To Keep The Tax Bills Down �� Should The Community Build Homes Or Parks

Park advocates frequently find themselves in competition with residential developers for land in a community. The conventional wisdom which prevails among many decision-makers and taxpayers is that development is the "highest and best use" of vacant land for increasing municipal revenues. This notion is reinforced by developers who claim their projects "pay for themselves and then some." At a council hearing debating the merits of these alternative land uses, the case made by developers is likely to resemble the following:

"The residents' property taxes are already too high. Acquiring this land for a park would result in a tax increase since the property would be removed from the tax rolls. On the other hand, if the tract were developed, more homes would produce more tax revenues, which would result in keeping our tax rate from increasing. This community, in all good conscience, cannot afford to allow potential taxable property from being constructed."

The myth that development reduces property taxes resides deep in the American psyche and frequently has thwarted the conservation efforts of parks and open space advocates. However, the reduction in financial aid from intergovernmental transfers and the on-going resistance of residents to tax increases has caused some elected officials to scrutinize this conventional wisdom more carefully. This has led to a growing number of communities investing in fiscal impact analyses and cost of community service (COCS) analyses.

As a result of these types of studies, parks and open space advocates are now able to respond to the developers' case in the following terms:

"It's not true that more development is the answer to our rising tax rate; in fact, it is often the cause of it. If the land were to be developed, it would cost the community more to provide services to the development than the community would receive in tax revenues. This deficit would have to be made up by increasing the tax rate.

Parks do not demand municipal services. They cost the community little beyond acquisition expenses but provide many economic benefits. In fact, the projected deficit created by the cost of servicing a development exceeding the taxes received from it, is often adequate in fifteen years to pay for the land's acquisition for a park. Parks and open space keep our taxes low and it is in the best interests of the community to acquire the property for a park."

Fiscal impact analyses are concerned with the future fiscal impact on a community of a specific proposed development, while COCS analyses relate to the current conditions based on existing budgets and real dollars. In this way, they provide hindsight from past land use decisions. The findings from these two types of analyses have challenged the historical view that more development generates more net revenue for municipalities.

COCS analyses consistently report that over a wide range of residential densities, and especially in rapidly growing communities, the public costs associated with residential development exceed the public revenues that accrue from it. The traditional' belief is that developments generate sufficient tax payments to pay their way.

The people who reside in developments require services. Natural parks and open space require few public services -- no roads, no schools, no sewage, no solid waste disposal, no water, and minimal fire and police protection. A recent monograph published by NRPA (see Documenting the Benefits) exposes the development myth by reviewing the results of over 70 studies that have been reported on this issue.

The contribution that parks make to minimizing property tax increases was recognized by some in the late 1950s and was articulated by the Outdoor Recreation Resources Review Commission in its landmark report in the early 1960s:

"The use most often competing for potential park land or open space is residential development, and governments often lose money on such development -- that is, it costs more to provide schools, streets, and other services than is returned in new taxes. Thus, in many instances, placing the land in recreation use may prevent a drain on the community's finances."

These early observations have been confirmed in recent years by many of the findings reported in the increasingly sophisticated fiscal impact and COCS analyses that have been undertaken by numerous governmental entities.

The ascendancy of political acceptance of this viewpoint has been reinforced by two other factors. First, the climate of fiscal austerity, that is characteristic of many jurisdictions, has made local officials more receptive to techniques which may protect them against new spending and tax pressures. Second, the rise of antigrowth sentiment in a growing number of communities has enhanced the political plausibility of techniques that encourage growth control. These factors are gradually shifting the burdens of fiscal proof from the opponents to the advocates of growth.

Cost of Community Services Analysis Procedures

COCS analysis determines the overall fiscal contribution of current land uses to a community. It assesses the costs incurred by, and the revenues accruing to, a given public jurisdiction from different types of land use in a given time period, usually a year. COCS and fiscal impact studies have been used as planning tools for over 50 years, but from the perspective of park and open space advocates they had two critical limitations. First, they typically did not include parks and open space. Apparently, it was assumed that undeveloped land had no substantial economic value. Second, they were expensive, costing over $50,000 to commission which made them non-feasible in many small communities.

To address these issues, the American Farmland Trust in the mid-1980s developed a relatively inexpensive procedure for assessing the costs and revenues of community services associated with different land uses that included open space. A description of their methodology is given in publications listed on their website and in the NRPA monograph (see Box).

Review of Empirical Findings

The monograph reports the results of studies that have used the American Farmland Trust's approach to COCS. These studies were undertaken by 26 different research teams in 18 different states. The main commonality among the studies is that most of the selected communities were relatively small and incorporated farmland in their tax base.

Given the diversity of locations and research teams involved, the results are remarkably consistent. They confirm the results reported by more elaborate conventional fiscal impact studies, which consistently document the net deficit of most residential development and recommend attracting commercial and industrial development to offset these deficits. However, they offer the additional dimension of demonstrating the relatively positive fiscal impact of farm and forestland, open space and parkland, when compared to residential land use. These elements traditionally have been omitted from fiscal impact analyses.

A summary of results from over 70 COCS studies is reported in Table 1. It shows the median cost per dollar of revenue raised to provide public services to each of the three different land uses.

Thus, for every $1 million in tax revenues these communities received from farm/forest/open space uses and from industrial/commercial uses, the median amount they had to expend was only $370,000 and $290,000 respectively, to provide them with public services. In contrast, for every $1 million received in revenues from residential developments, the median amount the communities had to expend to service them was $1,150,000.

The results of these studies indicate that favoring residential development at the expense of open land does not alleviate the financial problems of communities. Indeed, it is likely to exacerbate them.

A more detailed review of the COCS and fiscal impact case studies revealed three useful additional insights. First, communities with larger and rapidly growing populations appeared to experience greater net deficits on their residential land than did communities with smaller, more stable populations.

Bedroom communities, which are characterized as places from which people commute to work to commercial/industrial establishments located elsewhere, are particularly vulnerable to the taxation increases likely to accompany new residential development. Such communities have no commercial/industrial base to mitigate the costs of servicing new residential developments, making substantial tax increases to existing residents almost inevitable.

Second, the use of a broad residential development category which was adopted in all of these studies, often obscures substantial differences within it. Thus, many studies have shown that the more sprawling the growth, the higher the cost. For example, in Wright County, Minnesota, the net annual deficit between taxes paid and the cost of services required was found to be $490 for developed home lots larger than one acre, and $114 for quarter acre lots.

Similarly, in a study of Loudoun County, Virginia (the location of NRPA headquarters), which is the fastest growing county in the Washington, D.C. area, it was found that public costs were approximately three times higher ($2,200) per dwelling where the density was one unit per five acres, than where the density was 4-5 units per acre ($700 per dwelling}. This reflects the increased costs associated with such services as school buses, emergency service response times, road provision and repairs, garbage pick-up, and utilities when homes are spread out.

While sprawl often contributes to net deficits so, on the other hand, do lower-rent apartments and larger (four and five bedroom) housing units also tend to result in a net fiscal deficit. This occurs because the dominant cost centers of local governments are education and social service expenditures. Together these two centers on average account for approximately 50% of local government expenditures.

Building on this observation, a third insight was the major role of education in accounting for the residential property deficits. The impact on school costs is especially pernicious because in many states the subsidy that a local school district receives from the state declines as assessed valuations in the district increase. This means that the deficit fiscal impact of residential property is accentuated, because by increasing the tax base it triggers a reduction in the revenue that school districts receive from the state.

Parks and Open Space Implications

The data from these empirical studies group publicly owned parks and open space with privately owned agricultural land, forestland and vacant lots. However, the revenue implications associated with this non-developed land are quite different in the public and private sectors. Revenues accruing to the city from publicly owned land are likely to be minimal - limited to net receipts from admission fees, concessions, grazing rights, or lease income from tenant farmers. In contrast, even if the private lands are protected by conservation easements and taxed at their use or productive value rather than their appraised value so property taxes are low, they still yield some tax revenue to the community.

Residential development is the most common alternate use proposed for potential park and open space lands. Thus, because only nominal revenue is likely to accrue from public park and open space lands, the key fiscal impact issue becomes, "Will the net costs of purchasing, maintaining and operating the land as a park or as open space be greater than the net costs associated with servicing a residential development that may be constructed on that site?" Evidence in the NRPA monograph (see Box) suggests that the purchase cost is likely to be paid for by increases in proximate property values. Hence, the fiscal impact comparison involves only the park or open space land's maintenance and operating expenses.

Figure 2 presents alternative scenarios for the uses of a 50 acre natural site, and applies the data summarized in Figure 1 to illustrate how to undertake the comparative fiscal impact analysis. In the context provided, the illustration suggests that if the annual cost of maintaining and operating the site as a natural park is less than $112,500, then it is likely to be less of a financial burden to the community than if the 50 acre site is developed for houses.

FIGURE 1. THE MEDIAN COST, PER DOLLAR REVENUE RAISED, TO
PROVIDE PUBLIC SERVICES TO DIFFERENT LAND USES

(N=70 COMMUNITIES)

Commercial   Farm/Forest
Industrial   Open Space   Residential

  $0.29        $0.37        $1.15

Source: American Farmland Trust, Farmland Information Center,
Technical Assistance Division, Northampton, MA

FIGURE 2. AN ILLUSTRATIVE COMPARISON OF THE NET COST OF SERVING A RESIDENTIAL DEVELOPMENT AND A NATURAL PARK AREA.

On the 50-acre site, assume a density of three homes per acre and a property tax rate (school district, city, county et. Al.) of 2-1/2% of market value on these $200,000 homes. Thus, annual property tax revenue equals

$750,000 (50 x 3 x $5,000).

Assume that the cost of servicing these residences is 15% higher than the property taxes received (figure 1). Thus, the annual net loss to the community for servicing this residential development is

$112,500 ({115 / 100) x $75,000}- $75,000).

If the operation and maintenance cost of the 50-acre natural park is lower than $112,500 per year, then it is a less expensive option to service than the housing development on the same site.

Further, investment in parks and open space does not incur the externality costs that accompany residential development -- traffic congestion, noise, crime, pollution, infrastructure deterioration, and changes in community character. The COCS methodology does not include quantification of the costs of these externalities, but presumably they add to the appeal of using land for open space rather than developing it.

Conclusions

Communities striving to reduce the tax burdens on citizens may not fully appreciate the increase in the scope and level of services that will have to be provided to different categories of land use. The costs and benefits of parks and open space have largely been ignored by fiscal impact studies in the past. The results reported here provide evidence of the need to include parks and open space in the fiscal and economic discourse. These kinds of analyses have caused some communities to consider purchasing land for open space or purchasing conservation easements, rather than incurring the losses likely to accrue from development.

The procedures used in these studies were intended by the American Farmland Trust to "simplify" the complex and expensive process involved in undertaking traditional fiscal impact analyses. The trade-off involved in using the simpler procedures is that there is some reduction in level of accuracy. However, the consistency of the results, and the magnitude of differences between residential and open space use, is so striking that debate over nuances in the methodology is rendered redundant. The evidence clearly indicated that creating parks and preserving open space can be a less expensive alternative to development. The conclusion is that a strategy of conserving parks and open space is not contrary to a community's economic health, but rather is an integral part of it.

These types of findings provide park advocates with a credible entre into the economic development discussion and enable them to position parks as being a meaningful component of economic development. By showing their relative fiscal strength compared to residential development, advocates can refute the notion that parklands are a drain on local resources. The results challenge the assumption that development of land is its "highest and best use," which often thwarts park and open space advocates.

The intent in this paper is not to suggest that one type of development is a superior land use to another, because some combination of all three land uses (residential, commercial/industrial, and open space) is needed in viable communities. Rather, the intent is to point out that using land for parks and open space is relevant to discussions concerned with enhancing a community's fiscal health.

The goal is not to prevent growth, but to encourage a balance between development and open space that tends to get lost without these types of analyses. These types of studies moderate the dialog by giving parks and open space a higher profile in the economic development debate.

RELATED ARTICLE: Documenting the Benefits

NRPA has published a 116 page publication titled The Impact of Parks and Open Space on Property Values and the Property Tax Base. The publication reviews the principles and empirical evidence relating to the economic impact of parks, open spaces, greenways, and golf courses on property values. The economic impact derives from two premises.

First, these amenities often increase the value of proximate properties, and the resultant incremental increase in revenues that governments receive from the higher property taxes is frequently sufficient to pay the acquisition and development costs of the amenities.

The second premise is that development causes public expenditures to increase, because the costs to a community of servicing residential sub-divisions usually exceed the property and sales tax revenues that accrue from the development. Thus, conversion of open space to housing often results in an increased tax burden on existing residents.

The publication reviews and synthesizes a convincing body of evidence, dating back almost 150 years to pioneering work by Frederick Law Olmsted, which suggests the conventional wisdom that park amenities offer no economic return is wrong.

This is the second publication in NRPA's series documenting the economic benefits of parks and recreation. The first monograph, published last year, was titled Measuring the Economic Impact of Visitors to Sports Tournaments and Special Events. The publication can be obtained from NRPA by calling (703) 858-2190.

John Crompton is a professor, in the Department of Recreation, Park and Tourism Sciences at Texas A&M University. His article, "To Keep the Tax Bills Down, Should the Community Build Homes or Parks" points out that using land for parks and open space is relevant to discussions concerned with enhancing a community's fiscal health.

COPYRIGHT 2001 National Recreation and Park Association
COPYRIGHT 2001 Gale Group