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.

Prop 98 guarantees a minimum level of state spending on education each year. Sacramento pools most city, county, and special district property taxes into special education funds to meet this commitment. The localities only get to keep a small part of the property tax revenues for their own general budgets.

This system creates a disincentive for cities to permit housing. New housing brings in new residents who need city services. But it doesn’t bring in a commensurate increase in property taxes since most of that revenue gets scooped up by Sacramento.

Commercial development, though, brings in taxes a city gets to keep. Sales and hotel taxes are significant revenue streams. And they don’t cause the kinds of strain on city services that new residential does.

Reforming Prop 98 might be low hanging fruit. Changing the formula to appropriate a broader stream of city revenues might help ease the bias against housing. And it might even be possible to amend the law without having to fight the California Teachers Association. As long as there’s no net decrease in education funding, of course.

For those not acquainted with California politics, the California Teacher’s Association (CTA) is the most potent lobby in Sacramento. If the CTA doesn’t like a bill, it doesn’t become a law.

It’s tough to say exactly how much new housing Prop 98 actually prevents. Different cities get to keep different amounts of their property taxes, so the disincentive differs case to case. And there are plenty of other things like CEQA and Prop 13 which put a drag on new construction as well. But where CEQA and Prop 13 make it easier for residents who are already NIMBYs to gum up the works, Prop 98 is a reason in itself for a city to avoid residential development. So while we can’t do much to change the aesthetic preferences of our neighbors, we can do something to change the law. And if tweaking one law makes cities see new housing as a financial boon instead of a burden, it might be worth the effort.

The post Why Money for Schools Means No Permits For Housing appeared first on Market Urbanism.

2. It’s unfortunate that this developer chose to express himself in such an unsympathetic way (someone should teach him the meaning of the word “corruption,” in particular), but his analysis of NYC’s recent property tax assessment hikes is consistent with what we’ve seen before: people who live in apartments are taxed at higher rates than people who live in single-family homes.

3. Urbanists are trying to change Fannie Mae, Freddie Mac, and HUD’s policies of not funding small mixed use projects. From what I understand, the GSEs’ role in financing American mortgages has actually increased in the wake of the financial crisis, so the federal bias against mixed use may actually be stronger than it was before the recession.

4. Washington, DC may speed through zoning changes that require parking to not be out front. I’m not sure, but I think that DC currently has some laws mandating that it be out front, which means this would be yet another example of zoning codes going from density-forbidding to density-forcing without any intermediate stop.

5. Remember yesterday when I said that Gallaudet was a bigger drag on its neighborhood than the industrial-looking blight nearby? DC lawmakers may try to one-up Gallaudet by replacing the buildings with a soccer stadium.

The post Links appeared first on Market Urbanism.

By the mid 1930s the owners of Detroit’s Temple Theater, a nine-story office building that had once been the home of the city’s most successful vaudeville house, had had enough. In a city reeling from the Great Depression, the vacancy rate for office buildigns was running between 35 and 40 percent. With tenants hard to find – and rents, which had been falling steadily, hard to collect – the Temple Theater no long paid. In an attempt to lower property taxes and operating expenses, its owners did what other downtown property owners in Detroit and other cities had done. They demolished the building and turned the site into a parking lot. [These] were commonly referred to as “taxpayers.” The “taxpayers” were as much a legacy of the depression as the “Hoovervilles,” bread lines, soup kitches, and dance marathons. They symbolized downtown in the 1930s as much as skyscrapers, department stores, and high-rise hotels had in the 1920s. […]

Things were much the same in downtown Los Angeles, where so many buildings were torn down and replaced by parking lots or “taxpayers” in the 1930s that by the early 1940s roughly 25 percent of the buildable land was used to store autos. In a business district of less than one square mile there were no more than nine hundred parking lots and garages, with space for more than sixty-five thousand cars. […]

By tearing down the buildings, the owners could lower their tax bills and reduce their operating expenses. By replacing them with parking lots or one- and two-story garages, they could capitalize on the growing demand for parking space and generate enough income to hold on to their property until the vacancy rate dropped to a point where new construction was warranted. By the time it did, however, the country was in the middle of World War II, and the government had imposed tight restrictions on all nonessential construction. […]

According to downtown business interests, local officials also took other measures that gave the outlying business districts a competitive edge. They imposed more stringent fire, sanitary, and building regulations in the central business district, a step that drove up the costs of doing business downtown. Even worse, they assessed central business property at a much higher rate, a practice that drove costs up even more. As a result, wrote Oles in 1935, a downtown Seattle lot that rented for five dollars per square foot a month was paying ten times as much in property taxes as a suburban Seattle lot that produced the same income. Local officials, downtown business interests complained, were assessing property not on a basis of its “revenue producing power,” but on the basis of “a theoretical ad valorem figure” – a figure that was based on its potential, though highly unlikely, use as the site for a tall office building.

Fogelson also writes more about why downtown property was assessed at such high rates:

To understand why, it is necessary to bear in mind that down through World War II cities derived the bulk of their revenue from property taxes, of which the central business districts paid a share out of all proportion to their size. They paid a very large share because their assessed values, on which their property taxes were based, were very high – 20 percent of the city’s assessed value in Chicago, 27 percent in Milwaukee, and nearly 30 percent in Seattle in the late 1920s, by which time the incipient decentralization of commerce was well under way. Their assessed values were high partly because their property was the most valuable in the city and partly because, in the view of two experts from Milwaukee, it was “greatly over assessed.” The ratio of assessed value to actual value was much higher in the central business district than in other parts of the city, sometimes twice or even three times as high. The disparity was especially striking on the edge of downtown. As William H. Ballard explained, property there was normally assessed not on the basis of its actual value – the capitalized value of its current earnings – but on the basis of its speculative value – the value if someone wanted to develop it as a site for an office building, department store, or luxury hotel. This property was so assessed (and thus so “excessively and unequally taxed”), observed Cuthbert E. Reeves, a Los Angeles real estate economist, even if there was “not a chance in the world to finance or find tenants for such [a] development.”

Downtown was hit so hard in the 1930s and 1940s, first by the Great Depression and then by decentralization, that some property owners demolished their buildings and either replaced them with “taxpayers” or left the site vacant. Others persuaded the local officials to lower the assessed value, no easy task. Still others refused to pay their taxes, a practice that drove the number of delinquent properties up to record levels. Despite these maneuvers, the central business district still paid a large share of the property taxes in most cities in the 1930s and 1940s, if not as large a share as it had in the 1920s. According to several studies, moreover, downtown produced much more in property taxes than it consumed in public services – two and a half times as much in St. Louis and even more in Boston, where the central business district generated enough revenue not only to meet its own expenses, but also to make up most of the deficit attributed to the blighted areas. Small wonder that Graham Aldis of Chicago, where about one-third of 1 percent of the city paid over 17 percent of its taxes, called the central business district “a milch-cow for the tax collector.” And that Albert D. Hutzler, owner of Hutzler Brothers, Baltimore’s largest department store, referred to downtown’s tax base as “the lifeblood of the city.”

A thriving downtown, one with high (and steadily rising) property values that generated more than its fair share of municipal revenue, was vital to more than the city’s ability to meet its day-to-day expenses. It was vital to its ability to undertake long-term capital projects as well. […] According to a 1941 study, New York was able to stay under its debt limit only by assessing Manhattan real estate on the basis of “fictitious” (that is, highly inflated) values. If the city had assessed property on the basis of earnings, a policy that had recently been adopted in Seattle, its bonded debt would have exceeded its debt limit, and New York would have been “legally bankrupt.”

I should add that much of this property tax revenue was used to fund road construction – something I covered in my personal blog two and a half years ago (!!), which I believe spurred Adam to invite me to post on Market Urbanism.

Also of note: The property tax gap between density and sprawl is, unfortunately, still with us. Even today, multifamily rental property has effective local property tax rates that’re 18% higher than taxes on single-family, owner-occupied units. And that’s just on the local level – when you factor in the mortgage interest tax deduction, the disparity is even higher.

The post Parking lots as tax arbitrage during the Great Depression appeared first on Market Urbanism.

The study finds that for the nation as a whole, multifamily rental housing bears an effective tax rate (tax divided by property value) that is at least 18 percent higher than the rate on single-family owner-occupied housing. This gap appears to have arisen during the 1990s. The level of taxation and the apartment/house differential vary considerably by location. Much—but not all—of the differential is associated with the fact that apartments have a lower average property value per unit than houses. The residential property tax, as implemented, promotes low-density development, disproportionately burdens lower-value properties, and may impose higher taxes on apartment residents than on homeowners with identical incomes.

This is on top of the fact that the vast majority of property taxes in the US are used to fund local roads and schools (right?), which apartment-dwellers surely make lesser use of. So even if the taxes were levied across the board, they’d still be redistributing wealth from poorer apartment dwellers to richer homeowners.

I should also emphasize that these are local property taxes, and are completely separate from the mortgage interest deduction that homeowners can also use to lower their federal tax burdens. We hear a lot about that one, but this is the first time that I’m hearing about property tax differentials. I’m guessing the reason for this is that national journalists find it much easier to cover federal issues that apply nationwide, but this this is a shame, because although local issues are more heterogenous and difficult to research, I think they’re ultimately more important than federal ones when it comes to land use and transportation. I’d like to say that the urbanism blogosphere is immune to this pro-federal bias, but unfortunately I don’t think that’s the case.

So again, thanks to Alon Levy for pointing this out, and for his steady stream of insightful comments. Every so often I fear that I’ll soon uncover every possible tool that governments use to favor suburbs over cities and run out of things to blog about, but then I snap out of it and remember that the possibilities are truly endless.

The post How local property taxes discourage density appeared first on Market Urbanism.

I’ve been meaning to address the public education system’s complex role in land use patterns, and found that Murray Rothbard does a better job in his 1973 manifesto, For a New Liberty than I ever could.  In summary, locally-funded public education is an engine of geographical segregation, which encourages flight from urban areas, and was a driving motivation for the popular acceptance of exclusionary zoning in newer suburbs.  As a result, wealth is consistently concentrated geographically, and housing affordability is at odds with these restrictions of supply intended to exclude poorer people from draining the property tax base.

Here’s a paragraph from the chapter on education:

The geographical nature of the public school system has also led to a coerced pattern of residential segregation, in income and consequently in race, throughout the country and particularly in the suburbs. As everyone knows, the United States since World War II has seen an expansion of population, not in the inner central cities, but in the surrounding suburban areas. As new and younger families have moved to the suburbs, by far the largest and growing burden of local budgets has been to pay for the public schools, which have to accommodate a young population with a relatively high proportion of children per capita. These schools invariably have been financed from growing property taxation, which largely falls on the suburban residences. This means that the wealthier the suburban family, and the more expensive its home, the greater will be its tax contribution for the local school. Hence, as [p. 133] the burden of school taxes increases steadily, the suburbanites try desperately to encourage an inflow of wealthy residents and expensive homes, and to discourage an inflow of poorer citizens. There is, in short, a breakeven point of the price of a house beyond which a new family in a new house will more than pay for its children’s education in its property taxes. Families in homes below that cost level will not pay enough in property taxes to finance their children’s education and hence will throw a greater tax burden on the existing population of the suburb. Realizing this, suburbs have generally adopted rigorous zoning laws which prohibit the erection of housing below a minimum cost level — and thereby freeze out any inflow of poorer citizens. Since the proportion of Negro poor is far greater than white poor, this effectively also bars Negroes from joining the move to the suburbs. And since in recent years there has been an increasing shift of jobs and industry from the central city to the suburbs as well, the result is an increasing pressure of unemployment on the Negroes — a pressure which is bound to intensify as the job shift accelerates. The abolition of the public schools, and therefore of the school burden-property tax linkage, would go a long way toward removing zoning restrictions and ending the suburb as an upper middle-class-white preserve.

Later chapters address other urbanism-related issues, and I’ll share those insights as I come across them.

For a New Libertyis available for free from the Mises Institute in full as an html page, a pdf, or audio book read by Jeffrey Riggenbach. (the audio version is how I am finding time to absorb it among the rigors of caring for the little guy)  Bryan Caplan also summarizes this chapter (and each chapter) as part of the Econlog Book Club.

The post Rothbard the Urbanist Part 1: Public Education’s Role in Sprawl and Exclusion appeared first on Market Urbanism.

If you haven’t read the entire series, you can catch up with these links:
Rent Control Part One: Microeconomics Lesson and Hording
Rent Control Part Two: Black Market, Deterioration, and Discrimination
Rent Control Part Three: Mobility, Regional Growth, Development, and Class Conflict

Conclusion

Rent control is not just a simple price control setting the price at which willing renters and landlords are permitted to do business, it is much worse.  It is a coercive act that gives landlords no legal option, but to rent to a tenant against his will, often at a financial loss.  Rent control adds a non-voluntary burden to landlords which deepens over time because landlords do not have the option to rent to a tenant at below market rates. 

Not only does rent control cause huge distortions in the housing market, but the burdens fall disproportionately on the poor and underprivileged people it was intended to benefit. Although particular people are able to live with the comfort of low rent payments, even those renters will see their living conditions deteriorate as landlords neglect repairs and maintenance. As the situation gets worse, middle class residents are able to move away, leaving behind the poorest residents who have become reliant on the reduced rent.

In effect, rent control grants property rights to renters, that originally belonged to the original property owners. Rent control becomes a redistribution of wealth to rent control tenants away from apartment owners, market apartment renters, and newcomers to the area. Nonetheless, over time the quality of life decreases for all residents of a city where rent control is imposed.

Solutions

So, it wouldn’t be very productive for me to rant about the problems rent control creates, if I didn’t discuss solutions to the problems. Cities can flat out abolish rent control, like California’s Proposition 98, phase it out through vacancy decontrol, or use other methods to end rent control. However, ending rent control, without ending other burdensome policies, doesn’t solve the problems of limited housing options, particularly for low income people.

Abolition

Abolishing rent control overnight would bring many market rate units onto the market at once, and would greatly reduce prices for market units. However, it would force many poor residents to move all at once and would cause a shock to the overall rental market. This would correct itself over time if proper action were taken by municipalities to allow additional supply to the market.

Most importantly, developers need to be allow to bring housing supply to market. Many of the places that have the strictest rent controls are also cities that have very restrictive zoning. As new development comes to market, prices will ease on the previously regulated apartments. In fact, I would argue that development restrictions should be eliminated several years before rent control is fully abolished, in order to give developers time to bring sufficient supply to the market in preparation of full decontrol.

Vacancy Decontrol

Vacancy decontrol is a more moderate method that has been used by many cities to phase out rent control or lessen the scope of rent control. Vacancy decontrol usually means that rent controls are enforced in apartments only until the tenant leaves. At the time a tenant leaves, the landlord is permitted to return the unit to market rates. California’s Proposition 98 is, in effect, vacancy decontrol where current tenants will not be effected as long as they stay in their current apartment.

Vacancy decontrol is typically a compromise between advocates of rent control and apartment owners. While it is preferable over fully-regulated rent control, there are serious drawbacks. The biggest drawback is that it increases the incentive to hoard. When a tenant knows that a unit will be deregulated when he moves out, he will try to stay as long as he can to maintain the benefits. Tenants may have family members stay there or maintain a second residence to ensure he will not loose the benefits of rent control. As a result, controlled units are likely to stay occupied by current residents for a long time, before being let back into the market.

Unfortunately, vacancy decontrol also incentivizes landlords to try to evict tenants in order to deregulate their apartments. There have been many horror stories of landlords harassing tenants, allowing horrible living conditions to prevail, and invading the privacy of tenants as ways of encouraging tenants to move out.

Rent Control and Property Rights

What if we look at rent control as an appropriation of property rights from the landlord to the tenant? A landlord has certain limited rights, while the tenant has extensive rights to the apartment granted through rent control. Since this appropriation typically happened many years ago, one could argue the apartment is more the property of the tenant than the landlord under rent-control policy.

If one accepts this point-of-view, one way to end rent control is to force a sale of the complete property rights either from the owner to the tenant or from the tenant to the owner. The tenant would be forced to offer a price to the landlord to purchase the remaining property rights of the apartment. If the landlord accepts the offer price the unit will be sold to the tenant at that price and become a condominium.

If the landlord rejects the offer price, he will have two choices. Either buy out the renter’s contract at the same price as renter’s offer or sign a contract extending certain rent controls indefinitely for the duration of tenancy. Such a mechanism would ensure the tenant would offer a reasonable amount. In effect, this forced sales will return all apartments to the market immediately, whether they now be owned by the original tenant, original landlord, or controlled only by contractual agreement.

If the tenant could not afford the purchase price, which would likely be below market, he would be permitted to resell the condo unit at any price or forfeit all rights to the property upon failure to execute.
There would be complications if a landlord suddenly lost control of an entire building, creating a fractured ownership of the building. Allowing the landlord the option to extend the lease or buy out the tenant would enable the landlord to maintain ownership of entire buildings at his discretion.

Of course, if one believes rent control was a theft of the original property rights from the landlord, you would be hesitant to reward the tenant for years of hoarding another person’s property. However, if one believes it is theft, should the government be forced to pay reparations to landlords for lost earnings? Perhaps, with a forced sale, the government would be required to remunerate to the landlord, a certain percentage of the transaction as a form of reparations.

Vouchers

For those who believe we need to "do something" for housing affordability, there are solution which are much better than rent control.

Federal housing assistance programs began during the Great Depression. In the ’70s, Congress passed the Housing and Community Development Act of 1974. This act shifted the focus from the quality of housing to the affordability by creating the Section 8 program. Learn more about the Section 8 program here. Many state and local authorities have implemented voucher programs as well.

Low Income Housing Tax Credits

Federal programs offer tax credits to developers of low income housing (LIHTC). These tax credits are more valuable than tax deduction and are often purchased by corporations who pay high tax rates. (learn more here)

Of course, there are consequences to subsidizing housing, (which is another topic altogether) but most would agree that a system of subsidizing housing for lower income people with vouchers or tax credits are certainly less less-bad solutions than forcing the burden on the providers of housing and rental apartment market through rent control.

Zoning and Regulation

The difficulties of phasing out rent control could be lessened by the market more quickly and effectively if zoning and other regulations are loosened at the same time. The private market needs to be allowed to meet the demands of market renters, so that lower quality, and smaller apartments remain affordable to people with lower incomes.

Most importantly, municipalities need to end exclusionary regulations that forbid affordable housing that would be used by low income residents. The most widespread example is that of many suburban communities that regulate the number of housing units per acre. Such regulations prevent developers from creating multi-family housing that is typically more affordable to lower income families. Often times, these regulations are aimed at keeping certain people out in order to maintain an upscale community.

Most cities also have provisions in their zoning codes that prevent development of affordable housing. Chicago, for example, has strict restrictions on dwelling units per acre that in many instances are more restrictive than density restrictions. These restrictions are supposedly implemented to encourage more housing for families, but forces developers to build less units, thus larger units. This discourages development of smaller, more affordable units, such as studios and single room occupancy units; and instead encourages development of larger, luxury units.

Almost all municipalities have restrictions on density, usually through FAR (floor area ratio) and height restrictions that inhibit the amount of development that can happen in a certain area. These restrictions directly burden development of market rentals, which in turn, causes shortages in lower quality housing as middle class renters are forced to choose lower quality units that would otherwise be rented by low income families. Thus, destroying affordability for all demographics.

In order to "protect jobs", many cities have implemented zoning restrictions that prohibit residential development on under-utilized industrial land. These prohibitions are very short-sighted, and in effect, keep land prices low in industrial areas since alternative use of the land is prohibited. These days, industries tend to be location insensitive since transport costs have come down significantly over the last century.   Industries typically choose to locate where land is cheap, so in order to attract manufacturing jobs, a municipality must put a huge burden on the housing market.  Forcing land prices down in urban areas to attract industries does more harm than good by preventing redevelopment of the land as housing, driving housing costs higher, elsewhere.

All things considered, most currently affordable units will remain relatively affordable if the market is allowed to satisfy the needs of the wealthy and middle class renters, preventing prices from rising across the board and preventing gentrification of lower housing stock by more wealthy persons.

Property Taxes

Many municipalities tax rental housing at a much higher rate than they tax home owners. This is mostly due to political pandering to homeowners who tend to be a reliable block. Nonetheless, much of the additional tax burden gets pushed on the renter as the landlord shares the burden by raising rents. Removing this redistribution of wealth would ease the burden on rents, as would lowering real estate taxes by cutting spending.

Tax deductions for home ownership also create a misallocations of housing resources away from affordable rentals.

A Free Market for Housing

In conclusion, supply controls do as much damage to affordability as price controls. Eliminating rent control needs to go hand-in-hand with loosening exclusionary zoning and density restrictions in order to allow the market to perform as it should. A truly free-market incentivizes investment in quality affordable housing for all residents by allowing individual decisions to determine living patterns and location preferences based on quality, availability and affordability.

For more reading, see the section on Rent Control on the Links to Articles and Academic Papers page.

The post Rent Control Part 4: Conclusion and Solutions appeared first on Market Urbanism.