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Private Sector Redevelopment

To have a vibrant downtown, there needs to be ongoing redevelopment. Even if population in the surrounding area is holding constant, the needs and wants of the community will be changing, and we can either accommodate them in the center of things, in the central business district (CBD), where they are accessible to people from a 360° radius, or find that they have moved to the fringe, leaving the downtown behind.

When local population is rising, we have the choice of letting the city sprawl out, forcing people to drive further and further, or we can offer the option of making the choice downtown sites available for redevelopment: a two-story building gets replaced with a 4-story building, or an 8-story building with a 12-story building. An acre downtown, properly developed, may prevent the premature development of 10 or more acres on the fringe.

How do we motivate the private sector to undertake this redevelopment? The first step is very simple (though it may require enabling legislation at the state level): divorce two taxes that never should have been married. The divorce I refer to is the property tax, which is two taxes whose effects are very different.
  • The tax on land value has one set of effects, which are generally quite positive
  • The tax on building value has a totally opposite set of effects, which are generally undesirable.

When we tax building values, we get slower redevelopment; we get buildings which aren't as well outfitted to serve owners' or tenants' needs; we get poorer maintenance; we get less of what we want more of. When we tax land values, we get more intensive use of well-located land. We get faster redevelopment. We get jobs. We get vibrant downtowns. We get entrepreneurs who are able to afford a location in the middle of things, where the market hums, instead of a place on the edge of things where they are accessible to only part of the community.

Suppose you were the owner of a piece of land downtown. Your parents left it to you, and you tore down the obsolete building that they had there. You feel that the site has potential, and you don't want to sell it, because you really want to leave it to your grandchildren, but you don't really feel like building on it quite yet. Your carrying costs are low, because while your neighbors are paying taxes on both their buildings and their land, you are only being taxed on the land, and it isn't much. You can cover your taxes if you rent parking spaces each month, and that suits you just fine. And it doesn't bother you that if someone wants to open a business, they'll have to locate outside the CBD. If someone came along and offered you enough money, you'd consider selling, but it seems pretty unlikely that someone would do so. (Call that price $50,000 or $500,000 or $5,000,000, depending on the size of your town or city -- choose the one that makes sense in your part of the US.)

Now someone comes along and talks about divorcing the two pieces of the property tax, and lowering the millage rate on buildings, and increasing the millage rate on land. The owners on either side of you, who are conducting businesses which serve customers and employ people, are going to pay less on their buildings than they currently pay, and all three of you are going to pay more property tax on your land. You can't cover your higher property taxes on the land with just a parking lot. You have three choices: (a) pay those property taxes from some other part of your portfolio and hold onto the nearly vacant land for your grandchildren; (b) build something on that site which will earn you enough rent to cover the taxes; or (c) lower your asking price to, say, $40,000, or $400,000 or $4,000,000. Someone who wants to build can afford to do so: while his land tax is higher, he won't be penalized as much for building a good building.

Or think of this situation: you own an older building downtown, and your single tenant pays you enough to cover the taxes and enough to live on. The building represents a tiny share of the total value of the property — that is, the land share of real estate value (LSREV) is approaching 90%. If the taxes on your building go down, and the taxes on your land go up, you are likely to seriously consider replacing the aging building with something newer and larger, more suitable to the current decade and century. And you will not ask a huge rent, because you want to be sure you fill that new building with tenants. Or you will decide that this is too much like work, and be willing to sell the property to someone who is prepared to redevelop it now, instead of leaving it to your grandchildren to redevelop someday.

This is incentive taxation: remove the perverse incentives, and replace them with incentives which move those who own our best sites to do that which benefits the community, instead of that which only benefits their heirs. Collect for the commons more of the value of the land, and reduce or eliminate entirely the taxes on buildings and even on labor and sales.

And, perhaps best of all, this doesn't cost the taxpayer or the worker: the private sector, properly motivated, will do what needs to be done.
  • Unused land is far more abundant than we realize.
  • End the Public Subsidy of Land Speculation and Sprawl
  • Counterproductive growth limitations and regulations should be abolished.
  • A Strategy for Urban Renewal
  • A Strategy for Economic Development
  • Public Finance by Self-Financing
Unused land is far more abundant than we realize.
We utilize less than 5% of the total land area in the United States for urban purposes, including housing, commerce, and manufacturing. As you fly across the country all you see is farm, timber, desert and an occasional small community. While less than 5% of our nation's land area is needed for urban purposes, much vacant land within existing cities is bypassed because it is cheaper to build further out than pay the high prices demanded for the more efficient, better located, land. The result is urban sprawl. Why do we choose to utilize land distant from employment, social, and civic needs while bypassing superior land? Why do many of us choose to spend two hours each day commuting to work? Why do our older cities fail to renew or rebuild obsolete buildings? Sprawl is not just about the density of land use. In many cities only one half of the land is devoted to housing and commercial uses while the other half is vacant or under-improved. Could it be that there are inefficient requirements built into some public policies? Smart growth should not be constrained by archaic patterns that impede or misappropriate free and open urban land usage. Local ordinances and practices within cities that force accelerated suburban sprawl should be abolished. We don't need more regulation, we need greater freedom to act responsibly. Individuals should have the opportunity to decide whether they want to live in the suburbs or in the city. This should not be a coerced decision because of a public policy that impedes growth within the city. Simple tax reform can help to achieve some of the goals and objectives of smart growth without government intervention and wasteful subsidies.

Counterproductive growth limitations and regulations should be abolished.
Property taxes should not be levied on new construction or existing improvements, when the revenue needed could be obtained from the land values created and maintained by the community.

The property tax could be shifted to reduce the incentives for sprawl. If the property tax were taken off urban buildings and focused on the land itself, this would penalize land speculation and would reward people who build on their land. Thus land speculation, which promotes a "leap frog" development out of the city and into the surrounding countryside, would decrease. The proposed shift from traditional property tax to a "land value tax" would penalize land speculation and encourage urban redevelopment. Removing the tax on buildings makes them cheaper to construct, renovate and operate, and more affordable to buy or rent. Urban construction creates urban jobs. Capital and labor both benefit.

A Strategy for Urban Renewal
Established cities could adopt some very practical long-term measures that will make the city a place where people can and will want to live, work, and play in safety. What few city leaders understand is the destructive role that taxation has played in the out-migration of people and business.

What is needed is a continuously self-renewing city and a public policy that can work effectively. Buildings have a limited useful life. Continuous maintenance and frequent retrofitting sometimes extends this life span. Other buildings reach a point where they should be replaced. Some buildings sit vacant for decades even in the city's central business district. Valuable parcels of land are left undeveloped or paved over and used as surface parking lots. The result is a lower tax base and an eyesore.

As urban buildings deteriorate, owners often don't renovate, remodel or make repairs because their property tax may rise. Thus the typical property tax creates suburban sprawl and urban decay. Shifting the property tax off buildings and onto land reverses these processes. Taxing land more than buildings usually reduces taxes for homeowners.

One means that has long been available but not brought into general use is to exempt buildings from the real estate tax and begin to impose an annual tax on land sites that makes holding land off the market for speculation a costly proposition. ...

... As the city begins to renew itself -- as property owners are no longer penalized when they renovate or build new structures -- businesses and people will increasingly see the city as a more desirable place and not just in a few neighborhoods that now benefit by abatement programs and public subsidies.

Exempting property improvements from taxation and collecting all of the property tax from land values (which are created by the community as a whole and not by individuals) is the cornerstone to continuous self-renewal and the reduction of urban sprawl.

The ideal public policy would be to reduce taxes on production and commerce and raise public revenue from non-distorting revenue sources.

That non-distorting revenue source is land and natural resources. The central problem which limits the operational success of the economy is the failure to procure the public value which is created by the community.

This value ought to be reserved for the community to pay for public improvements. However, this value is to a large extent diverted into private pockets by speculation in land and natural resource values. The correct approach is to create a system in which no-one, except the citizenry as a whole, is rewarded by the collection of publicly created values.

Economists can agree that the economically efficient public finance system is one in which revenue is drawn from the rent that people pay for the use of land and natural resources. These payments do not distort economic activity. Land rent, because it is pure surplus, could be taken and used for any purpose and there would be no negative consequences for the allocation of labor and capital, or in the use of land and natural resources. If this surplus is invested in needed infrastructure and other public services, it will in turn increase land values for future public investment. ... Read the whole article


 Wyn Achenbaum: Eminent Domain and Government Giveaways
It seems to me that there are better ways than eminent domain to provide the incentives that will lead the private sector to develop choice land. ...

While at one time this area might have been an appropriate place for a neighborhood of single family homes, it appeared to me that that time had passed a decade or so ago. It seemed to me that the path of progress would -- if the incentives were logical and the market responsive to signals -- have caused the private sector to have redeveloped that site. Such re-development might have been painful to the residents of the neighborhood, but would have put now-choice land to a higher and better use than single-family homes.

But our system wasn't designed to send signals all that well -- Connecticut law required properties to be reassessed once every decade (and I've heard that once in early '70s and once in the late 80's was construed to satisfy that requirement). ...

But if the properties had been reassessed on a regular basis, with market-based values assigned first to the land and the residual being assigned to the existing buildings, the homeowners themselves would have been in a position to make their own rational decisions on whether it was worth it to them to continue to occupy extremely valuable land (and pay the taxes on it), or more to their advantage to accept an offer from someone who was prepared to put it to a higher and better use, and take that equity and buy elsewhere. ...

Most of us know of an older home, or perhaps a diner, or something else that was a highly appropriate use for its site -- and typical of the neighborhood -- 50 years ago, which stubbornly remains in the middle of a neighborhood which has been redeveloped with taller commercial buildings. The home or diner is something everyone else has to walk around, drive around. If that site were well developed, it could prevent the premature development of far less desirable sites on the fringe of town -- an acre downtown well developed, can save 10 or so acres on the fringe. ...

But unless the properties are regularly and correctly assessed, land first and buildings as the residual, we won't have the signals which tell us when it might be time to move on.

In the absence of such a system of regular revaluations and a property tax which is concentrated on land values rather than equally on land and buildings, New London turned to eminent domain. But eminent domain is not the problem here. Lack of appropriate signals is the problem. ...

Our land, particularly the best-located land, is a common asset on which we are all dependent. Allowing individuals or corporations to occupy it without compensating the rest of us for its value is the underlying problem, and solving that problem through good assessment and rational (that is, land value) taxes is the way to solve it. When we do that, a lot of problems will begin to fall away.  read the entire article

 

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