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Costs of Commercial Development
Municipalities often proceed with the view that development is a one-time event that allows them to choose projects that will have a net positive impact on their finances. The 'race for ratables' is predicated on the idea that municipalities can attract high-end residential and commercial development with few negative consequences. These ratables can help expand the tax base, allowing a municipality to lower or hold steady its tax rates. But as mentioned above, once the full service costs of households are included, residential development almost invariably has a negative impact on a town's budget. This impact is even true of high-end residential development because such development is associated with low density, distance from existing infrastructure, and location in outlying areas - which are all things that drive long-term costs even higher.
Commercial development, however, is somewhat of a different story. As the tables below show, American Farmland Trust studies show that commercial and industrial development do provide more in tax revenue than they demand in services, and they do so at a ratio better than agricultural land and open space. As seen in the table below, in Monmouth County, New Jersey, commercial and industrial development provided an average of 23.8% of total tax revenue, and 11 times the total amount of taxes provided by farmland and open space. Independent of other development, a commercial development project can be a net positive influence on a municipal budget.
| Comparison of Commercial and Industrial Development and Rural Land and Open Space Tax Revenue for Monmouth County, New Jersey | |||
| Township | Commercial and Industrial Tax Revenue as % of Total Tax Revenue | Farmland and Open Space Tax Revenue as % of Total Tax Revenue | Commercial and Industrial Tax Revenue as Multiple of Farmland and Open Space Revenue |
| Freehold | 35.7% | 2.5% | 14 times |
| Middletown | 16.7% | 1.3% | 13 times |
| Wall | 24.4% | 5.6% | 4 times |
| Upper Freehold | 2.2% | 7.0% | 14 times |
| Holmdel | 30.3% | 3.7% | 8 times |
| Average | 23.8% | 4.0% | 11 times |
The problem is that commercial development is not independent of other development. Commercial development creates jobs and amenities that attract new residents. These residents require housing, and after a period of growth, new housing must be constructed. These new housing developments raise municipal costs, causing communities to seek additional ratables to provide additional tax revenue. When the new commercial development is completed, the cycle continues.
Communities may try to break this cycle by refusing to zone and/or permit new residential development that is affordable to the workers at the commercial development. The hope demonstrated in such a strategy is that the workers will choose to reside in other, neighboring communities. However communities cannot pursue this strategy indefinitely, especially when other communities in the area pursue the same strategy. Eventually, the need for housing becomes too dire, and the community permits residential development to proceed. Furthermore, this strategy will only end up exacerbating the problems associated with sprawl development - traffic congestion. If housing and commercial areas are not built in close proximity to one another, people have no alternative to the automobile.
Evidence of this cycle is shown in a study of commercial development throughout the state of Connecticut that found a strong correlation between the number of jobs in a town and the number of residents [Adams and Freedgood, 1998]. If participating in the race for ratables was a winning strategy for communities, towns with the most commercial and industrial development should have the lowest tax bills. Yet studies in New York, Connecticut, Vermont and Maine show the opposite; on average, tax bills are highest in towns with the most commercial and industrial activity [Adams and Freedgood, 1998]. For New Jersey, according to the most authoritative growth models, most communities have tapped out all potential commercial development for the next twenty years. Most development in the future will be residential [Center for Urban Policy Research, 2000].
Communities still participate in the ratables chase largely because of the diffusion and fragmentation of local governance, the misperceptions of municipal leaders and the public, and the property rights' bias of the United States. Competition is made possible by the fact that there are so many local government entities in New Jersey. With 21 countries, 566 municipalities, and 613 school districts, New Jersey has the highest density of local government bodies in the United States. Each of these bodies faces different incentives and has different taxing authority. The ratables chase feeds off the competition between the leaders of these entities. These leaders perceive growth as an almost unqualified good, in its own right and as a sign of a jurisdiction's desirability and their success. Competing for growth handicaps cooperation across similar entities within a region and among different entities that cover the same land area. Added to these institutional problems is the strong property-rights culture in the United States, which has engendered weak municipal planning structures that are focused on project-based analyses. The result is an ingrained institutional and cultural bias toward approving development projects.
Some of these biases could be overcome if communities were aware of the negative consequences of sprawl development. However, fiscal impact analyses are generally conducted to examine the effects that the project will have in isolation, at a specific point in time. A more comprehensive analysis, whole system analysis, would place the project within regional and temporal context, recognizing that developments interact with one another and considering the present and future costs and benefits. As the rest of this paper shows, the full costs of sprawl can only be understood through an analysis that accounts for the interaction developments will have with other current and future development in the municipality and in the larger area [Siegel, et. al., 2000].