Options for Financial Public Infrastructure. Desert City is a rapidly growing city in the Southwest, with a current population of 200,000. To cope with the growing vehicular traffic and the need for infrastructure expansion (e.g., streets, sidewalks, lighting, storm water drains, and sewage systems) to stay abreast of the pace of residential and commercial development, members of the city council have recently engaged in debate about the merits of alternative mechanisms for financing infrastructure expansion. The two alternatives the council is exploring are: (1) a sales tax referendum to increase an existing one-half cent capital improvement tax by one-quarter cent on every dollar of sales, and (2) a development fee of $0.50 per square foot imposed on real estate developers for new residential and commercial buildings.
Public debate at recent city council meetings has been contentious, with developers arguing that the burden for infrastructure improvements would be disproportionately placed on homeowners and businesses, whereas reliance on a sales tax increase would permit part of the infrastructure burden to be borne by nonresidents who shop in and otherwise enjoy the benefits of Desert City. Developers have also argued that more of the existing one-half-cent capital improvement tax should be spent for street and sidewalk improvements and less should be spent for improvement of public buildings, parks, and hiking trails.
Proponents of the proposed real estate development fee argue that new residential and commercial building is the main factor driving the growing demand for infrastructure development. Thus, they argue, it is most appropriate that new residents and new businesses shoulder much of the burden for expanding infrastructure. They further argue that the development fee will result in only a modest, largely invisible increase in the cost of each new building. Moreover, the incremental cost of the development fee should be recaptured as property values increase as a result of enhanced infrastructure. Finally, they argue that Desert City citizens enjoy better health and a generally higher quality life as a result of park and hiking trail improvements and that the existing one-half cent sales tax should continue to support recreational facilities.
Required
a. Evaluate the advantages and disadvantages of each potential financing option from the viewpoint of (1) a city council member, (2) the city manager, (3) current homeowners and business owners, and (4) potential new homeowners or new business owners.
b. Would accounting for infrastructure construction be impacted by the choice of financing method? Yes or No? Explain.