Saturday, September 28, 2019

Municipal funding - sales tax, property taxes and income taxes.

Utah has this curious situation where the 'host' muni gets a share of the sales tax. (Prior to which, munis did not zone for commercial, due to the traffic nuisance). Consequently, there is a bear-pit fight between munis to get commercial development, offering all sorts of inducements (taxes-breaks, infrastructure) to get the development, so they can get the taxes, to pay for the development. Prior to reading a lot of Strong Towns, I had been under the impression such a system was a local peculiarity. Regardless, I was much an advocate for it's abolition, as an inducement to sprawl.

Dan Sullivan of the 'Effective Georgism' Facebook group pointed out that this might not be the case, noting: "In Delaware, which has no general sales tax, commercial land values are exceptionally high, which means the municipality gets far more revenue from land that is zoned commercial". So even if Utah did away with sales tax rebates, munis would still engage in the same fruitless competition. Bleak.

I also commented on this to a Utah Developer, who argued for the sales tax as preferable to a property tax: a sales tax reflects the amount of business actually done, reflecting ability to pay, while a constant property tax might sink a business in a bad year. I might argue that while that's nice for the business, it's hard on the municipality--revenue goes up and down.

But recent readings suggest I may have it backwards--using sales tax may actually be kinder to the muni in the larger context. Tax assessments are also prone to all sorts of political gamesmanship, both over-assessing political opponents, and failing to re-assess. Rustbelt cities (Cleveland, Pittsburgh, Detroit) are famous for having property value assessments that are decades out of date--some of them reaching back into the 50's. (Don't even get me started on the obscenity that is California's Prop 13).

The peculiarity of Utah having the counties assess properties, rather than cities, has never made so much sense. The county isn't (as) reliant on property taxes to fund it's operations, and so it has less incentive to 'game' the process.

I'm still uncertain about sales-tax funded transit. When the economy crashed, UTA cut service, just when demand for transit-use was surging. However, property tax assessments to fund infrastructure are political non-starters (barring concentrated examples such as local improvement districts for things like streetcars). I know of no income-tax funded transit systems, although I expect one must exist--NYC used to have a income-based 'commuter fee' funding the MTA. Cities with specialty districts (airports, convention centers, tourist meccas) are reliable about harvesting that revenue scheme through per-use fees (rather than ad valorem taxes). I've seen both hotel and rental car fees in my travels. And even, in one curious case, a district (downtown) specific sales tax on beer.

Untaxed or unfee'd, it would be reasonable to see those charges capitalized into land values. And those land values mis-assessed (under or over). So perhaps a fee or sales tax based system is preferable to a property-tax based system.

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