Urban Returns

Taxing land rather than buildings: A reply to Market Urbanism

A couple of months ago I suggested jacking up property taxes on downtown lots while cutting property taxes on buildings in order to discourage "land banking."  (But see here for my characteristic wishy-washiness.)  

Market Urbanism thinks this is a bad idea because it would discourage land speculation.  He argues that, while land speculation might stick us with surface parking lots in the short run, speculation serves a useful function by reserving land until development is optimal for the site.  This ultimately facilitates denser development.  (He offers a couple of other reasons as well; check out his post.)

I'm on firmer ground, though.  Although I couched my suggestion as a way to penalize vacant lots, taxing land rather than buildings is perfectly sound economics.  A tax on buildings is a tax on capital.  Taxing capital discourages investment in capital.  This underinvestment creates a deadweight loss:  the investor foregoes the return the capital investment would have yielded; consumers (potential renters) lose the consumer surplus they would have enjoyed.  Taxpayers are no better off because the government can't collect a tax on a building that isn't built.  Switching to a land tax eliminates this deadweight loss.

By reducing the returns to investment, a capital tax makes undeveloped lots (such as surface parking lots) relatively more attractive and causes investors to demand  higher returns from their investment -- which may indeed mean greater density.  But that assumes property values eventually rise enough to create those higher returns.  That's no sure thing.

In any event, who's to say a 2.5% tax encourages an optimal level of density?  Why not a 4% or 8% tax on buildings?  Or 20%?  I don't see a rationale for choosing one rate as "optimal."  It's better to let investors make decisions based on the real returns to investment and avoid the distortionary effect of taxes altogether.

One New Urbanist community's battle for approval

See this account of a developer's struggle to gain approval for I'On, a New Urbanist community in Mount Pleasant, South Carolina, just outside Charleston:

[T]he neighborhood is located in close proximity to two historic districts that are, if price is any measure, the most sought after places to live in the area; through its Master Plan and Strategic Plan the Town had adopted a clear vision for the kind of development they wanted; we had two of the best, if not the best, planning teams in the country creating the initial plan [Dover Kohl and Andres Duany's DPZ - AC]; no less than four environmentally oriented groups endorsed the plan along with a substantial number of community leaders; and the developer had a track record of successful TND development within a 90-minute drive of the subject property.

But to gain approval, the developer had to cut the project from 800 single-family homes, 440 multi-family units, and 90,000 sf of commercial space to 749 single-family units and 30,000 sf of commercial space and eliminate the multi-family units, a gross density of only 3.1 units/acre.  It took two city council votes spaced over two years and a lawsuit appealed all the way to the South Carolina Supreme Court; the council members who voted for the project were turned out of office after bitter elections.  Attempts to connect the development to surrounding neighborhoods were shot down.  The developer won the right to locate a Montessori school in the village center only after obtaining another judgment affirmed by the court of appeals.

Although one can  speculate why there are not more New Urbanist greenfield developments, this kind of story, I think, explains why we don't see more NU infill developments.

Taxing land rather than buildings

The Overhead Wire points to this at the ULI blog:

How about restructuring the property tax across America to install a two-tiered system? More tax on those horizontal pieces of empty land and asphalt, less on the buildings. That is, reduce the tax rate on homes and other improvements, and substantially increase the rate on the site value. I think such a system would induce more compact development and more infill work.

I've floated this before for downtown property in order to discourage surface parking lots.  One commenter kindly pointed to this institute devoted to promoting  this idea.  I haven't had time to study those materials yet.  

Obiously, I like the idea, but, thinking it through, I envision one problem.  In order for the tax to be revenue neutral, the tax must be equal to the tax on a fully-developed property.  Suppose a $95 million office building is built on a $5 million dollar lot.  Annual taxes are assessed at 2.5% (for simplicity's sake), so the total tax is $2.5 million.

A revenue-neutral tax would require that a $2.5 million tax be levied on the vacant $5 million lot.  But how do we determine the value of the improvement before it is  built?  I.e., how do we determine that the value of the "appropriate" capital improvement is $50 million, $100 million or $200 million?

The tax system has to be consistent.  The only solution that comes to mind is to assume a build-out to the maximum zoning entitlements.  That would incentivize property owners of vacant or under-developed properties to campaign for lower entitlements.  In other words, they would seek a cap on the permitted density.  This is the opposite of their incetive today.

Perhaps that wouldn't be a disaster -- it would lead to development at a uniform scale, which would be an aesthetic improvement of what we have today.  But I'm not sure the trade-off for lower density (and thus higher prices for existing space) is worth it.

Perhaps Pittsburgh or other jurisdictions that have implemented this type of taxation have come up with a better solution.    

Stock up on poultry, eggs and cheese

Because of this:

An outbreak of salmonella food poisoning has made 388 people sick across 42 states, sending 18 percent of them to the hospital, U.S. health officials said on Wednesday.

The U.S. Centers for Disease Control and Prevention is trying to trace the source of the outbreak, which began in September. The Department of Agriculture, state health officials and the Food and Drug Administration are also involved.

The CDC said poultry, cheese and eggs are the most common source of this particular strain, known as Salmonella typhimurium.

Dear poultry, eggs and cheese producers:  Be afraid. Be very afraid.

Or maybe not.  Perhaps chastened by the wanton damage it needlessly inflicted on tomato growers (and tomato consumers) last year, the CDC appears to be taking a more conservative approach this time:

"Because foods of animal origin may be contaminated with Salmonella, people should not eat raw or undercooked eggs, poultry, or meat. Persons also should not consume raw or unpasteurized milk or other dairy products. Produce should be thoroughly washed," [the CDC spokesman] said.

In other words, "You don't need to take special precautions."

The city hurts your brain

So reports Jonah Lehrer for the Boston Globe:

[S]cientists have begun to examine how the city affects the brain, and the results are chastening. Just being in an urban environment, they have found, impairs our basic mental processes. After spending a few minutes on a crowded city street, the brain is less able to hold things in memory, and suffers from reduced self-control. While it's long been recognized that city life is exhausting -- that's why Picasso left Paris -- this new research suggests that cities actually dull our thinking, sometimes dramatically so.

"The mind is a limited machine,"says Marc Berman, a psychologist at the University of Michigan and lead author of a new study that measured the cognitive deficits caused by a short urban walk. "And we're beginning to understand the different ways that a city can exceed those limitations."

. . . 

Consider everything your brain has to keep track of as you walk down a busy thoroughfare like Newbury Street. There are the crowded sidewalks full of distracted pedestrians who have to be avoided; the hazardous crosswalks that require the brain to monitor the flow of traffic. (The brain is a wary machine, always looking out for potential threats.) There's the confusing urban grid, which forces people to think continually about where they're going and how to get there.

The reason such seemingly trivial mental tasks leave us depleted is that they exploit one of the crucial weak spots of the brain. A city is so overstuffed with stimuli that we need to constantly redirect our attention so that we aren't distracted by irrelevant things, like a flashing neon sign or the cellphone conversation of a nearby passenger on the bus. This sort of controlled perception -- we are telling the mind what to pay attention to -- takes energy and effort. The mind is like a powerful supercomputer, but the act of paying attention consumes much of its processing power.

This kind of research seems calculated to generate splashy headlines --  such as "How the city hurts your brain."  I'm sure anti-density types will eventually cite it in debates over urban form as evidence that density is "bad for us."  So let's fisk it now.

IBM is pushing congestion pricing

It implemented a trial road-pricing system for Stockholm and is running an advertising campaign touting the results:

The road charging system has made a real impact in congestion and overall quality of life for the citizens of Stockholm.  By the end of the trial, traffic was down nearly 25 percent.  Public transport schedules had to be redesigned because of the increase in speed from reduced congestion.  And even inner-city retailers saw a six percent boost in business.

And this:

In the face of local skepticism about the project, the authorities decided to implement road pricing for one year—on a trial basis—and then allow citizens to decide via a referendum whether to make it permanent. That referendum recently passed, and in a few of months, the program will be up and running again.

IBM obviously thinks it can make a lot of money implementing road pricing schemes for other cities.  Not to be cynical, but there is real hope for road pricing if influential, politically-connected corporations start lobbying for it.  

H/t The Overhead Wire.

Stop privatizing toll roads

Ben Wear discusses (but unfortunately does not link to) a report from a task force created by the Texas legislature to examine TxDot's public-private toll road partnerships.  These partnerships have stoked a lot of opposition.  The task force offered a mixed evaluation; it is unlikely to settle the debate.

I think privatizing toll roads is a bad idea, at least for now and maybe forever.

Privatizing roads is unpopular.  Some people simply can't abide turning public roads over to private companies.  Some think the deals amount to corporate charity.  And public-private agreements include contract provisions that infuriate some people. These include clauses limiting speed limits or capacity increases on parallel roads.  These are necessary to assure the private operator that revenue will be stable, which in turn is necessary to sell bonds.   But most people don't see them that way.

There is already plenty of resistance to tolling roads.  It will take the public time to get accustomed to them.  There is no need to link tolls and privatization, which simply stokes more opposition to tolls.

There is another reason to oppose privatization.  Privatization requires that each new road pay for itself.  For reasons I've explained before, the roads that ought to be tolled are the congested, older roads.   Properly pricing these older roads with congestion tolls would generate revenue to fund new capacity -- whether new roads or commuter or light rail.  Pricing new roads does little to relieve the congestion on existing roads.  Instead, it discourages trips that ought to be taken while doing nothing to discourage trips that shouldn't be taken.  (This is exacerbated by TxDot's insistence on charging flat tolls rather than variable congestion tolls.)  It should be no surprise, then, that new toll roads rarely pay for themselves.

We ought to treat our roads and transit systems as a network.  We should care about network capacity and network congestion and not so much about the revenue generated by a given road.  Privatization encourages us to chop up the network into little pieces.  That's counter-productive at best.