Austin Contrarian

A contrary view on density bonuses

Frequent (if involuntary) guest-poster Miggy responds to my criticism of density bonuses.  (Let this be a lesson to those who leave long comments.)

I, too, have a lot of misgivings on this policy, and yet, while I would agree that this is a marginal tax, so is the ad-hoc system….the unwritten rules that you mention here. Preference therefore cannot be given to the status quo on that basis alone. As you suggest, one way to compare the two systems is by the relative ‘bite’ – have past developments paid more for increased entitlements than they would under this proposal? The monetary value is not an easy comparison to make in most cases, but my layman’s research would indicate that some have paid less but some have definitely paid more and that’s without other factors such as attorney costs for taking it through the exception process or the value reflected back in sales prices from the investment. If this is indeed the case, it also raises a question of equitable treatment – why should one project pay more tax than another on that last square foot based simply on the political winds or the political stroke of their lawyers? We do not leave it to people to hire attorneys to individually negotiate their property, sales or income tax bill on an ad-hoc basis because we punted on creating a systemic, equitable approach to revenue generation. There’s an argument to be made, too, that this situation is not terribly unique – there is a marginal benefit of income, sales, capital gains and the improved value of real property. “Sin taxes” or levies on marginal negatives are great for behavioral modification but also unreliable for public funding which is why they make up relatively little of the overall revenue pie at any level of government.

I cannot speak to anyone else’s motives, but my best supposition for why the development community is objecting to these rules is not necessarily for the cost of what’s proposed. As you say, is not that onerous or, on average, dramatically different than the cost of the status quo… but there is a threat of the unknown. In other words, a failure to object at this juncture will increase the risk of more onerous fees being institutionalized. There is also a very real potential threat of tweaking ROMA’s proposal in the political process to where it definitively falls in the bad policy column.

I would further concur with your assessment that the arguments against the policy that use utility infrastructure costs are a red herring and are likely being used as a mask for other motives. Those infrastructure costs are significant and I realize that they’re paid for in real dollars not relative ones, but a long-term plan should not be bogged down by such obvious short-sightedness.

Bringing this back on topic – I personally believe that the current proposal is an improvement on both the status quo and the interim density bonus (which sends money to a city-wide affordable housing slush fund rather than having the same flexibility to reinvest in the project or immediate area of downtown).  Now…that being said, the proposal is also far from ideal. Density is a necessary component to a vibrant and valuable downtown, but it is also an insufficient quality on its own. While it’s tempting to simply say that the laws should be loosed and no restrictions be placed on a marginal positive, that’s also taking away an important point of leverage for achieving those other qualities that make for a successful downtown. That little bit of leverage is important in a state, that, as I am frequently reminded, has taken away a lot of sticks and leaves municipalities only to dangle their few remaining carrots.

It should be pointed out, too, that not all ‘community benefits’ are budget patches or crutches for poor general fund support from the city that could be made up by the taxable value of the new building. TDRs from the Warehouse district are not possible under an ad-hoc system and other benefits, such as green building or the burying of parking garages, are strictly the preserve of the private developer where incentives need to be in place to move projects in that direction at the time of construction. Moreover, what remains largely un-discussed are the market and construction variables at play and why ‘the sweetspot’ square footage for development is where it is (where density bonuses likely play a minor role). An ideal policy would seek to mitigate those variable costs or market limitations and move that sweetspot higher, but I’ve never heard that approach discussed seriously. There is only the assumption that the developer demand for greater density is insatiable (when we have a lot of empirical evidence of underbuilding and not a lot of empirical evidence of burj dubai’s passing on Austin because of its density bonus program).

In an attempt to wrap up this rambling comment on this wide-ranging topic, let me say that I look forward to hearing the completion of your thoughts on this. From your post here your argument would seem to condemn both the status quo and the density bonus proposal but it leaves open to suggestion what regime could replace both. I mean this more in an inquisitive than a challenging way, but: what is your proposal? What is the third way? Feel free to be ambitious and perhaps make it applicable to TODs / future town center nodes… but keep in mind that a proposal that is great urban planning but so audacious as to be politically DOA is also of little use. Again, I look forward to hearing your ideas on this topic…and thank you, as always, for raising important questions on public policy in Austin. 

I'll respond in a separate entry.

Texas is studying a tax on the number of miles you drive

News to me:  Texas will study a tax on miles driven:

If you don't like gasoline taxes, here's an alternative: a tax on the number of miles you drive in a year.

The Texas Transportation Commission has directed a fresh study of the idea, and it is not alone.  There are pilot projects in other states and nationally to gauge how such a tax would work.

Texas transportation officials say the study is meant to help give lawmakers information on options ahead of their next regular session in 2011, when they confront a funding squeeze that is expected to drain the highway fund of money for new construction contracts by 2012.  “We need to think differently about how we fund transportation,” Texas Transportation Commission Chairwoman Deirdre Delisi said at a Texas Taxpayers and Research Association forum in November.

Delisi said the vehicle-miles-traveled tax idea is controversial, but should be discussed because revenue from the state's main source of transportation funding, the motor fuels tax, is declining.  The gasoline tax has not been raised since 1991.

The commission asked the Texas Transportation Institute, which is part of the Texas A&M University System, to take the lead on the study.  Commissioner Fred Underwood has emphasized that the commission's goal is to give lawmakers alternatives.

There are good arguments that a gasoline tax is a more efficient tax on externalities.  Heavier vehicles do more damage to roads; heavier vehicles use more gasoline.  Emissions vary with the amount of gasoline used (ignoring vehicle technology).  A miles-traveled tax perhaps better reflects a driver's accident risk to others, but larger vehicles impose a higher risk on other drivers, bicyclists and pedestrians than smaller vehicles.  (Neither accounts for congestion externalities.)

But two drivers who "consume" the same number of miles enjoy equal benefits.  It's fair in that sense to require them to pay the same amount.   A gas tax and miles-traveled tax thus serve different purposes:  a gas tax is a tax on externalities; a miles-traveled tax is a tax on consumer surplus.

A boneheaded proposal from Cap Metro

I missed this at the time, but it deserves comment.

Cap Metro is developing its long-range plan, which it calls "ServicePlan2020."   It has hired a consultant from Washington state to prepare the plan  (13.1 MB pdf).

I doubt the consultants have set foot in Austin because the draft plan contains a simply horrendous proposal, a proposal that could only be made by someone who doesn't know the facts on the ground.   That is to switch key local bus routes from Congress, Colorado and Brazos to Lavaca and Guadalupe.  Most significantly, the 1L/1M, which runs down Congress, and the No. 3, which runs up Brazos on its northern route and down Colorado on its southern route.  These are Austin's two most important north-south bus routes, linking the southern fringe of town with the northern fringe; they have lots and lots of riders.

The consultant offers a couple of rationales.  One is to relieve bus congestion on Congress.   The consultant accurately observes that Congress is beset by a "wall" of buses creeping ever so solely down Congress's twelve blocks.

I won't even paraphrase the other -- it is so bizarrely wrong, I would feel obliged to understate it:

Taxing density

I've owed a comment on this for a while.

ROMA, the outfit charged with developing a plan for downtown Austin, has proposed a density bonus ordinance for downtown residential development (available here).   Austin's had a temporary density bonus program since 2007.  ROMA is proposing to make that program permanent.

All things considered, it is not a particularly onerous proposal.   ROMA would allow commercial and hotel developments an automatic bonus if they comply with "gatekeeper" requirements, which mainly means complying with the city's urban design guidelines and submitting a detailed site plan for review and approval.   ROMA and its economics consultant concluded that the market for office and hotel space will not support a density bonus program.

The big change is for residential.   Residential properties seeking an increase from the district's base zoning must not only comply with the gatekeeper requirements but also must pay a bonus on the extra square footage.   Half the bonus must be satisfied by providing on-site affordable housing or an in-lieu fee of $10/sf.   The other half must be satisfied by providing a "community benefit," chosen from a menu of public space (fine), music venues (dumb), daycare or senior-care (dumber), or "family-friendly," three-bedroom apartments (dumbest).

The "temporary" density bonus scheme retained CURE zoning, a tool for obtaining additional square footage by providing ad hoc benefits, subject to city approval.   Some have criticized that exception as an ad hoc loophole for allowing developers to "get away" with providing merely nominal community benefits.

ROMA claims the new scheme will benefit even developers/property owners by providing certainty.  But my understanding is that every increase in entitlements since 2007 has been obtained through the CURE exception.   There is already a predictable way to get more entitlements, in other words, but developers and property owners have opted for ad hoc. This hardly supports ROMA's claim.  No, the evidence is that the bonuses have bite.

I was befuddled by the initial density bonus plan and I'm befuddled now.

A density bonus is a tax on marginal increases in density.  Don't be confused by the rhetoric.   It is a tax.  The plan raises the cost of that last square foot.   The claim that it does not raise the price because no one is entitled to an increase in density is a bit of misdirection.   The fact is that the city has an unwritten policy allowing increases in base square footage.   A property owner who wants more square footage can reasonably expect to get it for the payment of a nominal amount.   And it is expectations that determine property values, not the words written in the code.   Raising that cost -- frustrating those expectations -- reduces the incentive to build that last square foot.

The density bonus program is a bad idea because extra space downtown is an unmitigated good.   We shouldn't tax economic goods; we should tax economic bads.

More space means room for more people.  And more is better, at least for downtown.   More people means more demand for downtown businesses, a livelier streetscape, more eyes on the street.   We should encourage the clustering of people downtown.  Density bonuses shunt people elsewhere.

Density is downtown's reason for being.   That's why businesses and residents pay a premium to be there.  Agglomerations are valuable.   While they sometimes generate negative externalities, they do not downtown.  Downtown is not a desirable place despite the crowding together of people; it is a desirable place because of the crowding together of people and businesses.   Residents like being close to other people and to downtown establishments.  Downtown businesses like being close to other businesses.   That's why law firms, advertising agencies, government workers, accounting firms and others cluster downtown despite the cost.

Then there's the fiscal benefit.   Every extra square foot of downtown space generates gobs of revenue for the city.   Another square foot, valued at $400, generates $10 per year in extra taxes -- twice the proposed density surcharge.  And that's an annual payment.   If we use the city's cost of money as the discount rate, the present value of that square foot to the city, county and school district is $200 or so.   Why risk that for a one-time payment of $5?

That extra square foot imposes no cost on the city.   Adding twenty residents to a 200-resident project imposes no extra burden on our schools.  Nor on the fire department.   Nor on our streets or utilities.   By contrast, without the extra space, these twenty residents will need twenty homes in the 'burbs (or displace twenty other central Austin households who will land in the 'burbs), with the new infrastructure necessary to support them.

I've heard the argument that all the new downtown development will require the city to make massive upgrades in downtown infrastructure.  That's an argument for another day.  But we're concerned here with the impact of a marginal resident.  How much will that last resident cost the city in addition to the investments it must make anyway? Anyone who blames that last resident (or ten or hundred) for new infrastructure investments is engaging in hand-waiving, not evidence-based argument.

And then there's the argument that the new condos are making downtown less affordable.  What people really mean is that the new condos are not adding to the supply of affordable housing.  They are expensive (relative to the city's MFI) but that does not imply that they are raising the cost of the existing stock of affordable housing.  I suppose they are reducing the relative share of the existing stock of affordable housing (and there is some older, affordable stuff downtown).  But many central Austin neighborhoods have little affordable housing.  No one is pushing to require property owners in Pemberton Heights or Tarrytown to pony up money for affordable housing.  Many of these property owners have seen a windfall of hundreds of thousands of dollars from the run-up in property values during the last decade.  I'm not suggesting that we tax those windfalls, but it makes no sense to saddle downtown properties with the responsibility of providing affordable housing while letting relatively wealthy central Austin homeowners -- the main beneficiaries of central Austin's pricey real estate -- off the hook.   

Council is scheduled to consider the density bonus program at its next meeting.  The Planning Commission at its last meeting recommended deferring a decision for more study.  I suspect that the members who pushed for it are not worried that the plan is too onerous; they want to make it more onerous and need time to generate more public opposition to the plan.

I've heard some Council members are growing skeptical of the plan, for just the reasons laid out here.  Here's hoping they do the right thing.

Why Clusters of Like Businesses Thrive

In New York, for example, diamond dealers, florists and even chess shops are clumped together.

That's from yesterday's All Things Considered (4:44 podcast).  A very nice explanation of economies of agglomeration.

I liked it mainly because the reporter actually used the phrase, "economies of agglomeration."

Some Council members are skeptical, too

Let me give credit where credit is due.  If I had been watching yesterday's Council meeting, I would have known that some city Council members also are skeptical of the new wave of historic landmark applications:

The Austin City Council on Thursday ordered a review of rules on granting historic landmark status to homes — and the tax breaks that come with that designation — amid concerns from some council members that a rush of new historic zoning cases could undermine the city's tax base.

On Thursday, the council heard 25 requests for historic status, most from the Pemberton Heights neighborhood, just northwest of downtown.

That amounted to more historic cases than the council usually considers in a year, Council Member Bill Spelman said.

The council gave preliminary approval to the requests but delayed a final vote until next week. The council also directed city staffers to look into possibly limiting the number of historic designations per neighborhood, or citywide.

"I think we have a major equity issue if all our cases are concentrated in a specific area" of West or Central Austin, Council Member Sheryl Cole said.

There are now about 440 buildings for which the city has granted historic status, city planning manager Jerry Rusthoven said.  To qualify as historic, a home must be at least 50 years old and must have retained its historical appearance, among other requirements.

The city taxes on a historic home are either capped at $2,000 or are levied as if the home is worth 50 percent of its taxable value, whichever is higher, Rusthoven told the council.

In exchange, the owner of a historic house may make only minimal changes to it.

With the 25 pending cases, along with three more cases to be considered at next week's meeting and 20 cases already approved this year, the city would lose $115,300 from the tax rolls.

The school district, county and other jurisdictions would lose taxes as well, Rusthoven said.

The solution is not to limit the number of designations per neighborhood. If a neighborhood is chock full of historic homes, we might was to preserve more of the neighborhood rather than less. (There is actually a separate zoning district for this.)

No, the solution is to enforce the ordinance on the books; i.e., require the structure to have "architectural, historical, archaeological, or cultural significance."  A house is not "significant" merely because the owners made no major changes to the house over the years. (Some of the houses on the list don't even pass this watered-down test because the owners have added garages or another wing.)

The article makes another important point.  The city's decisions spill over to the county and school district.  They, in fact, bear the brunt of an historic landmark designation.  Designating Pemberton Heights' "Huron Mills House" as historic will cost the city $5,000 per year -- capped -- but the county and AISD $29,000 per year.  (The Huron Mills House is historically significant because it was the home of the proprietor of Austin's first cash-only building materials business.  Oh, and it is an excellent example of Colonial Revival residential architecture (as is every third house in Pemberton Heights).)  The city naturally would designate fewer buildings "historic" if it had to bear the full cost of the designations.

The historic landmark tax dodge

While scanning today's City Council agenda, I was struck by the number of applications for historic landmark designation.  Twenty-five of the 93 agenda items, to be exact.

According to City code, the purpose of a historic landmark designation "is to protect, enhance, and preserve individual structures or sites that are of architectural, historical, archaeological, or cultural significance."  It is not a synonym for "old."  And it shouldn't be:  the owners of historic landmarks get generous tax breaks.   A historic designation, in other words, is a straight cash transaction; the owners get cash, we taxpayers get preservation.  So we should try to get our money's worth.  That ought to mean, at a minum, that we give two snaps about the structure we are paying to preserve.

Most of these don't rate one snap.  Here is a sampling of the items on today's shopping list:

For $10,325 in annual tax abatements, we are buying the preservation of Pemberton Heights' ca. 1938 "Lolla Peterson House."  (Step one in any landmark designation application is to name the house.)   The staff report gives this summary of its reason for recommending historic landmark status:

The house is a good example of a Tudor Revival-syle stone cottage and is associated with Lolla Paterson, who headed the Travis County Welfare Department for many years, and was known for her kindness and treatment of the needy. 

Mind you, the historic structure was not actually built for Ms. Peterson; she did not move in until 1957.

For $11,777, we are buying the preservation of Old West Austin's "Sutton-Bailey House."   This 1938 house "is an excellent example of severe Colonial Revival architecture" and is associated with William S. Sutton, a leader in the field of education and Dean of the College of Education at UT.  Mr. Sutton, unfortunately, died before the historic structure he imbued with significance could be built, but it was occupied by his wife and daughter ten years after he died.   Sort of a "one degree of separation" test of historic significance.

For $5,359 in annual tax abatements, we are buying the preservation of the ca. 1924 home of Madison Benson, a "pioneer automobile dealer in Austin."  The home was also "associated" with Godfrey Flury, who was responsible for the painted interior of St. Mary's Catholic Church in Praha (wherever that is) and who then established an "outdoor advertising business in Austin" (i.e., billboards).   (Like Ms. Peterson, Mr. Flury never actually lived in the house; his widow bought the house 10 years after he died.)

Come on.  Who will get a special tingle from viewing the home of  the proprietor of Austin's first cash-only building materials business ($34,772 in annual tax abatements).  Or the home of an oilman whose wife was "prominent in Austin social circles" and a charter member of the Junior League (and whose historically significant home was built in 1947) ($28,381 per annum).  Or the home of the proprietor of one of the city's "leading women's clothing stores" ($17,841) or of prominent  clothing store owners who were leaders in the city's Jewish community ($15,058) or of  a "prominent insurance man" ($12,627).

Staff recommended the historic landmark designation in each of these cases.  I'm frankly surprised they could do it with a straight face.  I'm surprised at the Planning Commission and Council's willing complicity.   The only significance of most of these homes is that they lie in tony Pemberton Heights or Old Enfield and in many cases are appraised at well over $1 million.   The historic landmark ordinance has somehow been contorted into a tax-break scheme for the members of Austin's upper middle class smart enough to work the system.   Who can blame them for asking?  But I don't see why those of us relegated to less prestigious neighborhoods should stand for it.

You can access the staff reports from the City Council agenda page. They are items 60-84.

Streetsblog Capitol Hill

I have begun contributing to Streetsblog Capitol Hill.  My first piece is on the regressivity of our housing policy.  Check it out.

"No road we built in Texas paid for itself."

From Streetsblog Capitol Hill:

Over the past two days at the Congress for the New Urbanism Project for Transportation Reform conference, attendees have called for reform at local, regional, and national levels. In a panel debate about the future of transportation funding and the role of regional planning through MPOs, several speakers argued that the foundation of transportation and development funding had to be systematically overhauled.

Mike Krusee, [AC: former] chairman of the Texas House of Representatives Transportation Committee, said that financial problems were more significant than environmental, though they should be tied together in the same discussion.

"The reason there's not a new transportation bill is because there is no money. We've hit the wall of unsustainability on how we finance the transportation system," he said.

Krusee asserted it was urgent and necessary to understand the nature of this broken financial apparatus and to develop solutions to fix it. In Texas, he said that, on average, it cost the state 20-30 cents per person per mile to build and maintain a road to the suburbs, yet drivers only pay on average 2-3 cents per mile through the gas tax, vehicles fees, etc.

"What we found was that no road that we built in Texas paid for itself," said Krusee. "None."

The expense to build roads and utilities further and further from the urban cores not only drove costs to unsustainable levels, it created an imbalance in who paid for growth. Over the past 50 years, Krusee argued, the federal government used tax money that came by and large from cities to subsidize roads to areas without access otherwise.

"City dwellers have subsidized the land purchases and the development costs out in the suburbs," said Krusee. What's more, the gas tax, which city dwellers pay when driving on city roads, but which goes to freeways largely outside of urban cores, is "a huge transfer of wealth from the cities to the suburbs to build these rings."

Krusee said building the interstate system was initially a good thing, because if facilitated interstate commerce and increased the productivity of cities. Now however, because of congestion caused by ever longer commute patterns, system productivity is in peril. "What's happened is the federal government has basically reneged on the deal. By subsidizing highways out to the suburbs, it's no longer efficient for truck traffic, for goods and services and people to move between cities in the United States because those roads have been hijacked by all the commuters."

Krusee, by the way, represented suburban Williamson County.

Krusee's assessment matches TxDOT's own internal assessment.  (This actually should be no surprise since Krusee's committee relied on TxDOT for data.)   TxDOT, for example, concluded that the 15 miles of SH 99 from I-10 to US 290 will cost $1 billion to build and maintain over its lifetime, while only generating $162 million in gas taxes -- just 16% of the total cost.

Some of us get swept up in the rhetoric sometimes, but roads aren't unmitigated evils.   Obviously, we need roads.  Just as obviously, I think, we will continue to need new roads.   But new roads should be built only where drivers are willing to pay for the new capacity.   And the only way to gauge that demand is to price existing roads properly; the revenue they generate will tell us when it is time to add to add that capacity.

Aragon

Mueller gets a lot of criticism -- see the grouchy comments to this entry -- much of it unfair.  I like Mueller.  I do agree, though, that it is not a model mixed-use, New Urbanist development.  Among other things, there is  too much segregation of single-family and multi-family/commercial.

So let me offer an example of a model New Urbanist development.   Aragon is an infill development in Pensacola designed by Michelle MacNeil (who happens to be my cousin).   It's several years old, but I got my first tour in August when we visited her during a trip to the Gulf Coast.

One of the most significant features of Aragon is its location.  Many New Urbanist developments are suburban greenfield developments or massive redevelopments of abandoned industrial land or airports (Mueller and Stapleton, for example).