Rethinking tax breaks for business

     Offering property tax incentives to lure businesses to locate in cities and towns is a common practice, costing state and local governments up to $10 billion annually in forgone revenue. Boston recently used tax breaks to promote continued growth in the Seaport district.  But there's a major problem. There is little evidence that this practice has much of an effect, either in the decision-making process or in terms of promised economic activity or new jobs.
     So say Lincoln Institute researchers Daphne Kenyon and Adam Langley in Rethinking Property Tax Incentives for Business, our latest Policy Focus Report. The policy deserves closer scrutiny because there is so much money at stake and so little evidence of impact, they say. They found that  property tax incentives are unlikely to have a significant impact on a firm’s profitability, since property taxes are a small part of the total costs for most businesses—averaging much less than 1 percent of total costs for the U.S. manufacturing sector; that tax breaks are sometimes given to businesses that would have chosen the same location even without the incentives -- thus merely depleting the tax base without promoting economic development; and that widespread use of incentives within a metropolitan area reduces their effectiveness, because when firms can obtain similar tax breaks in most jurisdictions, incentives are less likely to affect business location decisions.
      Over the course of nearly two years, Kenyon and Langley, authors of the report Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests, analyzed five types of property tax incentives and examined their characteristics, costs, and effectiveness: property tax abatement programs; tax increment finance; enterprise zones; firm-specific property tax incentives; and property tax exemptions in connection with issuance of industrial development bonds.
      The goal of promoting economic development is laudable. Attracting new businesses to a jurisdiction can increase income or employment, expand the tax base, and revitalize distressed urban areas. In a best case scenario, attracting a large facility can increase worker productivity and draw related firms to the area, creating a positive feedback loop.
      But municipalities should first consider alternatives to property tax incentives to achieve these economic development goals, the report says, such as customized job training, labor market intermediaries, and business support services. In addition, state and local governments also can pursue a policy of broad-based taxes with low tax rates or adopt split-rate property taxation with lower taxes on buildings than land.
      If property tax incentives continue to be used as part of the economic development toolkit, the report recommends that they be fine-tuned and more closely scrutinized. State government can restrict the use of incentives to certain geographic areas or certain types of facilities; publish information on the use of property tax incentives; conduct studies on their effectiveness; and reduce destructive local tax competition by not reimbursing local governments for revenue they forgo when they award property tax incentives.
      Local government officials should set clear standards for avoiding the use of incentives when costs exceed benefits. Localities should set clear criteria for the types of projects eligible for incentives; limit tax breaks to mobile facilities that export goods or services out of the region; involve tax administrators and other stakeholders in decisions to grant incentives; cooperate on economic development with other jurisdictions in the area; and be clear from the outset that not all businesses that ask for an incentive will receive one.
      The findings were summarized in an op-ed essay in The Boston Globe, published earlier this week. The report is available for free downloading here.

Atlas of Urban Expansion

     At a time when the world’s cities are bursting with massive increases in population, visiting fellow Shlomo “Solly” Angel continues to lay out a vision for better planning, with the publicatiion this week of the Atlas of Urban Expansion, followed by the companion volume Planet of Cities  later this summer. 
     Half of the world’s total population already lives in cities, and that urban population is expected to nearly double in the next 40 years, from 3.5 to 6.2 billion people -- nearly all in developing countries, where burgeoning megacities will likely more than triple their developed land areas by 2050.
     Increased global awareness is needed to better understand and plan for this massive expansion of cities in developing countries, Angel says. Local and national governments, civic institutions, international organizations, and concerned citizens must make minimum adequate preparations. For example, he says, it is vital that cities acquire the rights-of-way for arterial roads that can carry public transport and trunk infrastructure and protect selected open spaces from encroachment in advance of the coming expansion.
     The main objective of the Atlas of Urban Expansion is to increase understanding and help residents, policy makers, and researchers around the world come to terms with the expected global urban expansion in the coming decades. The call to action is urgent, as the urbanization process now underway will be largely completed by the end of the 21^st century.
     “Most people who desire to live in urban areas will already be in them by 2100, but by that time it will be too late to act,” Angel says. “If the land required for public works or public open spaces is not protected from encroachment before it is developed, it will be next to impossible to ensure the orderly development of cities to make them more efficient, more equitable, and more sustainable.”
     The Atlas of Urban Expansion is part of a long-term research project that includes a series of related publications and online resources including three working papers, the Policy Focus Report Making Room for a Planet of Cities; and the online version of the Atlas.
     The Atlas in book form introduces the project and presents two sets of full-color maps and a set of raw data tables. The first contains pairs of urban land cover maps from circa 1990 and 2000 for a global sample of 120 cities. The second includes composite maps of a global representative sample of 30 cities, showing the historical expansion of their urbanized areas from 1800 to 2000. In both sections, the maps are paired with numerical and graphical data, making it possible to compare cities in terms of their metric values on key attributes of urban expansion. The third section contains four extensive tables of urban, national, and regional data for each of the 120 cities.
     The book Planet of Cities, to be published in late August, recommends making adequate room for increased urban population growth, rather than emphasizing containment; adjusting densities within a sustainable range; providing an ample supply of urban land for decent housing; and securing land necessary for public streets, public infrastructure networks, and public open spaces well in advance of development.  Angel will present the research at the World Urban Forum organized by UN-Habitat in Naples, Italy, in September.

Considering infrastructure

     Infrastructure -- planning, privatizing, and paying for it, and its relationship to cities and sustainability -- was the timely topic of the the 7^th Annual Land Policy Conference held earlier this month in Cambridge, with some 90 leading researchers and practitioners on hand. Some highlights: 
     -- Fred Salvucci, the former Massachusetts transportation secretary and chief architect of Boston’s $15.6 billion Big Dig, opened the conference by recounting the "acrobatics" necessary to coordinate multiple stakeholders in that megaproject and meet the challenges of financing.
     -- In the keynote address, Brookings Institution fellow Katherine Sierra highlighted "green infrastructure" initiatives related to renewable energy in Austin, Texas, sustainable transport in Mexico, and resilience planning for climate impacts in Jakarta. "The time is now," she said. "The choices are being made."
     -- Yan Song from UNC Chapel Hill presented on the estimated $1 trillion in infrastructure investments underway and being planned in China, and the associated implications for economic growth and urbanization there.
     -- Lincoln Institute president Gegory K. Ingram, a longstanding expert on infrastructure going back to the World Bank's 1994 World Development Report, presented a paper by César A. Calderón from The World Bank on measuring the economic impact of infrastructure.
     -- Lawrence C. Walters from the Romney Institute of Public Management, Brigham Young University, and David Crapo of Crapo/Smith LLC, discussed railroads and public utilities as models for private operating entities, followed by Janice A. Beecher of Michigan State University on the regulation of utility infrastructure.
     -- The challenge of financing infrastructure maintenance, despite strong evidence that deteriorating roads or drinking water pipes has high economic costs, was explored by Felix Rioja from Georgia State University.
     -- Louise Nelson Dyble of the Michigan Technological Institute explored lessons from the $1.8 billion 99-year lease of the Chicago Skyway, as part of the trend of privatizing toll roads.
     -- The impact of "mega-events" such as the Olympics or the World Cup was the subject of the presentation by Victor A. Matheson from the College of the Holy Cross, who noted that long-term benefits are fleeting and prone to be exaggerated; a key question is how cities use the infrastructure put in place for such events after the crowds have gone home. The redevelopment of East London for the 2012 Summer Olympics will be an important test case.
     -- Anu Ramaswami from the University of Colorado Denver delivered a sobering assessment of the minimal results in reducing greenhouse gas emissions, even on a per-capita basis, of climate action initiatives undertaken by metropolitan areas.
     -- Alex Anas and Tomoru Hiramatsu from the State University of New York at Buffalo analyzed the spatial effects of road pricing policies such as congestion pricing, finding that a braoder approach, such as a fuel tax, tends to lead to more centralization in urban areas.
     -- Robert Picciotto of Kings College London presented on the "dirty little secret" of many big infrastructure projects -- involuntary resettlement -- and called for better planning and a fairer process.
     -- The social, economic, and cultural impact of dramatically expanded use of mobile phones in the developing world -- and specifically Africa, where a cottage industry for phone repair and retrofits is well-established -- was the story told by Mirjam de Bruijn of Leiden University. "People are going to be walking around the slums and the favelas with a supercomputer in their hand," noted discussant Anthony Townsend from the Institute for the Future.
   Katherine Sierra's keynote address will soon be available at the Lincoln Institute's video page. The full agenda can be viewed here. The papers presented at the conference will be compiled in a single published volume and also made available online. The most recent conference volume, Value Capture and Land Policies, was published this month and was based on the Land Policy Conference in May 2011.

Taxes by installment

     Property owners are less likely to be late with their tax payments if they made three installment payments a year instead of two, according to new research by Lincoln Institute visiting fellow Andrew Reschovsky.
     The delinquency rate drops by nearly half if the number of payments is increased from two to three, says Reschovsky, a public policy and economics professor at the  Robert M. La Follette School of Public Affairs at the University of Wisconsin - Madison.
     The statistical analysis, done with Paul Waldhart, an analyst at the Wisconsin Legislative Audit Bureau, is of data from Wisconsin municipalities for 2005-2009. “Around the United States, more people are late with their property tax payments,” Reschovsky says. “In Wisconsin, the delinquency rate was 2 percent in 2005. In 2007 it was 2.5 percent, and by 2009 it had risen to 3 percent.”
     Of Wisconsin’s 1,850 municipalities, about 60 allow more than two installments for real estate taxes, Reschovsky says. These municipalities are generally larger: of Wisconsin’s 38 municipalities with populations over 20,000, with 22 allow multiple installments. In addition, collection methods for delinquent payments vary across and within Wisconsin counties. Some municipalities collect their own delinquent taxes, while many others give the county this responsibility.
     On average, in fiscal year 2009 local governments in Wisconsin relied on the property tax for 65.2 percent of their own-raised revenues. In only six states did local governments raise a higher share own revenues from the property tax. Reschovsky and Waldhart’s study, started after City of Madison Treasurer Dave Gawenda noticed an increase in property tax delinquency and wondered whether increasing the number of payment installments would bring it down, is available as the Lincoln Institute working paper Property Tax Delinquency and the Number of Payment Installments.

Property tax in Latin America

    Why is the property tax so important for Latin America?  Because it's a fair and reliable source of revenue for financing local public services in some of the fastest-growing urban areas of the developing world, according to a new report published by the Lincoln Institute of Land Policy.
     Improving the Performance of the Property Tax in Latin America, by Claudia M. De Cesare, suggests several reforms that would enable municipalities to improve property tax collections, strengthen local governance, and also emphasize the shared responsibility of citizens and public authorities for urban development.
     There are many challenges in establishing a successful and sustainable property tax in Latin American countries. Local public officials responsible for its administration often face intense political pressure because the property tax is universal and highly visible. Public dissatisfaction arises just as it does in the U.S., when homeowners are unhappy with property tax bills. Good assessment practices require technical expertise and administrative capacity.
     In addition, wide disparities in income and wealth complicate the setting of equitable property tax rates. Limited access to data on property sales prices hampers accurate valuations, as does the great diversity in land tenure and occupation patterns in the region. An added difficulty is the distrust of public authorities by many taxpayers in view of weak governance and corruption.
     Widespread informal land occupation also complicates matters. Excluding informal properties limits the universality of the tax, but including such properties requires significant efforts to update cadastral records. How residents of informal areas perceive the property tax is another concern. Using fees and charges tax might be viewed by many as less influenced by political factors, easier to administer, more efficient, and more capable of generating revenue.
     Nevertheless, property taxation remains the best way to support local public expenditures for several reasons, including its familiarity to taxpayers, its progressivity relative to taxes on consumption, and the difficulty of tax avoidance, the report says. A growing number of municipalities demonstrate the feasibility of operating efficient property tax systems; the report makes these recommendations to overcome roadblocks:
     -- Fiscal policy. Local jurisdictions should be able to collect property taxes autonomously, and guarantee the universality of the tax. These goals can be achieved by adopting policies that adhere to basic principles of equity, ability to pay, universality, legality and certainty, effective administration, and transparency.
     -- Tax policies. A sustainable tax system avoids policies that enable tax delinquents, erode the universality of the property tax, and create inequities and inefficiencies. The same level of government should decide on public expenditures and set property tax rates.
     -- Assessment practices and collection procedures. Some of the shortcomings in tax administration relate to property cadastre systems, which may be more sophisticated than local technical capacity can support, or be costly relative to the revenues produced by the property tax. Better tax administration requires increased efforts to design cadastres for sustainability and the application of more flexible approaches to improve the accuracy of valuations. In addition, consistently applying sanctions in cases of tax evasion can all help to improve collections. Effective public information campaigns on taxation procedures and on the use of tax revenues can strengthen fiscal culture and promote trust.
     The report will be translated into Spanish and Portuguese. The related subcenter at the Lincoln Institute website, Property Tax in Latin America, includes extensive data and case studies, and is available in Spanish and Portuguese.
     Property taxation is one of the core topics of the Lincoln Institute of Land Policy and is of central importance in Latin America. The Lincoln Institute’s Program in Latin America and the Caribbean, Martim O. Smolka, director, has for many years been engaged in research, urban planning strategies, and education and training in key topics related to land use in 19 countries throughout Latin America and the Caribbean.

Infrastructure's dizzying array

     At the 7th Annual Land Policy Conference: Infrastructure and Land Policies, Janice Beecher, a political scientist at the Institute of Public Utilities at Michigan State University and a self-described "regulation nerd," provided this collected picture of the physical imprint of utility infrastructure in the U.S.:

-- 66 nuclear, 580 coal, 1,169 petroleum, and 1,705 natural/gas plants
-- 1,432 hydroelectric plants
-- 1,356 renewable energy facilities
-- 395,000 miles of high voltage lines
-- 15,700 transmissions substations
-- 6 million miles of electricity distribution lines
-- 20,000 miles of gas-gathering pipelines
-- 306,000 miles of transmissions pipelines
-- 1,400 gas compressor stations
-- 400 underground natural gas storage facilities
-- 2 million miles of gas distribution mains
-- 75,000 water treatment facilities
-- 2 million miles of water distribution mains (half just 6 to 20” in diameter)
-- 14,500 wastewater treatment facilities
-- 600,000 of wastewater collection lines
-- 18.7 million telephone poles
-- 1.7 billion miles of metallic wire
-- 38 million miles of fiber wire

     The portrait was drawn from the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, the North American Electric Reliability Corp., the Federal Communications Commission, industry trade associations and other sources.
     The presentation was part of the session on taxation and regulation of infrastructure, as the participants considered increasing privitization of infrastructure including transport infrastructure. Former Massachusetts transportation secretary and chief architect of the Big Dig Fred Salvucci kicked off the conference last night, followed by keynote speaker Kathy Sierra this morning, on green infrastructure.