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Diversifying Tax Revenue

Town staff announce plans to alleviate real estate tax sting.

Herndon homeowners can expect to see an average increase of 15.7 percent in their real estate taxes in fiscal year 2007, despite efforts by the town to diversify the tax base by increasing the local meals tax, according to estimates in the proposed local budget.

Underlining the need to curb the amount of money that homeowners will have to pay this year on their appreciated properties through tax revenue diversification, the Herndon budget team released their proposed budget to the public for fiscal year 2007 last week.

The new budget proposal seeks to lower the real estate tax rate from the current 25 cents to 23 cents for every $100 of assessed property value and the complete elimination of the passenger Herndon vehicle decal requirement, while raising the local meals tax rate on prepared food purchased in the town for the first time in town history from 1.5 to 2.5 percent.

"We're trying to find revenues to replace certain things," and move away from real estate tax being the sole source of local tax revenue, town manager Steven Owen said.

ALTHOUGH THE PROPOSAL calls for an increase in the total budget from approximately $36.8 million to $45 million, or 22.6 percent, from last year, it is not a budget that endorses any new spending, according to Owen.

"There will be no new services provided [next year]. It is a maintenance budget, not a bold spending plan." he said. "Fuel costs are up, insurance premiums are up. It costs more to run the town, the same as it does to run your household."

Another area that will see a rise in spending is the proposed budget for the Capital Improvement Program [CIP], which includes public building development as well as construction and maintenance of roadways, parks and other aspects of public property.

For fiscal year 2007, the budget team has requested $5.4 million for the CIP, an increase of 205 percent over last year's approved budget of $2.05 million, according to town finance director Mary Tuohy.

Tuohy cites rising construction costs and other influences such as the high price of oil as major contributors to the increase in spending in the CIP.

"Oil prices play a lot into certain things," said Tuohy. "Road repaving and other projects that have increased in operational costs over the last year definitely add a lot to how much we need to spend [in the CIP]."

However, atop the list for the amount of money requested is construction of the Runnymede Park Nature Center. About $2.25 million, or 41.6 percent of the total CIP requested amount, is requested for fiscal year 2007 for the construction of the center.

"The big driver [of spending] in this program that the council has had many discussions about is Runnymede Park [nature center construction]," said Tuohy. "That is the major component of the increase of spending between fiscal year 2006 and fiscal year 2007."

"The prices for construction in northern Virginia have been astounding," she said. "What you do is you go through analysis of how much this will cost in construction and try and determine whether or not these prices will go up or go down or stay stable."

"Does the community need these projects? Yeah, otherwise they wouldn't be on the list," Tuohy said. "We're trying to balance out as best we can with what we have and move forward."

"These cost escalations are not as startling as they should be because public and private developers throughout northern Virginia have seen them," she said.

THE ESCALATIONS in construction costs could be offset by the increase in the amount of tax revenue that will be collected from real estate owners this year.

The real estate boom experienced throughout Fairfax County over the last three years caused an increase in the assessed value of the average Herndon home by 26.5 percent over the last year alone, according to figures of the Fairfax County Office of Real Estate Assessment. It is these increases that have not just left homeowners with a big return on their investments, but a larger real estate tax bill as well.

These gains will increase total revenue from real estate taxes by approximately 15.7 percent over last year under the proposed 23 cents for every $100 assessed rate.

The proposal has tried to limit that figure from getting any larger by lowering real estate tax rate for fiscal year 2007 in exchange for the increase in the meals tax rate, a source of revenue the town is trying to cultivate to shift some of the tax burden from homeowners and on to Herndon's inward commuters, according to Owen.

"We have a large migration of people into Herndon everyday ... for work and other purposes." Owen said.

"We're part of the Dulles Corridor and we're fortunate to ... be a part of an employment center," he said, adding that 43 percent of Herndon's assessed real estate is commercial space.

"THROUGH DIVERSIFYING our tax base, we won't be so reliant on the real estate rate," Owen said. "To offset the rapid growth of the [real estate market] we can lower the tax rate, but we still need to find the revenue somewhere else."

"If we can diversify the tax rate we can make our town healthier, and we can avoid some of the cyclical things in our economy," such as the rise and fall in consumer spending patterns that cause fluctuations in revenue, he added.

"Diversification is important because there are fewer taxes that we have been able to utilize in our tax structure aside from the meals and the transient [hotel and motel] tax," said Town Council member Steve Mitchell.

"I believe in consumer-based taxes because taxes should pay for what people [consumers] need as well," Mitchell said. "If a lot of people come [to Herndon] to eat dinner or stay at a hotel, they are using town services and these taxes help to offset some of those services that they utilize."

The proposed one percent increase on the meals tax rate is expected to generate approximately $700,000 more in fiscal year 2007, an increase of about 67 percent over fiscal year 2006, according to town estimations. There are no plans to raise the hotel and motel tax in the proposed draft of the budget.

However, Owen says that the 135 restaurant owners of Herndon, whose products will generate the meals tax revenue, will not see any adverse effect to their business from the new tax.

"When you're talking about a $2 hamburger, you're basically only going to pay an extra nickel," he said. "I don't think that paying an extra 1.5 or 2.5 percent on tax on meals will have any negative impact on the local economy. No restaurants have been shutdown since we initiated the meals tax [in fiscal year 2004]."

THIS ABILITY of the town to adjust taxes such as the meals tax should be utilized while it is still available, as Fairfax County and the State of Virginia may commandeer the rates, according to Mitchell.

"As a town we are very limited in what we can and can't [tax]," Mitchell said. "This year we need to take a real good look at our revenue sources because we might not have all of them next year."

The committee has also recommended the elimination of the vehicle decal requirement that costs Herndon residents between $20 and $25 annually, a move that is being proposed in light of Fairfax County's proposal to eliminate their vehicle decal requirement, later this year.

"This is a very popular change because people don't like them," Owen said. "They're a pain to purchase and a pain to get off you car."

The proposal will eliminate $321,800 in revenue from the budget, according to proposal figures.

This loss in revenue will more than likely be negligible, according to Mitchell, who cited administrative costs used for the decal program and the fact that the program was never meant for supplemental revenue.

"It wasn't supposed to be a revenue generator in the first place — [its] real purpose was so police could make sure your car was registered in [Fairfax] County," Mitchell said.

The Herndon Town Council received the budget proposal last Tuesday at the Town Council meeting, and will hold at least two open public sessions before voting on the proposal.

They are set to vote on the proposal in the second session on Tuesday, April 25, although Tuohy said that the original date has been pushed back to May in each of the past three years.

As was the case last year, no town money has been earmarked for maintenance or administration of the Herndon Day Labor site, according to Owen.

OTHER ITEMS in the Fiscal Year 2007 Budget Proposal:

* Base sewer service rates to increase three percent from $3.12 to $3.21, with peak rate to increase three percent from $1.56 to $1.60

* Base water service rate to increase three percent from $1.92 to $1.98 with peak rate to increase three percent from $3.20 to $3.30.

* Police and public works services for the general population will make up 43 percent of general expenditures.