Research Shows New Urban Growth Subsidized by Taxpayer Dollars

Eben Fodor, a professional community planning consultant, based in Eugene, Oregon is the author of “Better, Not Bigger: How to Take Control of Urban Growth and Improve Your Community” (New Society Publishers).

Until recently we had no idea to what extent urban growth was being subsidized by public agencies. Astute folks may have guessed that a lot of taxpayer dollars were going to support the infrastructure new growth requires (roads, schools, fire stations, etc.) and the tax subsidies intended to stimulate business expansion. But there have been no hard figures available anywhere in the country until earlier this year.

Thanks to funding from nonprofit Alternatives to Growth Oregon, I was able to perform the first statewide assessment of state and local government spending on growth. This nine-month research project proved to be a challenging and complex topic. However, with the help of several research associates, we were able to develop a conservative (low) estimate of the total cost.

For the fiscal year 2000, growth subsidies by state and local governments totaled at least $1.14 billion. (For comparison purposes, the total state general fund revenues from taxes for the same period was $4.88 billion.)

This growth subsidy is equivalent to an annual per-capita cost of $334 for each Oregonian. Based on an estimated state population increase of 63,800 people in 2000, the growth subsidy amounts to about $18,000 per new resident of the state.

For this research, “subsidies” are considered to be the portion of growth-related costs or investments that are not paid for by the growth itself. The Federal Government also subsidizes growth, but these subsidies were outside the scope of the project and are not included in the report. A number of subsidies could not be reasonably estimated and therefore had to be left out of the final tally shown in Sumary of Statewide Growth Subsidies in above table.

Here are the types of subsidies evaluated in this study:

Infrastructure subsidies proved to be the biggest ticket item in the growth subsidies basket, amounting to $738 million in 2000. This figure represents the net infrastructure subsidy of new growth by established residents and businesses. Payments of development impact fees (known as “system development charges” in Oregon) were deducted to establish the net amount in above table.

The capital costs of building the infrastructure to serve new development (schools, roads, sewage treatment, fire stations, libraries, etc.) is typically the highest net cost of growth to local governments and taxpayers. This is in spite of a recent survey showing that 73 percent of Portland Metro Area residents want new growth to pay for all, or more, of its own way.1 Clearly there is an opportunity for public policy improvement in this regard.

Economic development (ED) growth subsidies were divided into five categories: tax incentives for business development (property and income tax abatements); tax incentives for housing construction; state-wide business finance programs; state-wide economic development expenditure programs; and local economic development programs.

The largest single growth subsidy program under the economic development category is a local program known as an Urban Renewal District or Tax Increment Financing District. Fifty-eight districts managed by 40 local agencies statewide spent a total of $84 million in fiscal year 2000.

Not surprisingly, the next two largest subsidies are the Enterprise Zone ($33 million) and the Strategic Investment Program ($24 million), both included under the business tax incentives category. These three programs account for over half of the economic development growth subsidies, which totaled $257 million for fiscal year 2000.

Based on a representative sampling of Oregon cities and counties, most are charging developers far less than the full cost of processing land use applications, development proposals and building permits. Most of the traditional planning work performed by cities and counties is planning for the accommodation of future growth.

To the extent that this work primarily or exclusively benefits new growth and development, and is not funded by that growth, it constitutes a growth subsidy. However, to the extent that this work achieves important public goals and primarily provides broad public benefits, the cost would not be counted as a subsidy.

Department budgets for planning and development services were compared with fees collected. The City of Eugene, for example, subsidizes 29 percent of the cost of construction permits and 91 percent of the cost of planning and land use applications, for a total fiscal year 2000 subsidy of $3,147,152.

Based on a sampling of local governments and costs for state planning programs, the total statewide growth subsidy for planning and development services is estimated to be about $33 million.

A number of other growth subsidies were considered in this study, including unmet infrastructure needs (primarily needed schools and roads), measurable social costs, and land-use windfalls.

The Texas Transportation Institute’s 2001 Urban Mobility Report indicates that Oregon’s three largest urban areas (Portland, Salem and Eugene-Springfield) built only a fraction (zero percent to 41 percent) of the needed transportation infrastructure over the most recent 1994 to 1999 period. The cost to build this needed infrastructure is unknown, but is certainly in the billions of dollars.

The result is increased social costs in the form of traffic congestion and delays. The cost of traffic congestion estimated by the Texas Transportation Institute, using fuel and time-value costs, was about a billion dollars per year ($995 million). While most of this cost could be considered a growth subsidy, this study conservatively counted only the cost of the congestion increase occurring in 1999 (the most recent year available) of $115 million see lower left graph.

Not only is growth subsidization a heavy burden for the Oregon’s taxpayers, but it is stimulating urban growth that most Oregonians have indicated they don’t want. Public opinion surveys clearly show that Oregonians are not enamored with growth.

A 1999 statewide survey found that 95 percent of respondents think Oregon’s population is either too big or just right.2 Only two percent prefer it bigger. Surveys from two major metropolitan areas in Oregon show that most residents think their area is growing too quickly and Portland area residents indicate they want local government to try to slow it down.3

The fact that these subsidies pass largely unnoticed by the public, contributes to their proliferation. Lack of awareness of the extent and magnitude of growth subsidies is probably the main reason why they continue to be tolerated.

These subsidies are distorting business and land development markets and inducing growth that is generating more costs for Oregon’s taxpayers and impacting communities across the state.

So how do these findings relate to Washington State? Each state is different and no similar studies have been done anywhere in the U.S. However, there are likely to be many similarities in the nature and relative magnitude of the growth subsidies in Washington and Oregon. This is especially the case since growth rates were similar for both states in the 1990s (both grew about 21 percent for the decade).

©2002 by Eben Fodor

Copies of the eight-page executive summary and full 150-page report (in pdf format) can be found on my web site at http://www.FodorandAssociates. com.

1. 2001 Metro Public Opinion Study by Davis and Hibbitts, Inc., May 2001. When asked who should pay the cost of growth, 40 percent felt developers and new home buyers should pay all of costs associated with infrastructure, 33 percent felt new growth should pay a greater share, and 21 percent felt that the costs should be shared equally (six percent don’t know).

2. 1999 Oregon Annual Social Indicators Survey (OASIS) by the University of Oregon Survey Research Laboratory. The survey was conducted from the middle of November to early December, 1999, and asked opinions from a random sample of 420 Oregon residents over the age of 18. The survey results accurately represent the opinions of Oregonians with a maximum error of plus or minus 4.8 percent. Responses to the question, “Oregon’s population is...” were: about the right size—65.4 percent; too large–29.3 percent; too small—2.4 percent; don’t know/no answer—2.9 percent.

3. 2001 Metro Public Opinion Study by Davis and Hibbitts, Inc., May 2001, showed that 54 percent of respondents think Metro and their local governments “ought to try to slow growth down.” City of Eugene Community Survey (Conducted January 5-19, 1999 for the City of Eugene by Advanced Marketing Research) asked “Do you believe population growth and development in Eugene during the past 10 years has been too fast, too slow, or just about right? Responses: too fast–56 percent; just about right–37 percent; too slow–three percent; don’t know–five percent.