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.
It sure would induce more development.
Higher taxes on the land, lower taxes on the building, discourages a land holder from leaving his land fallow and speculating on its increased value, and conversely, encourages improvements on the land and redevelopment. The monograph used Sydney Australia as a case study, but its general point, that a site value tax system puts “pressure on owners to sell their property for redevelopment if they cannot or will not redevelop it themselves.”
Note that ULI is an organization primarily of real estate developers, investors, and related professions. (I am a member.) So, I can see why developers would favor a mechanism that would force more land into development.
Overall, this type of scheme will help drive development in the short run, but be harmful in the long-run. By encouraging development in the present by discouraging land speculation, we can expect a few consequences:
- Speculators play an important role in the land market, even if we don’t like the surface parking lots they often operate on their land. Speculators essentially hold the land until development is optimal for the site, and all sites cannot be optimally built at once. Discouraging speculation drives the land into the hands of developers at cheaper prices than current market prices.
- At the same time in reaction to the new tax regime, all the new developers will compete for users of the space they are building on the vacant land. This either means they’ll build smaller in anticipation of the glut of new development, or vacancy rates will be much higher.
- The new supply of space will likely serve to lower rents and condo prices, but this will only be temporary as available development sites quickly disappear.
- Had speculators been forced to build on their lots, less dense, and less optimal buildings would be in their place, and a future developer faces the opportunity cost of demolishing that building. This would be similar to developing in New York, where vacant parcels are very rare, compared with developing in Chicago where developable parcels are relatively plentiful. There is a huge affordability gap between New York and Chicago, which can be partially attributed the the availability of development sites.
- It will harm the diversity of building age that Jane Jacobs claims as a key ingredient that makes for great cities. The stock of buildings will be disproportionately represented by buildings built shortly after the tax scheme is enacted. As new development occurs, affluent people will be attracted to the developing areas. As these buildings depreciate, the more affluent will relocate. Without enough diversity, over a long period of time a neighborhood will be predominantly lower-class residents.
- This under-developed scenario will breed NIMBYism over the years, as the new development will be of lower density than under current taxes. Residents will likely be resistant to future higher density development of sites to meet market demand. However, new development would necessarily involve demolition of existing lower-density buildings, which is costly from an opportunity cost point of view, as well as community relations.
I do favor some regional, state, or other tax based upon acreage. (if offsetting income tax or other productivity-stifling taxes) However, I would implement the tax to discourage sprawl, not to discourage speculation. Thus, I would tax each acre equally, whether developed or vacant. Encouraging development of vacant land may only serve to encourage lower density development as a “tax payer”, as opposed to a more optimal use of the land. As long as density isn’t overly restricted, speculation can allow for higher density, and more optimal land use in the long run.
By burdening speculators, we should expect speculation to shift to under-optimal “development” like this: