Wednesday, December 06, 2006

Taxing questions 

I was invited to the release of a report that was to show the effects of building new housing in the St. Cloud area. The teaser in this release was the sentence:
The housing industry not only pays for itself, its economic impact results in new income and jobs and additional revenue for local governments.
That's not what you usually hear. You hear instead that many residential developments create net burdens on local government. So local impact fees have been used to charge up front for the cost of adding one more household to the family. According to a Brookings Institute study, "property taxes fail to cover the full cost of the infrastructure" that a new household demands. That certainly sounds possible to me.

So to my shock I learn that this report estimated that the cost of all the impact fees and expenditures on the home that the cities of St. Cloud, Sauk Rapids and Sartell demand builders put into new homes was estimated to equal almost $32,000 per home built (new houses here average about $195,000; the raw land cost per home is less than $12,000.) Wow, I think. Is it that expensive to support a new family to the St. Cloud area? It turns out the study handles this as well, and the calculation comes to about $17,000, based on a cost estimate done by the National Association of Home Builders. (I have seen the study -- it's not available online and not public, so all I can do is characterize it as looking like what a reasonable economist would do to estimate the cost of providing public goods. More than that I cannot vouch.) When all fees and taxes collected are added up, the net gain to the city is almost $20,000 in the first year, plus a continuing net revenue gain to the city of more than $1000 per year thereafter.

Many area officials were in the audience with me, and I must credit them for being civil in their criticism, but there was no doubt the number gave them indigestion. Questions were asked, and in the conversation it came out that the number derived from actual agreements between the cities and the developers, details of which were given to the researchers. From the Times' report:

St. Cloud planning director Matt Glaesman said the $31,800 in fees Eisenberg's study suggested local governments are charging for each new home sounded too high. He and other officials have asked the economist to explain how he calculated that number.

"We really didn't have enough information to make a judgment either way," Glaesman said.

Sauk Rapids finance director Jack Kahlhamer said Eisenberg's study includes infrastructure costs, such as sidewalks and storm sewers. But in Sauk Rapids, developers pay those costs themselves, Kahlhamer said. The city doesn't pay or collect fees for those expenses.

While Kahlhamer doesn't doubt homebuilding has a positive impact on the economy, he questions who's receiving the benefit. If new homeowners spend money at a restaurant, that doesn't help the city pay for a new water treatment plant, he said.

"I just see revenues being exaggerated, but I don't see the expenditures there," Kahlhamer said.

Having seen the study, what I found was a calculation for different cities of the relationship between homes built and expenditures on local capital and current expenses. What significantly drives down the cost local government pays are the transfers from the state budget for education (assumed to be 85% in the analysis) and LGA (which, while down, still covers more than 60% of local government administration.)

A flaw in Kahlhamer's statement is that a substantial part of what adds to costs are not payments to government but required expenses to meet codes in the cities. One example: Any building over 8000 square feet must have water sprinklers. There are therefore many condo buildings kept smaller at, say, 7985 square feet. The study appears to have captured those mandated expenses; cities wish to ignore them. There is an additional benefit to the homeowner, the city official will certainly say, but the economist responds by saying the sprinklers could be purchased by the homeowner if the benefit to the homeowner exceeds the cost. If you're trying to hold down the cost of firefighting, simply ask the homeowner to pay a fee per call to the fire department.

I think it's quaint to believe that the cities charge only what they need to develop land. Undeveloped land is a tax source for them: they have a monopoly on platting and permitting for home development, so they will charge a price that allows them to capture a good deal of the profit of development. It is far less costly to city officials -- particularly around election time -- to raise impact fees than taxes on current residents. But monopoly pricing will push up the cost of housing and reduce the number of units produced. (And this while the cities still suck up to the affordable housing lobby.) And, just as I predicted years ago, the building is being pushed further and further out into the countryside. Building boomlets are happening north of St. Cloud in places like Rice now, where fees are much lower ... for now.