Livable Communities Financing

Enhancing livable communities—through projects to improve transportation options, ensure more affordable and accessible housing, and build and maintain public spaces such as parks—requires both adequate funding and effective prioritization of limited resources. Although some funding for such projects can come from the federal government, a significant proportion must be generated at the state and local levels. This raises equity issues about who bears the burden of the tax mechanisms available to state and local governments. 

Government financing for affordable housing primarily focuses on preserving, maintaining, and increasing the supply of that housing. The majority of these funds comes from the federal government through general revenue. That is, these funds are not explicitly designated for affordable housing programs. This means that funding for affordable housing could decrease if government officials decide to prioritize other programs. 

In addition to using federal government funds, states and localities finance affordable housing projects through their own budget processes. They can use revenue produced through such sources as bonds, property, sales and occupancy taxes, and a variety of fees related to the sale and construction of buildings. The total level of funding is inadequate to meet the great need for affordable housing units. For example, only about one in three income-eligible older households receives assistance (see also Issuance of Bonds, as well as Retail Sales Taxes, and Property Taxes in that chapter). 

The following are brief descriptions of some of the revenue sources used to fund the development and maintenance of affordable housing. 

Transient occupancy tax: Some states and localities levy a tax on the rental of accommodations in a hotel, inn, tourist home or house, motel, or other short-term lodging (for example, less than 30 days). 

Fees associated with the sale of a home: Governments can charge fees for passing a property title from one person to another; providing, recording, and indexing official copies of property documents; and other services. 

Fees on developers: These fees are typically passed onto homebuyers and include the following. 

• Impact fees are imposed on new development projects to pay for the costs of providing public services. 
• Linkage fees are imposed on new development projects to fund the production of affordable housing. 
• In-lieu fees are collected from developers who do not include affordable housing within the development. In some cases, the proceeds of these funds are not designated for affordable housing. 

Transportation funding is used to pay for highways, public transit, and other mobility options. A substantial but narrowing fraction of highway funding comes from the Highway Trust Fund (HTF), which is funded through the gas tax. The HTF also supports public transit, transportation for older adults, sidewalks, and bicycle infrastructure. 

As communities have increased transportation investments, they have needed to generate additional revenue. Sources include taxes (such as sales and gas taxes), fees (such as tolls and fees charged to obtain a driver’s license or register a vehicle), and public-private partnerships (see also Retails Sales Taxes and Excise Taxes on Individual Commodities or Services). 

The following are brief descriptions of each of these revenue sources. 

Gas tax: The federal gas tax has remained the same since 1993. Since then, inflation and increasing vehicle efficiency have eroded more than one-third of the tax’s purchasing power (see also Excise Taxes on Individual Commodities or Service for more information about gas taxes). 

Road pricing: A variety of ways for drivers to pay for their use of roads currently exist. Traditional toll collection is one way. Another is the imposition of mileage fees, in which policymakers charge a fee for each mile driven. Doing so would create a direct link between the people using roads and the money needed to maintain them. But this could adversely affect people with low incomes and people living in rural areas who travel long distances. 

A third method of road pricing is congestion pricing. This involves imposing a toll that varies based on road congestion to ensure free-flow traffic conditions and greater system efficiency. Pricing encourages drivers to shift travel times, carpool, or use public transportation. Removing just 5 percent of traffic from a roadway or street network can result in substantially less congestion. 

Congestion pricing can take several forms: 

• Variably priced lanes change the toll based on levels of congestion or time of day. Sometimes, exempt cars with at least a certain number of riders from the toll. This is known as high-occupancy toll lanes. 
• Area pricing charges a fee for driving anywhere within a designated area, typically a city center, during peak hours. Drivers pay this fee regardless of whether the trip originated inside or outside the designated area. 
• Cordon pricing charges a fee on vehicles entering a designated area, typically a city center, during peak hours. This fee can vary based on road congestion. 

Public-private partnerships: Although state transportation departments can own and operate a priced transportation facility—such as a highway—they often lack the up-front funds to build one on their own. As a result, some state and local governments have turned to public-private partnerships. For example, a private firm could pay to construct a road in return for the right to operate a toll there for a specific period. The challenge of this model is that the public sector gives up its rights over a transportation investment for a significant period of time. Officials may not be able to assess fully the future value of an asset to the public. 

Many tax mechanisms employed at the state and local levels are regressive, particularly the sales tax. A tax is regressive when people with lower incomes pay a larger share of their income than do those with higher incomes. They are especially problematic when they fund projects that disproportionately benefit people with higher incomes. 

User fees tend to be regressive. In the transportation context, they can have secondary effects. For example, the gas tax can fall disproportionately on people who drive older, less fuel-efficient cars, as well as rural residents who may have to drive longer distances than people in urban and suburban areas. On the other hand, user fees can have positive effects on livable communities beyond the revenue they generate. Some economists argue that road pricing helps offset some of the negative environmental and social impacts of automobile travel, such as air and water pollution and traffic congestion. 

Financing strategies for livable communities require balance. Relying solely on regressive state and local revenue mechanisms raises equity concerns. However, relying too heavily on industry fees, such as developer fees, can slow growth and development. Transportation financing decisions can have a direct effect on people’s travel choices. That, in turn, affects broader livable communities’ goals such as safety, equity, and environmental protection. Policymakers must balance multiple community objectives in setting revenue-generation policies.