Virginia Peninsula Association of REALTORS’® Position On Residential Growth

ISSUE: Residential growth in Virginia has been rapidly increasing in recent years, particularly in areas in close proximity to major cities. As our economy expands and new corporations locate to Virginia, and existing businesses grow, the Commonwealth will continue to grow and prosper. However, along with this increased growth has come concerns that the growth is leading to sprawl, and that localities are unable to sufficiently fund the infrastructure and services that their citizens require. The real estate and development communities must be cognizant of these discussions and be willing to participate in the creation of a solution.

VPAR also recognizes the decline in the quality of life in Virginia’s cities and the movement outward from the cities to the suburbs. Our cities are deteriorating and are experiencing increases in poverty, increases in crime, eroding infrastructure and overall urban decline.

DISCUSSION: Virginia Court precedent has established that the provision of roads, schools, parks and other pubic facilities is largely a responsibility of government. Today, Virginia’s localities are looking for ways to raise additional revenues to help ease the financial burdens in growing communities.

Historically, localities have looked to development and real estate-related fees and taxes to create revenue streams to fund services. These have included raising the real estate tax; increasing real estate assessments; seeking enabling legislation to levy impact fees, transfer taxes or cash proffers; or seeking General Assembly approval to create adequate public facilities ordinances.

Realizing that localities may be more strained than ever to generate revenue in light of the phase-out of the personal property tax, cities and counties again are looking to real estate to assist in the creation of funding sources. The real estate industry is being looked at as a "cash cow" to provide localities with extra revenue for public infrastructure.

PROPERTY TAXES: Increasing property taxes reduces the affordability of homeownership; causes a strain on the increasing numbers of older citizens on fixed incomes; and lessens the attractiveness of our area to new business. Local governments should strive to cut their costs, or if necessary, look for a more broad-based tax. It is unfair for owners of real estate to bear so much of the income requirement when non-owners and daily visitors also are using and benefiting from local government services. Revenue requirements must be based on a thorough analysis of the operating efficiency of government and a careful examination of the necessity of services provided. In addition, we are concerned that reductions in personal property taxes will place more pressure on local governments to raise real property taxes.

REAL ESTATE ASSESSMENTS: With the recent drop in property values and therefore assessments, some localities have chosen to increase assessments on homeowners to meet revenue requirements. Assessments of real property dramatically increased in the 1980s, but show little or no sign of reductions in the face of decreased real property values. More and more homeowners are finding it difficult to pay real property taxes and some even are being forced to sell their homes and move. Additionally, taxes on commercial real properties have made it more and more difficult for businesses to operate.

IMPACT FEES: Impact fees are a tax on new development. Based on the premise that developers pay for infrastructure necessitated by new developments, impact fees generally are used to finance infrastructure -- such as roads, sewers, water, drainage, schools, parks and transit systems -- some government services and public services, and, to a lesser extent, affordable housing.

Local governments turn to impact fees to deal with the cost of providing services to a growing population, especially a growing school population. Builders merely pass the cost of impact fees on to the new homebuyers. It is unfair to tax one class of citizens, those who purchase newly constructed homes, for the cost of additional services. Additionally, impact fees do not provide a reliable source of income due to the instability of the real estate market. Perhaps most important, impact fees raise the cost of homeownership and reduce the number of people who can qualify for their first home.

The General Assembly traditionally has defeated attempts to expand impact fee authority, but it is a perennial issue that has returned in different forms such as zoning proffers and tap and sewer fee increases.

PROFFERS: Many localities in Virginia favor proposals for mandatory or "voluntary" zoning proffers that seek to raise funds for public infrastructure projects.

Like impact fees, proffers are a special tax on new housing. In many localities, they are not voluntary at all. Builders merely pass the cost along to the buyers. A system designed to encourage developers to provide land for schools, libraries and parks has in some cases become a blatant shakedown for cash.

In an open market, high proffers or impact fees can have an inflationary effect on the price of all housing. Higher prices mean even fewer families are able to buy, or families will have to settle for less. Eventually, homeownership could become a dream that only the rich can afford.

TRANSFER TAXES: Almost every year in the General Assembly, there are proposals to increase transfer taxes, grantor/grantees taxes or recordation taxes to fund local projects. Recordation or transfer taxes remain a popular political promise from government officials in high growth regions.

Increasing recordation/transfer taxes places an additional burden on homebuyers and sellers at the time of settlement and places an unreasonable burden on real property owners. Where an increasing number of families already cannot afford to buy a home, any increase in costs is cause for concern, further exacerbating the state’s affordable housing crisis. Virginia and her local governments already extract hundreds of dollars in recordation taxes on a typical transaction.

Additional homeowner taxes unfairly target one segment of the population. Homeowners are already paying their taxes through the real property tax. Over the last 10 years, most homeowners’ equity has not increased commensurate with inflation. In many cases the transfer tax would tax a loss rather than a profit.

In addition, real estate transfer taxes are an unstable and unpredictable source of revenue. Because home sales are cyclical, when a downturn in the housing market occurs, revenues from recordation and transfer taxes fall, creating added pressures for a tax increase. Given the economic climate, increasing the cost of purchasing a home would have a devastating effect on the industry and would be detrimental to the local economy.

The transfer tax also is a regressive tax. In general, people tend to spend a smaller share of their income on housing as their income increases. Therefore, relative to income, the effective tax burden of a real estate transfer tax is much higher on a low-income family compared to on a high-income family.

Finally, the transfer tax is more severe than an increase in a broad-based tax designed to generate the same amount of total revenue. The base transfer tax is very narrow relative to a more general tax, such as a local option sales tax, so fewer people pay the tax in a given year. Distributing the burden among a wider group of taxpayers would reduce the tax burden per taxpayer.

In states where a transfer tax is in effect, the cost of the tax is as high as 5% of the sales price of the property.

These and related growth control proposals have been brought to the General Assembly in recent years. In 1996, the General Assembly defeated two attempts to expand impact fee authority alone.

In the 1998 General Assembly Session, Senator Billy Mims introduced SB 693 to create local impact fees on new homes to assist in the cost of school construction in Loudon County; the proposal was withdrawn by Senator Mims citing a lack of local preparation to implement the concept. However, the bill was included as a part of HJR 195, a comprehensive growth study looking at various aspects of this issue. Since the session, Senator Mims has formed a local committee in Loudon to draft an impact fee ordinance and will bring the idea back to Richmond in 1999. Delegate Bill Howell of Fredericksburg also introduced impact fee legislation in the form of HB 440 to create an impact fee for roads; this bill was passed by indefinitely in the House Counties, Cities and Towns Committee.

Senator John Chichester of Fredericksburg introduced SB 355 to allow high-growth localities, as part of a subdivision or zoning ordinance, to determine whether public facilities are adequate to support the services which will be required by a proposed subdivision or rezoning. The bill was carried over to the 1999 Session and likely will be introduced again – and may even be passed. Any such legislation used as a no-growth tool would severely damage the already fragile economic stability of the real estate and economic development industries.

Several studies were passed by the legislature as well. HJR 195 is a comprehensive legislative study looking into all aspects of land development patterns and ways to address demands for increased services and infrastructure resulting from residential growth. It encompasses several growth studies which were introduced this year, including Delegate Gladys Keating’s study of the costs of land development patterns; Senator Mims’ study of proffers, zoning and impact fees; and Sen. Quayle’s and Sen. Houck’s study of demands for increased services and infrastructure from residential growth.

In addition to HJR 195, SJR 177 was passed in the 1998 session. This resolution directs the Commission on the Future of the Environment to study smart growth area initiatives for Virginia. The study will focus on the cost effectiveness of co-locating new development in areas served by existing infrastructure; the feasibility of legislation authorizing cluster zoning and mixed-use development; recommend policies that promote in-fill development; suggest transportation initiatives such as ride-share; and develop policies which encourage the revitalization of older communities.

Also during the 1998 General Assembly Session, Speaker of the House Tom Moss introduced HJR 432 to create the Commission on the Condition and the Future of Virginia’s Cities.

The Commission is conducting a comprehensive examination of the condition and needs of Virginia’s cities, and developing and recommending appropriate and feasible alternatives to address problems while providing vital public services with limited resources.

Over the last few years, there also have been several attempts to establish a new state level strategic planning program. In 1994, the Commission on Population, Growth and Development endorsed and introduced the Virginia Growth Strategies Act. The bill was carried over in the 1994 session and defeated in 1995. Eventually renamed the Strategic Planning Act, the Act would have created a "Virginia Growth Strategies Plan" which would have carried the full weight of the law. A new state planning bureaucracy would develop and enforce the plan. Once approved, the plan would take precedence over the state budget and could be amended without General Assembly approval. Support for the concept of statewide strategic planning remains alive, and the proposal may return again.

POSITION: The Virginia Peninsula Association of REALTORS® recognizes the needs of Virginia localities to raise revenue to fund critical infrastructure needs. We believe existing state and local revenue streams should be examined closely to determine if they can be modified or redistributed to provide additional resources to localities. Further, we believe localities need to focus on ways to maximize existing revenues and minimize expenditures through improved efficiency, consolidation of programs, regional cooperation and privatization. We believe that dedicated, broad-based funding methods, such as the local option add-on sales tax, income tax and gasoline tax, are the most equitable and efficient means to address those needs. We remain adamantly opposed to a homeowner’s tax on the sale of their property. The Association acknowledges the increasing demands of the public to address infrastructure and land use priorities and are dedicated to being part of the solution.

VPAR supports a balanced and broad-based approach to taxation in Virginia localities and encourages local governments to consider the mix of residential and commercial development as well as the range of revenue measures in effect in their efforts to reduce reliance on the property taxes to cover local spending.

In order to address this concern in Virginia, VPAR:

Believes local governments should not rely on increasing the tax rate of real property when property assessments are lowered.
Continues to support assessment tax relief for the elderly and the handicapped.
Supports efforts to restore "599" money promised to Virginia localities for placing moratoriums on annexation.
Supports an increase in the state sales tax.
Supports an increase in the percentage of the state sales tax that is returned to local governments.
Supports a local option add-on sales tax, gasoline tax or income tax.
Supports revenue sharing from the state to the localities in order to allow localities to have direct benefits in the growth of new business in Virginia instead of being concerned about fiscal impacts and increased service demands.
Supports dedicated resource streams for localities, such as returning a portion of lottery proceeds to the localities.
Supports equalization of taxing authority among Virginia’s localities.
Supports flexibility on the referendum requirement which currently exists for certain revenue and bonding measures.
Supports Constitutional Amendments #3 and #4 to encourage regional cooperation.
Supports the creation of an "Infrastructure and Revenue Resources Commission."
Supports comprehensive re-evaluation and restructuring of the state’s tax system to more accurately reflect the current technology- and service-oriented economy.
Supports leveling the playing field between cities and counties, i.e., restructuring of the "independent" cities concept.
Supports adequate public facilities through appropriately planned and funded CIPs.
Opposes legislation which would require the existence of adequate public facilities prior to, or concurrent with, governmental approval of a particular project or planned development, whether commercial, residential or mixed use.
Opposes increases of the recordation or grantor/grantee taxes, or the implementation of a real estate transfer tax.
Opposes any transfer of development rights legislation that solely addresses the shifting of population from one area to another without addressing services, tax shifting, downzoning or economic development.
Opposes impact fees and excessive cash proffers.
Opposes any legislation that would usurp the authority of the local governments to plan their communities according to the wishes of their constituents.