The Great Recession, Municipal Budgets, and Land Development

1. The Great Recession, Municipal Budgets, and Land Development Michael A. Pagano Dean, College of Urban Planning & Public Affairs University of Illinois at Chicago MAPagano@UIC.edu Tuesdays at APA Chicago 29 January 2013 View From 18th Street Bridge, a watercolor by Pat Wright

2. The Great Recession, Municipal Budgets, and Land Development • Setting the stage: • The contemporary situation • Challenges • Economy is Changing • Aligning Economic Base with Fiscal Authority • Fiscal Foundation is Changing • Narrowing the Tax Base • Linking fiscal architecture and space • Spatialization of revenue structures • Options: The Fiscal Policy Space • A new sustainable fiscal architecture?

3. Recession December 2007 – June 2009 Recession March –November 2001 Recession (peak to trough) July 1990-March 1991 Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions in 2012 (Washington, DC: National League of Cities, 2012)

4. Recession December 2007 – June 2009 Recession March –November 2001 Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions in 2012 (Washington, DC: National League of Cities, 2012)

5. Recession December 2007 – June 2009 Recession March –November 2001 Recession July 1990-March 1991 Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions in 2012 (Washington, DC: National League of Cities, 2012)

6. Recession December 2007 –June 2009 Recession March –November 2001 Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions in 2012 (Washington, DC: National League of Cities, 2012)

7. Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions in 2012 (Washington, DC: National League of Cities, 2012)

8. Recession December 2007 –June 2009 Recession March –November 2001 Recession July 1990-March 1991 Source: Christopher Hoene and Michael Pagano , City Fiscal Conditions in 2012 (Washington, DC: National League of Cities, 2012)

9. The Great Recession, Municipal Budgets, and Land Development • Setting the stage: • The contemporary situation • Challenges • Economy is Changing: • Aligning Economic Base with Fiscal Authority • Fiscal Foundation is Changing: • Narrowing the Tax Base • Linking fiscal architecture and space • Spatialization of revenue structures • Options: The Fiscal Policy Space • A new sustainable fiscal architecture?

10. Bureau of Labor Statistics Industry:      Total Nonfarm Data Type:     ALL EMPLOYEES, THOUSANDS

11. Bureau of Labor Statistics Industry:      ManufacturingData Type:     ALL EMPLOYEES, THOUSANDS

12. Bureau of Labor Statistics Industry:      Service-providingData Type:     ALL EMPLOYEES, THOUSANDS

13. Bureau of Labor StatisticsIndustry:      Leisure and hospitalityData Type:     ALL EMPLOYEES, THOUSANDS

14. Source: State and Local Government Sales Tax Revenue Losses from Electronic Commerce By Donald Bruce, William F. Fox, LeAnn Luna. April 13, 2009 http://cber.utk.edu/ecomm/ecom0409.pdf

16. Growth of 501-c-3 • The nonprofit sector accounts for roughly one-tenth of the U.S. economy, whether measured by employment or total spending • Houston: A “drainage fee” last year did not exempt 501-c-3 organizations. • Chicago: Nonprofits with assets below $250 million will pay 80 percent of their water use by 2014 (The largest nonprofits now pay their full water bill.)

18. Source: Daphne A. Kenyon and Adam H. Langley, Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests (Cambridge: Lincoln Institute of Land Policy, 2010).

19. (Estimates For FY2000) States Move to Revoke Charities’ Tax Exemptions (February 27, 2010) Provena-Covenant Medical Center v. (Illinois)Dept. of Revenue (2010) Pittsburgh Pushes Tax on College Students

21. Source: Phil Oliff, Chris Mai, and Vincent Palacios, “States Continue to Feel Recession’s Impact “Center for Budget and Policy Priorities, (updated June 27, 2012) http://www.cbpp.org/cms/index.cfm?fa=view&id=711

23. Spatialization of Revenue Structures Parcels will be identified for development that maximize revenues or minimize costs. This choice is informed by a city’s revenue structure and manifests itself spatially in the design, land-use designations and development patterns of the city and region, or the spatialization of revenue structures.

24. STRATEGIC BEHAVIOR OF PROPERTY-TAX CITIES Property-tax cities think strategically about development based on the market value of the development and on the possibility of shifting service-delivery costs to other jurisdictions (fiscal externalities). Property Tax • Concentric urban structure • Clear physical and historic identity • High-end residences close to center • High-end office and retail in center Adapted from Ann O’M. Bowman and Michael A. Pagano, Terra Incognita: Vacant Land and Urban Strategies (Washington, DC: Georgetown University Press, 2004). Graphic design by Steve Price, Urban Advantage, Inc.

25. STRATEGIC BEHAVIOR OF SALES-TAX CITIES Sales-tax cities think strategically about development based on their mental constructs of “shopping sheds” and on which market transactions are taxable. Sales Tax • Development pressure at urban edge • Tax dollars drawn across city borders • Development formulaic • Urban center languishes Adapted from Ann O’M. Bowman and Michael A. Pagano, Terra Incognita: Vacant Land and Urban Strategies (Washington, DC: Georgetown University Press, 2004). Graphic design by Steve Price, Urban Advantage, Inc.

27. STRATEGIC BEHAVIOR OF INCOME-TAX CITIES Income-tax cities think strategically about development based on their assessment of the income growth potential of the individual or firm. Income Tax • Development less formulaic • Targeted to higher incomes • Development locations idiosyncratic • Results depend on where tax collected Adapted from Ann O’M. Bowman and Michael A. Pagano, Terra Incognita: Vacant Land and Urban Strategies (Washington, DC: Georgetown University Press, 2004). Graphic design by Steve Price, Urban Advantage, Inc.

28. City A Commercial Density determined by market forces High Density Industrial City B City C Site Value City? City officials are motivated to behave in ways that differ from typical property-tax cities. The incentive to put land to its highest and most productive use has little revenue-enhancing benefit to the city treasury.

29. The Great Recession, Municipal Budgets, and Land Development • Setting the stage: • The contemporary situation • Challenges • Economy is Changing: • Aligning Economic Base with Fiscal Authority • Fiscal Foundation is Changing: • Narrowing the Tax Base • Linking fiscal architecture and space • Spatialization of revenue structures • Options: The Fiscal Policy Space • A new sustainable fiscal architecture?

30. Fiscal Policy Space of Cities • FPS= a confined decision space within which city officials are permitted to take action, and shaped by the following attributes: • Intergovernmental System (tax authority, TELs, revenue reliance, state aid) • Economic base • Local legal context • Citizen/consumer demand • Political culture

31. Municipal Tax Authority by State WAe ME MTf ND VT MNf OR NH MA IDf WI NYa SD RI WY MIa CT PAa NJf IA NE NV OH DEa INc IL UT MDa CO WV VA KS MOa CA KY NC TN AZ OKd ARb SC NM GA ALa MS TX AK LA FL a Income or sales tax for selected cities. b Cities can levy a local income tax, but no locality currently does so. c A local income tax under certain circumstances. d Sales tax only; cities can levy a property tax for debt-retirement purposes only. e Cities can impose the equivalent of a business income tax. f Sales taxes for selected cities and/or restricted use only. HI Property + sales + income Property + sales OR Income Property or sales only Source: Michael A. Pagano and Christopher Hoene, “States and the Fiscal Policy Space of Cities” in Michael Bell, David Brunori, and Joan Youngman, eds. The Property Tax and Local Autonomy (Cambridge, MA: Lincoln Institute of Land Policy, 2010), pp. 243-284.

32. Source: Michael A. Pagano and Christopher Hoene, “States and the Fiscal Policy Space of Cities” in Michael Bell, David Brunori, and Joan Youngman, eds. The Property Tax and Local Autonomy (Cambridge, MA: Lincoln Institute of Land Policy,2010), pp. 243-284.

35. The Great Recession, Municipal Budgets, and Land Development • Setting the stage: • The contemporary situation • Challenges • Economy is Changing: • Aligning Economic Base with Fiscal Authority • Fiscal Foundation is Changing: • Narrowing the Tax Base • Linking fiscal architecture and space • Spatialization of revenue structures • Options: The Fiscal Policy Space • A new sustainable fiscal architecture?

36. A Sustainable Fiscal Architecture? The fiscal shock of the Great Recession ought to encourage a political discourse about reforming the fiscal architecture of municipalities: • If States Want Cities to be Responsible for Their Actions, States Should Give Them Adequate Tools. Diversify. Authorize access to taxes. Eliminate TELs. • The Fiscal Mismatch Is Weakening Cities. Reform the tax structure: Tax structures might be designed that link closer to cities’ underlying engines of growth or to income and wealth. Tax on income/wages. Is a tax on income at the place of employment (such as Ohio’s, Kentucky’s) or a gross receipts tax (such as Washington state’s Business and Occupation Tax) a more accurate measure and reflection of a city’s tax base?

37. Broaden the sales tax base. As the retail sales tax base has narrowed as a percent of consumer spending, is it time to reconsider a sales tax on services? Restructure the property tax. As real estate loses much of its value, as vacant properties lie fallow, and as the number and value of tax-exempt properties increase, might cities consider moving from a uniform to a split-rate system? What’s lost and gained by exempting so much property from the tax roles? 3. Jointly Provide Services and Share Service Delivery Costs. Create regional taxing powers. Municipalities will be looking for regional partners and allies in designing a system that is less destructive to the region’s long-term interests and fairer in distributing the costs to the users. 4. Pricing Drives Consumer Behavior and Often Disadvantages Cities. Approximating the market value of city-delivered services would possibly reduce subsidies to free-riders. Mileage fee? Fee for service? …. a brief digression ….

38. Pricing infrastructure must include and recognize the importance of planning, managing and financing.…. Finance, Budgeting, Management

41. The Utah Model. Government Performance Project Grade (2008): A Statutory Set aside of 1.1% of value of fixed assets in the Operating Budget for maintenance and repair of state buildings. Political Challenge: Future legislatures are (theoretically) bound by prior legislature’s decisions.

42. …. And returning to the Elements of a Sustainable Fiscal Architecture … 5. Revisit the Social Compact. The social compact of the last century that bound generations, socio-economic classes, neighborhoods, cities and regions needs to be reconsidered in light of demographic shifts, the transformation of the underlying economy, the forces of globalization, and an irrepressible resolve to enhance the human condition.

43. fairness of revenue systems; • Spatial/land-use effects of revenue structures; • Benefits principle v. ability-to-pay; • pro-cyclical nature of local and state budget practice; • accumulated long-term liabilities (pensions, OPEBs, and infrastructure); • definition of “core services”; • pricing services and infrastructure assets; • Horizontal and vertical regional partnerships in service delivery …

44. THANK YOU The Great Recession, Municipal Budgets, and Land Development Michael A. Pagano Dean, College of Urban Planning & Public Affairs University of Illinois at Chicago MAPagano@UIC.edu Tuesdays at APA Chicago 29 January 2013 View From 18th Street Bridge, a watercolor by Pat Wright