John Mack - Newtown Supervisor
Taxes Category

Trends in Newtown’s “Volatile” Earned Income and Property Transfer Taxes

According to the 2017 Financial Report and Audit, Newtown Township collected $9,993,697 of tax revenue that year primarily from three sources: (1) Earned Income Tax (EIT Definition), (2) Real Estate Transfer Tax Definition, and (3) Real Property Tax Definition. In addition, the town collected $460,431 in Local Services Tax (LST Definition) in 2017.

Figure 1: Newtown Tax Revenue Sources in 2017.
Source: Newtown Township 2017 Annual Financial Report

In this post, I focus on the first two taxes, which are “volatile” in the sense that they depend on the state of the economy and the actions of neighboring townships that are beyond the control of Newtown planners.

I first learned about the volatility of these taxes during the 2018 Budget Presentation meeting in October, 2017, when the Township Manger discussed the issue (view the video of his remarks here).

Earned Income Tax

Resident and non-resident EITs account for about 79% of Newtown’s total tax revenue (see Figure 1) and 55% of the Township’s yearly TOTAL revenue from all sources. As I reported in the October 9, 2018, issue of Newtown News Update, Newtown’s financial situation, according to our auditors, is stable as long as the EIT revenue remains stable (read “All’s Well in the Garden as Long As…”). It is prudent, in my opinion, to examine the data for the past several years to determine if the trend verifies EIT revenue will remain “stable” in the future.

According to data from the 2017 Financial Report and Audit, there was a substantial increase in total EIT in 2017 compare to 2016 primarily due to better economic conditions with more people employed and/or making more money (see Figure 2).

Figure 2: TOTAL EIT, which includes both resident and non-resident contributions, increased by over $1 million in 2017 compared to 2016 but is estimated to decrease by 12% in 2018. The 2019 budget anticipates a 3% increase in total EIT.

But can we expect that trend to continue? Compared to the high of about $8.37 million in 2013, the 2017 EIT revenue represents a 6% DECREASE. This was only partially due to an “unusually high” Delinquent Residential EIT Collection of $320,519.30.

According to the Manager’s Budget Letter submitted to the Board of Supervisors (BOS) at the October 15, 2018, Budget Presentation, the estimated total EIT collected by the end of 2018 will be $ 6.938 million – a decrease of 12% compared to 2017. The 2019 Propose Budget estimates a 3% increase in total EIT compared to 2018; i.e., $ 7,120,000, which is still 3% below the average of $ 7,320,692 for period of 2013 through 2018.

It is obvious from Figure 2 that EIT is a “volatile” source of revenue for the Township and the trend is downward.

Aside from the impact of general economic conditions, the Town’s EIT revenue can be impacted by businesses moving out of town and by decisions of neighboring towns. For example, Newtown lost approximately $650,000 in EIT plus an additional loss of $44,000 in Local Services Taxes when Lockheed-Martin left town. Add to that the loss of $198,000 when Middletown Township implemented an EIT and a loss of $202,376 when Bensalem did the same and the result is a total loss of $1.1 million.

Real Estate Transfer Tax

Another “volatile” source of tax revenue is the Real Estate Transfer Tax, which is a 1% tax on all home and land sales in the Township. This tax is split between the Township and the Council Rock School District. Newtown’s 2017 share of real estate transfer tax collections totaled $943,172. That beats the five-year (2013-2017) average. However, 2017 represents the first year since 2013 that the final collection was less than the previous year (see Figure 3).

Figure 3: The increase in Real Property Tax from 2016 to 2017 was due to
the 1 mill tax increase in 2017 for road repairs.

According to the Manager’s Unaudited Discussion & Analysis section of the 2017 Audit Report, “2018 may be concerning as the year to date [transfer tax collection] totals are running far below where we would expect them to be. Factors such as the long and harsh winter and rising interest rates may be the driving factor behind decreased collections.”

At the October 15, 2018, 2019 Budget Presentation, I asked the Township Manger about these trends. For example, the 2019 budget estimates $800,000 in real estate transfer taxes (see Figure 3). That’s a decrease of $125,000 from what was budgeted in 2018 but somewhat higher than the $741,775 that is estimated for the actual transfer tax that will be collected by the end of 2018.

Interest rates are rising, which may mean a drop in home sales or a longer time for homes to remain on the market, which can impact collections in 2019. In light of that, I wondered why township officials think we will collect more transfer tax in 2019 than in 2018? For the answer to that question, view the video at the end of this post.

Transfer Tax Revenue from a Typical Housing Development Project

New housing developments can have a substantial short-term impact on Newtown’s tax revenue. Let’s consider a hypothetical project of about 150 homes on a 125-acre plot.

In the first year after completion of the project, assuming the land cost $75,000 per acre, all the homes are sold, and the average price per home is $400,000, such a project would generate a one-time real estate transfer tax revenue of nearly $350,000 for Newtown Township.

Here’s the math:

  • Sale of land to the developer: 125 acres X $75,000 per acre = $ 9,375,000. Transfer tax = $9,375,000 X 1% = $93,750: Newtown Twp gets 50% = $46,875

  • Sale of 150 house at $400K each = 150 X $400,000 = $60,000,000. Transfer tax = $60,000,000 X 1% = $600,000: Newtown Twp gets 50% = $300,000

  • Total Transfer Tax revenue for Newtown Twp = $46,875 + $300,000 = $346,875.

Note that $75,000 per acre may be a very low-ball estimate. There are plots of land in Newtown that sell for over $400,000 per acre. For example, the 9.7 acres of land at the intersection of the Bypass and Lower Silverlake Road that encompasses the proposed 4.9 acres that Wawa wishes to purchase are on the market for an asking price of $4,000,000 or over $412,000 per acre (see the Penn’s Grant Realty Silverlake Property brochure).

Transfer Tax revenue could go a long way to pay for items in the budget without raising taxes – at least in the short term. The problem is that Newtown is reaching a point where there are less and less plots of land that can be developed for high-density housing unless zoning ordinances are changed. One example is the proposed development proposed by Toll Brothers. The BOS recently was presented a sketch plan that would require a change in the Conservation Management (CM) zoning for that project to move forward (read “Toll Brothers Twining Bridge Road Proposal”).

General Fund Balance

A good indicator of the financial health of a township is the balance remaining in the General Fund Definition at the end of the year. This is considered a “reserve fund” that can be used to pay for unanticipated expenses or shortfalls in revenue from taxes such as EIT and Transfer Tax.

The Government Finance Officers Association (GFOA) Best Practice recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months (16 percent) of regular general fund operating revenues or regular general fund operating expenditures. Meanwhile, Jack Brod, chair of the Finance Committee, in a recent report to the BOS, suggested the “safe harbor” for a General Fund balance should be 30-40% of the operating budget (view video: “Newtown Township Finance Committee Report”).

Newtown’s General Fund balance is projected to be $2,537,544 by the end of 2018 (21% of the $11.93 million budgeted expenditure for 2018). That’s a reduction of $605,912 from the starting balance of $3,143,456. The 2019 budget, meanwhile, projects a balance of  $1,286,357 by the end of 2019, which would be a 49.4% reduction compared to 2018 and only 10% of the projected operating budget of about $12.4 million!

For clarification, I asked the township officials what they thought was an acceptable safe harbor number and the impact on future financing opportunities. For the answer, view the video below:

Posted on 22 Oct 2018, 01:43 - Category: Taxes

If You Believe Gerry Couch, I Have a Bridge to Sell You!

Former Newtown Township Supervisor Gerry Couch engaged in a despicable misrepresentation of the facts in order to undermine the trust in and respect for the new Board of Supervisors!

In a letter to the editor published in the February 5, 2018, issue of the Bucks Courier Times (BCCT), former Newtown Township Supervisor Gerry Couch accused Democrats on the current Board of Supervisors – yours truly included – of raising taxes by $1 million and claimed that “taxes are going up $168 for [the] average household” (see letter shown below).

First of all, Newtown is NOT “poised for a $1 million dollar tax increase” as Mr. Couch claims. Oh, yes, I forgot. According to the BCCT editors, the mistake was theirs. “Basically, all of our articles get looked over by an out-of-office copy desk,” a source inside the paper told me, “and in this case, someone unfamiliar with municipal government mistook "1-mill" for ‘$1 million’ and changed Mr. Couch's original letter before it went online.”

Really?! I find that hard to believe. Whatever!

The letter goes on to mention that taxes are “going up $168” for the average household. Only the owner of a house valued at $1.68 Million will see Newtown taxes “go up” $168 in 2018. As for the average Joe like me, whose house is valued at $340,000, the tax will “go up” $34! I could save two to six times that by switching to a different trash pickup company!

This is a particularly telling “mistake” because Mr. Couch is a financial planner and was the Assistant Treasurer while on the Board of Supervisors. So you would think he knows how to transform a 1-mill tax increase into a dollar amount for the average household.

The editors of BCCT should be ashamed of themselves to allow such an obviously fake number to be published. This "fake fact" should have been known to be incorrect based on a previously published article that included the correct data. This sloppy journalism has had consequences. It undermines the trust in and support of our local government, which has already received many phone calls from residents.

But the main culprite here is Mr. Couch, who I believe has engaged in a despicable misrepresentation of the facts. Maybe, however, Mr. Couch is not a purveyor of “fake facts” but simply does not know how to do grade school math. I don’t know which is worse.

The Courier Times Prints Two Corrections

In what must be a first, the Courier Times printed two corrections regarding this letter on two consecutive days! Talk about closing the barn door after the cows have left!

 

Posted on 07 Feb 2018, 07:35 - Category: Taxes

Newtown's "Volatile" Sources of Revenue

Ferguson Talks About Taxes at the January 10, 2018 BOS Meeting

For the benefit of "newbie" Township Supervisors John Mack and Linda Bobrin, Town Manager Kurt Ferguson discussed the "volatile" nature of the taxes the town depends upon to meet its expenses.


To sum up: Ferguson suggested that Newtown is unique in that it does NOT have a property tax (see below) and the lion share of it’s revenue sources depend upon “volatile taxes.” These taxes include resident and non-resident Earned Income Taxes (EIT), which account for about 54% of the yearly revenue. These are “volatile” because people may lose jobs and other municipalities may enact their own EIT. That means that Newtown can lose the taxes collected from residents of those municipalities who work in Newtown. This would have a "devastating effect" on the Town’s financial stability and credit rating.

The Truth About “Real Estate” Taxes

What’s often quoted as “Real Estate” tax millage of 3.50 is actually composed of a 0.875 Fire Tax millage plus a 2.625 Debt Service millage. This income does NOT go into the General Fund to cover ordinary/general ongoing expenses. The former goes into the Fire Protection Fund, which pays for the Fire Chief’s salary, health insurance, etc., and contribution to the Newtown Fire Association. The latter goes toward paying off loans for road improvements, etc. Other towns have a property tax that pays for the general expenses of running and maintaining a town.

Resident and non-resident EIT accounts for 54% of Newtown's annual revenue.

 

Posted on 11 Jan 2018, 01:38 - Category: Taxes

No New Tax Hike Does Not Indicate a Stable Local Economy

According to an analysis prublished in the Bucks County Courier Times this morning, more than half of Bucks towns will not raise taxes in 2018. However, that does not mean that these towns will not face a financial crisis down the road (see clip below). File this under "Don't ever believe a politician who says 'Read my lips. No new taxes!' or the equivalent."

Newtown Township may soon be added to the list. At a contentious public meeting on December 13, 2017, the Board of Supervisors debated whether to cut spending for essential services (again) or to approve the 2018 budget with new taxes to pay for Emergency Medical Services and Fire Hydrant Maintenance. In the end, they were unable to reach a consensus. Read "Newtown's Looming 2018 Budget Crisis." 

According to the BCCT, perhaps a quarter of Bucks County towns have not seen a tax increase since 2013 (see the following table).

Note that Newtown Twp raised taxes by 1 mill in 2017 for debt service, which allowed the Township to borrow $1 million for roadway improvement every three years. If another tax increase is necessary down the road, at least that road is likely to be in good condition!

Posted on 18 Dec 2017, 01:16 - Category: Taxes

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