insights (2005-38)

Let Localities Set Development Taxes

House Speaker Jimmy Naifeh deserves all the support he can get in seeking state legislation that would enable localities to impose impact fees or other development taxes on their own.

As matters stand, a county or municipality must seek a special act of the state Legislature to establish such a tax, and the climate for their approval in Nashville is getting increasingly inhospitable. Blount County, Jefferson County, Rutherford County and Williamson County all got nowhere in this year’s legislative session with development taxes that their County Commissions had approved by the two-thirds majority that state law requires.

There is no reason why a locality shouldn’t have the same authority to set or raise a development tax as it does in setting property taxes, local option sales taxes, wheel taxes and hotel/motel taxes. A two-thirds majority, as is the case with a wheel-tax increase, or a referendum, as is the case with a sales-tax increase, might be appropriate, but having to go hat in hand to Nashville for approval most certainly isn’t.

According to the Tennessee Advisory Commission on Intergovernmental Relations, at least 27 other states authorize their local governments to levy new residential and commercial development to help cover the cost of infrastructure (e.g. schools and roads) needed to support it. In Tennessee, 10 counties, mostly rapidly growing ones, managed to get what are known as adequate facilities taxes through the legislature when the getting was still good. In addition, five municipalities have what are known as impact fees.

The difference between the two is that adequate facilities taxes are applicable to all new construction in a county at rates that typically range from 50 cents to $1 per square-foot on new residences and lesser amounts on new commercial buildings. Impact fees, by contrast, target specific developments and are set to cover directly associated public sector outlays to support them.

Traditionally, the Legislature has deferred to the delegation from a county seeking approval of a development tax. But even though all three of Blount County’s legislators sponsored a bill authorizing the $1 per square foot residential levy that Blount County Commission approved in 2004, the bill got diverted to TACIR for further study. So did similar measures sought by four other counties—on the heels of legislative inaction in 2004 on yet another two.

Ostensibly, the legislators wanted TACIR’s guidance on matters such as how development taxes affect economic growth, whether they should be limited to counties experiencing rapid growth and how that might be measured in terms of fiscal stress. TACIR is now addressing these and other issues.

In the view of many, though, the real culprit in effecting the hiatus is the mounting opposition of home builders and realtors from throughout the state who have started swarming Nashville by the busload to fight development taxes at the state rather than the local level. The president of Association of Tennessee Homebuilders James Carbine contends that development taxes unfairly single out homebuilders and their buyers for bearing a cost burden that can also stifle development. And it’s true that a $1 per square-foot tax would add $2,000 to the cost of a $200,000 home.

On the other hand, new houses beget new households that beget more demand for government services. And development tends to be concentrated in areas that are growing fastest as manifest in West Knox County by the need for a new high school and two new elementary schools at a time when overall school enrollment in the county is nearly flat. So there is logic to a tax borne most heavily by those who are generating these needs. A $1 per square-foot development tax in Knox County would raise on the order of $15 million annually, which is more than the $12 million that County Mayor Mike Ragsdale raised last year with a $30 increase in the county’s wheel tax.

Conceptually, an impact fee that targets specific developments and calibrates the fee to the cost of additional facilities and services needed to support them would be most equitable of all. But such fees are difficult to calculate and administer and appear impractical.

The argument that development taxes can stifle growth is resoundingly rejected by officials in the seven counties that ring Nashville, all of which have such taxes and thus account for most of the state’s total. In rapidly growing Rutherford County to Nashville’s east, “The development tax hasn’t slowed things down one bit,” reports the county’s director of planning, John Davis. Indeed, as one measure of that growth revenues from Rutherford County’s existing tax, which is a flat $1,500 per residence, soared to $7.7 million in this past fiscal year from about $4 million two years prior. It was to slightly increase the take and also make the tax more equitable that the county unsuccessfully sought the legislature’s approval of a change to $1 per square-foot this year.

In the last analysis, though, the issue isn’t so much whether development taxes are desirable but rather whether decisions about them are best made at the state or local level. In that regard, Blount County’s Republican Rep. Doug Overbey observes that “generally, I think that the more locally decisions can be made the better.” And Republican Sen. Bill Ketron, who represents part of Rutherford and three other counties, reports that “I’ve consulted with my four county commissions and eight city councils, and they’ve all indicated they would like to have that authority even though it would put all the pressure on their back.”

So Naifeh’s initiative appears to have bipartisan support and will hopefully be enacted when the legislature reconvenes.

© 2005 MetroPulse. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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