October 11, 1966
Page 25987
METROPOLITAN REFORM
Mr. MUSKIE. Mr. President, in recent years local government officials have been subjected to tremendous pressure to seek property tax revenue for provision of needed public services. The relative ability of localities to deal with their public service needs varies greatly. This situation is particularly acute in our metropolitan areas where each community has its own zoning and land use control without reference to its neighbors and to the urban area as a whole.
The typical metropolitan picture today finds some local communities siphoning off lucrative types of development to increase their tax base for production of revenue in excess of expenditures, while other communities seek to keep governmental costs at a minimum by only permitting low density development. One community will reap the tax revenue advantage derived from the location of a major plant or large, regional shopping center within its borders while neighboring communities bear the costs of the spillover effects in educating the plant employees’ children or grappling with the traffic generated by the new development.
The economic and fiscal effects of these "revenue producers" have placed local governing bodies in metropolitan areas under heavy pressure to zone large stretches of land for commercial and industrial purposes. Thus the property tax in these instances has been converted into an instrument of metropolitan disunity and fiscal reasoning has become a major justification for zoning changes. State policy, however, can do much to minimize this competitive scramble for tax base among metropolitan area local governments by equalizing local government finances so that fiscal incentives for zoning are reduced.
A paper prepared by two members of the staff of the Advisory Commission on Intergovernmental Relations for the 1966 National Conference of the American Institute of Planners suggests solutions to overcome the local property tax fiscal zoning game. Several moderate, politically realistic proposals are suggested on both the zoning and tax fronts I believe these proposals can go a long way toward harmonizing the principles of local home rule with the growing need for a more equitable method of taxing land resources within our metropolitan areas.
Mr. President, I ask unanimous consent that this paper, entitled "Metropolitan Zoning and Tax Equalization Reforms Cushioning the Impact of the Divisive and Regressive Property Tax," be inserted in the RECORD at this point.
There being no abjection, the staff paper was ordered to be printed in the RECORD, as follows
METROPOLITAN ZONING AND TAX EQUALIZATION REFORMS CUSHIONING THE
IMPACT OF THE DIVISIVE AND REGRESSIVE PROPERTY TAX
(Prepared for the National Conference of the American Institute of Planners, Portland, Oreg., Aug. 14, 1966, by James Pickford and John Shannon, senior analysts with the Advisory` Commission on Intergovernmental Relations)
The first wave of metropolitan reorganizers, propelled by their efficiency principles, attempted to sweep aside the disorderly array of municipalities clustered around the center city and leave in their wake one community with one government. Stunned by the massive resistance to this all- out assault on the principles of local autonomy, the second wave of reformers sought to pick up some political support with the federation compromise. Under the federation approach the outer shell community identification of little principalities would remain the same. However, those functions of an area wide character would be shifted to a regional government. The surrender of some local autonomy would be at least partially compensated by representation on the area wide government. As is well known, the list of accomplishments is short, with innumerable qualifications.
A fine grained look at metropolitan governmental reorganization and cooperation at present being nurtured by the third wave of metropolitan reorganizers, indicates a continuing series of adaptations for the old workhorses of reorganization annexation, use of extraterritorial powers, intergovernmental contracting. These adjustments to our intergovernmental system are incremental rather than revolutionary changes. They clearly underscore the constraints placed on reform by political reality. In order to maximize public support for structural changes, the third wave of reformers have learned to minimize the radical character of their proposed innovations.
THE PROPERTY TAX -- AN INSTRUMENT OF DISUNITY
The purpose of this paper is twofold: first, to trace out the primary factors that have converted the property tax into an instrument of metropolitan disunity and second, to suggest ways and means to take some of the wind out of the sails of the local property tax fiscal zoning game.
What are the rules of the game? Actually, there are just two: local autonomy and "winner takes all." In essence, this local autonomy means the city fathers can determine the way land will be used, the amount of the property tax payoff (via the tax assessment and rate route), and the size of the expenditure commitment (public service levels and costs).
The second rule -- winner takes -- all brings the fiscal zoning game into focus. For example, there is always the hope that a large share of the local tax burden can be exported via the pricing system to near and distant neighbors by snagging the giant shopping center, the industrial research park or the massive public utility installation. Operating under a curious logic that goes back at least to the Domesday Book of William the Conqueror, each autonomous principality has the unchallenged and exclusive right to protect and to pump all taxable re sources within its domain.
This winner take all rule perhaps made sense -- or at least had a few baneful effects -- in a rural economy. However, with the property tax in 1966 accounting for 85 percent of local tax revenue the typical metropolitan picture today finds some local communities siphoning off lucrative types of development to increase their tax base for production of revenue in excess of expenditures, while others seek to keep governmental costs at a minimum by only permitting low density development. Fiscal reasoning is frequently disguised or not officially recognized as justification for zoning changes actually designed to carry out fiscal policy. But it is indeed a rare case where elaborate relationships between housing costs, family incomes, number of school children, and other governmental services are not figured in as arguments for or against zoning, changes.
Although by itself zoning based on area wide planning will mot solve disparity problems, it is nevertheless an indispensable part of the solution. Adjusting planning responsibilities so that larger units can tackle larger problems, and equalizing local government finances so that incentives for fiscal zoning are eliminated, are also part of the solution.
The individual proposals advanced in this paper for zoning and property tax reforms are not revolutionary. While solutions have been advanced for zoning and property tax changes that would substantially reduce metropolitan disunity, most appear too far from the status quo to gain wide acceptance. However, if the problem is attacked on both fronts with more moderate politically realistic proposals, it is believed that progress can be made in minimizing metropolitan disunity.
RESTRICTING LOCAL ZONING AUTHORITY
For local government to act responsibly, its units must be large enough to consider issues in context and balance the needs of diverse groups of people. Local governments, based on either limited geographical or limited functional jurisdiction, acquire a higher degree of special interest and, consequently, are more likely to practice fiscal zoning. Small suburban municipalities often fall into this special interest category and may, indeed, have incorporated specifically to gain or protect a specially advantageous fiscal position. Larger municipalities and counties, in contrast, usually represent a diversity of viewpoints which make fiscal zoning objectives less dominant. Thus, reservation by the State legislature of zoning authority to large municipalities or counties would reduce the ability of the small interest municipalities to practice fiscal zoning.
The Advisory Commission on Intergovernmental Relations has suggested a way for gearing in the planning structure of metropolitan areas to facilitate more effective county municipal planning and zoning relationships. Under the proposal, the county (a) reviews and approves certain planning and zoning actions of existing municipalities between 5,000 and 30,000 population, (b) exercises its planning and zoning authority in all existing municipalities of less than 5,000 population and (c) exercises its planning and zoning authority in all future incorporations within the county until the population of that municipality exceeds 30 000 within its territory.
The proposal, acknowledging political realty, does not remove the power to zone or plan from municipalities of more than 5,000 persons. Rather, it subjects certain municipal actions to an approval procedure by a larger unit of government and, in specified instances, review by other municipalities. Municipalities must refer any planning and zoning proposals to the county that would have the effect of (a) changing the types of use of real property bordering major county or State highways and parks, (b) decreasing the front yard setback or minimum lot width of any property abutting any such county or State highway or park, (c) connecting any new street into any such highways, (d) connecting new drainage lines into existing channel lines, and finally (e) reducing residential densities to less than three families per acre. These categories include virtually all local planning or zoning actions likely to have an effect beyond the corporate limits. Thus, the absolute authority of the little principality to determine its land use is subject to the broader public interest of the larger unit of government.
INTERGOVERNMENTAL EQUALIZATION
In contrast to this traditional metropolitan reform approach -- restructuring planning responsibilities of local jurisdictions -- proposals to compensate for loss of tax base and for necessary land use adjustments must be directed to offset fiscal disparities among governments in a metropolitan area. The thrust of the following approaches is essentially to equalize local property tax loads among local jurisdictions in metropolitan areas, thereby reducing the incentives for fiscal zoning. And not only will these actions help remove the incentives for local officials to pursue fiscal zoning practices, they also appear to meet the test of political realism for putting the programs into practice.
Planners, therefore, might consider lending their support to State action to bring the property tax more in line with the principle of federalism by limiting local property tax rate decisions to the financing of essentially local or municipal type services.
School equalization policy: In order to secure a more even distribution of tax revenue generated by major industrial, commercial, and utility uses, this policy calls for the State to partially neutralize local property tax differentials by requiring (1) that all classes of property within the State contribute equally to a minimum school program through a State mandated local property tax rate levied in each county, and (2) that collections in excess of a specified per pupil expenditure be transferred to the State for redistribution to less wealthy counties Typically, school rates account for about half of the total local rate. Thus, State action designed to secure a more equal distribution of the property tax resource behind each pupil would also substantially reduce total local property tax differentials.
The time has come to overthrow the concept that the winner takes all the revenue advantages that may flow from an industrial or regional shopping center location. The pressing demands for higher public service levels no longer permit the grossly inequitable distribution of property tax resources. The quality of a child’s education should not hinge on whether an industrial plant
is located within the school district. While this partial equalization policy still acknowledges the primary claim of the place of residence of the plant, it also recognizes the need for a more uniform distribution of taxable resources to finance the spillover burdens that result from commutation and the fractionation of local government.
While the champions of local autonomy may view this proposal as extremely damaging to their cause, it can be argued with some justification that it prevents a bad situation from getting much worse. Unless the advocates of local autonomy are willing to make some concessions, more radical remedies will be imposed by the State. Adoption of this policy would go a long way toward eliminating fiscal zoning practices -- a force that is tending to balkanize the metropolitan community -- and insure the demise of industrial tax havens.
If we follow this school equalization principle, the truly local property tax could be rationalized on a benefits received basis and the tax would approximate a moderate users’ charge. It would finance such general government services as the courts, police, sanitation, and fire services, as well as such local facilities as neighborhood parks and streets.
Because welfare and educational programs have assumed vital importance for the well-being of the State and the nation, the quality of these services should not be determined by the accidents of geography, the size of the local property tax base, or the willingness of local tax rate authorities to underwrite such a program. Once we fully accept the idea that education and welfare programs have acquired State and national character, we are then either in a position to shift most of this financial burden off the back of the local property tax and onto the broader shoulders of Sate and Federal revenue producers, or to embark on extensive State or Federal equalization programs that can effectively neutralize the accidents of geography and the variations in local fiscal capacity.
In the case of many public welfare and health programs we have already taken the non-property tax route and shifted responsibility upward. In the last thirty years, the Federal and State governments have taken over responsibility for both the treatment and the prevention of indigence -- responsibility that historically had rested with the family and local community
The growing public concern today about disparities in educational opportunity clearly reflects sharp increase in public awareness of the fact that education has lost its local character. Significant changes fn the conventional wisdom of financing educational services are being widely discussed.
The Advisory Commission has prepared suggested legislation to eliminate inter-community disparities in educational opportunity. The Commission suggests that a basic program at an adequate expenditure level ($500 per pupil) be financed jointly at the State and the county level. The program would gather the property tax resources of the entire State in support of a mandated minimum level of per pupil expenditures in local districts. This would eliminate those causes that have given birth to the practice of fiscal zoning to either (1) shield certain properties from the burdens of financing education, or (2) reduce the cost of operating public schools in particular districts.
OTHER PROPERTY TAX REFORMS
Two other property tax reforms, full disclosure assessment policy and hardship relief policy, are of particular interest to planners; the first, because it could set off badly needed assessment reforms and the second, because of its impact in equalizing public service and economic disparities among communities in metropolitan areas.
Full disclosure assessment policy: Perhaps the most promising State reform policy is simply to advocate that property, taxpayers be given a full and complete report on the fractional assessment practices of local tax officials.
A full disclosure assessment policy rests on the premise that if local assessors deviate from the State legal valuation standard (full value in most States), property owners have a right to know what fraction of estimated market value is being used for tax assessment practices Only with this assessment ratio information can the property owner readily determine whether his assessment is fair. To put the issue in another way, if a local assessor is attempting to assess property at 30 percent of market value, this fact should be made as public as possible in order to minimize the number of inequitable assessments. In the absence of full disclosure, the so called "public" tax roll becomes a convenient graveyard in which the local assessor can bury his mistakes.
There are two reasons for believing that a full disclosure policy might be able to trigger more far reaching assessment reforms. First, while the great mass of taxpayers may not be particularly interested in beating the drums for the selection of assessment officials on the basis of demonstrated ability, they can be expected to be more receptive to a policy which would enable them to judge the fairness of their own assessments. Second, a full disclosure policy would dramatize assessment inequalities, and thereby generate more support from the general public and the tax officials for proposals calling for institutional and administrative reforms.
Suggested legislative language for implementing a full disclosure policy is set forth in a model property tax bill prepared by the Advisory Commission on Intergovernmental Relations.
Hardship property tax relief policy: Administrative reforms, however, fall short of going to the heart of the property tax problem. Or to put it in another way, if by some stroke of a magic wand the local assessor could equalize all property tax assessments at full value, or some uniform percentage thereof, the collection of this tax would still create special hardships for property owners with low incomes.
Although the value of the family residence served as a fairly good proxy of ability to pay taxes in a rural society, total household income stands out as a far more precise measure of taxable capacity in our modern urban society.
The point must be emphasized that an affluent society should be able to finance its public services without forcing low income households through the property tax wringer.
Perhaps the most notable attempt to draw the regressive stinger from the property tax can be found in Wisconsin’s 1964 tax credit plan that provides substantial property tax relief to low income elderly persons -- both homeowners and renters meeting specified income criteria. This tax relief program is financed from State funds and administered by the Income Tax Division of the Wisconsin State Tax Department.
The Wisconsin legislature took the position that if an elderly householder has to turn over more than 5 percent of total income to the residential property tax collector, he was confronted with an extraordinary burden and that amount in excess of 5 percent is either refunded by the State to the property owner, or applied as a direct credit against his State income tax if the taxpayer falls in that category.
The critical need is to convince State legislative bodies that (a) household income is the most effective measure of ability to pay taxes, and (b) that the State (not the local governments) should assume responsibility for financing a property tax rebate program for those persons deemed to be carrying excessive property tax loads in relation to family income.
This proposal, of course, will not please those advocating that rates and taxes, levied only on unimproved capital value, would have beneficial effects on urban land use patterns. It would, in some instances have, instead, the effect of retaining land in less than its highest and best use. Many of the elderly and the poor, who have homes in neighborhoods where land values are rising as commercial and apartment uses replace single family uses, would be "protected" and thus frustrate those whose primary objective is a rational land use pattern. In its pure form, the land tax sacrifices the poor on the altar of highest and best use -- a situation that the political leadership in most countries found politically intolerable. "Hardship" exemptions to permit such people to retain their homes and farms in these transitional neighborhoods have been enacted, thus negating the objective of the use of this tax to influence land use patterns.
It should be noted that this type of property tax relief, geared to family income, moves in the "right direction" from the standpoint of inter-community equalization. Because the poor tend to cluster together and because the rich do likewise, the mailman would deliver more property tax refund checks in low income communities than he would in wealthier municipalities This should interest those persons seeking to reduce public service and financial disparities among municipalities in metropolitan areas.
CONCLUSION
All of the approaches discussed above are based on recognition that the best way to deal with some of our principal difficulties is indirectly, not by frontal attack. Three considerations should be kept in mind. First, as long as planning controls are run by local governments heavily dependent upon the local real property tax, this will act as a severe brake on progress unless planners develop more sophisticated notions of how tax devices might be used to reduce fiscal zoning incentives. Second, the problem of rectifying unfair treatment of property owners will come from raising the standards of local public administration rather than from creating new legal rights, enforceable in court. Finally, as Norman Williams has stated,
"Much of American planning and planning controls are now in the service of some of the more unattractive aspects of our life: social snobbery, exclusionism, the anti tax hysteria, and so on. Now the underlying inter-ethnic strains have been an historic problem in a country such as ours, and are certainly obvious now. Yet the long term period is toward a wider effectiveness for the democratic ideal of tolerance and equal opportunity and mutual respect, extending into more areas of life. For some things we can depend on this and for some we shall have to wait upon it."
Norman Williams Jr., "Development Controls and Planning Controls The View From 1964", Proceedings of the 1964 Annual Conference, American Institute of Planners, Washington, D.C., p. 87.