Must Floodplain Buyouts Decrease Tax Revenue?

July 5, 2018

Helen Wiley

Floods are the costliest natural disaster in the United States.  73% of presidential disaster declarations are for flood-related events.  Scholars estimate that flood losses will continue to grow, due to economic development in flood-prone areas, as well as climate changes that are altering storm patterns and raising sea levels (see here, here, and here).

As flood risk increases, some floodplain managers foresee voluntary housing buyouts as a necessary risk reduction tool.  In a buyout, local and state governments purchase flood prone homes that meet program requirements and preserve the land as open space.  Federally funded buyouts require that acquired properties will always be maintained for a use that is compatible with open space, recreational, or wetlands management practices (Stafford Act, Section 404).  While there are a number of appealing features of buyouts—specifically, permanently reducing exposure and possibly creating floodwater storage or greenspace—there are also myriad challenges, including the high cost, disinterest among residents, the long time-frame needed for implementation, and difficulties in coordinating strategies and aligning priorities between government agencies and across municipal boundaries (see here, here, and here).

One frequent challenge is that local government officials are reluctant to offer post-disaster housing buyout programs because buyouts can result in lost property tax revenue: if residents relocate into other jurisdictions and properties are kept as vacant lots, tax revenue falls.  While the potential loss of tax revenue necessarily plays a major role in local level decisions, buyout programs can be designed such that they minimize potential losses or even increase local revenues by coupling the buyouts to strong land-use planning strategies that enhance the community.

There are at least four potential strategies local governments can use to lower the tax burden of buyouts including:

  1. Offering financial incentives for buyout participants to resettle in the same municipality,
  2. Building new housing developments in non-flood prone areas to accommodate displaced residents and to encourage them to stay in the jurisdiction,
  3. Maximizing recreational benefits of properties post-buyout to increase local amenities and thus nearby property values, and
  4. Creating comprehensive pre-disaster/hazard mitigation plans that integrate with long-term land-use and adaptation planning to ensure buyouts are part of a strategy that brings value to the community.

The importance of local context

Local context greatly impacts buyout program design and program success.  The short- and long-term objectives of buyouts can vary: maintaining local revenues, reaching a target total number of houses bought out, reducing exposure regardless of where participants relocate, and creating new recreational or green spaces, among others.  External local factors, such as the availability of affordable housing and residents’ ties to the community, will affect whether buyout participants are interested in staying in the same municipality.  And, the local context determines whether the strategies proposed above may be more or less feasible to implement and how effective they will be.

Buyout programs may have the greatest negative impact on local tax revenues in states that rely heavily on property taxes (for example, New Jersey) versus in states that rely predominately on sales taxes (for example, Louisiana).  As such, in states that rely primarily on property tax revenue, government officials may be more reluctant to offer buyout programs.  For example, since 2012 some New Jersey communities impacted by Hurricane Sandy have faced enormous challenges in making up for lost revenues, which has resulted in cutting government services (see here and here).  This reduction in tax revenue has been caused in part by property buyouts, but more so by foreclosures and destroyed buildings not being redeveloped.  As flood costs continue to rise, buyouts can be strategically used to minimize potential losses and lower the impacts of future unplanned tax revenue setbacks, including foreclosures and abandoned properties post-disaster, while maximizing benefits, such as creating new recreational amenities and mitigation zones.

Offering financial incentives to resettle residents nearby

Buyouts will have less of an impact on tax revenues if homeowners are relocated within municipal boundaries but outside of floodplains (see here for a financial impact analysis).  To achieve this, some programs have offered participants financial incentives above the pre-disaster value of their property to stay within the same municipality or state.  These financial incentives can come in multiple forms including: a percentage increase in the amount offered for purchase of the house, supplemental funding to cover moving expenses or a bonus for staying nearby, a forgivable loan to make more expensive homes in the same jurisdiction more affordable, or through tax abatement programs (for examples, see here).  These financial incentives allow homeowners to more easily afford comparable local housing outside of the floodplain, which is often more expensive, and enable people to maintain their existing social networks and ties.

Buyout program designers need to take into account multiple factors when deciding whether financial incentives are appropriate in their particular region.  For example, in some programs, incentives may be insufficient if they do not adequately account for the cost of housing alternatives or a shortage of housing options within city or municipal limits.  In these cases, buyout programs may need to offer other types of resources on top of additional funding to help people stay in the same areas.

Some buyout program managers have pushed back on any limitations or incentives to keep people in a jurisdiction, advocating instead that buyout participants be offered as much flexibility to relocate as possible, as this could be better for those homeowners.  For example, buyout participants could be offered financial incentives to simply stay in state rather than within a certain municipality.  Ultimately, program managers need to employ a careful balance of restrictions and financial (dis)incentives in order to encourage participation in buyouts, while considering state and municipal priorities (see here).

Building new housing developments in safer areas

Offering financial incentives to stay in the same area can be key to reducing lost tax revenue from buyouts, but municipal officials should consider in tandem whether new housing developments are needed to accommodate displaced people outside of the floodplain.  For example, new housing might be needed in cases where there is a limited supply of housing, housing has been concentrated in risky areas, or there is nothing affordable outside of the floodplain.  A 2013 study concluded that buyout programs are most cost-effective and get the most local support, when governments develop new housing in safer areas that keeps bought-out residents nearby and minimizes tax losses.

As much as possible, municipalities should plan and develop needed housing in advance of disaster events.  Local governments can work to identify land and vacant lots that could be developed, so that affordable housing options in safe areas are more readily available post-disaster.  However, it is challenging to make alternative housing available in a timely manner.  If affordable, safe housing options are not constructed within a reasonable time period, residents might end up forgoing a formal relocation program and move out of the area independently (see here for an early buyout case study).

Learning from Buyouts in North Carolina

After Hurricane Floyd struck North Carolina in 1999, the state offered funds to affected communities to create home buyout programs using FEMA funding as well as a state relocation fund.  In the city of Greenville, eligible residents who wanted to participate were offered the pre-storm value of their homes, plus an incentive in the form of supplemental funding if they relocated within city limits.  This additional funding encouraged participation by both increasing the total amount offered and making it more financially feasible to stay in an area with a shortage of affordable housing.

Similarly, the city of Kinston offered a buyout program that incentivized residents to relocate outside of the floodplain but within the same community through supplemental funding.  These incentives were offered through programmatic adjustments made to a buyout program already underway in Kinston after experiencing significant flooding during Hurricane Fran in 1996.  In order to further reduce challenges that the city had faced in generating community interest under the initial program, Kinston complemented the buyouts after Floyd with a series of programs that increased the availability of local housing, including new apartments, a new senior housing development, and a program to build new homes on vacant lots.

Additionally, some buyout programs after Floyd hired councilors to help identify houses outside of the floodplain similar to homeowners’ previous homes.  In cases where supplemental funding from the state relocation fund was not enough to cover price differences, the state’s Department of Commerce and county governments offered forgivable loans to homeowners who inhabited their new homes for at least 5 years.  By offering both financial incentives and building new housing options in some cases, North Carolina made buyout options for staying in the same municipalities more attractive to targeted homeowners (see here or here).

Maximizing recreational benefits of properties post-buyout

While most buyout programs require that acquired properties be maintained as open spaces, and thus would presumably lower property taxes, buyouts at times enhance property values. Specifically, when the recreational benefits of properties post-buyout are maximized, buyouts can, in fact, actually increase local amenities and, therefore, nearby property values (see here).    For example, after the Great Flood of 1993, the state of Missouri and local municipalities invested in floodplain buyouts using Federal funding, acquiring over 4,000 frequently flooded properties. As explored in a previous blog, within the St. Louis region, many of these properties were eventually incorporated into municipally managed conservation areas and provided the basis for greenways near the Meramec and Missouri Rivers. Conservation areas, including parks and greenways, act as regional amenities and increase the values of properties located near to them (see here for a St. Louis specific example).

The St. Louis example is not the norm, however.  At present, few acquired properties are successfully converted into recreational or wetland management spaces.  Instead, bought out properties often remain vacant lots.  To remedy this, local officials can target high-risk communities that have collectively expressed interest in participating in a buyout program, to more easily plan and develop recreational and conservation spaces post-buyout (see here).  Buyout programs can also partner with state land trusts in order to provide funding to care for vacant lots and areas until recreational spaces are created.  Additionally, as one study demonstrates, targeting properties that are both flood-prone and have natural resource conservation value enables buyouts to meet multiple objectives.  By prioritizing areas that align both mitigation and conservation goals, buyout programs can maximize potential benefits and further reduce potential revenue losses.

Incorporating buyouts into long-term planning strategies

Municipalities can best minimize lost property tax revenue from disaster-related buyouts by considering them within broader discussions of long-term land use and adaptation planning.  In general, small municipalities struggle to implement long-term planning projects, since they typically have few staff members and resources available. Often, short-term concerns are more pressing for both budget allocation and reelection.  However, local officials can engage in discussions at community meetings and events about local priorities and values as they pertain to the future of neighborhoods in high risk areas and the locations of future housing developments.  By engaging in these types of discussions and planning pre-disaster, municipalities will be better able to assess where buyouts are feasible and plan future housing developments and recreational areas in ways that enhance communities and increase tax revenues when funding sources are available.

Given that climatic changes increasingly play into the frequency and intensity of flood events, buyouts need to also be discussed as part of coastal adaptation strategies for communities that cannot afford to armor their coastlines or elevate all structures. These discussions for both coastal and inland riverine areas can be facilitated, in part, by integrating hazard mitigation plans and adaptation plans, which has been advocated, specifically, for advancing buyout policy (see here). Some states, cities, and communities have begun to integrate their plans (see here and here for examples), but most flood-prone areas have yet to do so.

Buyout programs moving forward

Recently, a bi-partisan group of U.S. Senators and Members of the U.S. House of Representatives introduced legislation (S. 2862 and H.R. 5846) that calls for a comprehensive review of the Federal Emergency Management Agency’s (FEMA) program to reduce flood risk and taxpayer exposure by buying homes from property owners in flood-prone areas. This call for a comprehensive review of FEMA buyout policy speaks to the many challenges that flood related buyout programs, both funded by FEMA and otherwise, have faced in the past and the need for more viable buyout options in the future.  In seeking to make voluntary buyouts a better option, the strategies and measures explored here can help municipalities minimize potential negative financial impacts.  However, further research needs to be done on the long-term impacts of buyouts on both affected municipalities and individual homeowners, including, specifically, how local contexts influence what types of accompanying measures will help buyouts be most effective.