly lower (1.35), with apartments facing an effective tax rate that is 35% higher than homesteads on average. There are five cities where apartments face an effective tax rate that is at least double that for homesteads, with New York City being a major outlier since the rate on apartments is almost five times higher than the rate on a median valued home. It is important to note that while renters do not pay property tax bills directly, they do pay indirectly since landlords typically pass through some or all of their property taxes in the form of higher rents.

Finally, the report also measures the impact of property tax assessment limits, which have been adopted by 19 states,. Assessment limits typically restrict growth in the assessed value of individual parcels and then reset the taxable value of properties when they are sold, based on two factors: how long a homeowner has owned her home and appreciation of the home’s market value relative to the allowable growth of its assessed value. As a result, assessment limits can lead to major differences in property tax bills between owners of nearly identical homes based on how long they have owned their home.

For example, in Los Angeles the average home has been owned for 13 years and the median home value is $542,100. Because of the state’s assessment limit, someone who has owned their home for 13 years would pay 39 percent less in property taxes than the owner of a newly purchased home, even though both homes are worth $542,100. The largest discrepancy is in New York City, which has an assessment limit that has capped growth in assessed values for residential properties since 1981, and unlike most assessment limits does not reset when the property is sold. Assessment limits in New York City provide the largest tax savings to homeowners in parts of the city where property values have grown the fastest since 1981, and the least savings to homeowners where property values have grown slowest.

Getting smarter about tax incentives

Cities provide billions of dollars in tax incentives each year to lure businesses, a practice that continues to increase despite criticism that it often erodes the tax base and fails to deliver public benefits. Now, officials and experts are taking a closer look at these incentives and identifying strategies to prevent waste, ensure accountability and transparency, and produce the maximum benefit for each public dollar invested.

“There are times when the use of incentives is appropriate but it’s with caveats,” Ron Rakow, commissioner of assessing for the city of Boston, said at a panel convened by the Lincoln Institute at the American Planning Association’s 2017 National Planning Conference in New York.

At the session, and in a piece recently published in the institute’s quarterly magazine, Land Lines, Rakow discussed Boston’s efforts to apply new rigor to its tax incentive practices. The city only issues incentives to attract a key company or stimulate development in places where it fails to happen organically, or where developers face unique economic or construction challenges, he said. Boston also requires thorough financial disclosures, and makes tax breaks contingent upon creation of jobs or delivery of other promised benefits.

Rakow cited Boston’s Fan Pier, a long underutilized waterfront area south of downtown where the city offered $12 million in property tax breaks and provided $38 million in infrastructure through a partnership with the state of Massachusetts to attract Vertex Pharmaceuticals (the state also provided $10 million in tax credits). The surrounding Seaport district has seen an explosion of new investment and jobs.

Greg LeRoy, president of the nonprofit organization Good Jobs First and a critic of tax incentives, said Boston is the exception, and that many communities continue to provide incentives haphazardly, to the detriment of taxpayers. Good Jobs First tracks the use of tax incentives across the United States, and will soon dig into disclosure data required by a new government accounting rule.

Daphne Kenyon, an economist and Lincoln Institute fellow, shared results of a recent study of Franklin County, Ohio, which includes Columbus. The study showed that property tax breaks did not increase the tax burden on other property owners, an oft-cited side effect of eroding the tax base. Among other practices, Ohio uses tax incentive review councils to monitor the performance of incentives.

The panel was part of a series of sessions at the conference that seek to promote the integration of economic development, land-use planning and public finance, and promote municipal fiscal health. Lincoln Institute president George “Mac” McCarthy provided an overview of the pillars of fiscal health, calling for a holistic approach to evaluating land use decisions that takes into account the long term economic, social, and environmental impacts. Lourdes Germán, director of international and institute-wide initiatives, led a session on infrastructure finance, from municipal bonds to public-private partnerships, as well as a deep dive into the financing of the Hudson Yards development project in New York City.

Odds & Ends

With a national infrastructure plan promised in the next several weeks, we lay out the case for long term thinking to avoid the mistakes of the past, and for confronting climate change …  The Fiscally Standardized Cities database is getting attention, with a working paper by Bruce McDonald and a citation in this provocative piece on federal funding and cities by former Milwaukee mayor John Norquist … We helped launch an Organisation for Economic Co-operation and Development (OECD) report on land use governance at the Federal Reserve Bank of Boston … How fair lending affects fiscal health … Alissa Walker on Richard Florida ... Scholars gathered in London to explore China’s urban development …  City books for non-planning nerds ... Citizen Jane: Battle for the City, to which we contributed, is in theatrical release … This month’s highlighted Working Paper: Land Values, Property Rights, and Home Ownership: Implications for Property Taxation in Peru, by Zackary Hawley, Juan José Miranda, and W. Charles Sawyer.

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