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:
-
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.
-
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
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