Taxes

Taxes

Taxes are probably one of the most dreaded words in the English lexicon. But wait, there are numerous benefits communities can attain from local tax dollars. Communities get parks, playgrounds and trails as well as natural areas for wildlife habitat and wildlife viewing, unobstructed views of the most precious scenery around and above all, a better place to live. Numerous types of taxes exist, but who pays them and who benefits from them are usually the most controversial topics when putting together a campaign to increase taxes in your community. The attitude and desires of the citizens who will bear the tax burden ultimately determines which tax structure best pertains for your community. In the following tools and examples, we outline the many taxes available to local, county and state governments and give a brief description of who is affected, who pays and who reaps the benefits. This is not a comprehensive list. New funding mechanisms including tax structures are being attempted throughout the United States. If you know or hear of a new, innovative funding mechanism, please let us know.

Property Tax

Property taxes are one of the most widely used funding mechanisms for park improvements, acquisitions and local government expenditure for natural area preservation. As a dependable source of revenue and predictability, they are popular with local governments because property taxes do not share the fluctuations of other market-based tax schemes. Since the tax is applied to all property owners in a community, equitable collection and distribution reigns, whereas other funding measures can exclude beneficiaries from the financing burden. Property taxes do omit some community members, such as renters, from contributing. Numerous jurisdictions have run successful campaigns to increase their property tax revenues in order to finance parks and open space acquisition.

When considering an increased property tax measure to fund parks and natural area preservation and examination of your communities tax measure history and the successes or failures of neighboring communities, needs to occur. Has it been done here before? Are there communities in the region that have used this tactic before? Why did it succeed or fail? How do the voters in the community feel about their tax rate? Are they willing to support an increase?

Property tax assessments receive more favorable approval ratings when citizens are actively involved in the appropriation process. For example, in Routt County, Colorado, voters approved a property tax increase in 1996 to purchase the development rights of ranchlands. Written into the measure were provisions for a volunteer, citizens advisory committee charged with making recommendations to the County Commissioners for all expenditures from the fund. This mechanism appealed to the community because it gave them local control of how their tax dollars would be spent. Fears of politicking, wasteful government spending and loss of local control are usually enough to elicit voter negativity.

The Trust For Public Land has tracked all conservation-related ballot measures since 1988. Their LandVote Database compiles information on local and state government ballot issues to raise funds for land conservation.

In 2004, 164 of 219 land conservation measures passed. Of the $26.2 billion of approved tax increases, $4.1 billion were earmarked as land conservation funds. In 2005, an off-year election 111 of 140 measures passed, which created a pool of $1.7 billion for land conservation. Some recent ballot box examples include Rochester Hills, Michigan, western edge of Chicago suburbs, which approved a ten-year property tax expected to provide $10.2 million for open space acquisition. East Baton Rouge Parish, Louisiana approved a ten-year property tax in 2004 that is projected to create a $45 million fund for land conservation.

Sales Tax

The sales tax is the second largest source of income for state and local governments and typically the most popular tax among voters. All 50 states have sales tax enabling legislation. However, they differ considerably in the maximum taxable amount, election process for an increased sales tax and the specific products that can be taxed. Most states have a sales tax between 0.5-5.0 percent, but allow local governments to impose their own, specific taxes on top of the state sales tax. In most cases, local government sales taxes need voter approval for assessment. One of the popular arguments in favor of increasing sales taxes is both locals and visitors pay for the preserved land. While property taxes and benefit assessment taxes only affect locals, the sales tax is applied to all regardless of property ownership or residence address. This is a major benefit to an open space campaign to be funded through sales tax dollars. Detractors argue that the sales tax is a regressive tax, and lower income individuals wind up contributing a greater proportion of their income.

Sales taxes offer local communities several advantages as a park and open space funding tool. The tax is relatively easy to collect and reporting costs are fairly low. Most local governments piggyback their portion of the tax onto the state tax and the total sum is collected at the register. Even though revenue fluctuates with the local economy, a small percentage can usually generate substantial revenues for a variety of projects such as park maintenance, recreational improvements, and open space acquisition. When locating matching funds and showing community involvement in the natural area preservation program, sales taxes provide evidence of full community participation and provide great leverage for additional bond money, grant awards and state or federal assistance. California, Colorado, Missouri and many other states have local government enabling legislation to impose a sales tax based upon voter approval.

Boulder, Colorado has the most successful open space program based on sales tax revenues in the country. Financed through an initial 0.4% and subsequently increased, the 0.73% sales tax has preserved more than 43,000 acres of open space in and around the city over the past 40 years. Boulder County has a separate open space sales and use tax of 0.45 percent that generated more the $16 million in tax receipts for the county in 2005.

Tax Increment Financing

Tax increment financing (TIF) is a taxing method, which can indirectly help preserve open space and agricultural lands at the fringe of urban development. TIFs are used to induce real estate development, frequently in previously or underdeveloped areas of a community. The tax can be used to encourage new construction, redevelopment or to pay for infrastructure such as water, sewer and streets.

The state of California invented TIFs in 1952, and now 49 states have enabling statutes for the tax. Local governments are authorized to designate and activate redevelopment agencies. Tax increment financing provides local governments with a funding mechanism that sidesteps state limits on revenue and expenditures.

As an area is redeveloped, it may generate higher property tax revenue than before. This revenue is known as the tax increment. TIFs use the additional property taxes created by the development to help offset some of the development’s costs. A redevelopment agency engages in tax-increment financing when it funds its activities such as bonds or notes secured by the increment.

A TIF succeeds when newer developments increase the taxable market values of an area. However, if the new development fails to increase the density or intensity of land use then the TIF will fail to generate revenue to cover the revenue funding mechanism such as a bond. Replacing a large apartment complex with single-family homes would not be a suitable use for a TIF. With certain exceptions, the agency must allocate 20 percent of the tax increment to funding low- and moderate-income housing.

By encouraging density and redeveloping under-utilized land within an urban setting, more open space and working lands could possibly be maintained.

Real Estate Transfer Tax

In a rapidly expanding real estate market, many opportunities exist for requiring developers and their projects to contribute back to the community. One such way is through a real estate transfer tax. Real estate transfer taxes are state and local taxes that are assessed on real property when ownership of the property is transferred between parties. The seller is usually responsible for the taxed amount, though various conditions exist for both the buyer and seller. The money is then used to purchase land or development rights within the community for conservation purposes. Tax rates and dispositions vary from state to state. Some states have no real estate transfer tax enabling legislation; some direct the revenues to the state general fund, although collection remains a county responsibility; and others give local governments the authority to collect and keep tax revenues. If no jurisdictional authority exists, transfer taxes can be agreed upon in a development agreement and applied to real estate transactions within a specific planned development or subdivision, and a predetermined land conservation organization receives the funds.

Historically, this type of funding mechanism is created on a project-by-project basis, but opportunities exist to make it a permanent program for any community. However, special interests and other anti-tax movements have made obtaining approval for a transfer tax with a dedicated open space funding element difficult to pass in some communities.

In 1969, Maryland created a 0.5 percent real estate transfer tax as a dedicated funding source for land conservation and created the Maryland Program Open Space within the Department of Natural Resources. The real estate transfer tax funds state, county and city park programs and operation, a rural legacy program, an agricultural land easement program and a species conservation fund. The tax has resulted in the acquisition of more than 234,000 acres of open space for state parks, natural resource areas and working landscapes and more than 31,000 acres of local park land.

The real estate transfer strategy works better in “hot” real estate markets. Rapid turnaround in home sales, a growing supply of housing and rapidly increasing value of that housing quickly creates useable funds for land conservation. Rapid growth generates the dollars needed to permanently protect the natural areas in and around our communities. On the other hand, transfer taxes can inflate real estate values and potentially slow the market.

Since revenues from the tax fluctuate with the real estate market, income can be difficult to predict. The level of revenue that a real estate transfer tax creates depends primarily on the rate charged, the types of properties covered and the level of real estate market activity. Though, even with sparing funds, real estate transfer taxes can be used to leverage grant funding and private donations. In addition, as new businesses, homeowners, and landlords move into gentrifying neighborhoods, transfer taxes can capture a portion of that investment and redirect it to programs that preserve what originally made the neighborhood attractive, while allowing long-time residents to benefit from reinvestment along with newcomers.

When deciding on a real estate transfer tax, there are a number of issues to keep in mind:

* What type of real estate will the tax cover? Residential, commercial, industrial, and agricultural lands all have values that will either increase or decrease over time. Decide what is the most important and most relevant to your funding situation.
* What will be the tax rate? This is usually a compromise between getting the most out of the tax while still retaining approval from the affected parties.
* Will there be any exemptions? In order to avoid burdening low-income homebuyers, a transfer tax is often applied only to the amount of the purchase price above a certain threshold, such as $75,000.
* What will the revenue be used for? For our purposes, open space preservation. Though any number of combinations can be used. Affordable housing and education are a few of the other uses for transfer taxes.
* Who will pay the tax? Will it be the buyer, seller or a combination of both?

Transfer Tax Case Study: East West Partners and the Truckee/Tahoe Region

The Town of Truckee, California, situated 35 miles from the California-Nevada border, is the gateway to the majestic Sierra Nevada mountains and beautiful Lake Tahoe. This town, of approximately 16,000 residents, has experienced enormous growth pressures throughout the past five years influencing everything from traffic and home prices to losses of open space and decreasing water quality. Three new planned developments recently gained approval (two within the town of Truckee and one nearby in Placer County) and promise to provide the utmost in sustainability and community amenity. East West Partners, the real estate developer behind these planned communities, engages in sustainable development, operating and management practices in the North Tahoe region. As part of the development approval process, East West Partners created a real estate transfer tax applying to both declarant, first sale and non-declarant, subsequent resale, residential home sales within all three of their developments to be collected in perpetuity and dedicated to various social initiatives: open space acquisition, environmental enhancement and arts and entertainment.

Multiple reasons exist for East West’s choice to offer transfer taxes as a way to give back to the community, but none resonates more than the simple response given by East West’s environmental coordinator Aaron Revere, “it is part of the company philosophy and we could do it.”

East West Partners, as a resort-focused company, realizes their residences sell partly because of the natural surroundings. Therefore, it is in the company’s best interest to help protect that natural environment. As a development company, they look to attach a greater value to their homes, and open space and trails just outside the neighborhood help increase home prices. The transfer tax provides a way to mitigate some of the development’s impacts by adding value to the proposed neighborhoods and creates a lasting fund to purchase open space and trail easements in perpetuity.

East West aligned their practices with their company’s vision of protecting what their customers come to the mountains to enjoy. These fees were not required in the development approval process, but were offered as part of the settlement and final planning phase of the projects. The market-based factors that brought East West to the agreement table are important for any community wishing to improve and create a sense of place through positive, interest-based negotiations versus expensive, drawn out litigation.

The transfer tax program is expected to collect in excess of $40 million dollars over a 20-year period. The Truckee Donner Land Trust, Tahoe Mountain Resorts Environmental Fund, Tahoe Mountain Resorts Foundation and community foundation in each of the new developments will receive funds from the transfer fees. Managing the funds proved to be perhaps one of the more difficult factors to figure out in this process. Initially, with the title company unwilling to take responsibility for the management of the transfer taxes, an obvious problem arose: How were the taxes to be collected, calculated and deposited in the correct accounts and who would ensure compliance. East West succeeded in creating a transparent and clear process open to everybody with a technology-based solution. A recorded notice of lien is drafted to make the buyer aware of all the transfer fees through the Tahoe Mountain Resorts website. Then, the buyer enters their parcel number with the amount of the proposed sale and the results of where, when, and how much transfer tax is assessed. This website, listings and calculations are open to the public.