Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
11/22/99
Contacts: Mark Edelman, Extension Economics, (515)
294-3000, x1edelma@exnet.iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
dkmarks@iastate.edu
PLAIN ECONOMIC SENSE
For release Nov. 22, 1999
Column 390
Sprawl Studies Can Generate Wrong Conclusions on Housing Development
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
One of the myths circulating for the past two years in Iowa's urban sprawl debate is an erroneous conclusion based on a Cost of Community Service Study (COCS) that claims to show residential property does not generate enough tax revenue to pay for the public services received from local government. One such study was done in May 1998 for three central Iowa cities and then submitted to the statewide legislative commission on urban planning.
To be fair to the author, his study was based on methodology that is included in some planning literature and promoted by the American Farmland Trust, a national nonprofit organization committed to the protection and preservation of farmland. But now, some local farm groups are using erroneous conclusions to argue for additional restrictions on use of Tax Increment Financing (TIF) incentives for housing developments in rural communities. So before we go too far based on an erroneous map, maybe we should revisit the earlier myth.
The author of the 1978 COCS study indicates the study methods are an inexpensive and consistent way to evaluate existing contributions of municipal land uses. I would add that the conclusions generated can also be wrong. Let me explain. The numbers in the study are probably accurate given the assumptions and the methods used, but the conclusions are wrong because the author bases his interpretations on "average costs," instead of what economists call "marginal costs." Let's dig a little deeper.
The COCS study analyzes the revenues and expenditures for Altoona, Indianola, and Waukee. In Altoona, the study found residential property accounted for 53 percent of the city's revenues while requiring 68.5 percent of the city's expenditures. Residential property in Indianola raised 68 percent of the total revenues, but residential services used almost 76 percent of expenditures. Waukee's residential revenues were the highest at 77.5 percent of the total for the city. But, even this was surpassed by an 82 percent share of all expenditures being allocated to residential property.
The author states, "The results show, on average, that while residential development costs $1.12 for every dollar that it brings in, commercial costs 72 cents, and farmland costs 89 cents for every dollar in revenue." The key word change is from "residential property" in the author's text to "residential development" in the author's conclusions. The erroneous conclusion is thus based on the author's assumption that average revenues and benefits generated from new residential development is equal to the average revenues and benefits generated from all residential property.
This erroneous assumption also is made for commercial and industrial development. Conventional wisdom from experienced community leaders and economic developers indicate otherwise and data to demonstrate their case are available from the county assessor's office.
For the purpose of illustration, let's assume that families in a new house and an existing house require the same public service benefits and that the only revenues generated for local government are from the property tax system. The average existing house in the city of Boone, for illustration, was assessed Jan. 1, 1998, at $60,000. The property taxes for all local taxing units on this house are $1,140. If we use the COCS study ratios, the expenditures required by the average family would be estimated to be $1,277. Thus, the average family in Boone would require $137 more in services each year than what it provides in revenues.
However, a quick evaluation of the new houses under construction in Boone's local developments show the average new house is assessed at about $150,000. Boone's property taxes on the average new home would be about $3,000 a year. So the average new house would generate an extra $1,723 in revenues over and above the average cost of public services that is assumed to be required by residents of the average new house.
The bottom line of this analysis is that each new $150,000 house likely more than pays for the revenue shortfall of more than a dozen existing houses assessed at the $60,000 average for the community. A similar kind of marginal analysis can be used to evaluate the revenue streams from new commercial/industrial property compared to existing commercial/ industrial property. Some communities can become much better off with tax base growth strategies, even if TIF incentives are used to stimulate new housing and business development.
The bottom line is that the 1998 COCS study does shows that, on average, existing commercial and industrial property generates more revenue relative to its benefits whereas residential property, on average, generates less revenue relative to its benefits. However, the study's conclusion cannot be extended to new housing development. Potentially, new housing can provide revenues greater than costs to offset the gap accurately observed for the average residential property taxpayer in the community. However, a definitive study would require the analysis of marginal costs--not average costs.
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