Regional Tax-Base or Revenue Sharing

Description of Technique
This technique involves each community designating some part of its assessed value base, or of a stream of tax revenues, for inclusion in a regional pool of assessed values or tax revenues that is then divided among all localities in the pool by some formula, usually involving total population and perhaps other variables. The assessed values or revenue streams to be included in the base from which the shared pool is derived are only those added to each community subsequent to the date at which this arrangement is adopted by the state legislature.

• For each property created after that date, some percentage of the assessed value is retained by the locality where the property is built, and the remainder is placed in a regional pool of assessed values. Each year, that pool is divided among all localities in the region on the basis of some objective formula, heavily based on population.

• The basic purposes of sharing tax bases are (1) to reduce competition among communities for non-residential properties to add to their tax bases, since such properties added to any community also add to the pool shared by all communities; (2) to create a fairer distribution of tax benefits from properties created in each community that impose costs upon surrounding communities too; (3) to reduce disparities in assessed values per capita among communities within the same region so as to provide more equalized (but not equal) bases for financing local government services, including education; and (4) to permit regional land-use planning across a territory that contains parts of several different municipalities, each of which would not receive equal shares of future developments if rational plans were adopted for the region as a whole.

Possible Variations in this Technique
Regional tax-base and revenue-sharing arrangements can vary in several key dimensions. Since only one region—the Twin Cities region of Minnesota—has adopted an extensive version of regional tax-base sharing, its experience provides some guidelines concerning these possible variations. They are as follows:

The Type of Taxable Property Included
The Minnesota approach includes only non-residential properties created after the date at which the program was first adopted. Hence it does not affect local residential tax-bases or the original, past non-residential tax bases, of the communities involved. However, in theory, other tax-base-sharing arrangements could involve residential values as well. Moreover, it is possible to include sales tax receipts in a similarly-shared pool, as Montgomery County, Ohio, has done concerning a one-percent add-on sales tax.

The Percentage of Added Assessed Values Included in the Shared Pool
In Minnesota, 60 percent of added assessed values are retained by the community where the new properties are located, and 40 percent are placed in the pool to be shared by all communities. This division recognizes that the place where the new property is built must bear most of the added costs of servicing that property, but also that other communities may have to bear some added costs too.

The Formula for Allocating Assessed Values in the Pool Among Participating Localities
This formula will almost certainly include the population of each locality, but may also make some allowance for the relative tax burdens placed on local citizens, or the proportion of poor citizens within each locality, or other relevant factors.

Potential Benefits of Technique From General Public Point of View
The potential benefits of this technique are the same as its basic purposes, plus the following:

• In theory it reduces competition among localities for non-residential properties, provides fairer sharing of taxable assessed value bases among all those communities with costs increased by the creation of new properties located in just one of them, creates greater equality among per-capita assessed value bases across the entire region, and can make possible land-use planning that is more rational from the viewpoint of the entire region encompassed. The third of these advantages is especially important in regions where some communities are burdened with high fractions of low-income residents but low per-capita assessed values. These communities cannot afford to provide basic social services to their residents anywhere nearly equal in effectiveness to those provided by wealthier communities. This situation both creates a “non-level playing field” among children raised in these different communities, and also may fail to provide many of them with basic educations and other services necessary to make them effective citizens in a high-technology world marked by global competition.

• In addition, this technique enables local officials representing a majority of residents in the region to form a political coalition supporting regional arrangements in the state legislature, even if representatives of localities where a minority of the region’s residents oppose such arrangements. This coalition possibility can in theory overcome the ability of a minority of residents within a region to block the implementation of effective regional arrangements by refusing to participate in them voluntarily, even if a majority of the region’s residents support those arrangements. Regional tax-base sharing in effect can create an incentive for representatives from localities containing a majority of the region’s residents to support this—and possibly other—regional arrangements because their communities will gain higher tax bases per capita than they would achieve without tax-base sharing.

Potential Drawbacks of Technique from General Public Point of View
This technique has two main drawbacks.

• First, regional tax-base sharing tends to redistribute assessed value bases from communities that initially have high such bases per capita to those that initially have low such bases per capita. Of course, this redistribution is also one of the main advantages of the technique, but it does impose costs upon residents of the localities that are “net tax base losers” from the particular arrangements adopted.

• This first disadvantage leads directly to the second disadvantage. Such tax-base sharing is highly controversial because some communities are “net losers” of tax bases, and therefore consider themselves harmed rather than aided. These “net loser” communities almost always oppose this technique and will not participate in it voluntarily. But if they do not participate, the technique cannot distribute assessed value bases more equally among all communities in the region. Hence the technique can only be effectively implemented by having the state legislature compel all communities in the region to participate, whether they want to or not. This means the process of considering and adopting this technique is almost always controversial and confrontational, pitting representatives of the “net gainer” communities against those of the “net loser” communities. This occurs even though whether any given community is a “net gainer” or a “net loser” may change over time as new development patterns change spatially. Thus, generating support for regional arrangements through this technique creates hot political controversy, and is not a purely voluntary or consensual approach.

Practical Lessons from Application of Technique
The lessons learned are:

• In the Twin Cities Region in Minnesota, this technique has notably reduced disparities among the localities included in the pool concerning their assessed non-residential property values per capita. When this arrangement was put into effect in 1975, the greatest disparity was 50 to 1; today it is 12 to 1. It is not clear whether this technique has greatly reduced competition among adjacent or nearby localities for added non-residential development projects.32

• In the Dayton, Ohio, region, this technique has made it possible for multiple municipalities to cooperate in promoting the economic development of the entire region, including the provision of affordable housing and cultural facilities serving the entire region.

• In the Hackensack Meadows District, in New Jersey, this technique has made it possible for a regional body to develop a land-use plan that is rational from the broader perspective of an entire region, even though that region encompasses parts of 14 municipalities and two counties, without causing fiscal disadvantages to any of the those 16 legal entities.

• In Rochester, New York, the city is able to collect more funds from the local option sales tax that flows through the county government than it could if it charged that tax only within its own boundaries.

Strategic Considerations for NAIOP Members Faced with Technique
If a political coalition between central city and some suburban legislators is created that is effective enough to pass tax-base or other tax-revenue-sharing arrangements, that coalition might also be strong enough to adopt other region-oriented policies. Examples might be locating more low- and moderate-income housing in suburban communities as a prerequisite to getting permission to expand sewer and other infrastructure there. Whether this possibility is regarded as an advantage or a disadvantage depends upon the values of each individual observer.

Advantages from NAIOP’s Perspective
In the long run, tax-base sharing may improve the quality of the labor force within the metropolitan area by increasing the resources available to relatively low-tax-base communities to use in educating children living there, without causing any serious diminution of educational quality in high-tax-base communities. This is especially important in metropolitan areas where great disparities exist in levels of tax bases among communities, and in the quality of education offered to children living in those communities.

Disadvantages from NAIOP’s Perspective
The disadvantages are:

• Under tax-base sharing, individual communities have a reduced incentive to try to capture new development projects within their own borders. This is true because each community stands to gain at least some benefits from new projects, no matter where they are located. The local incentive to capture new projects is not totally eliminated, but it is weakened.

• Tax-base sharing reduces the bargaining power of developers in relation to individual communities where the developers might locate new projects. It is harder for a developer to “play off” one community against another in order to gain concessions from them if the new project could possibly be located in two or more such communities.

• Forming the political coalitions necessary to gain majority backing for any tax-base sharing arrangement that redistributes assessed values (even if only future ones) from wealthier communities to less wealthy ones creates great controversy among communities and legislators. Developers will be pressured by political representatives of both sides to take sides, and to make financial contributions to both sides.

Sources of Further Information
Myron Orfield, Metropolitics (Washington, D.C.: The Brookings Institution and the Lincoln Land Institute, 1998).

Hackensack Meadowlands Development Commission, Intermunicipal Tax Sharing: Theory and Operation (Web site, May 17, 1999).

Lincoln Institute of Land Policy, The Value of Land: 1998 Annual Review. This paper contains three essays on regional tax-base sharing, two favoring it by Myron Orfield and one opposing it by William A. Fischel.