City Fiscal Structures and Land Development

Executive Summary

Cities pursue land development and vacant land conversion to boost competitiveness,
enhance citizens’ quality of life, and improve the city’s fiscal fortunes. To this end, cities often
pursue development opportunities with an explicit goal of generating new revenues to expand and
improve upon the level of services they provide to businesses and residents.

This paper probes the relationship between cities’ decisions regarding land redevelopment
and their underlying fiscal capacity and revenue structures. The study is informed by macro-level
statistics on city finances from the Census of Governments and the National League of Cities, and
by micro-level data from three cities with different general tax structures. Several key insights
emerge from the analysis:

• City revenue sources have shifted remarkably over the past 30 to 50 years. Most
  notably, property tax collections no longer dominate cities’ revenue flows. Compare the
  trends altering property-tax and other revenue-source yields. Property-tax revenues as a
  percentage of own-source municipal revenues declined from 46.6 percent in 1972 to 28.9
  percent in 1997. At the same time, user-fee collections and charges surged from 16.6
  percent in 1972 to 26.6 percent in 1997 as a percentage of own-source municipal revenue.
  By 1997, the combined contribution of sales-tax and income-tax revenues was only slightly
  less than the property tax contribution.

• Cities’ varied fiscal structures respond differently to swings in the economy. Cities
  with the authority to tax sales and income generate revenues at a higher growth rate than
  property-tax cities during expansionary times. Property-tax collections tend to lag real estate
  appreciation, but do provide more stability through the business cycle than either sales- or
  income-tax collections. Data collected from the NLC annual fiscal conditions survey illustrate
  the variability of the different taxes. From 1995-2000, year-to-year growth in sales-tax
  collections averaged 6.5 percent. Then in 2000-2001 collections dropped 2.3 percent after
  the current economic downturn began. Growth in income-tax collections also slowed in
  2001. Property-tax collections, in contrast, actually increased in 2001.

• It remains difficult, meanwhile, to determine the relationship between a city’s revenue
  profile and its amount of vacant land. The fiscal imperative to generate revenues from
  non-productive land and structures might be expected to lead property-tax dependent cities
  to redevelop more vacant land than sales- or income-tax dependent cities. And indeed,
  cities with access to only the property tax retained somewhat less vacant land (14.2 percent)
  in the late 1990s than cities with access to sales- or income-tax revenues (17.5 percent).
  Nevertheless, the results of a regression model failed to find property-tax reliance a
  significant explainer of the amount of vacant land in cities. More significant was a city’s
  ability to expand its boundaries (Rusk’s “elasticity” measure).

• However, analyses of 15 land development projects in three case study cities did
  suggest that a city’s tax structure can influence the kind of economic development
  projects it pursues.
  • Columbia, SC’s heavy reliance on property taxes motivate that city to promote land
    development. Local officials present the city’s need to protect and enhance its revenue
    flows as its rationale for investing city resources in land development projects.

  • Oklahoma City, OK’s heavy dependence on sales-tax collections has led it to support the
    development of retail projects near the city’s borders, and build an attractive and vibrant
    downtown. Land development projects and vacant-land conversions may increase
    property values, but more importantly, they are pursued to generate sales-tax revenues.

  • Columbus, OH’s investments to stimulate land development revolve around its need to
    promote job creation and income growth. Those priorities stem from the city’s reliance
    for revenue on income-tax collections, which place jobs and wages at the top of its land
    development goals.

Together, the case studies are suggestive. They show that all kinds of cities share a
common interest in undertaking land development to eliminate blight and enhance the urban core.
But they also underscore that the fundamental fiscal incentives embedded in cities’ general taxing
authorities can play a large role in determining the particular type of redevelopment they pursue.