Local Taxes

VFBF Policy

We support the expansion of current law to allow local governments to implement impact fees/growth tax or adequate public facilities ordinances on residential development to help share the cost of providing new services for such developments, regardless of zoning classifications.

Background

According to the Comparative Report of Local Government Revenue and Expenditures for fiscal year ending June 30, 2003, revenues for use at the local level across the state were approximately 60 percent local sources, 33 percent state sources, and 7 percent federal. Local governments are granted certain authority to tax by the Constitution. Across Virginia, there are four widely used taxes for generating local revenue: real property, personal property, machinery and tools, and merchants’ capital. Miscellaneous taxes, charges for services, license and permit fees, and fines assessed are additional revenue sources authorized for use to some degree on a local level.

All revenues, whether generated locally or received through aid programs from the state and federal government, are used to fund a growing list of local government services and programs. Education is the largest component of local budgets; often 70 percent of an individual local budget is allocated for education programs. In education, as well as other local expenditures (including police and fire protection, public works, and others) continued improvements in service are both mandated by state law and demanded by local citizens. Financing basic services and mandates often falls to the local government.

The taxation system in Virginia has long relied on real property taxes as a primary source of local revenues. The Comparative Report of Local Government Revenue and Expenditures shows that levies assessed to real estate contributed approximately 51 percent of revenues in localities across Virginia for fiscal year ending June 30, 2003. Real property taxes contributed 43 percent of revenues for fiscal year ending June 30, 1998. Originally, real property holdings were a direct correlation to wealth; however, as the economy in Virginia and indeed the world has evolved, tangible property holdings are no longer an accurate indicator of wealth. At the same time, property is a finite and immobile resource; appreciation of property values does not keep pace with growth evident in the current economy. For example, income tax growth has far outpaced local revenues from real property. Likewise, growth in service based industries is hardly captured by any local tax.

Despite its steady but relatively nominal growth, local governments continue to look to increases in property taxes (either by reassessment or by increased rates) to fund budget needs. In order to keep pace with today’s economy, and to help local governments meet mandates and provide superior services to Virginia’s citizens, alternative sources of revenue need to be identified and authorized.

One of those sources could be giving local governments the authority to assess impact fees or adopt adequate public facilities ordinances. Generally, an impact fee is assessed by local governments on new development projects to help pay for infrastructure needed to serve that development. Such infrastructure could include roads and sewers. Impact fees are spent on infrastructure made necessary by the development; they are not intended to be used for operational expenses or to pay for capital improvements to correct an existing deficiency or shortfall.

Adequate Public Facilities (APF) allows local governments to deny or delay new developments if existing government services (water and sewer, roads, schools, fire and police) cannot support it. APF’s can ensure that new development does not negatively impact a community's quality of life by overburdening public services and community taxpayers. APF’s help to ensure the huge backlog of approved development in many high growth localities, does not bankrupt localities or taxpayers, and ensures that localities that wish to manage growth must adopt capital budgets that will support growth. Virginia counties do not have authority from the state to pass local adequate public facility ordinances.

Reasons for Position

Virginia’s current tax system, based on tangible assets, is antiquated, as property is no longer the single indicator of wealth.

Revision of our tax system should allow local governments to keep pace with the current economy, and reduce reliance on real estate taxes for local revenues.

With the pressures of development and the rapid conversion of land from agriculture to residential, localities cannot generate enough revenues to pay for the needed infrastructure that new development brings.