Real estate law yet to find sponsor, but opposition forming
Posted on Monday, January 15, 2007
People don't like taxes.
But cities need money, and the best residents and leaders can hope for is an equitable source of cash that doesn't have a detrimental effect on the local economy, said Kathy Deck, interim director of the Center for Business and Economic Research at the Sam Walton College of Business at the University of Arkansas.
The Fayetteville City Council is debating an ordinance asking voters to approve an impact fee for roads and will have an option of calling such an election when it convenes Tuesday. Some aldermen, however, have expressed interest in an idea offered by local developer Charlie Sloan, who is spearheading an effort to get local authority to levy a real estate transfer tax in lieu of such fees.
"It may be a rose by any other name, but these are all taxes, and taxes are the ways that cities raise revenue," Deck said of impact fees and real estate transfer taxes, both of which have been proposed as ways to fund Fayetteville's infrastructure needs.
"This is not just something Fayetteville or Northwest Arkansas is dealing with; it's anywhere there is growth," Deck said. "The challenge is to find a revenue source to keep up with growth. It's not an easy problem."
Folks in both camps have argued that the tax or fee will put an unfair burden on those looking for modestly priced homes and the housing market in general. While there seems to be general agreement that such costs do have an impact on the market, that's about as far as it goes.
How is "the billion dollar question," Deck said.
"It's something people have spent a lot of time trying to look at," she said. "Among economists there is no consensus."
Deck said there is definitely a relationship, but some argue that the fees or taxes cause the final price to go up for the consumer, while others say it shows up as decreased profits for the developer or original land owner. The relationship between taxes and the market is complex, she said, and even general sales taxes used to fund bond issues can cause home prices to increase to reflect the rising cost of materials.
"Everyone should be very skeptical of someone who says, ' This is how the impact is going to be, '"Deck said. "It is truly complex."
Sloan argues that the transfer tax is a more equitable way to generate money for infrastructure projects because it would be applied across the board, unlike impact fees, which would be charged only on new construction. Fayetteville has already enacted its share of such fees, and aldermen have often heard that those fees just get passed on to the home buyer.
The state already has a transfer tax, but local governments need authority to approve their own such taxes, which would essentially work the same way the fees do. Sloan is working to get support for legislation allowing for local elections on the transfer tax, which he hopes could replace the impact fees. He hired Steve Davis, the city's former finance director, to research the matter.
Davis said the tax and fee are basically two ways of solving the same problem; however, the transfer tax has some advantages. The concept is that the city could fund at least the same amount of money for projects by charging a lower tax than fee.
The tax rate being talked about is $ 4. 81 per $ 1, 000 of value, compared to the $ 4, 897 per home impact fee. The total fee includes the amended road fee, but the water and sewer fee component is expected to increase after a study to be completed this year.
The transfer tax would take longer to generate the same amount of money as the fee, but it would allow the city to issue bonds against it so projects could potentially be started sooner.
A sponsor for the bill has yet to be found in the 86 th General Assembly, and already the idea has opponents, among them the Washington County Democratic Central Committee.
The committee passed a resolution last week in opposition to the transfer tax and in support of the pending road impact fees.
"It's shifting the burden to people who aren't causing the problem," said Stephen Smith, sponsor of that resolution and a UA communications professor. "It's new construction on the periphery of town that's causing an increase in city expenses in water, sewer, fire and police. Those who cause the problem should have an opportunity to pay for it."
Smith argues that the transfer tax would unfairly shift the burden to existing homes and effectively "subsidize sprawl."
"I certainly understand why they want to do it," he said. "I would always like to have somebody pay my bills if I could trick 'em into it."
Smith described the argument that the transfer tax would be more equitable because it would be on a graduated scale as "nonsensical."
"The people that aren't causing the problems should be glad that they have to pay a little bit ? "he asked rhetorically, adding that it would be like collecting a gas tax for highways from people who don't drive.
Neither option appeals to the Arkansas Realtors Association, said Ethan Nobles, the group's spokesman.
Nobles said that although the association would have to see a proposed bill on raising the transfer tax before it would be able to have an official position on it, it does have a standing policy of opposing impact fees, transfer taxes or anything else that might "bump up home prices artificially."
Whether the group would consider the tax to be the lesser of two evils, Nobles said, is something that will have to be considered when the time comes. Even if one could be seen as preferable to the other, the organization will be against both because they each inflate home prices, he said.
Nobles said that either option will affect homeowners because they would both increase property values and, in turn, property taxes.
"It being the free market, whenever you put in an impact fee, you drag the prices of existing homes right on up with it. It's basic economics," Nobles said. "It's not like this is on new homes so it won't impact existing homes. That'll increase with real estate taxes as well."
Nobles said that problem is especially pronounced in Northwest Arkansas, where the average price of homes is about $ 40, 000 higher than in the rest of the state. He said that as of November, the average home prices were $ 150, 671 for the state, $ 189, 288 for Washington County and $ 198, 431 for Benton County.
"We know there's a problem with affordable housing in Northwest Arkansas as it stands," Nobles said. "Anything that will make it worse - harder to buy a home - yeah, we're against it."
The proposition of a local transfer tax has gotten some folks interested, including other developers and home builders. The Fayetteville Economic Development Council is also curious about it, Rust said.
"We think this has merit and sufficient merit that [Sloan and Davis ] are going to provide a briefing at the next board meeting of the FEDC," Rust said.
Rust said his group doesn't have a position on the tax yet, but neither does it have one on impact fees, other than they ought to be reasonable. He said the group understands the need to pay for infrastructure in a growing community.
"The bottom line is taxes are like a hot potato," Rust said. "All the different groups will try to pass it to somebody else to hang on to."
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