Recently The Pilot reported on a fiscal impact analysis prepared by the village of Pinehurst. This analysis looked at the village’s revenues and expenditures and allocated them to each land-use category to determine the net impact on the village’s budget of each identified land use.

At first glance, the analysis appeared to contradict the fundamental economic development assumption that residential growth does not pay its own way and that nonresidential growth is necessary to offset the cost of serving residents.

In this case, the analysis showed that multifamily residential development generated the highest net fiscal benefit for the village, and that most of the nonresidential categories cost more to serve than they generated in revenue.

With three decades of experience with municipal revenues and economic development, I thought that there were certain points worth making concerning the analysis.

First is that this analysis is specific to the village of Pinehurst. The staff analysts used actual village data — such as the number of road miles allocated to each land use, as well as the number of police calls for each land use, and specific revenues attributable to each. These numbers would be very different in other communities and would lead to very different conclusions about the net cost of service there.

Another point along these lines that really struck me was the fact that there are uses in Pinehurst that are classified as industrial. Now, normally in economic development circles, industries are the big prizes, because they generate lots of revenue and require few services. In this analysis, industrial uses have actually cost more to serve than they generated in revenue, though they were the best of all commercial uses in that regard.

Many of us would be hard pressed to think of a single manufacturing plant in Pinehurst. And I think that this identifies the heart of the anomaly regarding this study. Typical industries contain lots of machinery used in the manufacture of products. This equipment in North Carolina is taxable business personal property. If Pinehurst’s industrial uses consist principally of warehousing and not manufacturing, then they do not have the valuable machinery to add to the overall tax value.

You might well ask: What about the value of the buildings themselves that are occupied by the industrial uses? Don’t they add lots of taxable value?

In many cases, they do not. In fact, this is also the case for many retail buildings. The type of construction used today for industrial and retail buildings is often very inexpensive and simple.

When I was a city manager in Delaware, I worked with the governor, who was working to attract to my city a large new manufacturer. While he was very excited about this prospect, I was not.

Since Delaware did not allow taxation of business personal property, the only tax benefit to the city was in the building to be constructed to house the new manufacturer. I did an analysis of what this large building would do for my city’s property tax revenue stream. I had to tell the governor that his hot new prospect would not even generate enough new property taxes to cover the cost of health insurance for one city employee for one year.

And so it is also of small benefit to municipalities here to have new retail buildings added to the tax base, since they have little machinery to be taxed and their inventories were exempted from property tax many years ago.

The benefit of retail comes in the form of sales tax. Yet in another anomaly, sales tax in North Carolina does not flow to the municipality in which the retail establishment is located. So while Pinehurst has vigorously excluded most significant forms of retail, it still derives 23 percent of its revenues from sales tax — without bearing the costs of serving that retail development, which is primarily located in Southern Pines and Aberdeen.

I have often thought how ironic it is that Pinehurst keeps out significant retail and yet its residents complain about the traffic they themselves generate when they drive through Pinehurst to get to retail in the other towns. (Think of the fuss in Pinehurst about the proposed Publix store in Southern Pines.)

Now, to add to that irony is the fact that Pinehurst derives almost a quarter of its budget from those same out-of-town retail businesses, which makes their residential development seem like it is paying its own way because of North Carolina’s sales tax distribution methodology.

The Pinehurst fiscal analysis would paint a significantly different picture if sales tax were distributed based on point of origin. This approach would better allocate revenues to the jurisdictions bearing the costs of serving that retail development and would cause Pinehurst to actually have to tax its own residents more to provide them with services.

Until that happens, Pinehurst residents should thank the towns of Aberdeen and Southern Pines for bearing the costs of serving those retail uses, which effectively subsidizes their municipal services.

 

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