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Chapter 1. Introduction

1.1 Funding Transportation Facilities and Services

In 1902, the year of the first comprehensive census of governments, the property tax generated 68 percent of combined State and local revenue. Between 1900 and 1942, the property tax diminished as a State revenue source as State governments shifted away from the property tax in favor of sales and income taxes.¹ After World War II, States increasingly relied upon distributions from the Federal Government for transportation and other infrastructure. In the transportation arena, Federal support typically came from the Highway Trust Fund, supported by a Federal per-gallon tax on fuel. State funds, both for State roads and for State matching funds for Federal aid, were supported by State per gallon taxes on fuel.² Sales and excise taxes on fuel resemble user fees. The more we drive vehicles with internal combustion engines, the more gas we consume and the more fuel tax we pay. However, fuel taxes cover only some costs associated with roadway transportation. Roads and highways are also subsidized by general fund revenues.³

When Federal transportation funding began, it prompted a surge of infrastructure creation and private development. The following results have been observed:

• Land hoarding and speculation (vacant lots, surface parking, and underdeveloped lots) occur near infrastructure amenities and at the centers of transportation networks.⁴ This can inflate land prices at these locations.
• High land prices near infrastructure amenities (such as transportation facilities) encourage development at the fringe of a community where land is cheaper and the perceived transportation costs (in the absence of roadway user fees) seem minimal. “Drive until you qualify” has become the motto for many.⁵
• “Leap frog” development occurs, where large tracts of undeveloped land separate developed tracts. Some metropolitan areas that are losing population nonetheless continue to expand their urbanized area.⁶
• This discontinuous, sprawling development requires expanding infrastructure networks and creates high per capita infrastructure costs.⁷
• Traffic congestion sometimes increases substantially despite the significant extension and widening of roads, because sprawling development necessitates private vehicle use for almost every activity outside the home.⁸
• The concentration of development at the urban fringe may lead to economic decline in central cities and the underutilization of infrastructure there.⁹

Now, at a time when urban sprawl is creating demands for more infrastructure creation and maintenance, Federal and State revenues from fuel excise taxes are not keeping pace with State and local infrastructure funding needs.¹⁰ Increases in fuel prices do not increase fuel excise tax revenues. Excise tax revenues (levied per gallon) are dependent on the quantity of fuel consumed. Historically, fuel consumption increased along with increases in vehicle miles traveled. However, increasing vehicular fuel efficiency, combined with a leveling off in vehicle miles traveled from 2008 to 2015, has reduced revenues below what would have been collected if historical trends had continued.¹¹

1.2 Value Capture as an Overlooked Source of Funds

Transportation investments, while often creating benefits for the entire public, often also create discrete benefits for subsets of the population. Determining which populations receive which benefits creates opportunity for obtaining revenues from beneficiaries. For example, transit investments provide a direct benefit to transit riders. This is the justification for charging a transit fare to riders. Because transit moves people with fewer vehicles than if everybody drove their own car, transit reduces traffic congestion. This is a measurable benefit to drivers and could justify the expenditure of a portion of fuel tax revenues on transit. In communities with traffic congestion, transit service that provides convenient, affordable, and reliable service can make locations well-served by transit more desirable, as reflected in higher rents and sales prices. Improvements to a roadway or roadway network can likewise enhance the desirability and productivity of well-served locations.¹² Thus, landowners are often “invisible” or “overlooked” beneficiaries of transportation investments.¹³ Special assessments are one technique for obtaining revenues from landowners who benefit from transportation investments.

Special assessments have a long history. In the 1800s, streets in the District of Columbia were mostly unpaved. In dry weather, dust polluted the air. In wet weather, mud made travel difficult and unpleasant. Paving streets and sidewalks presented a tremendous advance. It would make travel easier, making homes and businesses more accessible. It would also clean the air.

During the 1800s, Congress managed the District’s municipal business. Congress could have funded the paving of streets and sidewalks out of the District’s general fund. After all, everybody would benefit. But, Congress realized that people whose property fronted a paved street would receive a special benefit. Once a street was paved, people would no longer track dust, mud, and manure into adjacent homes and businesses. Even if the owners of such properties lived in another city and never used the streets or sidewalks themselves, these owners would benefit financially because their sites were more valuable. Therefore, Congress enacted laws beginning in 1894 requiring adjacent property owners to contribute 50 percent of the cost of first-time paving of streets, gutters, curbs, and sidewalks through a special assessment.¹⁴

Special assessments are fees charged to property owners whose properties receive a specific and direct benefit from an infrastructure improvement.¹⁵ As an example, a special assessment might consist of a fee to connect a property to municipal water or sewer lines. Such fees are often established based on the typical cost of making such a connection. Thus, except for unusual circumstances, such fees would typically be the same for each connection made. Also, connecting a property to municipal water and sewer lines creates a benefit that is almost exclusive to the property being connected.

Alternatively, many public facilities create benefits for both the general public and for individual properties. Thus, to fund such facilities, jurisdictions might opt to use both general fund revenues and value capture fees. Value capture fees might be established based on several factors:

• Identification of properties deemed to receive a specific and direct benefit from the infrastructure improvement over and above the general benefit that accrues to all properties or taxpayers.
• The proportion of total benefits created that accrue as specific and direct benefits compared to the overall general benefits received by all taxpayers. Creating a highway interchange might provide benefits to an entire community or region in addition to specific and direct benefits provided to particular properties. Thus (as in the case of the first-time paving of DC streets), a portion of the cost is paid out of general revenues and a portion from special assessments.
• A formula for determining an equitable payment from each benefiting property. For that portion of the cost assigned to individual properties, the formula for equitable payment could be based on a variety of factors. These factors and payment formulas will be examined below.

With regard to identifying those properties receiving a specific and direct benefit, when water and sewer pipes are connected, those properties receiving a connection get a benefit. When a sidewalk is built, those properties adjacent to the sidewalk get a benefit. When a public parking facility is built, commercial properties within walking distance get a benefit, whereas nearby residential properties might not.

In this last example, all commercial properties within a defined area appear to receive a specific and direct benefit. This area is often referred to as a “special assessment district,” a “benefit assessment district,” a “community improvement district” or other similar terms.¹⁶ All the properties within the district deemed to benefit might be assessed a special fee. And the determination of the fee for each property could be based on a wide variety of factors that will be examined below.

Today, State and local governments are looking for new and innovative ways to fund infrastructure construction, operations, and maintenance. Obtaining funding from infrastructure’s beneficiaries, sometimes called “value capture,” shows potential for filling this funding shortfall. Although most people are not familiar with the term “value capture,” value capture techniques were used extensively by both communities and private developers before World War II. This document will focus on some value capture techniques known as “special assessments” or “benefit assessments.” It will provide information about:

• When special assessments make sense.
• Evaluating different special assessment techniques to understand which ones are best suited to particular needs in a particular community.
• Establishing and implementing special assessment techniques when they are deemed to be an appropriate infrastructure-funding technique

1.3 Role for Special Assessments

1.3.1 Opportunities

• Justifiable Source of Funds: Obtain funds from those who typically receive a windfall benefit from transportation investments.
• Equity: Obtain funds in proportion to the benefits received.
• Administrative Ease: Take advantage of the existing assessment and revenue collection mechanisms associated with the ubiquitous property tax.
• Overcoming Tax Limitations: In many States, revenues have been constrained and diminished by limitations to real property assessments and tax rates through referendums and legislation like California’s Proposition 13 (1978) and similar legislation that was enacted in many States around the country during the 1980s and 1990s.¹⁷ Because special assessments are “fees” and not “taxes,” in some cases they have become alternatives to traditional property tax revenues.¹⁸

1.3.2 Challenges

• Documentation:
• Establishing that identified properties receive a specific and direct benefit.
• Establishing that the special assessment levy is roughly proportionate to the benefits received by identified properties.
• Substantive and Procedural Requirements: Groups that advocated for property tax limitations have sometimes been successful enacting legislation imposing stricter criteria on the formation of special assessment districts.¹⁹
• Equity: Assessment fees may have adverse impacts on lower-income residents. Exemptions and mitigation strategies have been developed.²⁰
• Political Challenges:
  • Property owners within the district may argue that it is inequitable that their neighbors outside the district or future residents are not required to pay the fee, even though they partially benefit from the infrastructure improvement.²¹
  • Some owners of benefiting properties might oppose legislation required for implementation, whereas others who will also benefit from the proposed infrastructure improvement might not be opposed but won’t necessarily be sufficiently motivated to testify or advocate in favor of such legislation.

1.4 Definition and Authority

Special assessments are an infrastructure funding technique under which a fee is charged against property benefiting from an infrastructure improvement. It is typically charged as an “add-on” to the regular property tax. However, this add-on is a “fee” and not a “tax.”

A “tax” is a compulsory payment from “individuals, businesses or property to support and carry on the legitimate functions of the government.”²² A tax can be levied “without reference to peculiar benefits to particular individuals or property.”²³ Indeed, “[n]othing is more familiar in taxation than the imposition of a tax upon a class or upon individuals who enjoy no direct benefit from its expenditure, and who are not responsible for the condition to be remedied.”²⁴

A “fee” is also a compulsory payment from individuals, businesses, or property. However, unlike a tax, a fee is compensation for particular services or for something done or to be done.²⁵ A special assessment is a type of fee “levied against real property particularly and directly benefited by a local improvement in order to pay the cost of that improvement.”²⁶ In addition, “The rationale of special assessment is that the assessed property has received a special benefit over and above that received by the general public. The general public should not be required to pay for special benefits for the few, and the few specially benefited should not be subsidized by the general public.”²⁷ Thus, “[a]lthough a special assessment is imposed through the same mechanism used to finance the cost of local government, in reality it is a compulsory charge to recoup the cost of a public improvement made for the special benefit of particular property.”²⁸

1.5 Alternative Terms

Many different names are used to label or define special assessments in legislation. Perhaps the most common alternative term is “benefit assessment.” This term is used in California. However, because special assessments are often applied within a defined area or “district,” the acronyms have unpopular connotations:

• Special assessment district (SAD)
• Benefit assessment district

Whether for this reason or others, a host of alternative names for this technique can be found. They include:

• Transportation improvement district
• Downtown improvement district
• Public improvement district
• Community improvement district (CID)
• Local improvement district (LID)
• Business improvement district (BID) or special services district²⁹ (SSD)

Sometimes, these terms are just different names for the same thing, but other times there can be significant differences. For example, a traditional special assessment district is created by a taxing jurisdiction to fund an infrastructure project in an agency’s budget that has been approved by that jurisdiction. The revenue will be collected and spent by that jurisdiction as it administers and implements the infrastructure project.

On the other hand, a traditional BID results when private property owners petition for the creation of such a district, to be funded by a special assessment collected by the local taxing jurisdiction but administered by a nonprofit organization created by the property owners. Having an organization of private property owners in charge of setting the assessments, determining how they are spent and hiring the contractors to carry out these privately approved projects is a significantly different approach, although it also entails a special assessment being charged to property owners.

Yet another approach is a special services district. Where the governing jurisdiction is not providing a set of desired services, residents may petition to create a new government entity, an SSD, to provide them. All voters within the district elect the SSD’s governing board. The SSD has defined powers and duties, including the setting of fees and budgets to accomplish those duties.

Some of these more basic special assessment variants (BIDs, CIDs, and SSDs) will be discussed in more detail in Section 6.10 below. But the keys to understanding any particular special assessment arrangement will be found in its enabling and implementing legislation. Special assessment districts, business improvement districts, or special services districts cannot be established unless State legislation authorizes their creation and implementing legislation creates them pursuant to guidelines contained in the authorizing legislation. If the entity setting the assessment and spending the revenue is separate from the jurisdiction that creates it (e.g., a BID or SSD), additional information about powers and procedures will be contained in the entity’s bylaws.

Footnotes

¹ Lincoln Institute of Land Policy and George Washington Institute of Public Policy. (2017). “State-by-State Property Tax at a Glance.” https://www.lincolninst.edu/research-data/data-toolkits/significant-features-property-tax/state-state-property-tax-glance.

² Oregon was the first State to tax gasoline in 1919 (see Corning, Howard M. Dictionary of Oregon History. Binfords & Mort Publishing, 1956). Over the next 10 years, other States adopted this tax. The Federal Government began taxing gasoline through the Revenue Act of 1932. However, it wasn’t until the Federal Aid Highway Act of 1956 that gas tax revenues were dedicated to the Highway Trust Fund. See “When Did the Federal Government Begin Collecting the Gas Tax?” at https://www.fhwa.dot.gov/infrastructure/gastax.cfm.

³ Frontier Group. (2015). “Who Pays for Roads?” https://frontiergroup.org/sites/default/files/reports/Who%20Pays%20for%20Roads%20vUS.pdf

⁴ Pagano, M. and O’ M. Bowman, A. (2001). “Vacant Land in Cities: An Urban Resource.” Brookings. https://www.brookings.edu/research/vacant-land-in-cities-an-urban-resource. A survey of 70 cities revealed that on average 15% of urban land consisted of boarded-up buildings or vacant land. This ranged from slightly more than 20% in the South to about 10% in the Northeast.

⁵ Financial Independence Hub. (2016). “Affordable Housing: Is It Worth It To ‘Drive Until You Qualify?’” https://findependencehub.com/housing-worth-drive-qualify

⁶ Examples include Detroit, Cleveland, and Buffalo. See Mallach, A. (2010). Facing the Urban Challenge: The Federal Government and America’s Older Distressed Cities, The Brookings Institution. p.8.

⁷ Marohn, C. (2011). “The Growth Ponzi Scheme, Part 2.” https://www.strongtowns.org/journal/2011/6/14/the-growth-ponzi-scheme-part-2.html. See also Gallagher, L. “The Suburbs Will Die: One Man’s Fight to Save The American Dream,” Time Magazine, July 28, 2014, at http://time.com/3031079/suburbs-will-die-sprawl. Marohn estimates that property taxes return between 4 and 65 cents for every dollar of future liability incurred.

⁸ Rybeck, R. (2012). Public Acceptability of Road-Use Pricing. p. 15. https://justeconomicsllc.com/pdfs/PublicAcceptabilityofRoadUsePricing-LiteratureReview(fnl)pbk12-04-30.pdf

⁹ Rybeck, W. (2011). “Re-Solving the Economic Puzzle, Shepheard-Walwyn Publishers.” pp. 146–148, and Kushner, J.A. “Affordable Housing as Infrastructure in the Time of Global Warming,” The Urban Lawyer, 42(4)/43(1), Fall 2010/Winter 2011, p. 207, crediting real estate speculation as a significant cause of the 2007 financial meltdown.

¹⁰ There are numerous reports about the insufficiency of fuel excise taxes. primarily because they are not indexed to inflation and because increasing vehicular fuel efficiency erodes revenues. See “State of the Highway Trust Fund: Long-Term Solutions for Solvency,” Hearings of the House Budget Committee, April 24, 2013, at https://www.govinfo.gov/content/pkg/CHRG-113hhrg80475/pdf/CHRG-113hhrg80475.pdf. See “Why gas taxes aren’t paying the bills anymore” at https://www.bloomberg.com/opinion/articles/2018-02-15/gas-taxes-aren-t-paying-the-bills-for-roads-anymore. See also “Failure to Act: Current Investment Trends In Our Surface Transportation Infrastructure, Preliminary Findings,” (American Society of Civil Engineers) September 2020, at https://www.infrastructurereportcard.org/wp-content/uploads/2020/09/FTA_SurfaceTransport_Study%E2%80%94FINAL.pdf. See also Congressional Research Service, “Funding and Financing Highways and Public Transportation,” May 11, 2020, at https://fas.org/sgp/crs/misc/R45350.pdf.

¹¹ In addition to increased fuel efficiency, some vehicles do not consume gasoline for fuel. For trends in vehicle miles per capita, see https://www.enotrans.org/article/trends-in-per-capita-vmt. For total vehicle miles traveled data, see https://afdc.energy.gov/data/10315.

¹² Guidebook to Funding Transportation Through Land Value Return and Recycling, NCHRP Report 873. http://www.trb.org/Main/Blurbs/177574.aspx

¹³ Rybeck, R. (2018). “Financing Infrastructure with Value Capture: The Good, The Bad & The Ugly.” https://www.strongtowns.org/journal/2018/2/20/financing-infrastructure-with-value-capture-the-good-the-bad-the-ugly

¹⁴ See D.C. Code, 2001 Ed. 9-401.04 through 9-421.13.

¹⁵ Lough, J. P. (2001). “Basics of Special Benefit Assessments.” https://www.cacities.org/Resources-Documents/Member-Engagement/Professional-Departments/City-Attorneys/Library/2002/2-2001-Cont-Ed;-Lough-Basics-of-Special-Benefit-As

¹⁶ FHWA. “Value Capture Implementation Manual.” Section 6.1. https://www.fhwa.dot.gov/ipd/value_capture/resources/value_capture_resources/value_capture_implementation_manual/ch_6.aspx#6_1

In 2013, 46 States had limits on property tax rates, property assessments or both. In 2017, 36 of these States had limits on rates and 11 had limits on assessments. See State-by-State Property Tax at a Glance. https://www.lincolninst.edu/research-data/data-toolkits/significant-features-property-tax/state-state-property-tax-glance. Significant Features of the Property Tax. Lincoln Institute of Land Policy and George Washington Institute of Public Policy. (Property Tax at a Glance; accessed August 28, 2020.

¹⁸ Lough, J.P. “Basics of Special Benefit Assessments.” https://www.cacities.org/Resources-Documents/Member-Engagement/Professional-Departments/City-Attorneys/Library/2002/2-2001-Cont-Ed;-Lough-Basics-of-Special-Benefit-As

¹⁹ For example, in California, see The Right to Vote of Taxes Act (“Proposition 218”), adopted by the voters in November 1996 and Proposition 218 Omnibus Implementation Act, Cal. Gov’t Code §§ 53750 et seq.

²⁰ Ibid.

²¹ FHWA. “Value Capture Implementation Manual.” 6.1.7. https://www.fhwa.dot.gov/ipd/value_capture/resources/value_capture_resources/value_capture_implementation_manual/ch_6.aspx#6_1

²² Black’s Law Dictionary, 5th Ed., Abridged, 1983 p. 758.

²³ Fenton v. City of Delano. (1984). 162 Cal.App.3d 400, 405 [208 Cal.Rptr. 486], citing Black’s Law Dictionary (5th ed. 1979) p. 1307, cols. 1-2.

Carmichael v. Southern Coal Co. (1937). 301 U.S. 495, 521-522 [81 L.Ed. 1245, 1260-1261, 57 S.Ct. 868, 109 A.L.R. 1327]

²⁵ Black’s Law Dictionary, 5th Ed., Abridged, 1983 p. 317.

²⁶ Solvang Municipal Improvement Dist. v. Board of Supervisors (1980) 112 Cal.App.3d 554 [hereafter “Solvang”]

²⁷ Solvang, p. 552.

²⁸ Solvang, p. 553.

²⁹ BIDs and SSDs might be different in more than just name. BIDs, for example, are most often administered by private, nonprofit organizations composed of landowners who have obtained permission (via legislation) to have a jurisdiction collect a special assessment fee on their behalf. And SSDs are typically governmental entities with their own elected governing bodies and administrative capabilities (similar to school districts with elected school boards).

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