Daily Archives: May 25, 2015

What Would You Pay for Infrastructure?

I generally like the work that Strong Towns does. For example, I agree that cities should focus on getting the basics right, rather than trying to shoot the moon with huge economic development proposals like stadiums, convention centers, corporate tax incentives, and infrastructure projects, unless they have an obvious competitive advantage. As an engineer, I appreciate both Chuck Marohn’s efforts to get engineers to think more broadly about the systems they are part of, and his willingness to comment publicly as an engineer. American politics is much less willing to tolerate public dissent from engineers than from architects and planners.

However, I think some recent commentary on infrastructure financing misses the mark a little. The Density Question asks people to think about how much they would pay for a “once in a generation” charge for all the maintenance and upkeep of the infrastructure they use, based on owning a hypothetical $200,000 house. The post settles on suggesting a property value to infrastructure investment ratio of 20:1 to 40:1, a ratio that is far too high.

The problem is the way the question is being asked. While most people have a good idea of the present value of their house, most people don’t have a good idea of the present value of the property taxes they pay over time. At a 40:1 ratio, a 5% interest rate, and a 50-year infrastructure life span, you’d only be paying about $275/year on a $200,000 property – a tax rate of just 0.14%. A 20:1 ratio would double those values to $550/year and 0.28%. These amounts are well below what people actually pay.

We can’t use California as an example because Prop 13 has made municipal finances hopelessly byzantine, but there is a state with a rational local tax system we can use – Texas. Municipalities in the state of Texas, which famously provides very little state aid to cities, raise $1,872/year per capita. At the average household size of 2.58, that’s $4,830/year. Using the same parameters, the present value of those taxes to be paid over the next 50 years is about $88,000. This is a ratio of 2.3:1, and equates to a property tax rate of 2.42%, which is in line with tax rates in Texas.

Now, this includes things like police, fire, and schools, which may not be in the intent of the Strong Towns post. It also doesn’t account for things like water districts, which often collect their own revenue and function separately from general funds, or gas taxes, which in this analysis should theoretically be distributed proportionately to municipalities. I’m willing to be most people pay more than $550/year for water, sewer, trash, gas taxes, vehicle taxes, and so on.

None of this is to say that many municipalities are not in deep trouble. There are lots of cities that have infrastructure they can’t afford to maintain. Looking at the life-cycle costs of infrastructure, and ensuring that future generations will be able to maintain what we have built, is the right way to do things. However, to do an accurate assessment of that, we need to have an accurate idea of how much people are willing to pay, and that estimate starts with how much they already do. I find it hard to believe that any city would be able to fund its infrastructure costs charging a household only $275/year.