The Myth of the Ratable
The Myth of the Ratable
Developments and Dollars
An Introduction to Fiscal Impact Analysis in Land Use Planning
Urban Growth Means Lower Taxes -- and Other Myths
The Myth of the Ratable
Leonard W. Hamilton, PhD & Paul B. Wehn, PhD
* Prepared for the Great Swamp Watershed Association, a private non-profit organization dedicated since 1981 to the preservation and enhancement of the Great Swamp. Data analyses and interpretation primarily by LUH, who holds a doctorate in Biopsychology and has more than 25 years of experience teaching research design, data analyses and data presentation at Rutgers University. Data acquisition and standardized transformations primarily by PBU, who holds a doctorate in History and has had more than 20 years of experience in both private and comnercial research, data management, and software development. Requests for copies or additional inquiries should be addressed to: Great Swamp Watershed Association, P. 0. Box 300, New Vernon NJ 07976.
RATABLES DO NOT PAY THEIR WAY
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 police and fire protection.
Dollar for dollar then, this combination of high assessed value and low need for services of these so-called "ratables" is supposed to lead to lower costs of running the local government. This has not happened.
In a detailed paper entitled The Economic Benefits of Open Space. Stephen Miller has studied the costs and benefits of various types of properties in communities across the country. These analyses show clearly that communities benefit more from open space than from ratables. This is largely due to the fact that ratables cannot exist in a vacuum.
When a commercial/industrial property moves in, the employees and their families require housing, schools, utilities and all the other municipal services. The short-term benefits of taxes pajd by ratables is eroded away by the more gradual increase in the needs for infrastructure.
Miller concludes, as many others have in recent years, that the old arguments of the 1970's are not tenable: ratables simply do not pay their way.
ANALYSIS OF MORRIS COUNTY RATABLES
The long-term failure of ratables to pay their way was studied in Morris County, New Jersey. The "ratable rich" communities in that county have attracted over $4.2 billion in ratables over the past 20 years, yet failed to receive any of the expected tax relief. Let us examine these figures more closely.
Morris County, New Jersey has 39 municipalities that vary widely in terms of their proportion of commercial and industrial ratables. The assets and tax base of these communities were studied retrospectively over the 20-year period from 1973 to 1992.
For the purposes of directly comparing different communities across years, all calculations were based on constant dollar values (1986) and all assessed valuations were converted to 100 percent of actual value.
Table I shows all 39 of these municipalities ranked according to the amount of ratables added during this period.
The 13 municipalities that ranked lowest in the addition of ratables are now 92% residential and 8% commercial/industrial. Together, these towns own only 16% of the County's total assets. According to the argument for ratables, these "ratable poor" cities should have relatively high costs of running their local governments and pay more than their share of the total tax burden.
The 13 municipalities that ranked highest in the addition of ratables are now 65% residential and 35% commercial/industrial. Together, these towns own 58% of the County's total assets. According to the argument for ratables, these "ratable rich" cities should have relatively low costs of running their local governments and pay less that their share of the total tax burden.
The cost of running government is, of course, paid by collection of taxes within each municipality. For purposes of comparison, consider the County's total property assets as a pie. If government costs were equally distributed, then those who own 16% of the pie should pay 16% of the taxes and those who own 58% of the pie should pay 58% of the taxes.
But the municipalities that seek ratables are not seeking equality. They are going after tax reduction, and their hope is that a 58% share of ownership might only cost, say, 48% of the taxes. This hope has not been realized (see Figure 1).
In 1992, the "ratable poor" municipalities owned 16 percent of the county's total assets and paid almost exactly that proportion (16 percent) of the total taxes that were collected.
In 1992, the "ratable rich" municipalities owned 58 percent of the county's total assets and paid almost exactly that proportion (57 percent) of the total taxes that were collected.
Thus, despite the addition of $4.2 billion dollars of ratables over a 20-year period, there is no evidence that the "ratable rich" communities have gained a tax advantage-- dollar for dollar, their costs of running local government have remained the same.
Proponents of the ratable argument will claim that even though the relative cost of running the government remains the same, the commercial and industrial properties shoulder a greater share of this burden to give residential owners a lower tax rate. Figure 2 examines several hypothetical cases to demonstrate that this would necessarily result in lower tax rates. These lower rates did not occur for the ratable rich municipalities in Morris County:
Going back to 1973, the municipalities that are now ratable rich were on an equal footing with those that are now ratable poor. That is, there were no significant differences in tax mil rates. But 20 years later, after a huge expansion of ratables in the ratable rich municipalities, they still remain on an equal footing-- no tax reduction benefits have been realized.
Another index of change in taxation is to rank the 39 municipalities in Morris County from lowest to highest mil rate and look at the change in rankings from 1973 to 1992. Once again, the ratable rich municipalities showed no systematic differences from the ratable poor municipalities. In general, about the same number of communities moved up as moved down in ranking, irrespective of the group they were in.
The conclusions from these analyses seem clear:
> Some Morris County towns have added huge amounts of ratables over the past two decades but continue to pay taxes at the same rate as those that remained "ratable poor."
> Nationwide studies show the same failure of ratables as a mechanism of tax reduction.
> There is no reason to believe that this failed theory will work any better in the next 20 years.
LOCAL OFFICIALS MUST TAKE A LONG-TERM VIEW
These commercial/industrial properties 'become much less attractive if they do not fulfill their promise to lower government costs and residential taxes. Why then, are these companies so successful in convincing municipal officials to support this type of development? The primary reason is that local officials fail to calculate realistic estimates of long-term costs.
Some of these projections are difficult to calculate because they depend on such intangibles as court decisions. Typically, a ratable is willing to accept a high valuation in order to look more favorable as a tax reduction mechanism. But this is not necessarily a permanent arrangement.
In a recent article, Dan Weissman documented an alarming increase in successful tax appeals by ratables. Once the company is in place, it becomes increasingly easy to ask the courts to grant tax relief, thereby shifting the burden to the homeowners.
Other projections are easier to calculate. Although the old adage is true that nonresidential properties do not send children to the schools, their employees do. These commercial and industrial properties attract employees to the region. These employees have homes and families, they send their children to school, they have their garbage collected, and they require police and fire protection.
As the proportion of commercial and industrial properties in a municipality increases, so do the needs for wider roads, bigger sewage treatment plants, and so forth. The escalating costs of infrastructure enhance the lure of short-term solutions to the rising cost of government. Ironically, municipal officials take this bait and fall into the ratables trap again and again.
Ultimately, this ratables chase causes many municipalities to suffer a progressive decline in the quality of life. Traffic congestion, pollution, and lack of open space make the community 'a less desirable place to live.
This deterioration of the residential character of a community frequently translates into a loss of property value. Miller's article compares values of properties in different locations and shows that properties adjacent to open space increase in value 30-40% more than those located a short distance away. The replacement of open space with a ratable can, therefore, have devastating effects on local property values.
This viewpoint is shared by others:
In a detailed regional study of the Great Swamp watershed entitled "Designing Our Future", Anthony Nelessen shows that "...office parks, strip malls and residential subdivisions rank very low in the community's esteem."
In a recent column examining the impacts of ratables, David Moore concludes: "The bottom line is that we ought to be designing and planning communities that are good for people, ..[and] ...put the ratable business where it belongs, at the bottom of the list of considerations."
But how can we prevent our local officials from mortgaging our future with the addition of ratables?
One way is to insist that they take the long-term view of costs and benefits.
A SPECIFIC EXAMPLE: THE PRUDENTIAL PROJECT
Municipal officials must learn to calculate realistic projections of the long-range effects of commercial and industrial development on the requirements for housing, education, and municipal services. This requires neither fortune-telling abilities nor a degree in economics. Simple common sense, a bit of squinty-eyed skepticism, and a calculator are all that one needs to see beyond the short-term promises of the purveyors of ratables. Let's look at a specific example.
As a part of their application to build an office complex in Chatham Township, Prudential contracted Richard B. Reading Associates (Princeton, NJ) to prepare a document entitled Economic Evaluation: Prudential Proiect's Impact upon Chatham Township's Fiscal Base. This document is an excellent example of the short-term perspectives that municipal officials use to decide our future.
Table 2 shows, point by point, the types of questions and calculations that can translate these short-term promises into more realistic long-term projections.
The Economic Evaluation document does not deal with all aspects of the proposed project. In particular, the proposal is linked to a plan to expand Chatham's waste water treatment plant by 250,000 gallons per day. Simple calculations show that this proposed expansion is equally short-sighted.
Prudential's office complex will use about half of the increased capacity which, on the surface, would appear to leave about 125,000 gallons per day of increased capacity that could be used to provide service to Township residents who currently rely on septic systems.
But the office complex is not the only source of additional waste water. The 10,000 family members of Prudential's work force will each generate, on average, 60 gallons per day at home and at work. This amounts to an additional regional requirement of 600,000 gallons per day -- four times more than will be available. Chatham Township and its neighbors will have to deal with this additional requirement, and most of the neighboring communities are already at capacity for waste water treatment.
The failure to take these requirements into account now means that the regional bill will fall due in the future, when environmental considerations and construction costs will make the price more dear. Nearly all of the regional waste water flows into the flood-prone Passaic River and Great Swamp basin. The 600,000 gallons of waste water may become a problem that cannot be solved at any price.
SOME GENERAL GUIDELINES FOR LOCAL OFFICIALS
Local officials must realize that the purveyors of ratables have no incentives to make the types of projections and queries shown above. On the contrary, they want to present the best case. Their economic and engineering experts prepare documents that include only the most conservative projections.
The experts prepare projections that do not adequately account for additional school children, for travel by family members, for commuters, and so forth. These are not precisely untrue, but whenever a cost can be moved into the future or into an adjacent town, it does not appear in the calculations. The final report functions as a set of blinders to guide local officials to accept the proposal without seeing all the ramifications.
Local officials are frequently cowed by the technical jargon and sheer bulk (the Economic Analysis report is 58-pages long) of these documents. Furthermore, Township budgets cannot stand the strain of having a separate report prepared that takes a "Township" view. The result? Township officials accept the conclusions of the experts.
Local officials can apply a simple rule of thumb: When a report omits an obvious and important calculation (e.g., assuming that no additional school costs will be added; or that no additional housing requirements will be needed), the entire report should be considered suspect and sent back for revision.
The engineering and economic analyses are complex on the surface, but they are dealing with issues that everybody can understand at some level. Issues as simple as increased water running through a ditch, as simple as more students requiring bigger schools, as simple as more commuters requiring more cars.
In the words of the 1960's folk philosopher, Bob Dylan, "You don ' t have to be a weatherman to know which way the wind is blowing. "
Until our local officials have the courage to challenge the experts on these issues, our futures will continue to rely on the kindness of corporate executives who want our land.
Miller, S. The economic benefits of open space. May 11, 1992.
Moore, D. The State We're In. October 7, 1992.
Nelessen, A. Designing Our Future. Prepared for The Great Swarop Watershed Association, April 1992.
Reading Associates. Economic Evaluation: Prudential Project's Impact upon Chatham Township's Fiscal Base. August, 1990.
Weissman, Dan. Successful tax appeals force towns to up rates.
Star Ledger, September 20, 1992.
Urban Growth Means Lower Taxes -- and Other Myths
by Donella H. Meadows
We need to bring in business to bring down taxes. This development will give us jobs. Environmental protection will hurt the economy. Growth is good for us.
If we've heard those arguments once, we've heard them a thousand times, stated with utmost certainty and without the slightest evidence. That's because there is no evidence. Or rather, there is plenty of evidence, most of which disproves these deeply held pro-growth beliefs.
Here is a short summary of some of the evidence. For more, see Eben Fodor's new book "Better, Not Bigger," which lists and debunks the following "Twelve Big Myths of Growth."
Myth 1: Growth provides needed tax revenues. Check out the tax rates of cities larger than yours. There are a few exceptions but the general rule is: the larger the city, the higher the taxes. That's because development requires water, sewage treatment, road maintenance, police and fire protection, garbage pickup -- a host of public services. Almost never do the new taxes cover the new costs. Fodor says, "the bottom line on urban growth is that it rarely pays its own way."
Myth 2: We have to grow to provide jobs. But there's no guarantee that new jobs will go to local folks. In fact they rarely do. If you compare the 25 fastest growing cities in the U.S. to the 25 slowest growing, you find no significant difference in unemployment rates. Says Fodor: "Creating more local jobs ends up attracting more people, who require more jobs."
Myth 3: We must stimulate and subsidize business growth to have good jobs. A "good business climate" is one with little regulation, low business taxes, and various public subsidies to business. A study of areas with good and bad business climates (as ranked by the U.S. Chamber of Commerce and the business press) showed that states with the best business ratings actually have lower growth in per capita incomes than those with the worst. Fodor: "This surprising outcome may be due to the emphasis placed by good-business-climate states on investing resources in businesses rather than directly in people."
Myth 4: If we try to limit growth, housing prices will shoot up. Sounds logical, but it isn't so. A 1992 study of 14 California cities, half with strong growth controls, half with none, showed no difference in average housing prices. Some of the cities with strong growth controls had the most affordable housing, because they had active low-cost housing programs. Fodor says the important factor in housing affordability is not so much house cost as income level, so development that provides mainly low-paying retail jobs makes housing unaffordable.
Myth 5: Environmental protection hurts the economy. According to a Bank of America study the economies of states with high environmental standards grew consistently faster than those with weak regulations. The Institute of Southern Studies ranked all states according to 20 indicators of economic prosperity (gold) and environmental health (green) and found that they rise and fall together. Vermont ranked 3rd on the gold scale and first on the green, while Louisiana ranked 50th on both.Myth 6: Growth is inevitable. There are constitutional limits to the ability of any community to put walls around itself. But dozens of municipalities have capped their population size or rate of growth by legal regulations based on real environmental limits and the real costs of growth to the community.
Myth 7: If you don't like growth, you're a NIMBY (Not In My Backyard) or an ANTI (against everything) or a gangplank-puller (right after you get aboard). These accusations are meant more to shut people up than to examine their real motives. Says Fodor, "A NIMBY is more likely to be someone who cares enough about the future of his or her community to get out and protect it."
Myth 8: Most people don't support environmental protection. Polls and surveys have disproved this belief for decades; Fodor cites examples from Oregon, Los Angeles, Colorado, and the U.S. as a whole. The fraction of respondents who say environmental quality is more important than further economic growth almost always tops 70 percent.
Myth 9: We have to grow or die. This statement is tossed around lightly and often, but if you hold it still and look at it, you wonder what it means. Fodor points out, quoting several economic studies, that many kinds of growth cost more than the benefits they bring. So the more growth, the poorer we get. That kind of growth will kill us.
Myth 10: Vacant land is just going to waste. Studies from all over show that open land pays far more -- often twice as much -- in property taxes than it costs in services. Cows don't put their kids in school; trees don't put potholes in the roads. Open land absorbs floods, recharges aquifers, cleans the air, harbors wildlife, and measurably increases the value of property nearby. We should pay it for to be there.
Myth 11: Beauty is no basis for policy. One of the saddest things about municipal meetings is their tendency to trivialize people who complain that a proposed development will be ugly. Dollars are not necessarily more real or important than beauty. In fact beauty can translate directly into dollars. For starters, undeveloped surroundings can add $100,000 to the price of a home.
Myth 12: Environmentalists are just another special interest. A developer who will directly profit from a project is a special interest. A citizen with no financial stake is fighting for the public interest, the long term, the good of the whole community.
Maybe one reason these myths are proclaimed so often and loudly is that they are so obviously doubtful. The only reason to keep repeating something over and over is to keep others from thinking about it. You don't have to keep telling people that the sun rises in the east.
There are reasons why some of us want others of us to believe the myths of urban growth.
Donella H. Meadows is director of the Sustainability Institute and an adjunct professor of environmental studies at Dartmouth College.