Who can implement this: State, county, and city lawmakers
Sales tax is one of the largest sources of revenue for cities. A significant portion of money from sales tax goes directly to the city in which the taxed products are sold. As a result, cities often compete with each other to attract retailers (department stores, furniture stores, auto dealerships, etc.). Cities sometimes over-zone commercial areas in hopes of a corresponding demand for retail development, as expressed in the saying, “If you zone it, they will come.”
Agriculture, on the other hand, is considered to be one of the lowest tax generators for a city. Because cities are often led to believe that commercial development is more profitable than keeping land in agriculture, they can be tempted to develop as many businesses as they can, often at the expense of farmland. But cities should also understand that farms require very few services and therefore have reduced infrastructure costs, whereas commercial and residential developments cost more money to maintain. Agriculture also contributes more in revenue than it requires in expenditures.
Studies on the cost of community services done by the University of New Hampshire concluded that residential developments contribute less in revenue than they require in government expenditures. Farmland requires $0.37 in public services for each dollar paid in taxes, while residential land requires $1.11 in services for every dollar paid in taxes. Cities need to understand the value of agricultural lands in relation to their low public services costs; though agricultural lands do not generate major tax revenue, they are less expensive to maintain and provide other services that are often overlooked by purely economic analyses.
One way to ensure that agricultural lands are better protected from tax revenue-based development would be to switch from a local tax revenue structure to a tax-base sharing program. This change to the revenue structure would allow cities to share regional commercial taxes based on population rather than on the amount of commercial development in a city. As a result, cities would be better able to protect their supply of local food and alleviate the pressure to build retail or residential development on agricultural lands.
A tax-base sharing program will help cities cooperate with one another and act in a way that benefits the entire region, instead of fixating on just the interests of their own communities. Cities would be less likely to over-allocate commercial development and unnecessarily destroy farmland because they would be confident that they would receive some portion of the region’s taxes, regardless of what businesses they have. Changing the tax revenue structure will also allow the market to work more effectively, ensuring that the amount of retail in the region matches the actual demand more closely.
- State and city lawmakers on a statewide scale should work together to change tax policies so that a sharing-based system would be legally viable in their jurisdictions.
- Cities should cooperate together and be willing to share their commercial tax revenues. Cities that have a large amount of retail would have to be willing to share tax revenues with cities that have less retail, and other cities would likely need to help pay the regional infrastructure costs associated with retail in another city.
- Tax-base sharing could be explored as an option in Utah County, though it would be a significant change from the status quo and may require unique adjustments to the county and overall state.
- What constitutes a “region” would first need to be carefully defined, and then regions would need to work closely together to allocate resources and tax revenues.
The Twin Cities region (Minneapolis–Saint Paul) has an innovative tax-base sharing program, known as the Fiscal Disparities Program. The large size of the seven-county region and the amount of commercial-industrial taxes shared by its communities make the program unique.
With the support of the Metropolitan Council, the Minnesota legislature created the metro-area program in 1971. The council decided that tax-base sharing supported their goals of:
- Promoting orderly and efficient growth.
- Improving equity.
- Strengthening economic competitiveness.
- Encouraging land uses that protect the environment and increase livability.
Tax-base sharing spreads the fiscal benefits of commercial-industrial growth throughout a region, regardless of where properties exist in the metro area. It also reduces differences in property tax wealth between communities with a lot of commercial-industrial businesses and those with little. These wealth differences reflect how commercial-industrial development tends to concentrate near regional infrastructure and services, such as highways, wastewater treatment, and transit.
Started in 1975, the Minnesota legislature created a tax-base sharing program to:
- Share resources produced by the growth of the metro area.
- Make orderly development more likely by reducing competition for tax base.
- Work within the existing system of local governments and local decision making.
- Give incentives for all to work for growth of the seven-county metro area as a whole.
- Help communities in different stages of development and redevelopment.
- Encourage environmental protection.
How tax-base sharing works
Since 1971, local taxing jurisdictions have contributed 40% of growth in commercial, industrial, and public utility property taxes to an area-wide shared pool of tax base. Local property tax administrators distribute the funds in the shared pool to communities based on their population and the market value of all property per person compared to the average market value per person for the metro area. Communities with below-average property tax value per person receive a somewhat larger share of the area-wide tax base.