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Why shovel-ready sites are the death of us and how to stop them

By James Howard Kuntsler
Our system of property taxes may be the single most insidious, pathogenic factor contributing to the geography of nowhere. It is almost impossible to discuss. It involves numbers and formulae resembling mathematics, from which many otherwise healthy adults shrink in tearful bewilderment. It implies the confiscation of one's earning and chattels (i.e., one's security and well-being), which provokes a mindless terror that no mere talk can overcome. The impenetrable jargon of economists does not make it any more inviting -- they don't call it the dismal science for nothing. So, we complain about taxes, and vote for candidates who promise vaguely to make them lower (and are eternally disappointed by them), but we leave the details to presumed experts because taxes are too painful and baffling to think about. This being said, I will undertake to discuss the undiscussable.

Our system of property taxes punishes anyone who puts up a decent building made of durable materials. It rewards those who let existing buildings go to hell. It favors speculators who sit on vacant or underutilized land in the hearts of our cities and towns. In doing so it creates an artificial scarcity of land on the free market, which drives up the price of land in general, and encourages ever more scattered development, i.e., suburban sprawl. In tandem with zoning, the taxing of buildings rather than land itself promotes such wasteful practices as putting up cheap one-story burger joints in huge parking lots on prime city land. It is one of the biggest impediments to the free market creation of affordable housing. As a consequence of all these things it is a drag on economic productivity and employment.

This happens because we tax buildings much more heavily than the land under them. These buildings are visited by an official assessor who determines their value. The higher the building's value, the higher the tax. Under this system, a rational person has every reason to let his property run down, or building nothing at all. This is a major reason for the current desolation of American towns and cities.

The alternative to this is to tax land itself and not the buildings on it. The criteria for assessing the value of land minus buildings is based on its location or site. If it is one block away from Main Street, for instance, it is considered to have high site value because it is very close to together things that people like to be near: public utilities, the post office, civic amenities such as parks, museums, libraries, schools, other businesses and other services, and so on. The theory behind this is that in human society land derives value from both explicit public investment (sewers, water lines, streets), and from the aggregate of private human activities that go on around it. This is termed socially created value. Owners of prime real estate derive large benefits from socially created value and therefore should be taxed on that basis rather than on the basis of whether they choose to use or squander those benefits--for example, whether they chose to use it in the form of a vacant lot or a seven-story hotel. I will try to make it clear why our current system favors the vacant lot and discourages the hotel.

Viewed over the millennia one sees a strong tendency toward centrality in human settlement. People like to be around other people for safety, comfort, and excitement, and business enjoys certain advantages where there are other businesses. This is both the essence of civilization as a social construct, and of its physical manifestation in towns and cities.

Through history the site value of land close to the center has always been high. In our century, motorized transport and single-use zoning have undermined this tendency but by no means extirpated it. (Indeed, it is my view that American are suffering deeply from the centerlessness of suburbia.) Even in the face of these forces, land close to the center remains desirable. It still has high site value and high market value. Such land near the center, enjoying high socially created value, should therefore be said to have a higher taxable site value than land farther out, regardless of the buildings on it.

Living in America today, one would scarcely believe this. But even places as desolate as downtown Detroit have high site value--apart from all the disincentives operating to discourage the current landowners (including the city) from doing anything useful with the property. If nothing else, this land retains proximity to major streets, public services, and geographic amenities like waterfrontage, and we recognize its potential high utility.

In America today, much downtown land stands vacant, or contains decrepit buildings, or is underused in the form of parking lots. This land is being held in speculation. Someone is making a bet that at some point in the future it can be sold for lots more money than he paid for it. Land speculation is a form of hoarding. It contributes nothing to the life of the community. It takes prime land off the market and puts it in long-term cold storage, creating an artificial scarcity, which drives up the price of the land that is on the market. This behavior is supported by low taxes on the land itself.

Under our current system, a vacant downtown city lot is taxed much lower than a lot with a thirty-eight-story office tower on it. The owner can afford to pay lower taxes year after year, perhaps even for decades. This is called the holding cost. It is in the interest of such a speculator to allow whatever buildings that exist on his property to decay. Not only do his property taxes stay low, but he can enjoy the added benefits of depreciation on his income taxes as well. (Buildings depreciate, land does not.) It is a common misconception, by the way, that slumlords make their money on rents. Rather, they make their money on windfall profits when the city finally condemns the buildings and has to pay market value for the land according to the law of eminent domain--the market value being artificially jacked up by the condition of artificial scarcity created by the very slumlord/speculator/hoarders who benefit from it. What a wicked racket, huh?

Under the system I have just described, a downtown city lot with no buildings on it may have low taxes levied against it, though the market value of the land alone might be a million dollars.

Under the alternative system of site-value taxation, the owner of that million-dollar city lot would have to pay a much higher tax, a tax commensurate with the land's site value, regardless of what kind of buildings stand on it. Thus, his holding cost is increased, perhaps to the degree that he is presented with two courses of action besides just sitting there doing nothing with the land except waiting for it to get more valuable. These courses of action are as follows: he can put a building on the land that will produce enough wealth to cover the higher taxes and generate additional profit besides--let's say a hotel, which would employ lots of people and make the city nicer (increasing the socially created value of other nearby properties); or, if he lacks the ambition or ability to do something useful with it, he can sell the land to a willing buyer. This gives somebody else, perhaps with more ambition or imagination, the chance to do something useful (and profitable! and socially beneficial!) with the land.

If all landowners in a city were faced with such a choice of actions, many parking lots would go on the real estate market in short order. A higher tax would probably reduce the pool of potential buyers, lowering demand. Increased supply and decreased demand implies the lowering of price. Speculative holding would be discouraged and, with no tax on new buildings, city lots would more likely be put to some productive purpose.

There is a third course of action: the land owner could default on his higher land taxes, in which case the city would take over the property and auction it off as soon as possible to the highest bidder, who would then be faced with the same choices as spelled out above.

The criticism has been put forth that such a tax system would promote super-high densities in cities, with an excessive building of skyscrapers. Actually, the opposite tendency is true: the current system of taxing buildings rather than land perversely encourages skyscraper construction by keeping so much land off the market in speculative cold storage that the price of available parcels rises to fantastic and artificially high levels. Therefore, when a building is contemplated, only a skyscraper will justify in rents the huge cost of the land underneath it, usually with tax abatements thrown in to sweeten the deal.

Under an alternative system of site-value taxing, much more land would come onto the market as a result of higher taxes, but the price of lots would fall, due to increased supply and reduced demand. One could say that the up-front cost of purchasing land would be much lower, while the long-term holding cost would be higher. With buildings not taxed, many more land owners would seek to build profitable structures. But the demand for office and apartment space would then be diluted over many more pieces of property, discouraging excessively huge buildings on any single parcel as economically impractical. In any case, regulating the mass and height of buildings is one of the legitimate functions of city planning. Many cities already have height restrictions on buildings, including Washington, D.C., Paris, and Berlin.

One of the more likely results of such a system would be buildings of much higher quality and generosity, for example, apartments with higher ceilings, larger rooms, and attractive entrances. As anyone knows who ever lived in New York City, the luxuriousness of middle-class apartments dating from the early decades of the twentieth century seems incredible. In contrast, many East Side co-ops built in recent decades have apartments with small rooms and dinky eight-foot ceilings. The latter buildings were designed primarily for tax depreciation and secondarily for the comfort of their inhabitants.

The effect of our current system of taxing buildings is one of the prime causes of our affordable housing crisis. Because it rewards decay and punishes new, high-quality construction close to the center, almost no middle-class housing has been built since early in the twentieth century. Also, under the current system, high taxes on buildings tend to be shifted to renters. This is precisely what caused the perverse conditions at the end of World War Two in which the rent for Ralph Kramden's apartment was higher than the monthly mortgage payment of a house in Levittown, leading ultimately to the complete abandonment of the city by the middle class.

Under the alternative system of taxing land, not buildings, much more middle-class-market housing could be profitably built in cities, increasing the supply and lowering rental prices, as landlords compete for tenants. Since the site-value tax would have to be paid whether the land was used productively or not, there would be much more incentive for owners to build rentable housing at the highest densities allowable under the city codes. With a healthy supply of apartments, the market would bid down rents while increasing the standards of quality in rental housing stock as landlords compete to fill their buildings. Almost all economists agree that a tax on land alone stays with the land and cannot be passed along to renters.

Because site-value taxation encourages building, it also promotes the increase of socially created value, since the more activity and vitality there is in a given neighborhood, the more desirable it becomes to live and work there. Site-value taxation therefore creates a sum of value greater than the value of individual pieces in a given neighborhood. In the long run, this additional activity will make land more valuable, increasing the city tax base.

Since in the natural order of things affordable housing is housing that is older, and because some owners take better care of their property than others, eventually middle-class housing becomes the housing of the lower classes. It need not be decrepit, only less desirable. Because our current system encourages decrepitation, that is precisely what the poor get for housing.

Fear has been voiced that site-value taxation would be harmful to farmers, who generally own large amounts of land. In point of fact, 90 percent of land values are in cities. Site-value taxation would encourage more compact town and city development, and would take the development pressure (demand) off property in the hinterlands. There would also be less tendency to run highways, sewer lines, and other public "improvements" out to rural lands and their site value would be proportionally much lower, which would be reflected in lower taxes paid by farmers. Where farms stand close to existing towns, or perhaps newly formed centers, their site value would reflect that proximity and the farmer could profit from it. Most states have "agricultural district" rules that provide tax mitigation for farmers. Under the current property tax system--which promotes speculation in farmland--they need that mitigation desperately. Under the regime of suburban sprawl, a great deal more farmland is currently being lost than would be lost under an alternative site value tax system.

In recent decades, it has become accepted practice for farmers to "cash out" at retirement by selling their farms for housing developments and shopping malls. This has come to seem a sort of entitlement in my part of the world. Obviously every generation of farmers to come won't be able to enjoy a million-dollar bonus on retirement, for in a few generations there would be no farms and no farmland left. Therefore, the cashing-out syndrome must be viewed as one of the social abberations caused by our current system. Sooner or later it must stop. Site-value taxation would tend to keep farmland in farming.

While the beneficial effects of site-value property taxation may be obvious, the mere thought of higher taxes on land might be an inducement to reflex vomiting on the part of citizens who are apt to be deeply suspicious and fearful of any proposed changed in the status quo. One of the added benefits of site-value taxation is that it tends to be much fairer, clearer, and simpler to administrate than all other forms of taxation. The overwhelming number of poor people own no land whatsoever, the middle class generally own only the land under their homes, and the rest of the land privately held in towns and cities is owned by the relatively wealthy, including corporations.

It is reasonable that a person (or a company) should pay taxes in relation to his ability to pay, but the amount ought to be in some relation to benefits derived. Owners of valuable land benefit from socially created value based on the location of their land, so under a system of site-value taxation the relation between tax paid and benefits received would be clear and proportional. Under our current system of taxing buildings rather than land, taxes may be (and often are) out of proportion with the benefits received, which a normal person would rightfully construe as unfair. For instance, a homeowner whose assessment is increased because he decides to fix up his old house derives no increased benefit in municipal services. Why should he be penalized for taking care of his building? This sort of policy can only make citizens cynical. The site value of land, on the other hand, is relatively simple to assess, compared with the value of buildings, which are often unique. Benefits derived from the location of property alone are typically obvious. Site-value taxation therefore has both the appearance and the reality of greater fairness. Land can't be hidden--you can't stash it in a secret Panamanian bank account.

The idea of taxing land and not buildings comes from the nineteenth century political reformer Henry George (1839-1897). His life coincided with the rise of industrial cities in America, and his ideas were an attempt to remedy some of the unprecedented social distortions that accompanied it. George observed the paradox that poverty seemed to surpass the increased societal wealth generated by industry, and his taxing notions were an attempt to rectify that inequity without resort to the kind of Robin Hood economics embodied by socialism. George ran for Mayor of New York City in 1886 and came in second in a three-way race--losing to the Tammany Hall machine candidate a.S.Hewitt, and beating Republican Theodore Roosevelt. He ran again in 1897 but died suddenly of a cerebral hemorrhage during the political campaign at age fifty-eight.

It is important to recognize that Henry George lived in a period when cities grew and changed drastically and the cost of operating them went up astronomically. Vast new sewer and water systems were installed for the first time. Great bridges went up. Parks were created. Skyscrapers appeared for the first time in human history. The population of cities ballooned with a flood of immigrants. The cost of police and administration went up. Citizens in general were being asked to pay much more for the costs of running society. The income tax would become law a few years after George's premature death, but he was deeply involved in the debates that surrounded its creation, and he did not favor it. George saw that many of the common methods for raising taxes, including excise and sales taxes, and the proposed income tax, constituted a levy on unearned increment of wealth generated by the socially created value of cities accrued to a limited and concentrated segment of society who were contributing little in return to the cost of running this evermore-complex city-based society.

It must also be remembered that the rapid rise of industrial capitalism generated enormous public resentment which was often expressed in political violence and in many different revolutionary movements aimed at overthrowing the entire system. The last thing Henry George could be described as is a Marxist. His ideas essayed to improve the ability of a capitalist society to function. He did not aim to abolish wealth or punish the wealthy classes. He did not seek to abolish democracy or establish a dictatorship of the proletariat. He viewed the grotesque social imbalances of the machine age and saw that they could be reasonably rectified within the bounds of the existing economic and political system.

George died the year after Henry Ford introduced the motorcar, and he obviously did not live to see suburban sprawl. But his ideas have remained influential both here and in other industrial nations. I dare say he would have viewed suburban sprawl as just another set of social distortions inevitably produced by industry working in tandem with government's tendency to tax productive activity. George recognized that a tax on productive activity tends to erode its base. For instance, a tax on income decreases people's ability to buy things and use services, meaning it decreases productivity, the incentive to earn, and employment in general. A tax on good buildings tends to promote the decay of all buildings.

Now, the question arises: if the Georgist tax idea is so great, why hasn't it been tried? The answer is that is is being tried right now in a score of American cities, in Australia, and New Zealand. The most notable experiments are taking place in Pittsburgh, and in Harrisburg, the capital of Pennsylvania. The system they are using is a modified Georgist approach called two-tiered taxing. Two-tiered taxing is a gradualist method. It taxes land proportionately more than buildings, and over time the proportion continues to shift from buildings to land. The reason the old system of taxing buildings is not overthrown altogether is due to the reasonable fear that a sharp drop in land prices resulting from so much property coming onto the real estate market might destabilize a local economy, causing, in effect, a local depression.

Pittsburgh instituted a rather timid two-tiered property taxing as long ago as 1913. The steel barons had big estates within the city limits, including private deer parks, and they were contributing proportionally little in taxes. So the city ratcheted up the tax on site value just a little. Unfortunately, the change was very slight -- so as not to anger the steel barons -- and the city instituted this system at the dawn of the suburban era, just as the automobile was about to open the urban hinterlands for development. The upshot was that Pittsburgh toodled along for the next sixty years, like most other cities, without much apparent benefit from the two-tiered tax system, with its middle class decanting to new suburbs in large numbers. The exodus also had to do with the fact that Pittsburgh was an extraordinarily unpleasant city, even by American standards, renowned for its soot, smog, and noise. However, the precedent had been established for a modified Georgist tax system. It just lay dormant for a long time.

Beginning in the 1970s, the steel business which is to say the floor dropped out of its economy. In 1979, as a kind of desperation measure, the city took another look at its old two-tiered property tax system and decided to increase the tax significantly on site value while lowering the tax on buildings. Results were impressive. For the three-year period afterward, building permits issued in the city increased 293 percent compared to the national average. The city then shot itself in the foot by instituting a local wage tax (a tax on productivity), which provided new incentives for residents to move to the suburbs. But on the whole so far, the two-tiered tax system has had salutary results in that city. It has enabled Pittsburgh to make the difficult transition away from the steel industry to an economy based on hospitals and medical services. With the steel mills gone, soot and smog are a thing of the past, and Pittsburgh is now consistently ranked among the nation's most livable cities.

Harrisburg began a shift to site value taxation in 1977. It had lost nearly half its population since 1950. The downtown was dead. It was declared one of the most distressed cities in America. Under two-tiered taxing, it has made an impressive comeback. In 1994 the city issued the highest number of building permits for any year in its history. The number of businesses on the mercantile tax roles has risen from 1,908 in 1981 to 4,541 as of 1994. In 1994 and 1995 Harrisburg was considered to be among the top twenty-five American cities for affordable housing. The last tax increase of any kind was voted in 1987.
Other towns experimenting with a modified Georgist tax system are Scranton, Aliquippa, Newcastle, Titusville, McKeesport, and Clairton. In 1995, an extremely distressed Mohawk river factory town named Amsterdam in upstate New York adopted this system out of desperation. It is too early to see results there.

Historically, the city with the purest Georgist tax system was Edmonton, Canada, which, in 1904, instituted a plan that totally exempted buildings from tax consideration. Edmonton was then a brand-new city, growing up at exactly the time when elevator buildings were becoming technically feasible. Consequently, Edmonton quickly developed a dense downtown core, considered by many to be an exemplary exercise in civic design. Unfortunately, in 1918, to mitigate the expense of fighting World War One, the city slapped a 60 percent tax on the value of buildings, instead of simply increasing the tax on site value.

Experiments in Australia indicate that a modified Georgist approach in Sydney is already showing beneficial land-use results, compared to Melbourne, where a substantial tax on buildings is still in effect.
It is too early to say that site-value taxing has proved unequivocally to be superior to existing systems, but the evidence points in that direction. Many of the problems of industrial cities and automobile suburbs are still new to us. Our frantic attempts to cover the costs of running these organisms of habitation, with their vast infrastructure, has led to self-defeating behavior that is poorly understood. Many of our efforts to cope have produced unfortunate, unintended consequences, such as the abandonment of cities by the middle class, which has produced further unanticipated repercussions, such as the social pathology of the inner-city poor, and the spiritual impoverishment of suburbia. All of these things have grossly inflated the cost of running society, which we ever more desperately try to cover first with higher taxes, and then by spending money that doesn't exist -- the national debt -- on social services and other mitigations. It is clear that we've reached a limit in our ability to generate either more taxes by current means, or more debt by any means. Reform of our property tax system along the lines advocated by Henry George is a straightforward means for restoring the economic health of our ailing towns and cities -- no smoke, no mirrors, no voodoo.

(Copyright James Howard Kuntsler. Reprinted with permission.)


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