Category Archives: Taxes

Northam’s Affordable, Not-So-Ambitious Plan for Reviving Rural Virginia

Ralph Northam, Democratic Party candidate for governor, grew up on the Eastern Shore, so it’s not surprising that he has given considerable thought to the challenges of economic development in Virginia’s small towns and rural communities. Earlier this week, he unveiled his plan for economic growth in rural Virginia.

If you’re looking for a “Marshall Plan” to reinvigorate rural Virginia, this is not it. The plan is not ambitious, and there may not be enough in it to get rural Virginians especially excited about Northam’s candidacy. But it has this virtue: Proposals don’t require spending vast sums of money, so they are at least feasible from a budgetary perspective. This is a plan that Northam, if elected, has a realistic chance of implementing.

Personally, I distrust “Marshall Plan” approaches to chronic social and economic challenges. Instead, in our fiscally constrained era, I’m a fan of low-cost, low-risk initiatives that will likely yield a positive return on investment. In that spirit, I’ll start by illuminated the most promising ideas in the Northam plan and work my way down the list.

Virginia’s Rapid Readiness Program. Northam proposes a “rapid readiness program” similar to successful workforce training programs in Georgia and Louisiana. “We could get this program started here in Virginia with a ten million dollar investment, with funding tied to business participants, number of projects delivered, and individuals successful trained,” states his plan.

Assuming that Northam is drawing upon the thinking of Virginia Economic Development Partnership CEO Stephen Moret, who set up the Louisiana program, the program would function as a extension of Virginia’s economic development effort by offering a workforce-training solution as an incentive for corporations to invest in Virginia. The program would differ from existing educational/training offerings by creating a team capable of providing customized training within a time frame required by corporations to get their operations up and running.

While the rapid readiness program would be applied across the state, rural areas arguably would benefit the most because such training applies most frequently to light manufacturing projects that typically locate in smaller communities.

I’m not sure $10 million is sufficient to fund this program properly. Regardless, there is a readily available pot of money — Northam and Moret no doubt would disagree with me about this — and that is the Commonwealth Opportunity Fund, which the state dips into to provide “incentives” for economic development projects. But as Moret himself said in a presentation to the State Council of Higher Education for Virginia two days ago, workforce is one of the top three factors (and often the No. 1 factor) that corporations consider when deciding where to locate. Incentives are a secondary factor. Shifting money from incentives to workforce training looks like a no-brainer to me.

Expanding renewable energy. Expanding solar generation is viable rural economic development strategy. Solar farms may create few permanent jobs, but they do increase the tax base, and they often pay streams of royalties to landowners (depending on how particular deals are structured).

“In my home county of Accomack on the Eastern Shore,” says Northam, “the commonwealth’s largest solar farm is in the process of being built, which will ultimately power several data centers owned by Amazon.”

Northam says he is committed to working with Virginia’s electric utilities and the General Assembly to “remove barriers that stand in the way of developing and expanding clean energy efforts.” Note the phrase “remove barriers.” Northam is not asking for new subsidies or tax breaks. Solar doesn’t need subsidies; market forces increasingly favor solar. Rather, Northam wants to remove obstacles that inhibit businesses, entrepreneurs and homeowners from building rooftop solar and solar farms.

Utility-scale solar like the Amazon Web Services farms in Accomack need little help — Dominion Energy and Appalachian Power have ample incentive to deploy solar on a large scale. The barriers exist at two levels: local zoning codes and state regulatory policy. Local governments need to make their zoning codes more solar friendly. Meanwhile, state lawmakers need to craft “net metering” legislation that balances the interests of independent solar producers with those of electric utilities who maintain the electric power grid that everyone depends upon.

Broadband for all. Most people would accept the proposition that broadband Internet service is critical infrastructure for economic development today. The problem is that sparsely populated rural areas are not attractive markets to Virginia’s big broadband providers.

Northam points to a pilot project in Southside Virginia in which Virginia’s Tobacco Commission, Microsoft, and the Mid-Atlantic Broadband Company utilize unused portions of the television broadcast spectrum to push out high-quality wireless broadband. So far, more than 100 households have been connected, and the number could reach 1,000 by year’s end.

“Under this innovative public-private program, Virginia’s share of the cost is $500,000, leverage private investment for a total investment of $1 million,” states the Northam plan. “This commonwealth should look to replicate this successful program across rural Virginia.”

How so? He would pull together disparate broadband initiatives across the commonwealth under the direction of a cabinet official “who will be responsible for getting more people connected.” Northam also advocates legislation similar to that adopted in Minnesota that creates a clear set of metrics, including upload and download speeds, to evaluate broadband access. Whatever else you say about these proposals, it doesn’t sound like they will break the bank.

Expanding the University of Virginia-Wise. Northam proposes increasing the educational offerings of the University of Virginia-Wise to encompass high-need, high-growth disciplines such as cybersecurity, unmanned aerial systems, energy, and computer engineering and programs. Expanding UVa-Wise would cost about $15 million initially, Northam says, with a possibility of scaling up funding over time.

We have a unique opportunity … to transform UVA-Wise into an international destination for students and researchers. This will have a tremendous effect on the regional economy because when you can attract students and top talent from around the world for research and development, grants will follow. And with grants and applied research, business opportunities will soon follow. And structured correctly, these businesses will not only start up in Southwest Virginia, but they will remain and grow.

The idea of creating “innovation districts” around college campuses is a hot one right now, and anyone who has seen the Virginia Tech Corporate Research Center can readily understand the potential for economic development near college campuses. But Tech is the top research university in the state. Whether its success can be replicated on even a modest scale by a tiny, largely unknown newcomer is questionable. Tech has invested hundreds of millions, maybe billions, of dollars, over decades building academic programs, hiring star faculty, recruiting graduate students, and assembling the administrative infrastructure it takes to win research contracts.

Competing for research dollars is tough. Well established institutions such as Old Dominion University and the College of William & Mary have seen their research programs falter in recent years. It is a stretch to suggest that a $15 million investment in Wise would spark the miraculous transformation that Northam describes.

Startup tax plan. To help attract and retain new business in rural and economically depressed regions of Virginia, Northam proposes a “zero BPOL and merchant’s capital tax for new startup and small businesses .. for the first two years. This will drive economic activity and startups to rural areas, and result in no loss in existing revenue to local governments.” Once local businesses take root, they will start paying taxes — a win-win.

It’s good to see a Democratic Party candidate advocating tax cuts! But the proposal lacks crucial detail. BPOL and merchant’s capital taxes are local taxes. How does Northam propose eliminating those taxes for two years? Will the state just command localities to change their ordinances? Will the state reimburse them for lost revenue? Does he have the remotest idea of what the initiative would cost? Finally, while the BPOL and merchant’s capital taxes are near the top of the list of things that small businesses in Virginia hate, is there any body of evidence suggesting that a mere two-year reprieve will stimulate more startups?

There’s more to Northam’s plan, but the other proposals, which address workforce development, are statewide in nature and don’t address peculiarly rural issues. So, I won’t dwell on them here.

Perhaps the best thing that can be said about this plan is that Northam isn’t making extravagant promises that he can’t keep. These narrow-bore proposals won’t exactly spark a rural Renaissance, but for the most part, they seem politically and fiscally feasible.

Follow Ups: Fracking and Taxes

Fracking does not, repeat, does not harm underground water. But it can pollute surface water.

Frack me a river. A week ago, I noted how American Rivers had designated the Rappahannock River the fifth “most endangered” river in the United States on the grounds that the gas industry was showing interest in drilling in the Taylorsville shale basin beneath the river. Environmentalists claim that fracking is a hazard to drinking water, while industry groups say it is not. My take at the time: Who knows?

Now a Duke University study using sophisticated chemical tracing techniques has demonstrated that fracking has not contaminated groundwater in sample of 112 drinking wells in West Virginia, although accidental spills of fracking wastewater have polluted surface water. Fracking, or hydraulic fracturing, is a technique in which drillers inject pressurized sand, water and chemicals deep underground to fracture shale in order to release the oil and gas it contains. Environmentalists have long claimed that the procedure can contaminate water in underground aquifers.

“Based on consistent evidence from comprehensive testing, we found no indication of groundwater contamination over the three-year course of our study,” said Avner Vengosh, professor of geochemistry and water quality at Duke, co-author of a peer-reviewed study. States the press release:

Samples were tested for an extensive list of contaminants, including salts, trace metals and hydrocarbons such as methane, propane and ethane. Each sample was systematically analyzed using a broad suite of geochemical and isotopic forensic tracers that allowed the researchers to determine if contaminants and salts in the water stemmed from nearby shale gas operations, from other human sources, or were naturally occurring.

The tests showed that methane and saline groundwater were present in both the pre-drilling and post-drilling well water samples, but that they had a chemistry that was subtly but distinctly different from the isotopic fingerprints of methane and salts contained in fracking fluids and shale gas. This indicated that they occurred naturally in the region’s shallow aquifers and were not the result of the recent shale gas operations.

What’s true of West Virginia is not necessarily true of Virginia — geologies differ. And the Duke study warned that impact of fracking on groundwater might take longer than the three years of the study period to take place. Still, with its sophisticated science, the study undermines the endlessly repeated claim that fracking is a threat to underground water.

Solar farms: no longer a money-loser for local government.

Fixing a tax quirk. Three weeks ago, I blogged that a quirk in the way the state treats the value of solar energy projects for tax purposes could throttle Virginia’s solar industry in its infancy.

Under state law, solar farms qualify for an 80% tax exemption on projects exceeding 25 megawatts — an inducement for developers to build large solar facilities in Virginia. The exemption significantly reduces local government revenue from the project. At the same time, the Secretariat of Treasury has not taken the exemption into account when calculating the local tax base for purposes of distributing state aid for education. The perverse result is that local governments could lose tax dollars from a big solar investment, creating disincentives for them to provide needed permits.

Reston-based solar developer SolUnesco brought the discrepancy to the attention of state officials. After reviewing the matter, the Tax Commissioner issued a ruling to eliminate the discrepancy: “The actual assessed value will be reported by the Department to the Department of Education (DOE) as the true value of property to be used by DOE to calculate the amount of state educational funding.

“The So What,” says Francis Hodnall, CEO of SolUnesco, is that “projects over 25 mw … will provide a net revenue to counties.”

A Business-Like Approach to Paying for I-87

Proposed route of I-87 linking Raleigh and Norfolk.

Proposed route of I-87 linking Raleigh and Norfolk.

Sen. Frank Wagner, R-Virginia Beach, is the Republican candidate you’d almost forget was running for governor were it not for the occasional newspaper article like the one in today’s Richmond Times-Dispatch. He doesn’t have Ed Gillespie’s financial resources, and he lacks Corey Stewart’s penchant for controversy. But he’s out there, plugging away. As a long-time legislator, his ideas deserve a hearing.

Some of his ideas make sense. He is a fiscal conservative disinclined to gamble with big spending schemes or tax cuts that could disrupt the state budget. “This is not the federal government,” he said at a recent reception in Mathews County. “We cannot print money. We have to balance budgets day in and day out every day.”

But some of his ideas need work. His proposal for jump-starting the economy is to increase transportation spending. Because he’s a fiscal conservative, he would finance that spending through a tax hike, shifting to a sliding scale in which gasoline taxes are higher when the retail price of gasoline is lower, and taxes are lower when the price of gasoline rises.

In the article, Wagner elaborated on his thinking about transportation as a driver of economic development:

Virginia’s transportation network does not foster economic growth, he said, and the state will fall further behind North Carolina without major improvements. For one, North Carolina is planning a highway to connect Raleigh and the research Triangle to Norfolk and the port.

“That’s what business-people do,” Wagner said. “They make strategic investments and expect a return on that investment.”

Another thing business people do is conduct cost-benefit analyses before they make big investments. If anyone has conducted a reputable cost-benefit analysis of Interstate 87 between Raleigh and Norfolk, you can’t find it on the website of the Triangle’s Regional Transportation Alliance (TRA). (If someone knows of such a study, please let me know.) By way of justification, the RTA offers gassy language about investment that would accrue to North Carolina communities along the route (without acknowledging that communities not on the route might see investment shrink) and make it easier for tourists up north to reach the Raleigh area.

The singular virtue that I can see in I-87 is that half the proposed route is already constructed to Interstate standards. Supposedly, the 213-mile Interstate would cost only $1 billion to build. By eye-balling the map, I’d guesstimate that North Carolina would be responsible for building and maintaining 90% of the length. If North Carolina wants to waste its money, well, what the heck, maybe Virginia should be willing to throw in a few bucks to open up a new route for truck shipments from Virginia ports.

But that’s all back-of-the-envelope thinking. The acid test of whether such a project would be an economic boon or drain is whether it could support itself through tolls. Is there sufficient demand for a Norfolk-to-Raleigh connection — perhaps from trucks emanating from the Port of Virginia — that it could pay its own way? If so, and if private sector concessionaires were willing to put their own money into a public-private partnership, I’d be inclined to support the project. Conversely, if business people look at the project and decline to invest their own funds, then I’d be inclined to think that I-87 is just another boondoggle backed by civic boosters angling for Some One Else’s Money.

If Wagner really wants to do like business people do, perhaps he should get business people to pay for the project — and not raise Virginians’ taxes.

Standard & Poor’s Rains on Candidate Parades

Standard & Poor's "negative" rating on Virginia's AAA bonds could squelch candidates' plans for spending sprees and tax cuts.

Standard & Poor’s “negative” rating on Virginia’s AAA bonds could squelch candidates’ plans for spending sprees and tax cuts.

When you run for governor in Virginia, you have to make promises, and when you make promises, the only ones that cut through the media clutter are vows to cut taxes or launch expansive new spending programs.

Thus, this year, Republican candidate Ed Gillespie has rolled out a plan to cut taxes by $1.25 billion (assuming tax-revenue forecasts allow it), Democrat Ralph Northam proposes to eliminate the sales tax on groceries at a cost of $500 million, Republic Corey Stewart pledges to abolish the income tax entirely, and Democrat Tom Perriello has touted spending proposals that would jack up spending by $1 billion. Republican Frank Wagner wants to ramp up transportation spending, but he at least proposes a gasoline tax increase to pay for it.

Amidst all these promises, Standard & Poor’s Global Ratings has issued a sobering warning. While the firm affirmed Virginia’s AAA bond rating, it has dialed back its outlook from “stable” to “negative,” writes Jeff Schapiro in the Richmond Times-Dispatch.

Schapiro paraphrases Secretary of Finance Ric Brown as saying:

S&P is worried about two things, both of which are inextricably bound: the cash cushion the state maintains against a reversal in the economy and doubts about Trump-era federal spending, which would significantly increase defense spending — and Virginia’s nagging dependence on D.C.

S&P cited the big withdrawal — about $600 million — from the so-called rainy day fund that Gov. Terry McAuliffe, a Democrat, and the legislature used to help close a $1.5 billion hole in the budget attributed to sequestration.

With a balance in the emergency account of only $281 million, the credit agency views “this as a low level of reserves relative to similarly rated peers and a situation which could weaken the commonwealth’s ability to respond to economic and financial downturns in the future,” said Brown.

Concern about the draw-down of the rainy day fund is easy enough to understand. Less comprehensible is S&P’s worries about the Trump budget, which includes a proposed $50 billion in increased defense spending. The budget may or may not be good for the nation (we can debate that another time), but it would be unquestionably good for Northern Virginia’s and Hampton Roads’ defense-heavy economies.

Whatever… S&P has its reasons. And state legislators are paying attention. When Schapiro asked Chris Jones, R-Suffolk, chairman of the House Appropriations Committee, if tax cuts and spending hikes are justified, he replied: “From my perspective, I have an obligation to the commonwealth to have a structurally balanced budget that is conservative and prudent.” In other words, Jones is extremely cautious regarding any big spending and tax-cutting plans.

Update: In a statement released today, Gillespie is using Standard & Poor’s announcement to double down on his tax plan. He regards his 10% across-the-board cut to state income tax rates as part of the tonic — along with changes to education and workforce training, regulatory reform and a new approach to economic development — needed to “spark the natural, organic economic growth our Commonwealth needs.”

I still like Gillespie’s tax plan, but spending pressure from Medicaid, K-12 schools, higher-ed, mental health and other sources is not abating. The news from S&P reduces Virginia’s margin for error.

How Higher Ed Taxes the Poor and Gives to the Rich

Why do the richest colleges and universities providing education to the smartest and most affluent students get the biggest tax breaks? More and more people — both on the left and right ends of the ideological spectrum — are asking that question.

Controversy is sure to grow with the release  of a study, “The Ivory Tower Tax Haven: The state, financialization, and the growth of wealthy college endowments,” by Charlie Eaton with the Haas Institute for a Fair and Inclusive Society at UC Berkeley. Eaton argues that private colleges with substantial endowment wealth have become “ivory tower tax havens,” creating “islands of privilege” that perpetuate social and economic stratification.

Since the 1970s, elite universities have benefited from three big tax benefits: (1) tax deductions for donors giving to endowments, worth about $1.2 billion in 2012, (2) the non-profit exemption of endowment investment returns, worth about $12.9 billion; and (3) municipal bond tax exemption for higher education, worth about $5.5 billion. The total benefit in 2012: about $19.6 billion.

Per-student spending from endowments, 1976 to 2012, broken down by endowment wealth per student. Graphic credit: “The Ivory Tower Tax Haven.”

The result has been a growing disparity in resources and expenditures per student. For U.S. undergraduate-enrolling institutions in the 99th percentile for endowment wealth per student,” writes Eaton, “annual spending per student from endowments increased by 751% to a mind-boggling $92,736 between 1977 and 2012. … Public universities and less wealthy private schools saw no comparable increase in resources from endowments or other areas of support.”

Who benefits from this increase in spending? Rich kids mostly. Elite schools with the biggest endowments enroll the wealthiest kids. Recent research shows that 38 of the most elite schools in the U.S. enroll more students from the top 1% of the income spectrum than from the bottom 60% combined.

Prior to the 1970s, the logic behind tax exemptions for higher education was “to protect intergenerational equity by providing comparable levels of effort towards the university’s mission from one generation to the next,” writes Eaton. Over the years, colleges and universities have used the tax breaks instead to maximize the size of endowments and increase instructional spending per student, thus enhancing institutional prestige.

One commonly pursued strategy is to retain and reinvest income from endowments rather than spend it. Since 1990, the average investment return for what Eaton classifies as “wealthy endowments” has been 10%, but spending amounted to only 5%, leaving the balance to be applied to asset growth.

Another strategy has been to engage in indirect tax arbitrage, in which universities direct donations to endowments rather than operational spending or non-financial capital investments. Universities can make more money by investing their endowment wealth than they lay out in payments on tax-free municipal bonds.

Rather than using the income to increase enrollment, elite private universities have preferred to increase instructional spending per student. “Flat enrollment makes sense,” writes Eaton, “because low admission rates to undergraduate programs tend to improve schools’ position in college and university rankings.”

Eaton lists 24 private institutions with large endowments. Most are located in the Northeastern states, but two are located in Virginia. Washington & Lee University, with a $2.2 billion endowment, had endowment spending per student of $27,000 in 2012. The University of Richmond, with a $1.9 billion endowment, had $24,000 in spending.

Bacon’s bottom line: Eaton’s work shows how universities behave rationally from the perspective of prestige-maximizing, not profit-maximizing, institutions. Ten percent of the U.S. News & World-Report “Best Colleges” ranking algorithm comes from average per-student “instruction, research, student services and related educational expenditures.” Another 12.5% is determined by student selectivity. Thus, higher-ed institutions have an incentive to build their endowments, lavish large sums on student instruction and services, and keep enrollments small and selective. Which is exactly what most have done.

As regular readers know, I do not favor punishing the rich through increasing tax rates. The rich already pay a hugely disproportionate share of income taxes, and high tax rates distort economic behavior to the detriment of all. But neither do I favor heaping additional privileges upon the wealthy. Anyone who wants to create a more egalitarian society, as I do, would do better to focus on the $20 billion a year in annual subsidies for wealthy colleges.

Real change must come from Congress because the special tax treatment originates mainly from the federal tax code. But from a Virginia public-policy perspective, perhaps it is worth examining the repeal of state breaks for contributions to higher-ed endowments, income generated by endowments, and university municipal bonds. Do we, as polity, really deem it a priority to subsidize the education of the wealthiest among us?

Property Tax Assessments Could Sabotage Virginia’s Solar Industry

Outlook murky.

A quirk in the way the state treats the value of solar energy projects for tax purposes could throttle Virginia’s solar industry in its infancy, according to an analysis prepared by SolUnesco, a Reston-based developer of solar energy projects.

In theory, a major investment in solar energy should benefit the jurisdiction where the project is located by generating significant new property tax revenues. But under current practice, any gain in revenue for a locality would be more than offset by cuts in state support for public schools. If local governments calculate that solar projects will cost them revenue rather than boost their tax base, they will have a strong incentive to deny necessary permits rather than approve them.

“Bureaucratic bookkeeping might grind solar development to a halt,” states a SolUnesco white paper, “The Composite Index and How It Relates to Solar Development in Virginia.”

SolUnesco has proposed building an 11-megawatt solar facility in Albemarle County, but the county zoning code prohibits solar farms. The Board of Supervisors has asked the county planning commission to study the issue. A repeal of the restriction might encounter opposition from NIMBYs intent upon protecting the rural character of the county, as I blogged here. Albemarle’s decision could well hinge on its calculus of whether the project will benefit or hurt the county fiscally.

Under state law, solar energy projects are assessed for property tax purposes as “certified pollution control equipment.” That qualifies solar farms for an 80% reduction in property taxes. That exemption improves the economics of solar projects but it reduces the tax benefits to local governments.

By contrast, the state Department of Taxation counts the full market value of solar farms when calculating the Composite Index (CI), which is used to measure local governments’ relative fiscal health and ability to support public K-12 education. The state distributes state support for education on a sliding scale that gives a higher share to localities with a low CI (a smaller real estate tax base per capita) and a smaller share to wealthier jurisdictions. As SolUnesco summarizes: “Increased taxable property increases the Composite Index, which reduces the share paid by the state.”

So, how does that work out in practice? SolUnesco provides the hypothetical example of a solar project that creates taxable value of $100 million. Here’s how the numbers work out for a “representative county.” The county generates $80,000 in new tax revenue on $20 million of assessed value. But the county would lose $147,597 in state funding for schools based on the full $100 million added to the Composite Index. The net loss: $67,597.

If the Department of Taxation used the same value as the local government in calculating the Composite Index, our hypothetical county would experience a $52,083 revenue gain.

“Counties that have permitted utility-scale projects may regret their decision if they believe these projects will result in a net revenue loss,” states the white paper “Many projects have received their county [conditional use] permit, but many have yet to file for their building, electrical and other construction permits.”

“The state is aware of this inconsistency in their treatment of tax exemptions,” says SolUnesco. The Department of Taxation, Department of Education, and the State Corporation Commission “are all working together on a resolution.”

Key Fiscal Concept: the Private-to-Public Investment Ratio

It’s not “density” that makes the Ballston area of Arlington County such a fiscal success but the ratio of private-to-public investment.

Charles Marohn, founder of the Strong Towns movement, is frequently queried if there is an ideal density for communities of a particular population and size. In “The Density Question,” he uses the question as a springboard to address a topic that really matters, the long-term fiscal sustainability of counties, towns and cities.

Marohn’s answer: Density is a useless metric. Forget about it. “Density is not our problem or our solution. Insolvency is our problem. Productive places are the solution.”

Say you own a $200,000 house. How much would you be willing to pay for all the communal infrastructure — the streets, sidewalks, arterials, interchanges, pipes, treatment plants, traffic signals, water towers, and so on — that adds to its value?

What if I said your total bill was $200,000? Would you pay it? I’ve been asking people this exact question for the past two weeks and have yet to have anyone who didn’t immediately say “no, there is no way.” And, of course, nobody would pay this. If the house is worth $200,000 and my additional cost of maintaining the infrastructure to allow me to live in that house is an additional $200,000, then that’s a really bad investment.

What if the total bill was $100,000? $20,000? Only when the number gets down to $10,000 and below, writes Marohn, are people unanimous in their willingness to pay for supporting infrastructure.

I think this is a reasonable thought process and it points to a powerful conclusion. At a property value to infrastructure investment ratio of 1:1, everybody walks. Nobody sensible is going to invest $200,000 in infrastructure in a property and have it end up being valued at only $200,000. What’s the point? …

If your city has $40 billion of total value when you add up all private investments, sustaining public investments of $1 billion (40:1) is a doable proposition. Public investments totaling $2 billion (20:1) starts to be risky with outside forces of inflation, interest rates and other factors beyond your control starting to impact your potential solvency. …

At the end of the day, we’re talking about building cities that make financial sense. … Let me deliver the tragic news that demonstrates why discussions of zoning, new highways, high speed rail across America, recreational trails, decorative lights and every other fetish of the modern planner/zoner is a sad distraction from our urgent problems. I’ve now done this analysis in two cities – one big and one small – and for a $200,000 house in either of these cities, the once-a-generation bill for your share of the infrastructure would be between $350,000 and $400,000. …

When private investment is exceeded in value by the public investment that supports it, wealth is not being created, it’s being destroyed. The wealth destruction is rarely evident because there are so many subsidies and cross subsidies between federal, state and local government, and so much maintenance is deferred into the indefinite future, that nothing is transparent. But the system is not sustainable.

“Our cities are going to contract in ways that are foreseeable, but not specifically predictable,” says Marohn. “Yet most are still obsessed with growth and the ‘progressive’ among us, with issues of density.”

Bacon’s bottom line: Density is relevant insofar as it shapes the private vs. private investment ratio. As a rule, higher density development requires less infrastructure per unit of housing or business than lower density development. But Marohn is quite right to say that we shouldn’t fixate on density — it’s a means to an end, which is evolving toward a more favorable ratio of private to public investment.

Until we get this basic accounting right, I don’t see how there’s much chance of achieving long-term fiscal sustainability.

Ed Gillespie Tax Plan Checks All the Right Boxes

Ed Gillespie addresses the GOP convention in Roanoke.

Ed Gillespie addresses the GOP convention in Roanoke. Photo credit: Washington Post.

Republican Ed Gillespie has issued a blueprint for tax cuts that could define the terms of debate for Virginia’s 2017 gubernatorial campaign. It is a fiscally credible plan. It offers a well-articulated vision for how to jump-start Virginia’s economy. That’s not to say the plan is unassailable, but it is too big and bold to be ignored. Indeed, Republican rival Corey Stewart rolled out his own tax cut plan just a few hours after Gillespie’s announcement. Democratic candidates likewise will be forced to respond.

There are two parts to the Gillespie plan. The first is an across-the-board cut of 10% to state income tax rates, which the campaign says will put nearly $1,300 per year back into the pockets of an average family of four. Gillespie would phase in the tax cut over a five-year period, paying for it out of an anticipated $3.4 billion in state revenue growth, leaving about 60% of the new revenue to fund core services.

The second part would sunset three anti-business, “job-killing” taxes levied by local governments: the Business and Professional Occupancy License tax (or BPOL), the machinery & tools tax, and the merchants tax. To replace lost revenues, he would allow local governments to utilize alternative revenue streams from an unspecified “menu of options” that will be “collaboratively developed.” One option the menu will not include is a local income tax. Localities would be free to re-enact the business taxes or choose from the options.

Not only will the tax restructuring boost disposable income for an average household for four when fully phased in, Gillespie claims, it will stimulate $300 million a year in new economic activity, create 50,000 additional private-sector jobs (25% more than would be created otherwise), and help recruit and retain talented workers. These economic estimates are based upon the work of the Thomas Jefferson Institute for Public Policy using economic modeling tools of the Beacon Hill Institute.

The vision. The underlying premise of the plan is that Virginia’s economy is sluggish and needs a jolt to get moving again. Says the plan overview:

Our approach to economic development is antiquated and tired, and Virginia is losing ground to other states. Our economic growth rate has trailed the national average for five straight years. … Virginia’s antiquated ta code was designed in a bygone era and our income tax rates have never been lowered since they were established in 1972. Our tax climate ranking fell to 33rd in 2017, falling behind neighboring states like North Carolina, Tennessee, and West Virginia. Our business rankings are falling, and more people are moving out of Virginia than moving in.

What won’t revive Virginia’s economy, says Gillespie, is picking winners and losers with subsidies, tax breaks and other preferences.

The plan will raise take-home pay for hard-working Virginians squeezed by stagnant wages and higher costs, orient our economy toward start ups and raise ups, entrepreneurs and small businesses, and make Virginia more competitive and attractive to businesses, retirees and veterans. …

Instead of solely focusing our efforts on throwing taxpayer dollars at big corporations and hoping they move to Virginia, this plan is crafted to foster natural, organic economic growth over the long term through a more patient approach that will help start ups, entrepreneurs, and existing small businesses. …

The path to diversifying our economy will be charted by entrepreneurs given greater freedom to invest and innovate. They will identify the new sectors, services and products to flourish in Virginia, not a top-down government approach that picks winners and losers in the marketplace, and too often makes the wrong bets with your tax dollars.

The fiscal math. Gillespie has structured the plan to fend off the inevitable criticism that his plan will crimp funding for critical government services. First, he says, he will offset revenue reductions by eliminating “special interest tax preferences, cutting wasteful spending, and conducting a full review of economic development programs.” Second, he will build in revenue triggers to protect critical investments in education, health care, transportation, public safety, and other core revenues.

Gillespie’s plan is vague about exactly which “special interest tax preferences” he would cut — and he’s vague about the “revenue triggers.” Virginia’s tax code is larded  with tax breaks, but the big ones are political popular and eliminating the small ones yield only modest savings. In effect, Gillespie is punting some of the tough political choices until later. As for the tax revenue triggers, presumably, they would limit the tax phase-out in any given year if revenues fail to meet expectations. Undoubtedly, there would be considerable discussion over how sensitive to revenue shortfalls those triggers should be. Continue reading

Unplanned Obsolescence: Fairfax County’s Office Parks

Aging, outdated, not within walking distance of anything.... 75% of Fairfax County's commercial/industrial real estate is obsolete.

Aging, ugly, outdated, not within walking distance of anything….75% of Fairfax County’s office space is obsolete.

There is some scary data hidden in Fairfax County’s budget numbers. Back in 1990, commercial/ industrial property comprised 26.7% of the county’s total real estate property tax base. Revenues from high office valuations gave the county leeway to keep the tax rate low — great for homeowners. But the commercial/ industrial share has declined since then to 19.12%, which puts Virginia’s largest political jurisdiction in a bind as county officials prepare the Fiscal 2018 budget.

That commercial/industrial crucial ratio has been known to jump around, depending upon market conditions. The 26.7% number, the highest rate recorded, came only seven years after the lowest rate recorded, 16.12% in 1983, according to a County Executive Budget Presentation published in February. So, things can change. But there is reason to think that the ratio will stay low for several years more.

The office vacancy rate in Fairfax County runs around 20 million square feet out of 116.4 million square feet. Meanwhile the Metro Silver Line is spurring new construction as employers seek Class A office space with mass transit access. Almost 2 million square feet are under construction in Virginia’s largest office center, Tysons, and nine major applications with 9 million square feet are under review.

While the new construction is good news for the Fairfax tax base, here’s what’s not: The executive presentation quotes the Fairfax County Economic Development Authority as saying that 73% of the county’s office space is obsolete.

I’m not sure how the EDA defines “obsolete,” but it sounds ominous. I’m guessing that it means the buildings are aging physically, need re-wiring for state-of-the-art telecommunications, and/or have antiquated layouts incompatible with collaborative work styles. Furthermore, I’d hazard a guess, the office parks reflect a ’70s- and ’80s-era autocentric design, which means they lack the walkable ambience that Millennial employees are looking for these days.

It’s one thing to invest millions in modernizing an office building in a desirable location; it’s another investing millions to update a building in an office park where no one wants to work anymore. I would hypothesize that a large percentage of the county’s commercial/industrial office buildings will continue to get older and more out-of-date. Rents will decline, property values will decline, and the county tax base will continue to erode.

Let this be a warning to other suburban counties across Virginia. Unless they can figure out how to reinvent their old office parks as walkable, mixed-use districts where people these days prefer to work,  they, too, will find themselves heirs to obsolete office parks that leech value and undermine their tax base. The difference is that Fairfax County could see a revival if President Trump succeeds in ramping up defense spending. Henrico, Chesterfield, Virginia Beach and other jurisdictions will have no such luck.

(Hat tip: Andrew Roesell.)

Making School Vouchers Palatable to Democrats

School vouchers have brought about demonstrable improvements to students' educational achievement -- in some cases, but not all. How can we combined free choice with accountability?

School vouchers have brought about demonstrable improvements to students’ educational achievement — at some schools, but not all. How can we combined free choice with accountability?

The Richmond-based Commonwealth Institute (CI) has staked out a reasonable position on two school choice bills before the General Assembly this session. Rather than opposing school vouchers and health savings accounts out of hand, CI acknowledges that children, especially poor children, can benefit from alternatives to public school. But the center-left think tank insists upon holding private schools accepting taxpayer dollars as accountable as public schools.

Not all private schools are created equal. Some excel, far surpassing public schools in performance, while others can be described only as failures. “If the goal of school choice is to provide options for a high-quality education,” writes Chris Duncombe in CI’s Half Sheet blog, “then it makes sense to hold private schools receiving taxpayer dollars to the same standards as public schools.”

Two bills before the General Assembly — HB 1605 and SB 1243 — would create voucher-like educational savings accounts that would provide taxpayer dollars for families pursuing private education or home schooling. One way to hold hold private schools accountable to taxpayers is to adopt a policy practiced in some other states: If a private school falls short of accreditation standards, bar them from accepting vouchers the following year.

As a practical matter, if I understand the system correctly, that means private schools with voucher students will have to administer the Standards of Learning (SOL) exams. For a school to receive accreditation, a specified percentage of its students must rate proficient in the exams. That might well mean “teaching to the test,” which some private schools find objectionable. But unless someone suggests another means to hold schools accountable and weed out the inevitable fly-by-nights, meeting state accreditation standards may be the least bad option.

For Duncombe, a second issue is equity. The school vouchers would vary widely from locality to locality, dependent upon state Standards of Quality funds appropriated. “That means a family in Lee County would receive over three times as much as a family in Falls Church,” he says. “This variation is not based on the financial need of the family or the cost of pursuing private education in the area.”

(I’m not sure I see the objection here. A family in Lee County is already receiving three times as much state aid as a family in Falls Church. So, how would funding school vouchers on the same basis be any more inequitable?)

Duncombe’s third criterion is income eligibility: “A millionaire could get tax dollars to send their kid to private school, while a family who lacks the means to supplement the voucher with their own income would be left out.” His proposed solution would be to limit the benefit to households whose incomes are below 133% of free-and-reduced-price lunch eligibility — about $60,000 for a family of four.

These proposals are not unreasonable. Duncombe is not taking a position of “Vouchers, hell, over my dead body.” He’s trying to address the criticisms of school vouchers in a substantive way — in effect, taking away the arguments who those who are inclined to accept school choice over their dead bodies. If these compromises are what’s necessary to win legislative approval, expand the sphere of choice, and empower parents, then I can live with them. With luck, the General Assembly and Governor Terry McAuliffe will decide they can live with them, too.