Property Taxes in Walworth and Jefferson Counties
In early 2006, the Fiscal and Economic Research Center was approached by Sho-Deen Industries, a property developer out of Illinois, with a request to do a report on the impact of development on property taxes. Sho-Deen was seeking approval from the town of Delavan to begin work on a large 900-acre development in the jurisdiction of that community. The existing residents had many concerns. The one we addressed was specifically the recent relationship between residential development and property taxes. Economically, the question is straightforward. More residents and businesses mean more services are required…roads, sewers, police and fire protection, schools and such. At the same time, more property value means more property taxes. The question thus becomes whether the increased property tax revenues would cover any necessary increase in services. If the answer to that question is no, then a community must either lower the level of services or increase property taxes. Neither would be an appealing alternative to existing residents.
Critics of development often come loaded with many studies that point to its supposedly high cost. Such efforts are often co-mingled with efforts to assess the costs of urban sprawl. One such example would be the Cost of Community Services (COCS) Study. A main conclusion of this study is that the ratio of the cost of services to tax revenues generated exceeds 1 for residential space (1.05 to 1.15), whereas it is less than one for commercial and agricultural use. Aside from the fact that commercial and agricultural uses don’t leave anyone with a place to live, this approach in a way ignores the question we ask above…it is not necessarily the case that adding for example one more residential property adds more to cost of services than it adds to revenues even if the overall ratio is more than 1. The changes in costs and revenues are of interest here. This approach is fundamental to economics, and is called marginal analysis. There are many reasons why marginal analysis may come to a different result. Services with excess capacity do not need to be expanded at all, and can thus handle more properties with no increase in services whatsoever. At the same time, major expansions in service capacity may be necessary which could conceivably require significant increases in revenues beyond what current tax rates would support even with more aggregate value. Some studies which have made a more economically valid assessment have come up with varying results, but with little uniformity in results other than being nowhere near the ratio figure suggested by the COCS and some indicating a ratio for new development being less than 1.
The scope of our contribution does not tackle the question directly for the town of Delavan. Limitations on time and resources prevent the development of information on service needs net of Sho-Deen’s contributions and expected tax revenues of the developed properties. This is a dynamic proposition, dependent on the actions of Sho-Deen, the community’s responses and the subsequent actions and responses of Sho-Deen and the community. It is also dependent on the actions of additional players, such as the county, adjoining communities, and competing developers.
As an alternative, our work undertook to look at variation in communities in Jefferson and Walworth counties. This historic-based analysis looked at what had happened in the past following development. Different communities in these counties have different proportions of residential, commercial and agricultural usage. They also have different tax rates. A statistical regression looks at the correlation in variation between them. This provides a methodology to ask whether increases in residential usage leads to increased tax rates. The results of this study are summarized below.
One factor highly correlated with tax rates is the type of community – whether it’s a town, village or city. Figure 3 shows taxes on a home assessed at $150,000 broken up by community type, county and year. As can be plainly seen, towns have the lowest tax rates and villages the highest, with cities closer to the latter than the former. It is also clear that mil rates have been declining over the years we studied (2002-2004). If we look at changes in tax rates, towns also have the largest proportional decreases in tax rates over time. It can also be seen that tax rates vary substantially by county. Cities and towns in Walworth County tend to have lower tax rates than the same types of communities in Jefferson County, while villages have lower rates in Jefferson.
Figures 4 and 5 show the tax on a $150,000 property by the individual community. As can be seen, there is still significant variation between communities even of the same type. An additional complicating factor: Is the assessed-value mil rate really the relevant figure to compare? That certainly determines the final property tax bill. However, assessed values often diverge substantially from the market value of a property. Thus, the proportion of the value of a property paid in taxes is often less than the mil rate. In fact, for nearly all of the communities in these two counties market values have increased faster than assessed values, particularly for Walworth County where the ratio of assessed to market value went from 0.926 in 2002 to 0.874 in 2004. Only Elkhorn consistently had assessed values in excess of market values for all three years.
Regardless, our results indicate that if anything, more residential space is not correlated with tax rates for communities in these two counties. In fact, one result (many regressions are run to verify the consistency of results) suggests that higher rates of change in residential acreage is correlated with lower growth in tax rates (or faster decreases), though we do not assess this to be a reliable result. A more reasonable statement is that no statistical relationship exists between growth and tax rates.
The question still exists: Why do property taxes rise? This is more properly answered through a political economy model. While there may be instances in which a particular community finds that with development more services are demanded, growth and tax rates are not linked in a cross sectional model. If the cost of providing these services rise, the individual community makes the decision that link the two. They may choose to employ full-time firefighters, develop a public health office, expand services offered at city hall, etc. However, communities may also choose not to expand these features. Indeed, even the decision about what form of governance the community should take (city, town, etc.) places more weight on tax rates than how much development there is. There may still be good reasons for a member of a community to resist development or embrace it, but we are not able to find evidence that impacts on tax rates should be one of those reasons. Whatever the factors are, it would seem that most of the communities in Jefferson and Walworth counties are enjoying property tax relief both in the actual payment and the proportion of their property’s value that payment constitutes.