Bacon's Rebellion

James A. Bacon


 
 

Thumbs down!

Taxula Rasa

 

Virginia's gasoline and real estate taxes don't just pinch our pocketbooks -- they drive up the cost of government. It's time to wipe the slate clean and start over. 


To get a sense of how dysfunctional Virginia’s tax system is, take a look at what’s happening on the western fringe of the Richmond metropolis.

 

In the largest corporate expansion in state history, Capital One is building a 1.5-million-

square-foot office complex in the West Creek development in Goochland County. The credit-card giant's projected 8,600 employees represent only a fraction of the number of people West Creek will accommodate when fully built out in 20 to 30 years. This 3,500-acre commercial development is destined to become the third largest employment concentration, after downtown and Innsbrook, in the entire Richmond metro area, decisively shifting the regional center of gravity a dozen miles to the west.

 

In an ideal world, local governments would be planning an abundance of residential development in the immediate vicinity. A balanced community would provide local jobs, houses, shopping and recreational amenities so citizens could go about their lives without enduring long commutes or overloading the regional transportation system.

 

But no one in western Richmond seems to be thinking about the regional welfare. Goochland County, population 17,300, has put into force restrictive zoning to limit the residential development that can take place around West Creek. The county intends to rake off huge taxes from the commercial properties without incurring the expense of providing municipal services to the people who work there. Neighboring Henrico and Hanover counties have responded in kind. As a consequence, many of the people working in West Creek will wind up living in Chesterfield County across the James River, or in points west as far away as Charlottesville.

 

To the east, the Richmond metro area sports dozens of miles of Interstate running through vast, undeveloped districts of woodlands. But that massive infrastructure investment will go underutilized. Instead, West Creek will create demand for new roadwork, including Rt. 288 now under construction, and eventually, a widening of Interstate 64. Of course, funding the roads isn’t the localities’ problem – they don’t pay for highways, the state does.

 

Richmonders aren’t uniquely selfish or short-sighted. This kind of beggar-thy-neighbor planning occurs all over the state. As localities seek to optimize their tax bases, they covet commercial development but restrict residential -- pushing development to two, three, even four counties past the urban core. The extraordinary inefficiency of this leapfrogging, low-density pattern of development – commonly referred to as urban sprawl – is a driving force behind the relentless increase in the cost of state and local government in Virginia.

 

Gov. Mark R. Warner and senior legislators reportedly have made reform of Virginia’s antiquated tax structure a top priority this year. (See “A 19th Century Tax Code for a 21st Century Economy," May 5, 2003.) Unfortunately, the discussion so far has focused mainly on revenue. How much will a given “reform” to the tax code increase or diminish the revenue available to the state and localities? The obsession with revenue is understandable given the backlog of needs in K-12 education, higher ed, transportation and Medicaid, but it’s terribly short sighted.

 

A reform of Virginia’s state/local tax structure should be geared towards long-term results, not the next budget cycle. Lawmakers should aspire to doing two things: Generate more tax revenues by expanding the tax base, and alter the dysfunctional dynamics that drive up the cost of government. In last week’s column (“Growing the Pie,” May 12, 2003), I laid out a vision for stimulating economic growth and expanding the tax base by taxing consumption instead of wealth creation.

 

Today, I will explore how reforming the tax structure can ameliorate destructive, beggar-thy-neighbor, land-use policies which are stretching government resources to the snapping point. Two changes are essential:

 

  1. Restructure the property tax. This tax, which accounts for half of all local government tax revenue, encourages localities to pursue land-use strategies that optimize their local self interest at the expense of the region. As currently structured, the tax also subsidizes land speculators who keep off the market property that should be developed.

  1. Restructure road funding. The state relies upon the gasoline tax, sales tax and other levies to pay for road and highway construction. Virginia should shift to a “user fee” approach in which motorists pay for their “consumption” of roads and highways based on a combination of the number of miles they drive, the weight of their vehicles and their contribution to traffic congestion during periods of peak traffic.

Some of the concepts discussed here, though familiar to university professors, may sound radical and unnatural to most Virginians. One could hardly expect the General Assembly, which subjects the most commonsensical of proposals to protracted study, to enact them in the 2004 session. But if we start discussing the issues now, there may be hope of putting them into place at some point in our lifetimes.

 

Virginia’s property tax is an artifact of a by-gone agricultural economy. Two centuries ago, when 95 percent of the population made its living from farming, land was the most important economic asset. There was a direct correlation between the value of a household’s land holdings, its economic output and its ability to pay taxes. From the tax collector’s viewpoint, land also had the virtue of staying put. It didn’t move. It couldn’t be hidden. It was easy to keep track of.

 

It made sense in the 19th century to tax not only the land but the improvements upon it. Barns, silos, fences and tenant housing all added to the productive value of the land. The logic of taxing both land and improvements served Virginia well for many years. Indeed, the system has been practiced so long and is so deeply embedded in the governance structure that it never occurs to anyone to question it.

 

But the world has changed in the past 200 years, a fact that has not gone unnoticed even in the corridors of state government. Virginia’s economy began morphing into an industrial economy in the late 19th century, and then into a knowledge-

based service economy in the late 20th century. Agriculture and forestry account for a mere three percent of the state’s domestic product today. Wealth is based overwhelmingly upon manufacturing, services and trade.

 

Most people today value land not as a natural resource yielding crops, timber or coal but as a physical location for living, working, shopping, going to church, playing softball or otherwise conducting their lives. Land is valued not for its yield, as measured by what people can extract from it, but its location, or proximity to other assets used in the creation of wealth and the conduct of peoples’ lives. What matters about land today is the pattern and density of development: Does it promote mobility, allowing people to travel efficiently from place to place? Is there a sufficient supply to accommodate a range of housing types? Is it concentrated enough to support the efficient delivery of water, sewer, education, fire, rescue and other critical municipal services? Does it engender a sense of “place” that people want to be near?

 

By creating perverse incentives for local government, Virginia's system of property taxes promotes an inefficient pattern and density of human settlement -- that much I’d concluded when I began working on this series of tax-reform essays. It seemed clear that the property tax, accounting for $4.4 billion in local revenue in 2001, had to go. The dilemma, in my mind, was how to replace the revenue.

 

E M Risse, an urban planner and regular contributor to Bacon’s Rebellion, provided me a way out. Drawing upon the writings of Henry George, a 19th century American theorist whose writings provided the basis for the modern-day tax systems of Australia, New Zealand and Great Britain, Risse suggested to me, the problem isn’t taxing land – it’s taxing the improvements on the land.

 

Taxing improvements does two things that prove detrimental to a 21st century economy. First, it fuels local government’s beggar-thy-neighbor land use policies. Local governments pursue economic development strategies and jigger their land-use plans to maximize commercial development, which yields an excess of tax revenue over services demanded, and minimizes residential development, which represents a net drain on a locality’s tax base. Localities keep rates low and voters happy by restricting residential real estate development and forcing new development into outlying jurisdictions that haven’t figured out how the game works.

 

Eliminating the tax on improvements changes the local government incentives. Localities have less reason to act like Goochland County: zoning for massive concentrations of commercial development and fobbing off the housing to its neighbors. The antipathy to residential development doesn't go away entirely, but the commercial-residential dichotomy is much diminished.

 

The other problem with taxing land and improvements is that it encourages speculators to hold land off the market. Every metro area contains vacant and underutilized parcels which, if developed, would absorb an enormous amount of population and commercial growth. From the standpoint of regional efficiency, it makes more sense to steer growth to areas already served by roads, utilities and public services than to build in green fields where public infrastructure does not yet exist.

 

Even in a densely settled area like Arlington’s Ballston Corridor, served by five METRO rail stations, there are vacant parcels, expansive parking lots and run-down buildings that could be redeveloped. But landowners aren’t selling because the carrying costs are so low, says Risse. The owners are waiting for the price of the land to rise. By contrast, if Arlington County based its property tax on the value of the land only, the owner of parking lot or abandoned gas station would pay as much as the owner of an office tower. Higher taxes on land located in a prime spot, like near a METRO station, would induce the landowner to sell out to someone willing to convert it to its highest and best use.

 

Risse suggests that the Henry George tax model works best when municipal governments define a “clear edge,” inside of which urban services are provided, and outside of which they are not. Outside the clear edge, the logic changes: Taxing improvements and not the land would preserve land-intensive rural uses like farming and forestry, and would have the laudable impact of discouraging speculative housing development.

 

A handful of U.S. jurisdictions are experimenting with a “split tax,” which allows local governments to tax improvements at a lower rate than the land. Most are located in Pennsylvania, though Fairfax city here in Virginia is authorized to institute a split-tax system. Fairfax could provide a valuable experiment that the rest of the Commonwealth should watch carefully.

 

Virginia also needs to take a hard look at how it funds its transportation system: a mix of gasoline taxes, sales taxes and miscellaneous fees. There is, at best, an oblique connection between what the demands a motorist places upon the transportation system and the amount he pays.

 

The gasoline tax serves as a rough proxy for “consumption” of road and highway access: The more someone drives, the more gasoline he burns, and the more gasoline tax he pays. But the system is imperfect: A motorist commuting 60 miles daily on traffic-clogged Interstate 95 in Fairfax County adds far more stress to the transportation system than someone driving 60 miles daily on a near-empty U.S. 360 in Amelia County.

 

Virginia should consolidate its hodge-podge taxes into a “user fee” that makes motorists pay in direct proportion to which they contribute to the cost of operating the transportation system. There would be two components: one for road maintenance and one for congestion pricing. A citizen would pay the road-maintenance fee annually based upon the number of miles drives his vehicle (or vehicles) during the year. Because trucks and other heavy vehicles cause disproportionate wear and tear on roads, owners’ fees would be adjusted upwards according to a schedule based on weight.

 

Devising a congestion charge would be trickier but not impossible. By equipping vehicles with same technology used on Virginia toll roads, it should be possible to identify – and charge – a motorist every time he enters a congestion zone such as a busy Interstate during periods of peak traffic. Admittedly, there would be endless complications in ensuring fairness, but experiments in London and Singapore have demonstrated that the concept can work in confined areas.

 

The key is to structure the tax in such a way that it induces a positive change in peoples’ behavior. Because the gas tax is paid in small amounts every time someone gases up, the cumulative cost is almost invisible. The tax does not induce anyone to drive less. But if motorists receive get their user fee in the mail and say, “Holy cow, that’s a lot of money,” they just might resolve to change their behavior – work closer to home, start telecommuting, avoid congested areas, whatever – in order to lower their bills. As people alter their driving patterns, they relieve the state of some of the burden to build more roads.

 

There will be, I'm sure, numerous practical difficulties associated with implementing these new tax strategies. Numerous special interests from land speculators to banks, from truckers to developers on the urban fringe, vested in the status quo. Inevitably, they will raise a host of objections. It's the Virginia way to quake at problems and conclude, "It can't be done."

 

But if Virginians are serious about competing in a globally integrated economy, we need to modernize our institutions -- even if it requires painful, protracted effort. The time to begin tackling the challenge is now. Not after the next legislative election, not in the next gubernatorial administration, but now

 

-- May 19, 2003

 

Bring Home the Bacon

Help   About search

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fire back!

 

You can berate Bacon at jabacon@

baconsrebellion.com

 

Or read his profile here.