Equitable arrangements for financing beach nourishment projects

Ocean & Shoreline Management 14 (1990) 191-214

Equitable Arrangements for Financing Beach Nourishment Projects

D a v i d E. B l a c k , L a w r e n c e P. D o n n e l l e y & R u s s e l l F. S e t t l e Department of Economics, University of Delaware, Newark, Delaware 19716, USA (Received 12 July 1989; accepted 5 May 1990).

ABSTRACT In this paper we develop a systematic and objective economic approach to answer two fundamental financing questions created by beach nourishment projects: (1) who should pay for these projects?, and (2) what mix of taxes or user fees should be used to assess those responsible for paying? Establishment of a logical and feasible procedure for allocating the financing burden in a way that satisfies basic standards of taxpayer equity and fairness is our basic goal. An important criterion for evaluating alternative financing options is 'target effectiveness', that is, the extent to which a potential revenue source produces a close match between the financing burden and the benefit distribution. Various points, with examples from a recent evaluation of proposed beach nourishment projects for several beaches along the coast of southern Delaware on the east coast of the USA, are illustrated. Our equity analysis suggests that local communities should shoulder much of the financing burden for beach nourishment projects. Beach access fees and a special assessment on properties on, or near, the beach front represent the preferred sources of funds to pay for these projects.

1 INTRODUCTION G o v e r n m e n t officials in coastal states often c o m e under considerable political pressure to spend public monies to nourish eroding beaches 191 Ocean & Shoreline Management 0951-8312/90/$03.50 (~) 1990 Elsevier Science Publishers Ltd, England. Printed in Northern Ireland

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with new sand. t In every instance, three major questions arise: (1) (2) (3)

Is the proposed nourishment project worth undertaking? If so, who should pay for it? How should they pay?

The first question is customarily answered through the application of a conventional methodology: benefit-cost analysis. In contrast, the answers to the second and third questions--the financing questions-are frequently based, by all appearances, not on the results of careful and systematic analysis, but on simple 'rules of thumb' for dividing the financing burden among different governmental jurisdictions. 2 Perhaps part of the reason for relying on arbitrary cost-sharing formulae is that benefit-cost analyses do not always generate sufficient information to resolve the financing questions objectively. In this paper a systematic and objective economic approach to answering these fundamental financing questions is developed. Establishment of a logical and feasible procedure for allocating the financing burden in a way that satisfies basic standards of taxpayer equity and fairness is our goal. Various points with examples from a recent evaluation 3 of proposed beach nourishment projects for several beaches along the coast of southern Delaware, are illustrated. Aside from providing concrete illustrations, the Delaware projects raise a number of interesting financing issues in their own right. 4 They involve several different levels of government (see Figs 1 and 2): (1) three municipalities (Bethany Beach, South Bethany, and Fenwick Island), one of which (South Bethany) implicitly discourages the general public from using its beach due to a lack of public facilities (e.g. parking, rest rooms); (2) an unincorporated residential community that allows public access (referred to as unincorporated Fenwick Island); (3) one county (Sussex County); (4) the State of Delaware; and (5) the federal government. 5 Virtually all of the beach-front properties in the project areas have been developed, largely with vacation homes, but also with some commercial structures. The Delaware beaches are a major tourist attraction, so all of the beach communities have substantial summer populations, and relatively few permanent residents. More than three-quarters of the visitors and seasonal residents come from nearby states. The projects affect only about 35% of the ocean swimming beaches open to the general public in Delaware, so even within the state very good substitute beaches are available within a few miles of the project areas, including the state park beaches and two popular municipal beaches north of the Indian River Inlet (Dewey Beach and Rehoboth Beach (Fig. 2)).

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. a

York City

.

I

DELAWARE Washington, D C

Fig. 1. Location of Delaware.

Y

"I Rehoboth Beach Dewey Beach Atlantic Ocean

Indian River Inlet Bethany Beach

South Bethany Fenwick island (Incorporated) I=enwick Island (Unincorporated)

Maryland Line

Fig. 2. Map of eastern Sussex County, Delaware. 2 EQUITY CRITERIA FOR DETERMINING WHO SHOULD PAY When considering the question of tax equity or fairness, economists usually turn to either of two different principles (e.g. see Ref. 6). One is the 'benefit principle of taxation'. It suggests that those who benefit from a project should pay for it, and the distribution of financing burdens should match the distribution of benefits as closely as possible. Under ideal circumstances, people not benefiting from an activity

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would pay no taxes for it; those benefiting a small amount would bear a small tax burden; those benefiting substantially would bear a correspondingly large tax burden. Simply put, the benefit principle of taxation calls for people to pay in proportion to the benefits they receive, a rule with obvious appeal to many citizens' sense of fairness. In implementing this principle, it is necessary (1) to identify the beneficiaries; (2) to measure, at least roughly, the benefits they receive from the governmental activity; and (3) to design a tax, or set of taxes, that levies the financing burden in a way that approximates the distribution of benefits. In some instances application of the benefit principle is either impossible or undesirable. First, identifying the beneficiaries or, if identifiable, measuring even crudely the benefits they receive, can be too costly. Second, even if the first difficulty is surmounted, tax assessment or collection costs may make application of the benefit principle infeasible. Finally, some beneficiaries of public programs have low incomes, so requiring them to pay a share proportionate to their benefits may create an onerous obligation. In such cases the 'ability to pay' principle of taxation becomes relevant. It suggests tying the financing burden for a governmental activity to taxpayers' ability to pay (as measured by income or wealth), without regard to the benefits received from the activity. The equity rationale for most broad-based taxes on the general public (e.g. income and sales taxes) is rooted in the principle of ability to pay. With respect to beach nourishment projects, taxpayer equity is usually best served through the application of the benefit principle of taxation. Identifying beneficiaries, measuring most of the benefits (at least roughly), and assessing and collecting benefit taxes all appear feasible, certainly in cases such as Delaware's. Moreover, the evidence indicates that beach nourishment projects----or at least those undertaken to protect and enhance typical resort area beaches such as those found in Delaware--benefit people who, on average, have very substantial incomes and often considerable wealth. These characteristics make it very difficult to construct a reasonable argument for shifting the financing burden to the general public and, thus, to many nonbeneficiaries. 3 IDENTIFYING THE BENEFICIARIES 3.1 Real economic benefits

The wider beaches, made possible by a nourishment project, usually generate two potentially important 'real' economic benefits--'real' in

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that they represent an actual increase in the availability of things people value, rather than a mere reshuffling, for instance, of incomes, jobs, and taxes among various areas or governmental jurisdictions. 7 Firstly, wider beaches enhance the recreational experience for beach users. They help cut congestion, particularly on peak summer days, and for many visitors, wider beaches may hold greater aesthetic appeal than narrow, eroded beaches. Secondly, they provide additional erosion and storm protection for public and private properties (including both land and improvements), especially those located along a beach front where the risks are greatest. The added protection for public properties, such as roads, benefits their owners: governments and their taxpayers. 9 The added protection for private properties is reflected in property values: that is, they are higher with the wider beaches than without. Such gains accrue largely to the individual property owners, but some of the gains are transferred to governments through various tax effects. For example, local and county governments (and their taxpayers) should benefit through higher property-tax revenues. Moreover, state and federal governments (and ultimately state and federal taxpayers) will benefit from higher income-tax revenues to the extent that wider beaches (1) help generate taxable capital gains or reduce tax-deductible capital losses on beach-area properties and (2) help reduce casualty losses caused by storms and flooding (since uninsured casualty losses are partially deductible when computing taxable income, at least under the federal income tax). In addition, federal taxpayers will benefit if the wider beaches reduce flood and storm damage, and thus reduce payouts under the federal flood insurance program, which provides insurance at premiums that do not cover actual losses and is accordingly subsidized with federal tax dollars.

3.2 Economic impacts In addition to the real economic benefits, a nourishment project generates certain 'economic impacts' potentially relevant to the financing questions. 'Economic impacts' are effects on such economic factors as an area's income, job opportunities, and tax revenues. They differ from real economic benefits in an important way. 'Real economic benefits' represent an actual increase in the overall availability of things people value (e.g. more space on a beach, or more protection for property). In contrast, 'economic impacts' usually reflect a mere reshuffling or redistribution of economic activity--incomes, jobs, and taxes--among various areas or governmental jurisdictions, for example as tourists decide to go one place rather than another in response to an

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improved beach, t° The purely redistributive nature of economic impacts means, as is shown below, that their role in establishing equitable financing responsibilities for any given project depends crucially on one's perspective: there is no obvious 'right' way to incorporate these effects into an assessment of the equity consequences of various financing arrangements. From the federal perspective, all of the reshuffling of economic activity associated with the 'economic impact' of a project normally just cancels out: what the nation gains through a project's economic impact in one area or state, it loses in another. As an illustration, consider a project's economic impact on federal tax revenues. If beach nourishment projects in Delaware attract, say, 10000 additional tourists to Delaware beach resorts each year, boosting incomes in the area, then federal taxes (e.g. personal and corporate income taxes) generated in those resort areas will increase. However, increased tourism in Delaware means an offsetting reduction in tourist-related business elsewhere (e.g. nearby resorts in Maryland and New Jersey will have 10 000 fewer visitors), and that reduces federal tax revenues generated in those competing areas. In the end, total federal tax revenues are unaffected; the main thing that has happened is a rearrangement in the distribution of federal tax burdens. For such reasons, federal agencies, like the Corps of Engineers, usually view economic impacts as irrelevant for federal purposes. H From a state's perspective the national reshuffling of economic activity can nevertheless represent, at least in part, a real economic gain. For example, if jobs, incomes, and taxes rise in Delaware because of increased tourism, stimulated by improved beaches, those represent real gains for Delaware, even though they come at the expense of neighboring states. Of course, some of the economic-impact effects in a state are nothing more than a reshuffling of activity within that state, in which case, the state may well ignore them. For example, if increased tourism at Bethany Beach, Delaware, comes at the expense of reduced tourism at Rehoboth Beach, Delaware, the state experiences no net gain. (Of course, such reshuffling may produce political pressures from the affected communities that the state cannot ignore.) From the local perspective, the reshuffling of economic activity caused by a project's economic impact typically takes on considerably more significance than at the state, or especially the national, level. Expanded economic activity in a small resort town, for example, is a real economic gain from the viewpoint of local businesses, employees, and the town government, even though such gains come at the expense of neighboring resort towns just up or down the coast. Indeed, at the

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local level economic impacts may sometimes be viewed as more important than the real economic benefits.

4 D I S T R I B U T I N G T A X E S IN A C C O R D A N C E BENEFITS

WITH

In this section the issue of distributing the financing burden so that it parallels the distribution of benefits is addressed. Initially only 'real benefits' are considered, ignoring economic-impact effects. T h e n one way of incorporating economic-impact effects into the analysis is shown. Estimating the real economic benefits--those going to the beach users and those going to the property owners--requires the application of standard benefit-cost procedures; estimating the economic-impact effects involves the use of an economic-impact model. Applying benefit-cost analysis and economic-impact assessment to beach nourishment projects involves many difficult and interesting issues concerning data, assumptions, and interpretation of results (e.g. see Ref. 12). However, our interest here lies in using the results of those methods to establish an equitable distribution of the financing burden, rather than in considering issues and problems specifically related to the methods themselves. Thus, in this discussion we assume that the results of reliable benefit-cost and economic-impact studies are available, so the issue becomes one of how to use the results for establishing an equitable distribution of financing responsibilities. 4.1 Distribution of real economic benefits

It was estimated that the proposed nourishment projects for the four Delaware beaches would return a total of $3.3 million annually in economic benefits at a cost of $1.1 million annually, during the 1989-99 period. 3"~2Table 1 shows the relative distribution of the benefits across the four beach communities, by type of benefit. U n d e r ideal circumstances, application of the benefit principle of taxation would result in a distribution of financing burdens that matches exactly the distribution of benefits, so the type of information shown in Table 1 is essential for designing a rational system of benefit taxes. While the benefit distribution shown in Table 1 is specific to the Delaware projects, it nevertheless provides a number of insights that undoubtedly have broader application to other similar projects. Firstly, almost all of the benefits accrue to two groups: beach users and property owners. ~3 In Delaware they capture between 84 and 94% of

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TABLE 1 Percentage Distribution of Relative Real Economic Benefits, by Community and Type of Benefit

Community

Type of benefit

Bethany Beach

South Fenwick Bethany Island

Fen wick Island (Unincorporated)

Recreation benefits Peak-day users Off-peak users

34-1 28.3

0-0 0-0

4-1 0.0

4-1 0.0

32.0

84.1

81.5

81.7

0-1

0.3

0.2

n/a b

0-2

0.5

0-3

0.3

0.5

1-6

1.0

1.0

4-9

13.5

12-8

12.8

100.0

100-0

100.0

100-0

Property protection benefits ~ Retained by property owners Transferred to local governments Transferred to the county government Transferred to the state government Transferred to the federal government Total

Most of the property protection benefits are captured by the property owners. However, the tax system automatically transfers some of those benefits to various governments. In Delaware, local and county governments gain through property taxes, while the state and federal governments gain through income tax effects. b n / a - - n o n applicable.

the benefits each year, depending on the particular community. 15 Consequently, an equitable system of benefit taxes--and one that ignored economic-impact effects--would necessarily concentrate most of the financing burden on beach users and property owners (unless other considerations dominated, such as prohibitively high tax administration costs). Secondly, the transfer of real economic benefits through higher property or income tax revenues to the various governments are relatively small, even trivial in some instances, at least in the Delaware case. Only the federal government benefits to any large d e g e e , from the avoidance of tax write-offs associated with capital and casualty losses. 17 Clearly, state and local officials could make a strong equity argument for some federal subsidization of beach nourishment projects, at least in cases such as Delaware's. Even though the State of Delaware has an income tax, it receives few tax benefits from the avoidance of the

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tax write-offs associated with capital and casualty losses because a large majority of the beach-front property owners in the four communities reside permanently in other states, and are largely beyond the reach of the Delaware income tax. ts Obviously, this particular situation may differ substantially in larger states. Thirdly, the benefit patterns vary considerably between communities. For instance, in Delaware the recreational benefits to the users of Bethany Beach are substantial, since that beach is relatively congested, especially on peak days; in contrast, the benefits to the users of the beach at South Bethany are negligible, since that beach provides little access for the general public and is thus relatively uncongested. This suggests that, on equity grounds, the patterns of tax liabilities should vary considerably between communities. From an equity perspective, a beach access fee, for example, is inappropriate for South Bethany, but is probably essential for neighboring Bethany Beacti. Fourthly, recreational benefits also vary within communities because beaches are more congested on some days than on others. This suggests that taxes or fees on beach users should vary between peak and off-peak days. To illustrate, for the Delaware projects the benefit principle would call for levying some financing responsibility on visitors during off-peak days only at Bethany Beach, where again congestion is more of a problem than at the other beaches.

4.2 Incorporating economic-impact effects As noted above, there is no one proper m e t h o d for incorporating economic-impact effects into an analysis of equitable financing patterns: what is 'proper' depends on one's perspective. For illustrative purposes we adopt the perspective of the state (here the State of Delaware). Moreover, we limit our attention to the tax consequences of the economic impacts. That is, to the extent that a beach nourishment project leads to an increase (a decrease) in a government's tax revenues, we count that as a benefit (cost) and adjust the financing burdens shown in Table 1 accordingly. D e p e n d i n g upon a state's economic policy, some sort of explicit adjustment for other types of economic impacts, such as increased after-tax state income or expanded employment opportunities, also seems appropriate, t9 However, we do not consider these other effects here. The estimated impacts on tax revenues are shown in Table 2. Column 1 indicates the annual tax-revenue gains from the additional tourists that the wider, nourished beaches are expected to draw to Delaware. Overall, governments in Delaware should gain an extra $81 000 a year in taxes as a result of increased tourism in the state, with $49 000 going

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David E. Black, Lawrence P. Donnelley, Russell F. Settle TABLE 2 Effects of Economic Impacts on Tax Revenues

Annual tax revenue effects ($)

Governmental jurisdiction Bethany Beach South Bethany Fenwick Island (incorporated) Other Delaware resort communities Sussex County State of Delaware Total Delaware effects Governments in other states Federal government

Tourists attracted from other states (1) 5 500 2 000 1 500

0

Tourists attracted from other Delaware resorts (2)

Totals (.3)

17 000 6 000 5 000

22 500 8 000 6 500

- 2 8 000

- 2 8 000

23 000 49 000

0 0

23 000 49 000

81 000

0

81 000

- 8 1 000 0

0 0

- 8 1 000 0

to the state and the rest divided among the three resort towns and the county. The fact that the gains for Delaware are merely part of a redistribution of tax revenues is reflected in the offsetting revenue loss for other states, and by the absence of any impact on federal revenues. 2° From the perspective of the State of Delaware, it probably makes sense--at least on economic grounds--:to use the revenue gains shown in column 1 to adjust the benefit distribution in Table 1, since they are indeed gains for the state's citizens. Before turning to the adjustments we discuss briefly the intrastate economic impacts, shown in column 2 of Table 2. A substantial fraction of the gains from expanded economic activity in the three resort towns along the southern coast of Delaware comes at the expense of reduced economic activity in nearby resort towns along the northern coast of Delaware. Since these gains and losses represent a reshuffling of tax revenues within Delaware (thus, the zero amount shown in column 2 for the total state effect), they probably lack relevance, from the state's economic perspective, in establishing an equitable distribution of financing burdens (although they undoubtedly have relevance from a political perspective).

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TABLE 3 Percentage Distribution of Relative Real Economic Benefits and Economic-Impact Effects, by Community and Type of Gain

Community

Type of gain

Bethany Beach

South Fenwick Bethany Island

Fenwick Island (Unincorporated)

Recreation benefits Peak-day users Off-peak users

32.5 26.9

0-0 0.0

4-0 0-0

4.0 0.0

30.4

83.3

79-1

79-5

0-7 1-5 3.3 4-7

0-4 0-7 2.1 13-4

0.6 1.1 2.7 12.5

n/a b 1-2 2.8 12-5

100.0

100.0

100-0

100-0

Property protection benefits Retained by property owners

Tax revenue gains a Local government County government State Federal Total

a The tax revenue gains reflect both real economic benefits transferred to governments in the form of taxes and the tax revenue effects of economic impacts. n / a - - n o n applicable.

The $81 000 annual tax-revenue gains for Delaware governments are small relative to the annual real economic benefits of $3.3 million. Incorporating them into the analysis requires only slight changes in the foregoing tables. Table 3 shows the effect of these changes on the relative distribution of the proposed tax burdens. The basic changes in the pattern of tax liabilities are small increases in the state and local shares attributable to the revenue gains they enjoy as a result of the project. These are offset by small reductions in the shares assigned to the federal government, beach users and property owners. Table 4 shows the final distribution of dollar tax burdens suggested by the relative benefit distribution in Table 3. 5 APPROPRIATE BENEFIT TAXES We now turn to the task of identifying a specific and feasible set of taxes that would create a pattern of financing responsibilities approximately equal to the one suggested by the benefit principle (e.g. as reflected by the proposed tax-burden distribution shown in Table 3). Thus, a fundamental criterion for evaluating specific tax options is

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4

Proposed Distribution of Taxes ($), by Community and Type of Benefit

Community

Type of benefit

Bethany Beach

South Bethany

Fenwick Island

Fenwick Island (Unincorporated)

Recreation benefits Peak-day users Off-peak users

118300 97 900

0 0

11200 0

5600 0

Property protection benefits Retained by property owners

110 700

268 100

221 400

111 300

2 500 5 500 12 000 17 100

1 300 2 300 6 800 43 100

1 700 3 100 7 600 35 000

n/a c 1 700 3 900 17 500

364000

321 800

279900

140000

Tax revenue gains a Local government County government State Federal Total b

a The tax revenue gains reflect both real economic benefits transferred to governments in the form of taxes and the tax revenue effects of economic impacts. b Note: columns may not add to totals due to rounding error. c n/a--non-applicable.

'target effectiveness', that is, the extent to which a tax produces a close match between the financing burden and the benefit distribution. The stronger (weaker) the match between the financing burden and the benefit distribution, the better (poorer) is a tax's target effectiveness. Other important criteria for evaluating tax options stem from tax administration problems. These include tax-collection costs (e.g. high collection costs can make a tax undesirable) and problems of tax avoidance or evasion (e.g. easy avoidance or evasion would make a tax unattractive). Political considerations are obviously also important. If a proposed tax encounters powerful political opposition, for whatever reason, its adoption is unlikely, regardless of its attractiveness on economic grounds. Yet, while we recognize the importance of political considerations, it is not our purpose here to deal with them. Rather, our focus is on economic matters. 5.1 Taxing beach users

As noted above, beach users often enjoy substantial benefits from nourishment projects. Under the benefit principle of taxation they

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should pay a share of the overall financing costs proportionate to the benefits they receive. 21 In evaluating how effectively various taxes hit this target group, we should keep several facts in mind. First, as shown in Tables 1 and 3, benefits for beach users can vary enormously across different beaches and across different times on the same beach, so the financing burdens should follow similar patterns, varying from community to community and across peak and off-peak periods. Moreover, only a fraction of a state's population uses the beaches, so general state taxes---like income or sales taxes--have relatively poor target effectiveness. Further, many beach visitors come from other states (e.g. approximately 86% of Delaware's beach users are from out of state), and thus are largely beyond the reach of many taxes. Also, many beach users are day visitors (e.g. about 25% of Delaware's beach users fall into this category), and are also beyond the reach of many taxes, especially when they come from another state. Finally, as a group beach visitors tend to have relatively high incomes, so they can easily afford to pay their fair share of taxes to support beach nourishment. For instance, in Delaware, average family income among beach visitors in 1987 was approximately $48 000, as compared to average family income among the general state population of about $30 000. 22 These considerations suggest that only locally-imposed taxes tied to beach use can achieve a reasonable degree of target effectiveness in levying appropriate financing burdens on beach users. Several possibilities are considered. 5.1.1 Beach access fees In terms of target effectiveness a beach access fee undoubtedly provides the best method for assessing beach users who benefit from wider beaches. Indeed, for many day visitors, particularly those from out-ofstate, a beach access fee is likely to be the only effective method of assessment since they can avoid most other taxes. Furthermore, a community could charge higher access fees during peak periods than during off-peak periods, to reflect the differential benefits enjoyed by peak and off-peak visitors. From the narrow perspective of the benefit principle of taxation, daily access charges are very attractive. However, administrative and political considerations may call for making relatively inexpensive weekly and seasonal passes available for those who use a beach frequently. This would lower administrative costs by reducing the need to sell daily passes, and it would help gain the political support of local residents, since they would qualify for the inexpensive seasonal passes. To illustrate, if a system of beach passes were instituted for Bethany Beach, using access charges of $2 per day, $5 per week, and $10 per

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season, beach users as a group would bear their fair share of the financing burden (about $225 000 a year), and enough revenue would remain to cover collection costs. This assumes, however, that such access fees would not cause a significant n u m b e r of beach users to switch to other beaches. If that h a p p e n e d , it would undercut the revenue yield and raise opposition to access fees both from local businesses (that stood to lose sales) and from the local government (that stood to suffer a loss of tax revenue). In general, the extent of beach switching depends on the relative desirability and accessibility of nearby beaches and whether they charge for beach access. If good substitute beaches without access fees are available, the switching p h e n o m e n o n may deter the use of beach access fees. 23 When beach users enjoy relatively few benefits from a nourished beach, the cost of collecting a correspondingly small a m o u n t of revenue from them may render beach access fees impractical. For example, as shown in Table 3, the 'ideal' beach-user tax for the two Fenwick Island beaches is approximately $17000 a year, but the addition of tax administration and collection costs might require raising double that amount. Most tax systems cost a few pennies to operate for every dollar collected, so one costing 50 cents per dollar raised is highly inefficient. The only practical, cost-effective alternatives for raising a relatively small a m o u n t of money for a nourishment project through beach access fees are (1) to increase an existing access charge by a small amount or (2) to create a fee structure that also raised m o n e y for other purposes. For instance, if Fenwick Island already used a beach access charge to raise revenues for other purposes, a 25-cent surtax added to the existing fee for weekends and holidays would raise the $17 100 per year. Of course, if a resort community already levies a substantial beach access charge (with the revenues going to other purposes), it may find further increases impractical. In Delaware, this is not presently a problem as no community charges for access to the beach. However, in other states, such as New Jersey, many beach communities have substantial access charges. In summary, beach access fees offer very high target effectiveness for taxing beach users. Still, local communities may decide against beach access fees for several reasons: (1) local business or governmental opposition, arising from concerns that access charges will drive away too many tourists; (2) relatively high collection costs that make access charges impractical; or (3) the communities are already using access charges to raise revenue for other purposes.

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5.1.2 Parking fees Compared to beach access charges, parking fees offer a lower degree of target effectiveness. First, they only tax those beach users (e.g. most day visitors) who drive to the beach area and need to park their vehicles in a public lot or along a street. Thus, parking fees miss both those beach users who get to the beach area by vehicle but do not need to park (e.g. children dropped off for the day by a parent) and those who rent or own property within walking distance of the beach. Even for those needing to park, parking fees will produce an uneven burden because vehicles carry different numbers of people. The target effectiveness of parking fees is further weakened by the fact that they place financing burdens on people who are not beach users (e.g. shoppers). Parking fees suffer potentially from a number of other shortcomings. They may entail excessive costs, especially when relatively little revenue is needed. Of course, in communities already charging for parking, adding a special nourishment surcharge onto existing fees is a possible solution. Also, the possibility that some users will switch beaches to avoid parking fees can create local opposition. Finally, communities that presently have substantial parking fees, with revenue devoted to other local needs, may find that revenue source unavailable for the purpose of helping to pay for beach nourishment.

5.1.3 Renters' tax A renters' tax is a tax on the rental of beach houses or condominiums, usually levied as a percent of rental receipts. Its target effectiveness is relatively weak. While most renters of beach houses surely use the beach, many beach users do not rent beach houses. A renters' tax misses several groups entirely: (1) owner-occupants of beach area houses, (2) those staying in hotels, motels, or campgrounds, and (3) day visitors. Further, even among renters of beach houses, the tax burden has little connection to beach use. A renters' tax does not distinguish, for example, between renters who spend their vacation boating and fishing and those who make intensive use of the beach. In Delaware beach resorts, renters' taxes are common: among the communities affected by the nourishment projects, all but unincorporated Fenwick Island tax rentals. These communities could simply add a nourishment surcharge to their existing rental tax. For instance, if Bethany Beach raised the appropriate share for beach users by increasing its renters' tax, it would need to double the current renters' tax, adding roughly $30 a week to summer rental rates. Fenwick Island

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would need to raise its renters' tax by only about 35%, adding roughly $5 a week to property rental rates. A potential shortcoming of the renters' tax is that evasion seems relatively easy, since local governments rely heavily on voluntary reporting and compliance.

5.1.4 Public a c c o m m o d a t i o n s tax A tax on public accommodations in beach resort areas imposes a financing burden on beach users staying overnight in hotels and motels. As with the renters' tax, this tax has relatively weak target effectiveness. In many resort communities it would miss the majority of beach users. In fact, in some communities such as South Bethany, it would miss t h e m all because no public accommodations exist. In some resort areas, many of the hotels and motels are located outside the jurisdiction of the beach community. In such cases a local public accommodations tax would raise little revenue; further, it would heighten the incentive for new hotels and motels to locate outside the resort town. As an alternative, the county government might impose a public accommodations tax, particularly if most hotels and motels in the county were located in or near beach resorts. However, in counties with numerous hotels and motels located away from the beach area, a county public accommodations tax would work relatively poorly from an equity point of view. As another alternative a state or county could establish a special tax district to encompass both a resort town and any nearby areas containing hotels and motels. This approach offers two advantages: (1) it reduces greatly the tax effects on decisions concerning where to locate a new hotel or motel; and (2) by taxing only beach area public accommodations it reduces the degree to which nonbeneficiaries are taxed.

5.1.5 Other excise taxes

When commercial activity is present, a locality could levy excise taxes on goods and services commonly purchased by beach users. Possibilities include special excise taxes on restaurant meals or on various amusement and entertainment activities. However, the target effectiveness of these taxes is low. Many beach users will avoid t h e m entirely, while many who make little, if any, use of the beach will pay them. On equity grounds, special excise taxes of this sort have limited appeal. Moreover, they will raise no significant revenue for communities with limited commercial activity (e.g. South Bethany).

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5.1.6 Summary The criterion of target effectiveness clearly points to beach access fees as the preferred m e t h o d for taxing beach users for their fair share of the costs of beach nourishment projects. However, when a community cannot use beach access fees for this purpose (for any of several reasons), a combination of parking fees, renters' taxes, and public accommodations taxes may provide a reasonable alternative. In other words, if a community cannot---or will n o t m l e v y a direct tax on beach use, it can still use indirect taxes by placing charges on related activities, such as parking and renting. Individually, these taxes do not fare well on equity grounds but as a group their overall target effectiveness seems reasonably high. Yet, combinations of taxes, especially those involving new taxes, may create high tax administration costs relative to a single tax, such as a beach access fee. Finally, the very low target effectiveness of excise taxes makes them generally undesirable as a source of revenue to support beach nourishment projects.

5.2 Taxing property owners

As previously noted, property owners can enjoy, by far, the greatest share of the benefits from nourishment projects. In selecting a tax (or taxes) that will place an equitable financing burden on this group, we need to account for three central facts. Firstly, most of the propertyvalue gains from beach nourishment accrue to those owning property on, or very near, the beach. As noted above, we found that the beach-front property owners in Delaware would capture virtually all of the property-value gains. Secondly, many property owners in beachresort communities come from out of state. In the communities along Delaware's southern coast, for example, from 71 to 91% of the beach-front property owners are residents of another state. Thirdly beach-front property is usually very expensive, implying that the owners of such property typically have substantial wealth. For instance, small ocean front lots (50 feet wide) in the southern Delaware communities range between $200000 and $450000. These facts suggest that only locally imposed taxes, concentrated on the relatively wealthy owners of properties on or near the beach front, can achieve a reasonable degree of target effectiveness in assessing this group for their fair share of the costs for beach nourishment. 24 Several possibilities are considered below.

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5.2.1 Special assessment for beach improvement By this we mean a special tax on the properties that will benefit from a beach improvement project. The target effectiveness criterion suggests that the tax should impose financing burdens that are at least roughly proportional to the benefits expected. To match the pattern of beach improvement benefits, the tax should fall almost entirely on beach-front properties. For purposes of tax assessment, beach-front footage provides a simple and low-cost basis, and one usually related to the property-value benefits. Although the annual special assessments may appear large--from $1000 to $3300 per lot in Delaware's case--the property-value gains created by beach nourishment can still exceed them by a substantial margin. For Delaware the estimates show that the property-value gains exceed the appropriate special assessments by $1000-$20 000 per year, depending upon the community. 25 Delaware's beach-front property owners should clearly prefer to pay a substantial beach improvement tax in return for a wider beach than to forgo the improvement in order to avoid the tax. This type of tax has two important advantages. First, it has very high target effectiveness: it places the financing burden squarely on the beneficiaries, where it belongs according to the benefit principle of equity. Second, it is easy to administer, particularly if the assessment is based on beach-front footage. Indeed, the annual bill for the local property tax could simply include a separate itemized amount for the special assessment. The biggest drawback to such a special assessment is probably political. The assessments are large and concentrated on a relatively small group of wealthy property owners. They have the incentive, and the means, to lobby vigorously for a wider sharing of the financing responsibility. That task is made easier by the fact that the proposed special assessments ultimately rest on a foundation of estimated property-value benefits, and estimates are sometimes easy to dispute. If government officials lack confidence in the estimates of property-value gains, they will undoubtedly feel reluctant to impose a substantial special assessment on a small group of influential people. 5.2.2 Local property tax An alternative to a special assessment targeted on properties on or very near the beach is the broader-based local property tax. A local tax authority could simply add a beach nourishment surcharge to the existing tax rates for residential and commercial property owners. Since most property owners in a beach community enjoy few, if any, property-value benefits from beach nourishment, this financing approach has a relatively weak target effectiveness.

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The assessed property values used as the property tax base vary from place to place in a community, so the added burden created by an extra nourishment tax would vary as well. Although property-value assessments are typically out of date, they may reflect to some degree the overall pattern of market values, particularly the sharp rise in values as properties get closer to the beach. Thus, while the principal beneficiaries of property-value gains---the owners along the beach f r o n t - would probably pay a higher nourishment tax than those away from the beach, their burden would still fall short of that implied by the special beach-improvement tax discussed in the preceding section. For example, if beach-front property owners in South Bethany experienced a property tax increase that was twice the average increase for the community, they would pay an additional $290 a year, as compared to a special beach-improvement tax of roughly $3300. Of course, the other property owners in South Bethany would pay an additional property tax of around $140 for beach nourishment even though most would receive no tangible property-value benefit from it. Although the property tax has weak target effectiveness, it is a traditional, widely used tax, and thus offers a feasible option for any local community. The tax administration costs of raising additional revenue in this way are negligible.

5.2.3 Realty transfer tax This is a tax levied on the market value of property at the time of ownership transfer, usually through a sale. It has poor target effectiveness. Firstly, it is borne only by that small fraction of property owners who sell (or otherwise transfer) their property in any given year. Although that fraction will grow over the lifetime of a nourishment project, a substantial number of property owners would still escape the tax entirely. Secondly, many of those burdened by such a tax--assuming that it is levied community-wide--would enjoy few, if any, property-value benefits from beach nourishment. The principal advantage a realty transfer tax offers is that it is based on current market value, rather than assessed value. As a result, a transfer tax is likely to impose a relatively greater tax burden on the owners of expensive beach-front property (at least when it is sold), than would a property tax, which is based upon assessed values often only roughly related to true market values. Communities already using transfer taxes could simply add a beach nourishment surcharge to the existing rate structure, creating little, if any, additional tax-administration costs. Communities not presently taxing property transfers would incur some costs in establishing and administering a new tax.

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5.3 Automatic tax-revenue gains to governments As noted above (e.g. see Tables 1-3), various governments automatically capture through their tax systems a portion of the benefits created by beach nourishment projects. For instance, we estimated that approximately 3.3% of the benefits from a nourished Bethany Beach would go to the State of Delaware through the routine payment of income and other state taxes (see Table 3). Since existing taxes have already converted these benefits into tax revenues, the only financing question is what share of the revenues should go to support the beach nourishment projects generating them? The benefit principle suggests a simple answer: automatic tax-revenue gains give rise to the same relative financing responsibilities as the other types of benefits. So, if the State of Delaware captures 3.3% of the benefits from a nourishment project at Bethany Beach, that gain should--under the benefit principle of tax fairness--result in the state accepting responsibility for 3-3% of the cost of the project. This reasoning lies behind the proposed financing obligations assigned to the various governments in Table 4. Of course, some governmental beneficiaries may choose not to pay their fair share. The Delaware projects for instance received no federal funding, even though on equity grounds the federal government should have paid between 4-7 and 13.4% of project costs, depending upon the community. When that happens, the benefit principle suggests dividing the unpaid amount among the remaining beneficiaries in proportion to their benefits.

6 C O N C L U D I N G REMARKS During the public debate over the financing responsibilities for the proposed beach nourishment projects for Delaware, the following claim was made time after time: resort beaches are a valuable resource for the entire state, so the state government should shoulder most, if not all, of the financing burden, z6 Our analysis suggests a strikingly different conclusion. While the value of resort beaches is indisputable, their benefits are not shared widely throughout a state's population, even in a small state like Delaware, which has a population of approximately 680000. Indeed, benefits concentrate among two groups: (1) resort-area properry owners (particularly those along the beach front); and (2) beach visitors. The property owners are few in number, very affluent relative to the average taxpaying citizen, and (at least in Delaware) often from

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out of state. Beach visitors are far m o r e n u m e r o u s than resort-area property owners, but still represent only a fraction of a state's population; those going to resort beaches likely have incomes well above the average (that is certainly true in D e l a w a r e ) ; and a substantial fraction---even a majority in some instances-----come from out of state. For financing n o u r i s h m e n t projects on resort area beaches, these facts, combined with a basic sense of fairness to the taxpaying public, suggest a mix of largely local taxes (e.g. beach access fees and property taxes) targeted directly on the beneficiaries, not general state taxes that have little connection to the benefits received. Some attractive benefit-tax alternatives have been identified. While some are clearly better than others, all are preferable to general state taxes as the principal source of funds to pay for beach nourishment projects. Our application of the benefit principle of taxation suggests that, in m a n y circumstances, the state should have a rather limited financial responsibility for beach nourishment projects. This is not to say, however, that the state's role should be equally limited in all o t h e r dimensions related to nourishment projects. Indeed, since beach nourishment projects can involve several local communities and even multiple counties, the state should probably assume a major leadership role in organizing and coordinating both the planning process for such projects and the execution of them. H o w e v e r , the funding for the projects should often c o m e from the local resort communities.

NOTES AND REFERENCES 1. While beach nourishment projects are focused on in this paper, the discussion is also applicable to other erosion control or beach improvement strategies (e.g. groin or bulkhead construction). 2. For instance, beach nourishment projects in Delaware and Maryland were recently financed through state shares of 50%, county shares of 25%, and local shares of 25%. From personal experience, the authors know that in the Delaware case, this cost sharing allocation was not based on any sort of careful, systematic, and logical analysis. 3. Black, D., Donnelley, L. & Settle, R. An economic analysis of beach nourishment for the State of Delaware. Report prepared for the Department of Natural Resources and Environmental Control, State of Delaware, 29 June 1988. 4. The benefit-cost analysis of the proposed project revealed it to have a benefit-cost ratio in excess of 2, so on standard economic criteria it appears a worthwhile undertaking. 5. In addition, two private communities (Sea Colony and Middlesex) are also involved in the nourishment projects. However, since they allow no public

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6. 7. 8. 9.

10.

11. 12. 13.

14. 15.

16. 17.

David E. Black, Lawrence P. Donnelley, Russell F. Settle access to their beaches, they are fully responsible for all project costs attributable to their beaches. Thus, with respect to these two communities, there is no public financing question for us to consider. Musgrave, R. & Musgrave, P. Public Finance in Theory and Practice. 5th edn. McGraw-Hill, New York, 1989. In economists' jargon, the measure of 'value' that is implicitly used is the sum of individuals' 'willingness-to-pay' for something, such as a wider beach. For further details on this concept, see Ref. 8. Anderson, L. & Settle, R. Benefit-Cost Analysis: A Practical Guide. Lexington, Boston, 1978. In the study of the Delaware projects, the authors were unable to develop estimates of the savings in damage costs to public properties. Since most of the public property (e.g. roads, sewer lines) is owned by local governments, the 'ideal' tax burden distributions reported below will understate the share that local governments and their taxpayers should pay by the extent of the savings in damage costs. Some 'economic impact' studies carelessly blur the distinction between a project's real economic effects and its redistributive consequences. In this paper the authors wish to carefully draw this important and traditional distinction. Of course, some federal projects have economic development as one of their explicit objectives. In such cases, economic impacts become relevant in evaluating the project, even from the federal perspective. All estimates specific to Delaware come from Ref. 3. That report is available from the authors upon request. The benefits for beach users are based upon the travel-cost methodology for estimating recreation benefits. That methodology had been used by the US Corps of Engineers t4 for evaluating a proposed nourishment project in Ocean City, Maryland; we adjusted the Corps' estimates to account for inflation and applied them to the Delaware projects. The benefits for property owners are based upon estimates of property value increases following a nourishment project. Details of the estimation methodology are described in Ref. 3. US Army Corps of Engineers. 'Atlantic coastal Maryland and Assateague Island, Virginia--Main Report. Baltimore District, 1980. For the three communities with limited congestion problems, the authors have estimated that about 82-84% of the real economic benefits accrued to the ocean front property owners. Notably, Olsen 16 reports a similar benefit distribution for a nourishment project for a private beach on Captiva Island, Florida. That project was financed privately, by the property owners on Captiva Island. In attempting to establish a fair and equitable financing arrangement, they agreed to a plan that placed 87% of the financing burden on beach front owners. Olsen, E. South seas plantation beach improvement project. Shore and Beach, 50(1) (1982) 6-10. The authors were unable to estimate the potential savings to federal taxpayers arising from any reduction in payouts of federally subsidized flood insurance. Had such estimates been available and included in Table 1, the federal share would be somewhat larger, and the share attributable to individual property owners smaller. However, this shortcoming does

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19.

20. 21.

22. 23.

24.

25.

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not affect the basic nature of the illustrative calculations shown here. Since federally subsidized flood insurance has encouraged overdevelopment in high risk areas, it is possible to question its use as a basis for spending federal tax dollars on nourishment projects. Out-of-state property owners will pay other taxes of course (e.g., sales and excise taxes). However, aside from local property taxes, none of these other taxes have any connection to the property-value benefits that are suggested should be taxed. The basic problem confronting an analyst is knowing what adjustment to make. The value of additional jobs, for example, surely varies from state to state, and from year to year even within the same state. A state with very low levels of unemployment will presumably value further expansion in employment opportunities less than a state experiencing relatively high levels of unemployment. If the tax structures of the 'other states' differ substantially from Delaware's, the tax revenue effects will not cancel exactly. One can make a case against taxing beach users to pay for nourishment projects, even though they receive substantial benefits from wider beaches. If no structures abut a beach front, the beach will simply move inland over time, maintaining its width (assuming no natural barriers, like rock formations, block its migration), and nourishment would be unnecessary. However, if structures impede the migration of the beach, erosion occurs and nourishment may be needed. Thus, one may reason that equity considerations call for property owners to bear the entire financial responsibility for nourishment projects, since the problem was really created by their structures. While this is an appealing argument, the authors have nevertheless chosen to ignore it in this paper. The application of the benefit principle of taxation accepts the status quo distribution of property rights (which has in fact allowed development of beach front properties), and asks who benefits if a beach is widened. The answer to that question then provides the basis for allocating the tax burden for paying for the wider beach. Rejecting the status quo as the proper starting place for the analysis would undoubtedly yield a different benefit distribution and a different tax allocation. Delaware Tourism Office. 1987 Visitor Profile Study. Dover, Delaware, 1988. If the extent of beach switching in response to an access fee is relatively large, the benefits from nourishment would be reduced. Moreover, other beaches may experience more congestion as people attempt to avoid the fee. Such outcomes would reduce the appeal of beach-user fees. Of course, a wider, more attractive beach would tend to attract more beach-users, and that would help to offset the disincentive effects of a beach-user fee. Taxing beach-front properties also creates a desirable incentive effect. To the extent that property owners are taxed to pay for beach nourishment, they will only develop on beach fronts if the benefits of doing so exceed the costs, not just private costs but also nourishment costs. On beach fronts that are already developed (such as those in the project areas considered in this study), this type of tax would add to the cost of further improvements. The huge net gains of $20000 a year accrue to ocean front property owners in South Bethany. Since properties along that seriously eroded

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beach are not protected by dunes or bulkheads, the property-protection value of a wider beach is substantial. 26. Most recently, this point was reiterated in a front page article in the state's leading newspaper, the Wilmington News Journal. For instance, one state senator is quoted as saying 'I think the state should pay for it because I see our beaches as a valuable asset for all Delawareans'. 27 27. Anon. The question persists: Who'll pay for beach repair? Wilmington News Journal, 14 May 1989, p.1.