by Rick Rybeck, Just Economics, LLC
NHC invites guest blog posters to write on important housing topics. The views expressed by guest posters do not necessarily reflect those of NHC or its members.
If smart growth is so smart, how come there’s so much dumb growth? Economic incentives for sprawl are partly to blame. If we understand some of these economic incentives for sprawl, the remedies become clear.
Today, infrastructure such as transit can be a double-edged sword. We create it to facilitate development. Yet, the resulting inflation in land prices near transit stations often drive development (particularly affordable development) to cheaper but more remote sites. We then extend the infrastructure to these remote sites only to have the process repeat. Thus infrastructure intended to facilitate development ends up chasing it away. We run after sprawl with more infrastructure, but never catch up. The process destroys both the countryside and urban budgets as cities end up with much more infrastructure per capita than they would need if development was more compact.
Part of the problem lies in the ability of private landowners to appropriate publicly-created land values. This is the fuel for real estate speculation. Utilizing value-capture techniques can recapture publicly-created land values and return them to the entities that created them (such as transit authorities). In this way, infrastructure can become financially self-sustaining.
Additionally, if properly designed and implemented, value capture can actually encourage the development of high-value land. High-value land, typically adjacent to urban infrastructure such as transit, is where we want development to occur. The more we can accommodate development at these high-value locations, the more compact development patterns will become. This will facilitate walking, cycling and transit while preserving rural areas for agriculture, conservation and recreation.
Some jurisdictions have accomplished this by transforming their traditional property tax into a value capture user fee. This is accomplished by reducing the property tax rate on building values while increasing the tax rate on land values. (Although the typical property tax is only 1% or 2%, it has the economic impact of a sales tax of between 10% and 20% on construction labor and materials.)
The lower tax rate on buildings makes it cheaper to construct, improve and maintain them, resulting in more affordable rents for both residents and businesses. The higher tax on land values reduces land speculation and actually helps keep land prices low. So this reform makes development more affordable, concentrates development near transit and other urban infrastructure. It also promotes jobs by making it more affordable to improve and maintain existing buildings.