The Fiscal Cost of Sprawl: How Sprawl Contributes to Local Governments’ Budget Woes

December 2003

Environment Colorado Research & Policy Center

Executive Summary | News Release

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The high cost of providing and maintaining infrastructure for sprawling development hurts taxpayers and contributes to the fiscal crises facing many Colorado local governments.

Sprawling development does not generate enough tax revenue to cover the costs it incurs on local municipalities to provide new infrastructure and public services. Local governments and their taxpayers end up footing the bill to provide public services to sprawling developments.

Research by Colorado State University found that in Colorado, "dispersed rural residential development costs county governments and schools $1.65 in service expenditures for every dollar of tax revenue generated."

Additionally, the cost to provide public infrastructure and services for a specific population in new sprawling development is higher than to service that same population in a smart growth or infill development. Sprawling and "leapfrog" developments (those built far away from the current urban area) tend to be dispersed across the land, requiring longer public roads and water and sewer lines to provide service. Such developments also impose higher costs on police and fire departments and schools.

Research from around Colorado demonstrates the high fiscal cost of sprawl relative to compact development:

• Research conducted by the Denver Regional Council of Governments (DRCOG) in the planning process for the Metro Vision 2020 update found that sprawling development would cost Denver-area governments $4.3 billion more in infrastructure costs than compact smart growth through 2020.

• DRCOG found that a 12-square-mile expansion of the Urban Growth Boundary around Denver to accommodate additional sprawling growth would cost taxpayers $293 million dollars, $30 million of which would be subsidized by the region as a whole.

• University of Colorado at Denver researchers determined that future sprawling development in Delta, Mesa, Montrose, and Ouray Counties would cost taxpayers and local governments $80 million more than smart growth development between 2000 and 2025.

• New research from the Center for Colorado Policy Studies at the University of Colorado at Colorado Springs points to infill development and increased residential densities as important factors contributing to the substantial savings in infrastructure costs in Colorado Springs between 1980 and 2000.

• A Federal Transit Administration report conducted by the Transit Cooperative Research Program estimates that smart growth would save the Denver-Boulder-Greeley area $4 billion in road and highway construction over 25 years—a savings of 21 percent.

The costs of building and servicing infrastructure for new sprawling development is ultimately subsidized by the whole community. Local government generally bills the cost of new services and infrastructure on an average basis, rather than an incremental basis. That is, new costs are spread evenly among all taxpayers rather than charged only to those who generate the costs. This is, in effect, a subsidy from the whole community to new development. Existing residents, who were sufficiently served by the established infrastructure, must pay a share of the costly new infrastructure required to meet the expected demand of newcomers.

Why do we subsidize sprawl?

Communities end up subsidizing sprawl for a number of reasons.

First, most local governments, and by extension their citizens, do not know the true cost of development decisions. Most cities and counties do not conduct fiscal impact analysis. For example, the cities of Denver, Longmont and Castle Rock, along with Arapahoe, Douglas and Jefferson Counties, do not regularly conduct fiscal impact analysis. Of the local governments that do conduct some cost analysis, specific development decisions are rarely linked with fiscal plans. If a fiscal analysis is conducted for a specific development, the research is often narrow in scope. These analyses often ignore costs imposed by the development, like expansion of arterial roads or development of new water facilities. They also usually ignore geographic differences in the costs of development, such as the higher cost to provide longer sewer lines to developments farther from a sewage plant.

Second, many local governments approve sprawling development projects out of dire need for tax revenue. Some local governments get caught in a cycle wherein they approve development projects to generate new tax revenue to pay the costs of old development. This quickly becomes a dangerous practice.

Many expensive projects are approved because the costs are hidden in a variety of state and federal subsidies. Federal and state incentives, such as federal highway dollars and federal Community Development Block Grants for new infrastructure, promote expensive growth-related infrastructure projects by effectively reducing the price of providing public services. These subsidies enable sprawling developments, which typically require more costly infrastructure investments and might otherwise prove to be prohibitively expensive. Unfortunately, after the initial investment, these subsidies do not cover the long-term costs of maintenance and operation for that infrastructure.

Finally, Colorado's tax system plays an important role in promoting growth. The multitude of taxing jurisdictions pit local governments against each other in competition for tax revenue. Constitutional requirements under TABOR, the Taxpayers Bill of Rights which limits how Colorado governments can raise and spend taxes, also favor real estate development. The only way that local governments can increase their revenue limits under TABOR is to increase the total value of all real estate within their jurisdiction. This gives local governments an incentive to promote new construction, rather than to support infill development or rehabilitation of older neighborhoods.

Policy Findings

To reduce the fiscal impact of new development on local governments and their taxpayers, as well as promote compact, smart growth communities, Colorado policy makers at the local, regional and state levels should take steps to:

• Encourage regional comprehensive cost-of-development analysis and regular fiscal impact analysis of proposed developments that examine the cost to local governments and taxpayers of providing infrastructure to serve new developments.

• Make new development pay its own way for both infrastructure and services.

• Cut direct state and local subsidies for sprawling development.

• Amend sprawl-inducing tax structures included in the TABOR and Gallagher Amendments.