CONTENTS
FIGURES
TABLE
In 1902, the year of the first comprehensive census of governments, property tax generated 68 percent of combined State and local revenue. Between 1900 and 1942, property tax diminished as a State revenue source as State governments shifted away from property tax in favor of sales and income taxes.1 After World War II, States increasingly relied on funding from the Federal Government for transportation and other infrastructure. In the transportation arena, Federal funding typically came from the Highway Trust Fund, supported by a per gallon Federal excise tax on fuel. State funds, both for State roads and for State matching funds for Federal funds, were supported by State excise taxes on fuel.2 Sales and excise taxes on fuel resemble user fees. The more miles a person drives, the more fuel that person consumes and the more fuel tax that person pays. However, fuel taxes provide only about 25 percent of funding for the Nation's public roads and only capital expenditures associated with roadway transportation. State and local taxes currently pay for approximately three-quarters of the Nation's highways, according to the Urban Institute.3 Roads and highways are also subsidized by general fund revenues.4
The Federal-aid highway program was created by the Federal Aid Road Act of 1916. When Federal transportation funding began flowing to States, it prompted a surge of infrastructure creation and private development. The following results have been observed:
Land speculation near infrastructure amenities and at the centers of transportation networks can inflate land prices at these locations.5
High land prices near infrastructure amenities (including transportation facilities) can encourage development at the fringe of a community where land is cheaper and perceived transportation costs (in the absence of roadway user fees) seem minimal.6
Some metropolitan areas that are losing population nonetheless continue to expand their urbanized area through "leap frog" development, in which large tracts of undeveloped land separate developed tracts.7 This discontinuous development generates extensive infrastructure networks and creates high per capita infrastructure costs.8
Traffic congestion sometimes increases substantially despite the significant extension and widening of roads, because sprawling development necessitates single-occupant vehicle use for almost every activity outside the home.9
The development at the urban fringe might lead to economic decline in central cities and the underutilization of transportation and other public infrastructure there.10
Federal and State revenues from fuel excise taxes are not keeping pace with State and local infrastructure funding needs.11 Because excise taxes are levied on a per gallon basis, increases in fuel prices do not increase fuel excise tax revenues. Excise tax revenues are instead dependent upon the quantity of fuel consumed. Historically, fuel consumption increased along with increases in vehicle-miles traveled. However, increasing vehicle fuel efficiency and a leveling-off in vehicle-miles traveled since 2008 have reduced fuel tax revenues below what would have been collected if historical trends had continued.12
Transportation investments by the public sector, while creating benefits for the general public, also can create discrete benefits for subsets of the population. Determining which populations receive which benefits creates an opportunity for obtaining revenues from the beneficiaries. For example, transit investments provide a direct benefit for transit riders. This is the justification for charging a transit fare to riders. Because transit moves people with fewer vehicles than if everyone drove their own cars, transit reduces traffic congestion. This is a measurable benefit for drivers and justifies 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 more accessible and desirable as reflected in higher rents and sales prices due to a concentration of users. Improvements to a roadway or roadway network can likewise enhance the desirability and productivity of well-served locations.13 Thus, nearby landowners are often "invisible" or "overlooked" beneficiaries of transportation investments.14 There are a variety of techniques to return publicly created economic gains to the public sector. This is referred to as "value capture," and tax increment financing (TIF) is often included in these techniques.
TIF is a budgeting technique that allows infrastructure projects to be funded and/or financed without competing against existing projects and programs and without raising taxes. This is accomplished by pledging a portion of the future tax revenue increases in a defined area to fund or finance infrastructure improvements.
TIF-funded infrastructure projects can be funded without reducing spending on existing programs or projects and without increasing taxes. Taxpayers are subject to the same tax rates regardless of whether a TIF is implemented or not. It is only the increase (increment) in revenue, derived from increased economic activity and property values, that funds the TIF portion of an infrastructure project.
The ability to fund infrastructure projects without competitive spending or tax increases is politically advantageous. As a result, this technique has become very popular.15
The widespread utilization of TIFs has generated concerns that TIF revenues might be reducing general fund revenues and thereby depriving public services of funding. This concern has focused attention on the assumptions underlying TIF.
The first assumption is that tax revenues in the affected area will not increase but for16the improvement of specified infrastructure, which will catalyze private sector development and other economic activity. If this assumption is not true, and tax revenues would have increased anyway, then a TIF deprives the general fund of revenues and diminishes resources for existing projects and programs.17
Although some parcels reside within a single taxing jurisdiction, some parcels might exist within multiple taxing jurisdictions. In other words, a single property might receive a single property tax bill, including taxes to be paid to a city, a county, a State, a school district, a water and sewer district, or a road improvement/maintenance district. Typically, only one of these tax authorities will be able to implement a TIF. However, implementing a TIF could potentially affect revenues for these other taxing authorities. Where multiple taxing authorities exist, the process for creating a TIF might be more complex and controversial.
The second assumption is that increases in development and economic activity will yield sufficient additional tax revenues to fund the specified infrastructure improvements. If this assumption is false, then either alternative funding sources will be required to repay the debt or infrastructure project lenders will not be repaid.
1 Lincoln Institute of Land Policy. 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.
2 Oregon was the first State to tax gasoline in 1919. See Corning, Howard M. 1956. Dictionary of Oregon History. Binfords & Mort Publishing. Over the next 10 years, other States adopted this tax. The Federal Government began taxing gasoline through the Revenue Act of 1932. However, it was not until the Federal-Aid Highway Act of 1956 that gas tax revenues were dedicated to the Federal Highway Trust Fund. See When Did the Federal Government Begin Collecting the Gas Tax? https://www.fhwa.dot.gov/infrastructure/gastax.cfm.
3 Urban Institute, State and Local Finance Initiative. 2017. Highway and Road Expenditures. https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/highway-and-road-expenditures#Question1Highway.
4 Frontier Group. 2015. Who Pays for Roads? https://frontiergroup.org/sites/default/files/reports/Who%20Pays%20for%20Roads%20vUS.pdf.
5 Pagano, Michael, and Ann O'M. Bowman. 2001. Vacant Land in Cities: An Urban Resource. Brookings. A survey of 70 cities revealed, on average, 15 percent of urban land consisted of boarded up buildings or vacant land. This ranged from slightly more than 20 percent in the South to about 10 percent in the Northeast. https://www.brookings.edu/research/vacant-land-in-cities-an-urban-resource/.
6 Rybeck, Rick. 2019, October. Avoiding misgivings: Recycling community-created land values for affordability, sustainability and equity. Journal of Affordable Housing and Community Development Law, 28(2), p. 299, see footnote 6 on p. 300.
7 Examples include Detroit, Cleveland, and Buffalo. See Mallach, Alan. 2010. Facing the Urban Challenge: The Federal Government and America's Older Distressed Cities. The Brookings Institution. p. 8.
8 See Marohn, Charles. 2011, June 16. The Growth Ponzi Scheme, Part 2. https://www.strongtowns.org/journal/2011/6/14/the-growth-ponzi-scheme-part-2.html. See also Gallagher, Leigh. 2014, July 28. The Suburbs Will Die: One Man's Fight to Fix the American Dream. Time Magazine. http://time.com/3031079/suburbs-will-die-sprawl/. Marohn estimates that property taxes return between 4 cents and 65 cents for every dollar of future liability incurred.
9 Rybeck, Rick. 2012. Public Acceptability of Road-Use Pricing. p. 15. https://drive.google.com/file/d/17Qbk4LlLZ0cxDiiHjP2Ygwc1nyNx0v9o/view
10 See Rybeck, Walter. 2011. Re-Solving the Economic Puzzle. Shepheard-Walwyn Publishers. pp. 146–148. See also Kushner, James A. Fall 2010/Winter 2011. Affordable housing as infrastructure in the time of global warming. The Urban Lawyer, 42(4)/43(1), p. 207, crediting real estate speculation as a significant cause of the 2007 financial melt-down.
11 There are numerous reports about the insufficiency of fuel excise taxes, primarily due to the fact that it is not indexed to inflation and 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, 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, September 2020, American Society of Civil Engineers at https://www.infrastructurereportcard.org/wp-content/uploads/2020/09/FTA_SurfaceTransport_Study%E2%80%94FINAL.pdf.
12 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.
13 Vadali, Sharada, et al. Guidebook to Funding Transportation Through Land Value Return and Recycling. NCHRP Report 873. http://www.trb.org/Main/Blurbs/177574.aspx.
14 Rybeck, Rick. 2018, February 21. 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/.
15 McCarthy, Sean. 2017. Tax Increment Financing in Arizona. ATRA Special Report. p. 2. http://www.arizonatax.org/sites/default/files/publications/special_reports/file/tif_in_arizona.pdf.
16 The "but for" assumption/test will be discussed in section 5.1.
17 Schwartz Center for Economic Policy Analysis, The New School. 2020, August 20. TIF Case Studies: California and Chicago. https://www.economicpolicyresearch.org/insights-blog/tif-case-studies-california-and-chicago.
