Financing Livable Communities

Background

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

Government financing for affordable housing largely focuses on preserving, maintaining and increasing the supply of that housing. The majority of funds for affordable housing comes from the federal government through general revenue. (That is, the money does not come from revenue streams that are specifically designated for affordable housing programs. Instead, the money is allocated as part of the regular budget development process.)

In addition to using funds passed down from the federal government, states and localities finance affordable housing projects through their own budget processes and by using 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 (1.4 million out of 3.9 million) income-eligible older households (age 62 and older) receives assistance (see also Chapter 3, Taxation - Issuance of Bonds, Chapter 3, Taxation - Retail Sales Taxes, and Chapter 3, Taxation - Property Taxes).

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 lodging that lasts for a short time period (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 include the following:

  • Impact fees—fees imposed on new development projects to pay for the costs of providing public services,
  • Linkage fees—fees imposed on new development projects to fund the production of affordable housing, and
  • In lieu fees—fees collected by 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 fraction of funding for highways 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 those for obtaining a driver’s license or registering a vehicle and tolls), and public-private partnerships (see also Chapter 3, Taxation - Retails Sales Taxes, as well as Chapter 3, Taxation - Excise Taxes on Individual Commodities, for more information about taxes and possible reforms).

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 Chapter 3, Taxation - Excise Taxes on Individual Commodities or Service for more information about gas taxes).

Road pricing—A variety of ways currently exist for drivers to pay for their use of roads. 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 who live in rural areas, who travel long distances. In addition, the system requires a computer chip to be installed in each vehicle to track mileage, which prompts privacy and security considerations..

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

Congestion pricing can take several forms:

  • Variably priced lanes—the price of the toll may vary by time of day or dynamically based on levels of congestion. Often, variable pricing incorporates high occupancy toll lanes, in which those who have a certain number of passengers are exempted from tolls while others must pay to enter. This is sometimes referred to as value pricing.
  • Cordon pricing—fees are imposed on vehicles entering a specific area, typically a city center, during peak hours. This fee can vary based on road congestion.
  • Area pricing—a charge for driving within a restricted area, regardless of the number of times crossing the cordon.

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 of time. The challenge of this model is that the public sector gives up its right 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 of the tax mechanisms employed at the state and local level are regressive, particularly the sales tax. That is, lower income people pay a larger share of their income in the tax than do higher income people. Regressive taxes are a particular concern if people with low incomes are less likely than other populations to benefit from the projects that taxes fund.

In the transportation context, user fees, which tend to be regressive, can have secondary effects as well. 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. In addition, user fees can result in positive effects on livable communities beyond the revenue they generate. For example, some economists argue that road pricing helps offset some of the negative environmental and social effects of automobile travel, such as air and water pollution and traffic congestion.

Balance must be considered when evaluating livable communities financing strategies. Because of the regressive nature of most state and local revenue mechanisms, relying solely on them raises equity concern. However, relying too heavily on fees on the industry, such as developer fees, can slow growth and development. In the transportation context, 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 policy.

FINANCING LIVABLE COMMUNITIES: Policy

Goals for livable communities funding

In this policy: FederalStateLocal

Funding for livable communities projects should be sufficient to:

  • ensure the availability of enough affordable, appropriate, and accessible housing to meet the community’s needs;
  • increase affordable mobility options for all residents of a community, including by establishing and improving public transportation investments (this also includes supporting rideshare programs and building pedestrian and bicycle infrastructure); and
  • create safe and accessible community features (including public facilities such as parks and public libraries).

Public funding for transportation, including the gas tax, should prioritize projects that:

  • increase the efficiency of the transportation system by reducing traffic and travel times,
  • increase public transportation and other mobility options,
  • improve the safety of the transportation system,
  • increase transparency and accountability, and
  • ensure that costs and benefits are distributed equitably.

Policymakers should support innovation and balance investments in new infrastructure with the need to maintain existing infrastructure.

Revenue sources

In this policy: FederalStateLocal

Policymakers should use funding mechanisms aligned with AARP’s Taxation Principles. When regressive funding mechanisms, such as user fees, are used, policymakers should evaluate who will bear the costs and realize the benefits to ensure that people with low incomes should receive as much benefit as what they pay. They should also take into consideration the financial burden on people in rural areas. Any incentives offered by either the private or public sectors should be equitable and consistent with AARP’s Livable Communities Principles. State and local governments may also use tax credits, bond proceeds, and redevelopment funds to increase housing options for people with low incomes.

Industry should pay its fair share in funding livable communities projects. For example, developers should pay the cost of infrastructure improvements needed to support new housing developments and should create affordable housing units in addition to market-rate housing (see also Chapter 11, Financial Services and Consumer Products - Digital Privacy and Security).

Public-private partnerships

In this policy: FederalStateLocal

Any public-private partnerships must ensure full accountability to the public.

Policymakers should enter into these arrangements only when they can:

  • demonstrate long-term net public benefitsfor example, in considering whether to lease land for a private highway, demonstrating that the long-term public benefits justify the loss of toll revenue to the public sector;
  • ensure that the public sector retains control over transportation planning and policy, including the ability to maintain or upgrade public assets; and
  • and ensure access for people with low incomes.