Frequently Asked Questions

Q. What is the Smart Growth Tax Credit?

A. The Smart Growth Tax Credit is proposed state legislation, introduced in 2004 in the New Jersey Legislature, that would create an incentive program to encourage developers to invest in appropriately located, energy-efficient residential and mixed-use construction projects that minimize land and water impacts, are pedestrian-friendly, and facilitate the use of public transportation. In short, it is a tool to help states grow in smarter, more sustainable patterns, thereby reducing development pressure on open spaces.

Q. How does the Smart Growth Tax Credit work?

A. The program would provide a credit for a developer, against state income or corporate business taxes, equal to a specified percentage of the “allowable costs” of development (which would include the capitalized costs of construction but exclude the cost of land) for new and renovated buildings that meet all of the required criteria specified in the bill. These required criteria relate to location, proximity to transit, neighborhood design aspects, such as compactness and walkability, and “green building” features of construction. Additional incentives would be available for those who redevelop brownfields, build specially certified green buildings, or take certain other “extra credit” measures that are not required.

Q. If the legislation was written for New Jersey, can it work in my state?

A. Absolutely. Some language will have to be tailored to other states, but almost all of the substantive provisions can be transferred easily. The location criteria, however, will have to be adjusted for each individual state depending on the amount of state land use planning that has been done thus far. New Jersey already has an official State Plan that designates every part of the state as a specific type of planning area (e.g., urban planning areas, suburban planning areas, rural planning areas, etc.). As a result, the location criteria for the New Jersey legislation utilize these land use categories. If similar work has been done in your state, it should probably be incorporated into the location criteria to some degree. But, even if no such work has been done, there are other characteristics that can be used as a good basis for deciding what areas could be eligible for the tax credit. For instance, existing sewered areas could be used as the starting point for guidelines – such guidelines would likely encourage further development where infrastructure already exists, and so the resulting areas would likely be appropriately categorized as urban or suburban.

Transit criteria. Although transit accessibility is an essential part of smart growth, not every state is as transit-rich as New Jersey, and is not likely to become so overnight. If the levels of adequate transit service specified in the New Jersey legislation are impractically high for your state, you can consider adding alternative criteria relating to walkability and “neighborhood completeness,” which is a measure of how many services and shops are available within walking distance. The key is to help reduce automobile dependence – so, if a number of household trips and errands can be made by transit or foot, then an area should probably be eligible for the tax credit.

Water Supply Criteria. New Jersey has an existing official Statewide Water Supply Plan that was incorporated into the location criteria of the New Jersey version of the legislation and, if a state has a similar plan or document regarding water supply, it should probably be incorporated into the environmental location criteria as well. In the New Jersey legislation, the provision states that, if the development is located in a water supply-deficit area designated by the water supply plan and includes more than 20 residential units or commercial units that use 10,000 gallons of water a day or more, then the development’s water use plan must be preapproved by the New Jersey Department of Environmental Protection in order to qualify for a tax credit.

Energy Savings/Energy Efficiency Criteria. The 4% base tax credit is derived from an estimated annual savings of 40 MBtu (one million Btu) per year if all of the required criteria are met. The amount of additional tax credit for increased density set forth in the New Jersey legislation is based primarily on the additional proportional estimated energy savings resulting from increased density (due mostly to reduced consumption of vehicle fuel), with some consideration also given to New Jersey’s traditional development patterns. Some adjustments to these levels of extra credit may be desirable if a state’s land use patterns differ significantly from those of New Jersey, but it is important to keep in mind the end goal of decreasing vehicle miles traveled by increasing walkability and the ability to support transit, both of which generally increase with increased density.

In the New Jersey legislation, energy efficiency criteria require the certification of residential units under the New Jersey Energy Star® Homes program, which was developed specifically for New Jersey. If a state has its own energy-efficient home certification program, it can be incorporated into the criteria. If no such program exists, however, the U.S. Environmental Protection Agency’s (EPA) program can be used. Characteristics of EPA Energy Star® homes include tight construction and reduced air infiltration, tight ducts, improved insulation, high-performance windows, and energy-efficient heating and cooling equipment.

Q. Who should administer the program?

A. In the New Jersey version of the legislation, the New Jersey Department of Community Affairs is the designated administering agency for the Smart Growth Tax Credit program, although some responsibilities must be carried out in consultation with the New Jersey Department of Environmental Protection because of the necessity for expertise on environmental issues. The choice of which agency should be the administering agency will depend on each state’s particular circumstances and political structure. The administering agency should be the state department or agency that has a mission which most closely overlaps with the goals of the Smart Growth Tax Credit. For some states this may be an agency dealing with housing, urban or community affairs, or economic development; in other cases, it may be the state’s environmental agency.

Q. How can subsidizing the cost of development help save the environment?

A. Development that uses resources efficiently is much better for the environment than low-density sprawling development. Sprawl is the status quo all over the nation, however, and many political and market barriers prevent developers from adopting even the smartest, most cost-effective measures to reduce the adverse environmental and public health impacts of new development. In order to effectively change the way that developers use natural resources and build neighborhoods, it is necessary to reduce the costs of implementing more efficient development practices. The tax credit will encourage developers to use cutting-edge technologies and better design practices that will provide substantial environmental benefits. This will result in a new class of developments with the potential to demonstrate the benefits of, and the consumer demand for, environmentally superior development. The legislation aims to create long-term changes in the market through a short-term incentive program that will help to jump-start the market for smart growth developments.

Q. What is the likely fiscal impact of this legislation for my state?

A. The precise fiscal impact will vary for each state, and depend on how many developments qualify, but the amount of tax credits available can be explicitly capped, as it has been in the New Jersey legislation. In addition, the program is designed to be available for a limited number of years, and developers are required to collect the tax credits they earn over a five-year period, spreading out the impact to a state’s budget. In the long run, the state will benefit economically from smart growth.

A substantial portion of the immediate revenue reduction will also be offset by an annual increase in the taxes paid by commercial customers who will save up to 30% on their energy bills, and thereby enjoy higher taxable revenues. And, if a state is experiencing a recession, it is not likely that a tremendous amount of building will take place, so there will be few developers applying for the credit during this period (when a state can least afford it).

The tax credit is also likely to deliver substantial financial benefits to a state, as smart growth developments reduce the need for costly infrastructure investments to connect sprawling residences and office parks to the rest of the world. Many states have realized that the infrastructure costs associated with sprawl are high and unsustainable.

Q. What is the purpose of the proximity-to-transit criteria?

A. Because lower dependence on automobiles results in less traffic congestion, decreased oil consumption, and reduced levels of air pollution and greenhouse gases, the Smart Growth Tax Credit requires that eligible developments be accessible to adequate levels of transit.

The proximity-to-transit criteria for the New Jersey legislation were derived from studies of transit use behavior, combined with the advice of experts on transit systems in New Jersey. Although transportation experts based in your state should be consulted in order to determine if adjustments to the transit criteria in the New Jersey legislation should be made, research demonstrates that, nationwide, decreased automobile usage is linked to better transit accessibility and more compact, walkable neighborhoods. For instance, studies find that people are generally willing to walk as much as one-half mile in order to get to rail transit, but they are less likely to walk more than one-quarter mile for bus transit. The legislation allows developments with levels of transit service that are even higher than that required by the base credit criteria to receive “extra credit.” The amount of additional credit is calculated to be proportional to the energy savings and environmental benefits resulting from the corresponding increase in transit availability.

Further information on research regarding the relationship between neighborhood design and travel behavior (known as “location efficiency”) is available from the Natural Resources Defense Council and the Institute for Location Efficiency.

Q. What is the purpose of the residential density criteria?

A. Moderate to high densities result in more efficient land use and can support transit service successfully. At higher residential densities, homes share infrastructure and resources more effectively. Such compact neighborhoods are more walkable and accessible by transit and, thus, decrease dependence on automobiles. Because of these factors, the Smart Growth Tax Credit requires a minimum level of residential density but, since it applies to the overall average residential density of a development, a wide variety of lot sizes and housing types can qualify for the tax credit.

The particular threshold included in the legislation’s required residential density criteria is based on the minimum average density that can be expected to realistically support adequate transit service and create walkable neighborhoods. Reducing the minimum density specified in the New Jersey legislation may compromise the legislation’s ability to achieve those fundamental goals, but some adjustments to the density criteria may be desirable if your state’s land use patterns differ significantly from those of New Jersey. Like the “extra credit” for increased accessibility to transit, the amount of additional tax credit for increased density set forth in the New Jersey legislation is based primarily on estimated energy savings resulting from increased density, with some consideration also given to New Jersey’s traditional development patterns.

Q. What makes an area “highly urbanized” and why is that definition important?

A. In general, those areas most suitable for growth are already “highly urbanized” and states should encourage infill development in these existing urban areas, even if they are in places that would normally be considered environmentally sensitive such as coasts or riverbanks. The definition of “highly urbanized,” used in the New Jersey legislation, is based largely on the amount of existing impervious surface coverage in the area. Imperviousness is widely recognized as a key measure of sprawl’s impact on the environment. Abundant research on rivers and estuaries confirms that, when impervious surfaces cover more than 10 percent of a watershed, the rivers, creeks, and estuaries they surround become biologically degraded. It follows that watersheds that are less than 10 percent impervious should be protected, and watersheds with imperviousness of more than 10 percent should absorb the majority of growth. More information regarding research on watershed protection and development patterns can be found in the 2002 Pew Oceans Commission report, “Coastal Sprawl: The Effects of Urban Design on Aquatic Ecosystems in the United States.”

Q. What is “green building”? How does it fit in with smart growth?

A. The term “green building” encompasses a number of different design elements, including the integration of energy-efficient lighting and appliances and water-efficient faucets and appliances; the selection of non-toxic materials; and, the use of recycled materials wherever practical. The benefits of incorporating these practices and technologies include reduced stress on a state’s water supply and power grid, healthier indoor and outdoor air, and lower utility bills for consumers.

The vast majority of residential structures utilize more energy and water than necessary. Thus, new developments deplete existing resources and infrastructure capacity far too quickly. Because smart growth encourages compact development around existing infrastructure systems, infrastructure capacity must be used carefully. In order to reduce the depletion of energy and water resources and ensure that infrastructure is efficiently used, the Smart Growth Tax Credit requires that new developments integrate certain green building practices.

Q. What is “location efficiency”?

A. Location efficiency is a measure of the transportation dollars people can expect to save by living in location-efficient neighborhoods, based on the levels of population and public transit service in their communities. Location-efficient communities are neighborhoods where residents can walk from their homes to stores, schools, recreation, and public transportation. Residents of location-efficient neighborhoods have less need to drive than people living in less convenient locations, so they save money on transportation costs. Further information on location efficiency is available from the Natural Resources Defense Council and the Institute for Location Efficiency.

Q. What is “growth management”?

A. Growth management is the deliberate and integrated use of the planning, regulatory, and fiscal authority of state and local governments to influence the pattern of growth and development in order to meet projected needs. Included in this definition are such tools as comprehensive planning, zoning, subdivision regulations, property taxes and development fees, infrastructure investments, and other policy instruments that significantly influence the development of land and the construction of housing. Growth management is often distinguished from growth control. Where growth management accommodates projected development in a manner that achieves broad public goals by channeling it to acceptable places, growth control often caps development in certain places.

Q. What is the Energy Star® program?

A. Energy Star® is a national program setting guidelines for improved energy efficiency for household products and buildings.

Q. What does “LEED™” stand for?

A. The LEED (Leadership in Energy and Environmental Design) Green Building Rating System™ is a voluntary, consensus-based national standard for developing high-performance, sustainable buildings. Members of the U.S. Green Building Council (USGBC) representing all segments of the building industry developed LEED and continue to contribute to its evolution. LEED standards are currently available, or under development, for new construction and major renovation projects, existing building operations, commercial interiors projects, core and shell projects and homes. LEED provides a complete framework for assessing building performance and meeting sustainability goals. Based on well-founded scientific standards, LEED emphasizes state-of-the-art strategies for sustainable site development, water savings, energy efficiency, materials selection, and indoor environmental quality. LEED recognizes achievements and promotes expertise in green building through a comprehensive system offering project certification, professional accreditation, training, and practical resources.