Clarke County: Financing Local Government Services in the Wake of the Great Recession

As Virginia tax revenues continue to show steady recovery in the aftermath of the “Great Recession”, state leaders can perhaps hold hope that the Commonwealth is finally pulling out of a record fiscal slump. Still, the prospect of returning to post-recession economic levels any time soon seems all but non-existent. As Clarke County struggles to tighten its financial belt both citizens and elected officials are looking for new ways to fund essential county services.

This is the first in a series of articles examining potential challenges and solutions facing Clarke County’s financial future.

According to the Virginia Department of Taxation, the Commonwealth’s April 2011 general fund tax collections were up by 1.5 percent over April 2010, the 13th time over the past 14 months that state tax revenues have recorded month-over-month growth. Virginia appears to finally be on course to end a fiscal year with a small budget surplus and possibly avoid the necessity for another round of painful budget cuts.

But although it may be difficult for some taxpayers to consider increased state tax revenues as a good thing, the alternative of raising local taxes in a small county taxpayer pool to fund essential services like education, police and emergency services, may cause the prospect to take on a different tone.  Yet, shifting of previously funded state services to the pockets of local taxpayers is exactly what has been happening across Virginia over the past several years. As the Commonwealth’s tax revenue base has shrunk, state delegates have simply pushed the burden for funding needed services unto local taxpayers through budget cuts (like education funding and county employee retirement contributions) and unfunded legislative mandates (like Line of Duty insurance expenses.)

On a local level, the Commonwealth’s budget cuts have prompted Clarke County officials to scramble for ways to absorb the resulting funding deficit. One approach that has been repeatedly called for by some citizens is to find ways to make Clarke County more inviting to commercial businesses. However, broadening the county’s tax base during lean economic times may not be easy as many think.

“Even as business and sales tax revenues have declined through the recession, there remains the belief and expectation that local government should be able to successfully generate more business and sales tax revenues to add to county coffers” said Clarke County Board of Supervisors chairman Michael Hobert (Berryville).” While commercial development can clearly benefit a community, it is driven by demographic, customer and rooftop calculations that are closely analyzed by developers. We are a small community and commercial development may not the “cash cow” hoped for by some, at least in the short term.”

One area of Clarke County that has been looked at repeatedly for potential green-field business development is Double Tollgate.

At one recent county hearing, corporate names like Sheetz, Walmart and Target were offered as hoped-for tenants of a potential Clarke County commercial zoning district that would border Frederick County to the west and Warren County to the south, both areas where high density commercial zoning is already in place. Yet, Clarke County officials have been cautious about the cost risks associated with extending water and sewer to the Double Tollgate area, especially in light of the nation’s current soft economic recovery.

“We are now working with our Planning Commission to encourage additional commercial development in the vicinity of the same intersection” said Hobert. “A majority of the Board of Supervisors believed smaller, more immediate development options should be promoted at this time, with longer term plans requiring expensive infrastructure improvements -up front costs could be $8 million with payback over many years – to be studied further, in part due to the recent challenges associated with Chesapeake Bay limitations affecting construction of additional wastewater treatment facilities.”

But while some residents have questioned why more hasn’t been done to promote commercial growth in the Double Tollgate area, county leaders say that Clarke County already has designated business development areas, most notably the Berryville business park, that are not being fully used due to economic conditions.

“Expanding on the success of the business park is not easy today” said Supervisor John Staelin. “Just five years ago a developer came to the County with plans to add on to the business park. This would have been great because he wanted to build out a new section of the existing business park at his own expense and sell lots to the kinds of businesses that bring in the most net tax revenue. The County gave quick approval to the developer’s proposal but the land still stands vacant today.”

The problem, according to Staelin, is not Clarke Country’s zoning laws but the economy.

“The developer was leery of the future and decided he would wait until the business climate improved before he invested hundreds of thousands of dollars in infrastructure (roads, sewer, etc.). I was disappointed when I heard about the delay in his plans, but I have to admit that he made a wise business decision.”

In recent public hearings in which Double Tollgate planning was debated, Supervisor Pete Dunning (White Post) and Barbara Byrd (Russell) vigorously objected to any further money being spent to study Double Tollgate development. Dunning has also questioned the expense of extending utility services south of Double Tollgate when Berryville’s business park is still under-utilized.

“We intend to work with the Town of Berryville to better understand our options with respect to tax base expansion in and around the Town and the business park” said Hobert.

County leaders also appear cautious about putting too much emphasis on any one economic solution to county revenue challenges.

“It is true that commercial development can be one key to increasing revenue needed for critical government services” said Hobert. “However, as we know from our previous success with the development of the county business park, the amount of sales, property and business taxes generated by an individual business in most cases is quite limited. While we are unable to obtain numbers for individual businesses from the Commissioner of Revenue due to privacy, viewed in the aggregate, it appears taxes generated for the county by the average convenience and gas retail location would be less than the pay for an average teacher or public employee.”

Hobert goes on to say that this does not mean that Clarke County should abandon or neglect the pursuit of commercial or industrial development in the community.

“Rather, it suggests that our approach should be multi-faceted, seeking to improve our tax base with commercial development throughout the County in appropriate locations like Double Tollgate, Waterloo, Berryville, Boyce and Millwood, while continuing with a variety of strategies ranging from promoting tourism, hospitality businesses like B&B’s, highway commercial, retail, to niche and traditional agriculture, as well as the local equine industry, which is supported by multiple trades, suppliers and businesses in the County.”

But even if a Double Tollgate commercial development zone were established tomorrow, county officials point out that local tax revenue from convenience and “big box” stores is limited by statute to only certain revenue categories. For example, although all businesses, including retail stores, pay real estate taxes at the same tax rate as homeowners, stores that sell a physical product also collect a sales tax on most of the goods that they sell. However, Clarke County does not receive any tax revenue from the sales tax on fuels, like gasoline, but does collect sales tax on the merchandise sold in the store. Stores also pay taxes on their business equipment such as shelves, cash registers, and other infrastructure components.

“State sales tax on Clarke County based sales, including food, generates 1% of sales to the County” Hobert noted. “In addition, the School District receives 1% of Statewide sales tax, apportioned to localities by school age population.”

While individual business tax information is considered private information, Warren Arthur, Clarke County’s Commissioner of the Revenue has stated that the average convenience store pays about $28,000 in taxes on real estate, sales and business equipment. However, Supervisor Staelin points out that the $28K in tax revenue is before any deductions for county services, like emergency services and police, that all businesses require.

“Past studies by a variety of organizations have calculated that county services provided to businesses cost between 40% and 50% of the tax revenue received” Staelin said. “Additionally, if a business needs employees with special skills and cannot find local people to fill its jobs the added cost to schools of educating the children of a business’s new employees can easily outweigh the revenue generated by the business. A convenience store is not likely to require special skills and bring in new residents but its new revenue to the County is small in comparison to the County’s $38 million budget.”

Staelin also pointed out that the 1% tax on the sales of physical goods excludes services like haircuts, tax advice or cleaning services.

“About 15% of this revenue source has to be shared with our towns but the County still brings in about $750,000 a year from sales taxes” Staelin said. “As is the case throughout our region, Clarke’s sales tax revenues are lower now than they were prior to the start of the “Great Recession” but a recent study has shown that Clarke’s fall was smaller in size than our neighbors.”

At least one other tax tool is still available to assist Clarke’s Board of Supervisors with making up the funding shortfall from Richmond but Supervisor Staelin said that the county has been reluctant to implement it; the Gross Receipts Business License tax.

According to Staelin, although the Commonwealth imposes a strict cap on the size of the Gross Receipts Business License tax, it is still hated by most businesses because it is focuses on revenues rather than profits making the tax especially onerous for start-up companies and low profit businesses.

“The Board of Supervisors considered implementing a Gross Receipts Business License tax a few years ago but it was strongly opposed by the business community” Staelin said. “They wondered why it was even being considered at a time when Clarke was positioning itself as a business friendly community. As a result of these comments this tax was not implemented.”

Of course, tax revenues are not the only benefit of an expanded commercial base in Clarke County. Some residents have expressed their desire for more local shopping options for food, healthcare products and clothing, especially as increasing gas prices make the cost of driving to commercial areas outside of Clarke County increasingly expensive. But as appealing as local shopping may be to some local consumers, a new convenience store in Clarke County may not be in the cards anytime soon

“Interestingly, a few years ago, Town of Berryville officials called most of the major drug store chains to see if any of them wanted to open a store in Berryville” Staelin said. “None expressed interest at the time. Given the current economic climate that view is not likely to have changed.”