Surf City is a rapidly growing city on the Mid-Atlantic coast, with a current population of 200,000. To cope with the growing vehicular traffic and the need for infrastructure expansion (e.g., streets, sidewalks, lighting, storm water drains, and sewage systems), members of the city council have recently engaged in debate about the merits of alternative mechanisms for financing expansion. The alternatives the council is exploring are: (1) a sales tax referendum to increase an existing one-half cent capital improvement tax by one-quarter cent on every dollar of sales; (2) a development fee of $0.50 per square foot imposed on real estate developers for new residential and commercial buildings; and (3) a term bond issue maturing in 20 years.

Public debate at recent city council meetings has been contentious, with developers arguing that the burden for infrastructure improvements would be disproportionately placed on homeowners and businesses, whereas reliance on a sales tax increase would permit part of the infrastructure burden to be borne by nonresidents who shop in and otherwise enjoy the benefits of Surf City. Some voters fear that a term bond will adversely impact their children when the large principal payment is due in 20 years. Developers have also argued that more of the existing one-half-cent capital improvement tax should be spent for street and sidewalk improvements and less should be spent for improvement of public buildings, parks, and biking trails.

Proponents of the proposed real estate development fee argue that new residential and commercial building is the main factor driving the growing demand for infrastructure development. Thus, they argue, it is most appropriate that new residents and new businesses shoulder much of the burden for expanding infrastructure. They further argue that the development fee will result in only a modest, largely invisible increase in the cost of each new building. Moreover, the incremental cost of the development fee should be recaptured as property values increase as a result of enhanced infrastructure. Finally, they argue that Surf City citizens enjoy better health and a generally higher quality of life as a result of park and biking trail improvements and that the existing one-half cent sales tax should continue to support recreational facilities.

Supporters of the bond option argue that borrowing the funds for expansion will allow for continued urban growth without placing undue burden on developers, business owners, or current residents. They point to the balloon payment and stress that over the upcoming 20 years the increased population base will be better able to fund the city’s expansion. They worry that any tax increases will stifle growth and discourage tourists or other visitors from spending money in the city.

Required

Evaluate the advantages and disadvantages of each potential financing option from the viewpoint of (1) a city council member, (2) the city manager, (3) current homeowners and business owners, and (4) potential new homeowners or new business owners. Provide a written analysis of the options from the perspective of each party.

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