John Mack - Newtown Supervisor
Trends in Newtown’s “Volatile” Earned Income and Property Transfer Taxes

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

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The opinions expressed here are solely those of John Mack and do not represent the opinions of any other person or entity.
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