The Key to Unlocking Potential New Revenue: Rethinking the intersection between land use planning and finances to boost the revenue productivity of the tax base.

• Author: Minicozzi, Joe
• Position: RETHINKING REVENUE

The Rethinking Revenue initiative is a joint project of many organizations that have an enduring interest in creating thriving local communities and making sure that those communities are served by capable and ethical local governments. Rethinking Revenue is about providing local governments with the ability to raise enough revenues for the services their communities need--and to raise those revenues fairly and in a way that is consistent with community values.

Local governments are defined by their geographic boundaries. As a result, a local government's revenues [and expenditures) are linked to how land is used within its boundaries.* Property tax revenues are a function of the value of property in the jurisdiction. Sales tax revenues are often partially determined by how many and the types of merchants in the jurisdiction. However, when local governments make decisions about land uses, they may not consider the implications for the long-term financial health of the local government, either revenue produced or the cost to serve the development over its life. For example, comprehensive land use plans don't often account for the revenue and expenditure impacts of the land use patterns the plan calls for. This is part of the reason why, for example, many local governments face difficulties funding infrastructure maintenance and replacement: Historical land use decisions did not provide for sufficient taxable activities to pay the cost of maintaining the infrastructure that was built to serve the development. (1) We can see an example of this in the City of South Bend, Indiana, in Exhibit 1.

If local governments are to find a long-term, dependable solution to their structural revenue and expenditure imbalances, they need to become more intentional about making financially savvy land use decisions. It requires rethinking how local governments view their role in land use planning, which is conventionally focused on remaining in compliance with laws, administering building codes, keeping up with demand for new development, and making sure mobility, parking, and greenway goals are met. These are important and should continue to be, but the list must also include assuring that sufficient taxable activity takes place to support the spending needs of the local government.

In this article, we will demonstrate the importance of land use decisions for revenue: It may be obvious that there is a relationship between revenue and land uses, but the nature and size of the relationship may not be obvious. We will suggest actions that local governments can take to better manage their land uses for positive revenue impacts, including examples of local governments that have already taken some of these steps.

Revenue Per Acre: Revealing the Relationship Between Land Use and Revenues

If land is largely responsible for producing local government revenue, then we can divide a local government's land into units of production to compare the revenue productivity of land within (or across) jurisdictions. "Revenue per acre" standardizes revenues and tax values into a measure of productivity that can be used to make comparisons. This is like using "miles per gallon" to compare the fuel efficiency of cars.

Revenue per acre can be plotted on a map of the community (added as a GIS "layer"). Exhibit 2 is a map of property tax the county collects for the City of Durango. Much like a bar chart, the higher an area is raised on the map, the more revenue per acre it produces. We see on this map that the downtown area produces more property tax per acre for the county government than other areas of Durango. This is due to the density and quality of buildings found in the downtown area.

However, a surprising finding comes when sales taxes are added to the analysis. In Durango, big-box retailers are located in South Durango. Exhibit 3, sales tax per acre, shows South Durango to be more productive than it is in Exhibit 1, but South Durango still lags behind downtown by a large margin. This is because big-box retailers take up a lot of horizontal space, including large parking lots. Downtowns are generally vertical, so they use the available land more intensively. The county gets more "bang for the acre" with denser development.

Two more points are worth noting about Exhibit 3: First, North Durango, the second-highest area on the map, was developed before big-box retailers came into vogue. Its retail areas comprise mainly strip malls. Though still lagging behind downtown, North Durango outperforms South Durango due to the greater density of strip malls compared to big-box retailers. Second, these maps were developed from the perspective of the county government, which is more reliant on property than sales taxes. In Colorado, sales taxes have more importance for city government, so the greater per-density sales tax production of downtown benefits the city government, too.

This pattern of greater revenue per acre in downtown or denser, urbanized areas is a common finding for local governments that have developed maps of the revenue productivity of land * and is often a surprise to local officials. The common theme from a revenue-per-acre analysis is that if a local government wants more revenues, it will have to raise the average revenue per acre its jurisdiction produces. This will require managing development differently.

In the rest of this article, we will suggest several strategies to encourage higher revenue per acre. Before we do, however, we should confront the fact that higher revenues per acre will usually require denser, more intensive development per acre than many communities tend to support. This historical aversion to denser development may lead to objections to local government using its regulatory power to encourage higher revenue per acre. Let's review and address these objections below:

Is it appropriate for government to exercise power in this arena? In the United States, one primary purpose of government is to secure people's property rights. Part of doing that is controlling property rights. After all, something that is out of control can hardly be secured! As such, local governments use zoning and building codes to achieve public policy goals. For example, zoning codes might be used to encourage better traffic patterns (to improve mobility), and building codes to help prevent fire (to promote public safety). Hence, there is an argument to be made that regulatory powers should be used to promote a public policy goal of financially sustainable local government. A financially healthy local government can better maintain transit, public safety, and other public services.

Won't the private market reach an efficient outcome? This argument suggests that even if local government could use its regulatory powers to encourage more intensive land uses, perhaps it shouldn't because the private sector will reach efficient decisions about how to use land on its own. However, this assumes that the interests of private actors and the public interest are aligned, but they sometimes are not. Let's take the example of the "big-box" retail building. The buildings are typically not of high quality and are not meant to be long-term assets to the community. The owners of these buildings have gone so far as to advance a legal argument known as "dark store theory." This posits that retail spaces should be valued as if they were vacant, even when the retail space is in...