Taxing Blight & Rewarding Investment

Detroit’s existing tax structure disincentives development. Holding vacant land or land with dilapidated (i.e. assessed as worthless) structures is cheap from a tax perspective. Actually developing land triggers a tax increase because of the brand new structure who’s value gets figured into the tax bill.

What’s worse, the existing tax system encourages land hoarding. Land speculators sit on neglected parcels on the off chance that a developer needs it as part of a larger project. To caveat that, though, not all land speculation is bad. Holding some land off market and releasing it later into a development cycle can have positive benefits. In Detroit’s case, however, these are mostly vacant lots and abandoned buildings creating public health hazards the city has to deal with.

The Political Economy of Land Value Taxation

Unexpectedly – for me as a latte sipping coastal urbanite in California – Dugan’s LVT would also lower tax bills for homeowners. Land values in Detroit are low — in absolute terms and relative to structure values. Making the shift to taxing the less valuable land component of a property nets out positive for most homeowners. And the fact that it’s a win for homeowners makes me think it’s politically viable, both in Detroit and elsewhere.

In places struggling to get back on a growth footing — places where land values are relatively low because the local economy is relatively unproductive — proposals like Dugan’s might net out positive for homeowners. Wherever this type of property tax reform puts money back into homeowners’ pockets, it’s going to be politically possible. Which is, for the record, the complete opposite of high productivity coastal metros where land itself quite expensive.

But is it really going to happen?

Whether Dugan’s plan actually happens, though, is TBD. My understanding is that there’s a two step process. First, the Michigan state legislature passes a bill allowing Detroit to enact the change. Second, Detroiters have to pass it by popular vote. I have no idea what Michigan state politics look like, so no idea how to assess the p(this_actually_happens).

Additionally, this is not the maximalist 100% LVT proposal that many Georgists prefer. It’s a much more modest change — with a three year phase in. It will have impact in the aggregate and the long run, but it’s not heralding the arrival of Georgist utopia in the Great Lakes.

All that said, it looks like sound policy. And if an elected official is pitching it, I have to assume someone thinks it has legs. Fingers crossed for Mayor Dugan, Michigan, and Detroit.

Further Reading:

Mayor Dugan at the Mackinac Conference

Split Rate Property Taxation in Detroit: Findings And Recommendations

The post Detroit: LVT would fix that appeared first on Market Urbanism.

In particular, the book’s third section on reforms is outstanding. It starts with a slate of policy proposals typical to this kind of text, but quickly goes much farther afield. After suggested policy changes, we’re invited to consider a world without zoning via an in-depth look at Houston’s land use regime. Here we’re treated to both an explanation of how it works and the unique political history that left the city unsaddled with zoning. Nolan goes on to close his recommendations with a call to reimagine what a city planner could be in a post-zoning American city; a call that, as a former New York City planner, he is uniquely fit to make.

Aside from the content, this book deserves points for prose. Arbitrary Lines is blessedly readable. The writing flows and the varied anecdotes interspersed throughout the book make it feel less like a policy tract and more like a conversation with your favorite professor during office hours.

For those already initiated, buy the book and enjoy nodding your head and learning a couple new things. And for those trying to share the good news of land use reform, consider making Arbitrary Lines that one thing you get friends or family to read. It’s among the most accessible books on land use I’ve ever read, and it’s a great addition to the growing arcana of the YIMBY cannon.

The post Book Review: Arbitrary Lines – How Zoning Broke the American City and How to Fix It appeared first on Market Urbanism.

I think the story about incentives is correct. But I question whether pulling development forward in time is definitionally more efficient. In a world with transaction costs, tradeoffs abound and it’s worth thinking through the implications of an LVT.

A Tale of Two Cities 

Picture a growing local economy with increasing land values and an LVT. Now suppose we split the time stream and create two parallel universes with different tax rates. In scenario A, we apply an LVT at 75%; in scenario B the LVT is set at 25%.

There are two important questions here:

1) When will a given parcel be forced into development?

2) What intensity of development will the parcel support at the moment it’s put into productive use?

To answer our first question, we look at the tax curves and make some assumptions. Suppose carrying costs push land into productive use at $250 psqft in LVT costs, scenario (a)’s parcel goes into development around year 9 at a $331 psqft. Scenario (b)’s parcel doesn’t see development until year 20 and a ~$1K psqft value.

Given the delta between year 9 and year 20’s psqft valuations, we could expect to see different intensities of development. We’re now left with the question of whether a duplex in nine years is better than a mid-rise in twenty.

Appropriating the full rental value of land would pull development forward, but that doesn’t definitionally lead to it being put to its highest and best use. Highest and best is contingent upon what time scale we’re optimizing for and that choice of time scale is an inherently normative decision.

Terms & Conditions

Now the caveats. This is a simplified thought experiment and all the numbers are completely arbitrary. I’m not making the case that there’s a specific choice between development densities at particular tax burdens. The case I am making, though, is that in a world with transaction costs an LVT would force us to make important tradeoffs.

Also, several things that exist in the real world – but not in this fictional account – complicate our story.

• Carrying costs are impacted by more than taxes. An aggressive LVT might very well become the lion’s share of carrying costs, but factors like interest rates would matter as well.
• Liquidity preferences aren’t uniform. There wouldn’t be one psqft LVT cost at which all landholders are pushed to develop parcels. Differences in access to capital and risk appetite would make for a range of values.
• Land use regulations limit options. Being limited to commercial or varying types of residential or whatever’s specified in zoning would impact potential return and likely developer behavior.
• Technology could make the tradeoff disappear. If we were able to incrementally densify a parcel without losing the value of the existing structure, there’s not really any intertemporal tradeoff. To my knowledge, this only (kinda sorta) applies to informal developments in Latin America.

All said, I remain a fan of Georgist ideas. Capturing land rents for common infrastructure – whether through an LVT or by other means – is still an idea I support. But when we think about policy prescriptions, we need to recognize their limitations and that tradeoffs always and everywhere abound.

The post Land Value Taxation and Intertemporal Tradeoffs appeared first on Market Urbanism.

Creating Demand for Density

Belong is an early stage startup making it easier for homeowners to rent out their single family home. The main use case is that of a homeowner renting (instead of selling) after a move.

A lot goes into becoming a landlord and Belong’s elevator pitch is that they simplify the process. The company’s customers access insurance, connect to contractors for repair and renovation, get help with listing, and find anything else they need all in one place.

To the extent they’re successful, they’ll be creating a class of small scale landlords with every reason to develop missing middle housing. Transforming the family home from a speculative asset to one producing a monthly stream of revenue makes ADUs and duplexes more attractive. More units mean more tenants and therefore better monthly returns. And once an owner is no longer an owner-occupier, “neighborhood character” concerns become less salient as well.

That said, this is admittedly speculative. Whether single property landlords will be as YIMBY as I suspect is an empirical question for the future. More immediate, though, are the incentives another new startup is creating for homeowners across California.

Densification as the Path to Homeownership

Homestead is a property developer that’s using legislation like California’s SB9 and SB10 to build housing. They work with homeowners interested in the upside of doing a lot split and adding housing like a duplex or an ADU. They also market to prospective homebuyers. California home prices being that they are (obscene), doing a lot split to offset the initial purchase cost is attractive.

While Homestead is a developer, a lot of what they do is reduce cognitive overhead. California permitting processes are byzantine at best and while reforms like SB9 and SB10 have made them better, it’s still like playing snakes and ladders. Making it easier for people to take advantage of hard fought legislative victories is great. Showing a new generation of homeowners that density can be good may be even better.

Short Circuiting NIMBYism

No startup is going to unilaterally fix the housing crisis. That was always going to take major legal, regulatory, and political reform. Still, companies like Homestead and Belong could help shift homeowner attitudes in favor of density. Giving homeowners the personal financial incentive to develop missing middle housing in low density residential neighborhoods would be great for increasing supply. It would also help normalize densification, clearing the way for further development and greater reforms.

Convincing people to support housing on policy grounds is good and necessary. But not everyone spends their Friday night reading Vox explainers. For normal folks who neither know nor care what housing twitter is, creating opportunities to benefit from a pro-supply housing regime will matter. And although we all understand supply elastic housing markets will make society better off on the whole, anything that makes that upside more immediate and tangible for folks just living their lives is only going to help.

The post Entrepreneurs and the Changing Political Economy of Housing appeared first on Market Urbanism.

Allowing gradual densification is an absolutely necessary step towards general affordability. Supply, demand, and price form an iron triangle–the more responsive we can make supply to demand, the less price will spike to make up the difference.* What I really want to focus on here, though, is less about policy and more about political economy. I believe allowing medium-intensity residential development could make additional reforms easier to achieve and change views around development going into the future.

We Love What We Know

More often than not, I think a generalized status quo bias explains a lot of NIMBYism. Homeowners are most comfortable with their neighborhoods as they are now and are accustomed to the idea that they have the right to veto any substantial changes. Legalizing forms of incrementally more intense development could re-anchor homeowners on gradual change and development as the norm.

The first part of the story is about generational turnover. If the individuals buying homes today–and the cohorts that follow–are exposed to gradually densifying neighborhoods in their day-to-day, they’ll anchor on that as what’s normal and therefore acceptable. Moreover, if we’re debating whether to rezone an area for mid-rise development a generation from now, I imagine that those changes will get a much fairer hearing if for no other reason than the homeowners in prosperous communities will have spent a lifetime seeing gradual densification and population growth. 

Making Homeowners Pro-Growth

Beyond simply changing what people are used to and therefore comfortable with, I think there’s another pro-growth element here that’s about economic incentives. In a world where homeowners can add housing to their properties to make money, they’ll increasingly become focused on their right to develop their own land instead of their right to stop other people from developing theirs.

This doesn’t necessarily mean everyone is going to tear down the family home, put up a duplex, and live next door to or above some tenants. But if that type of development is legal, it’ll be priced into the market value of everyone’s property, giving homeowners additional incentive to anchor on a pro-development norm–to do otherwise would be to actively advocate for reducing one’s own property values. 

A lot of land use rules need to be changed in a lot of places across the country. As we address the technical challenges of better policy, we have to address the incentive structures and belief systems that conspired to create the world we’re dealing with now. And I’m happy to say that as we start to bring back neglected forms of residential development, I believe we’re going to get progress on all three fronts.

*See Nolan Gray’s Density is How the Working Poor Outbid the Rich for Urban Land.

The post The Duplex: Gateway Drug to Urban Density appeared first on Market Urbanism.

The permitting process for new housing in California is the bureaucratic equivalent of American Ninja Warrior. Localities use restrictive zoning and discretionary approvals to block new construction. When faced with state level oversight, California cities have historically leaned on bad faith requirements to ensure theoretically permitted and approved housing remains commercially infeasible. And as if that weren’t enough, “concerned citizens” can use the ever popular CEQA lawsuit to kill projects themselves (independent of direct involvements from electeds). 

This year’s housing package helps reduce the difficulty of getting a project through the gauntlet. Still an obstacle course, but with a few less water hazards and a slightly shorter warped wall.  Still suboptimal, but directionally correct in a very big way.

There are several pro-supply bills in the package, but two are especially worth calling out. 

SB 6 allows for residential development in areas currently zoned for commercial office or retail space. The bill would also create opportunities for streamlined approval if some portion of a proposed project site has been vacant. This last bit seems to be intended to encourage redevelopment of dead malls and similar retail heavy areas that could be better put to use as housing. 

SB 9 allows for duplexes and lot splits in single family zones by right. This type of missing middle housing could – at least in certain parts of California – be new housing that’s less expensive then existing stock; that’s a great outcome from a policy perspective, but would also come with the political upside of breaking the association between market rate and luxury. 

There are several other pro-supply bills in the package, but most of them deal with the more arcane minutiae of California’s land use system. Folks can check out SPUR’s legislative explainer (see the Land Use, Zoning and Streamlined Approvals section) for the TLDR on each.

The big takeaway is that we’re nowhere near a bill that institutes Japanese style zoning with by-right approval state wide, so continued progress pulling apart the gordian knot of California’s land use regime is something to be excited about. 

Beyond the potential policy wins, it’s worth appreciating where we’re at politically. Every year for the last several, we’ve had more and more state legislators authoring more and more pro housing supply bills. Yimby Activism has taken a settled policy debate as a foundation and begun building a sustainable political movement on top. I’m sure all of us are hoping this year is better than the last. In the area of state housing policy in California, I’m at least hopeful we’ve got a chance.

The post California Housing Reform: 2021 Edition appeared first on Market Urbanism.

Harris and Booker on Housing

Both the Harris and Booker plans call for direct subsidies to renters via the tax code.

• Harris’ Rent Relief Act (RRA) is a refundable tax credit for renters making $100,000 or less and spending more than 30% of their income on rent.
  • The credit would be worth a percentage of the delta between the recipient’s rent (capped at 150% of area fair market rent) and 30% of their income. Actual benefits would be bigger or smaller depending on the size of the gap.

• Booker’s Housing, Opportunity, Mobility, and Equity (HOME) Act is also designed as a refundable tax credit for renters paying more than 30% of their income in rent.
  • Unlike Harris’ RRA, there’s no sliding scale for benefits. The credit covers the entire difference between 30% of the recipients income and their rent (also capped by area fair market rent).

Both programs are in the same vein as other democratic anti-poverty proposals which use the tax code to affect transfer payments. The others, though, are expansions of the federal Earned Income Tax Credit (EITC) whereas these two proposals more narrowly target housing.

Devils in the Details

Housing costs are a major impediment to financial stability for many, so it’s good to see reducing them called out as a poverty reduction strategy. And transfer payments (as opposed direct government provisioning or price fixing) make for better social safety nets. However, as Tyler Cowen points out, juicing the demand side of a supply constrained market is a recipe for higher prices. Sending more dollars to chase a static supply of housing won’t solve the underlying problem.

To its credit, Booker’s HOME Act attempts to address supply constraints by adding language to the Housing and Community Development Act of 1974. After a cursory reading of the bill, though, it’s not clear how strong the extra language actually is. Harris’ RRA, as of this writing, has no such provisions.

A Federal Housing Agenda That Isn’t Terrible

If we want to reduce poverty by reducing housing costs, we need to build more housing. To that end, municipal regulations that prevent housing production need to be pared back. State capitals, with their different incentive structures and ability to override local policy, are the best points of leverage for reform.

Residential neighborhood in Harris’ hometown of SF

A pro-housing administration could use federal funds as a way to pressure states to liberalize land use. Funding for state administered versions of the Harris / Booker approach (and/or state level EITC programs) could be made contingent upon preemption of local zoning / permitting processes by state capitals. Direct subsidies would help uplift those at the bottom while land use deregulation would ensure a more supply responsive market overall. 

There some’s question about how far a hypothetical YIMBY presidential administration could interfere in state level prerogatives. My current understanding, though, is that if state governments can get money to do something they want to do anyway, no one will bat an eye (ie no state’s attorney generals will file suite). If the politics could be made to work, federal pressure on states to do the right thing could make for directionally correct federal policy. 

*One of the EITC expansion proposals was also authored by Kamala Harris

The post Democratic Candidates on Housing appeared first on Market Urbanism.

Learning by Listening 

Yimbys started out with a straightforward diagnosis of the housing crisis in California. They said, “…housing prices are high because there’s not enough housing and if we want lower prices, we need more housing”. And they were, of course, completely right…at least with regards to the specific problem-space defined by supply, demand, and the long run.

San Francisco, the birthplace of Yimby activism

As Yimby’s started coalition building, though, they began recognizing related, but fundamentally different concerns. For anti-displacement activists, the problem was not defined by long-run aggregate prices. It was instead all about the immediate plight of economically vulnerable communities. Increasing supply was not an attractive proposal because of the long time horizons (years, decades) and ambiguous benefit for their specific constituencies. 

Yimbyism as Practical Politics

Leaders in the Yimby movement could have thrown up their hands and walked away. But they didn’t. Instead they listened and developed a yes and approach. The Yimby platform still embraces the idea that, long run, we need to build more housing, but it now also supports measures to protect those who’ll fall off the housing ladder tomorrow without a helping hand today.

Scott Weiner’s SB50 is a great example of this attitude in action. If passed, the bill will reduce restrictions on housing construction across the state. It targets transit and job rich areas and builds in eviction protections to guard against displacement. At a high level, it sets up the playing field so that renters in a four story apartment next to BART don’t get evicted to make way for twelve stories of condos. But it still incentivizes homeowners next to the station (or, awesomely, just in Cupertino) to cash out by selling to a developer who’ll put in a triplex.

The strategic direction California Yimbys have taken, as exemplified by SB 50, makes all the sense in the world. Even if you take issue with the policy specifics, you have to admit it makes for great politics. This is politically viable legislation that opens the door to building more housing where we need it most.

Making a Big Tent Bigger

My co-contributor Nolan Gray has written about the growing bi-partisan nature of Yimbyism. And, in noting the tension between left and right oriented activists within the movement, has called out the challenge this represents for future coalition building.

If I’m reading him correctly, Nolan is noting that there’ll be work here, not necessarily making a prediction about future failure or success. I’ll stick my neck out, though, and say that the Yimbys will overcome the challenges posed by ideological tension. My general read is that the real action is still at the state level and that there’s limited need for inter-state coordination. There are still things to be gained from sharing best practices and lessons learned, but Yimby’s separated by state lines are operationally independent. Also, Yimby leaders have historically valued cooperation on practical politics over fights on questions of ideological purity. It’s been a healthy impulse in the past and I believe it will continue to serve Yimby activists well in the future.

I see the last five years of Yimby activism as one of the great policy success stories of our lifetime. I have every expectation that we’ll see the unwinding of a century’s worth of terrible policy in California and elsewhere across the country. And even the initial progress to date should give us hope that institutional inertia is not absolute and that positive change is everywhere still a possibility. 

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