Uncontrolled growth can cause taxes to skyrocket, but with good planning and the use of proffers and other tools, communities can accommodate growth without a budget crisis.

The Effect of Residential Growth on Local Taxes
Managing the Costs of Growth
Proffers
Community Development Authorities
Special Tax Districts
Land Use Taxation
The Affect of Conservation on Local Taxes
Other Tools

The Effect of Residential Growth on Local Taxes

Communities with high growth rates can be particularly overwhelmed by demands for new services and infrastructure. But even in more stable communities with modest rates of growth, residential properties rarely pay their own way. Instead, localities rely on businesses and on farms, forests, and open space to provide tax revenues in excess of what they require in services.

National studies overwhelmingly demonstrate that working or natural lands generate much more money in taxes than they require in tax-funded services, while residential properties generate less money in taxes than they require in services. The American Farmland Trust, which studied more than 100 communities throughout the United States, found that, on average, working and natural lands require only 36 cents for every dollar of taxes paid, while residential land requires $1.15 for every dollar of taxes. The graph below shows the results of the specific study that the American Farmland Trust conducted in Culpeper County.

Managing the Costs of Growth

The most important way that communities can manage the costs of growth is through good planning and the use of effective tools to control the location, rate, scale and design of growth. Protecting rural land can help a locality to retain tax-positive properties such as farms and forests while limiting the potential for residential developments which require expensive services. Such demands can be especially costly in rural areas that lack existing infrastructure. Localities can also use proffers, community development authorities, special tax districts and other tools to provide funding for the new infrastructure and services that new residential developments require (see below).

Proffers

A proffer is a voluntary agreement between a developer and the local government that a development will exceed the requirements of zoning laws-for example, by improving nearby roads, providing money for schools, or supplying land for a school, park or other public facility. The purpose of proffers is to mitigate the negative impacts that may be associated with a rezoning request, thereby encouraging the governing body to grant the request.

In general, under Virginia law, a locality may not impose conditions on a rezoning. However, if the applicant for the rezoning voluntarily “proffers” (offers) conditions in writing before the public hearing before the governing body, those conditions may be incorporated in the rezoning.

Proffers may seem like a great boon to the locality, but this can be misleading. Most proffers only partially offset the costs of the services a new development will require. In Virginia, a locality must base its suggested proffer amounts only on capital facilities costs-the costs of new construction. So, standard proffers might cover part of the expense for a new school, but the locality will still need to pay teachers’ salaries and pay to keep the lights on. A new residential development is unlikely to pay its own way unless proffers significantly exceed the estimated capital facilities costs.

Another drawback is that proffers can divert localities from focusing on whether the rezoning makes good use of the land. On major developments a developer can offer a glittering array of proffers that may obscure the fact that the underlying rezoning will have serious detrimental affects on the community or the environment.

In optimal circumstances, however, proffers allow localities to accommodate desirable growth while reducing or avoiding fiscal impacts that could lead to higher local taxes.

Community Development Authorities

Some funds included in a proffer package may not come of the developer’s own pocket. Instead they are expected to come from future residents of the development, who will pay taxes to a community development authority (CDA). CDA’s pose the threat of an additional tax burden for all residents because when a CDA doesn’t raise enough money-and many have failed financially in the past-the costs of new facilities and services most often fall on the local government.

Special Tax Districts

A special tax district is similar to a community development authority in that it can levy taxes on residents within a designated area for the purpose of providing services and improvements in or near that area. However, a special tax district is created by the county containing the district, rather than by landowners, and control remains with the elected government of the county.

Land Use Taxation

Under land-use taxation, some rural properties are taxed at their land use value instead of their fair market value. This two tier system makes sense for farmers and other rural landowners, since they make few demands for tax-funded services. It also makes sense for all taxpayers, because if high taxes pressure the people who work the land to sell off lots or develop their property, everyone will have to pay more. This is because, on average, residential properties cost localities more than they pay in taxes, while farms, forests, and open space cost less than they pay in taxes.

The state of Virginia allows counties to offer land use taxation for eligible properties in any of the following categories: agricultural, forestal, horticultural and/or open space. It is important to note that even on properties eligible for land use taxation, houses, farm buildings and other structures are always taxed at their fair market value. When the land changes to a use no longer qualifying for land use assessment, the landowner must pay back the difference between use value tax and the fair market value tax for a certain number of years, depending on the locality.

The Affect of Conservation on Local Taxes

Land conservation benefits local taxpayers by ensuring that land remains in tax-positive uses like farms, forests and open space, instead of converting to residential developments that make high demands for tax-funded services. Conservation also helps communities to accomplish public goals at little to no cost to the locality. For instance, private land conservation can improve water quality, preserve scenic views, enhance tourism, and protect historic resources.

Land conservation also offers a benefit for local schools. When the state allocates school funding based on how much it determines a locality can pay, it does not consider farms, forests or open space at their land use value. So localities that decide to tax certain properties at their land-use value forego short-term revenue without receiving additional funding from the state. However, the state does consider land under conservation easement at its use value. This lower assessed value results in more state funding for schools. So, it is financially optimal for a locality that employs use value taxation to have as much land as possible under easement.

Other Tools

Virginia is a Dillon Rule state, which means that localities possess only those governing powers that are expressly granted by the General Assembly. Some tools that are used effectively in other states are currently unavailable in Virginia because the General Assembly has not granted local governments the ability to use them. These tools include impact fees and Adequate Public Facilities Ordinances. Impact fees are charges that some local governments levy on developers to offset the strains their developments may create on roads, schools and other infrastructure. Adequate Public Facilities Ordinances control the timing of development in order to ensure that the necessary public facilities are constructed and available by the time new residents require them.

>> Virginia Chapter of the American Planning Association
>> Overview of Virginia Land Use Laws (Provided by Albemarle County)
>> Virginia Association of Counties
>> Smart Growth America
>> Urban Land Institute