The Fiscal Implications of the Comp Plan | Invest & Innovate | Steve Levy | Palo Alto Online |

Local Blogs

By Steve Levy

The Fiscal Implications of the Comp Plan

Uploaded: Oct 27, 2017

A fiscal impact study was conducted on Comp Plan alternatives that include a range of growth both higher and lower than the council’s preferred growth scenario.

The principal conclusions quoting directly from the study presented to council are:

The net revenue generated for the General Fund under the Comprehensive Plan Update scenarios result from robust revenue generating potential and modest cost implications attributable to growth. On the revenue side, property tax-related City income is anticipated to be strong, given the high value of real estate in Palo Alto. In addition, this analysis projects significant sales tax revenue will be generated by new residents and workers. On the cost side, the City is well positioned to expand to meet marginal increases in demand for City services without dramatic increases in operational cost.

Though the Comprehensive Plan Update scenarios are likely to generate net revenue for the General Fund, it is notable that even the most aggressive growth forecast will have a relatively modest net effect on the General Fund.

Other findings from the study include:

--Most sales tax revenues come from visitors and businesses, not residents. In 2015 the study reports 48% of sales tax revenue came from visitor spending, 41% from local employees and business spending and 11% from local households.

--Most hotel revenues (transient occupancy taxes) come from businesses (44%) visitors to Stanford and other reasons (48%) and 9% from household visitors.

--Over 2/3 of utility users’ revenues come from non-residential customers.

Although it was not covered in the fiscal study, it is true that the recent growth in infrastructure funding has come from the increase in the transient occupancy tax paid mainly by businesses and visitors.

At the council meeting last Monday, some members of the audience voiced support for limiting commercial employment growth and focusing new housing primarily on housing for low income residents—those eligible for below market rate (BMR) housing.

I support more BMR housing and would be willing to support a local bond measure for more funding. And I hope those in support will rally for the Palo Alto Housing project now before council and without adding restrictions that boost costs, lose tax exempt funding and basically kill the project.

But the fiscal impacts for the city (and school district) of limiting commercial growth and focusing primarily on BMR housing will reverse the findings of the fiscal impact study and create additional fiscal stress on the city at the same time we are trying to fund services for residents and deal with rising retirement benefits.

We see above how businesses and their visitors and employees contribute to hotel and sales tax revenue. What moves the needle on property taxes? I share two data points from the Santa Clara County Assessor Report for fiscal 2016-17. Both refer to county wide data.

--only 9% of the increase in property tax revenue came from the 2% inflation increase each existing property owner (like me) pays. 20% came from new construction, 7% from business personal property and the largest share by far from change of ownership (49%). Technical adjustments accounted for the rest of the increase.

--only 5% of county assessed valuation comes from the generation (1979-88) when Nancy and I bought our first house. 80% of residential valuation and 78% of non-residential valuation comes from construction and transfers in the last 20 years.

So here are my suggestions for the Comp Plan.

1) Understand the results of the fiscal impact study.

2) Build as much BMR housing as we can find funds, sites and projects that pencil out. But also build market rate housing. The council has heard many reasons to support policies for housing that meet or exceed the Comp Plan targets. Here are two not often mentioned. One, market rate housing is needed to make the Comp Plan fiscally secure and as a bonus provide customers for retail and two, if we build housing that older residents can move into if they wish and remain in their community, it opens up housing for new families AND creates tax revenue through the property transfer tax and higher new valuation,

3) Continue with well-planned commercial development within the guidelines of the Comp Plan. The fiscal study confirms common sense that commercial development is a major contributor to service and infrastructure funding.

The school district has property taxes as their primary revenue source. The data show that new development and high valued development is a primary contributor to school revenue growth through property taxes and impact fees. My 2% additional property tax contribution each year does not come close to covering normal cost increases.