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Decades before Henry George made a passionate case for the “single tax” in Progress and Poverty, the classical economists had recognized that, in theory, the land value tax was almost the perfect tax. There was a strong moral basis for the land value tax—land value increased over time because of growth in population and improvements made by the community, either as utility infrastructure or transportation investments by government and the private sector.
Today, many scholars and practitioners question whether land value tax is a serious contender as a revenue source. But, whatever its political potential may be, economists continue to find the theoretical case for land value tax compelling. This article examines the efficiency of the land value tax as well as land value tax as a substitute for other taxes;
Edwin Mills examines the issue of land value tax in the context of an urban economy, showing that the land value tax is indeed efficient in its effects on land use, as claimed.
Thomas Nechyba explores the land value tax in the context of a general model of the entire economy. He develops what is known as a “computable general equilibrium model” that quantitatively describes the changes in the macro-economy that will occur with the substitution of the land value tax for income taxation.
Author of this article, Dick Netzer, argues that, although the empirical evidence on land values is poor, some reasonable estimates suggest that, at least in the United States, the land value tax could replace the conventional local property tax at reasonable tax rates.
Andrew Reschovsky points out that the current balmy climate for state and local finance in the United States is likely to change radically, for the worse. State governments may be looking for substantial additional revenues. Is the land value tax the right, or the likely, choice for hard-pressed state governments?
Roy Bahl reviews the many difficulties and deficiencies in the use of property taxes by local governments in both developing countries and former Communist countries.
Edward Wolff suggests that substitution of the land value tax for the federal individual income tax would make the U.S. tax system less rather than more progressive with respect to income.
Decades before Henry George made a passionate case for the “single tax” in Progress and Poverty (published in 1879), the classical economists had recognized that, in theory, the land value tax was almost the perfect tax. Unlike other taxes, it causes no distortions in economic decision making and therefore does not lower the efficiency of a market economy in allocating resources. Also, it was obvious in the nineteenth century that a tax on the value of land would be highly progressive.
There was a strong moral basis for the land value tax, as well. Land value increased over time because of growth in population and improvements made by the community, either in the form of utility infrastructure or transportation investments by government and the private sector. Individual landowners did nothing to increase the value of their own land but rather realized “unearned increments” over time, unlike those who contributed labor and capital to production and thus earned their compensation.
In George’s day there was little question that the tax could provide adequate revenue, at least in the United States where the role of government was small-no more than a tenth as important relative to gross domestic product as it today. Virtually all government services were supplied by local governments, which relied entirely on property taxes. Today, many scholars and practitioners question whether land value taxation is a serious contender as an important revenue source. But, whatever its political potential may be, economists continue to find the theoretical case for land value taxation compelling.
In January, the Lincoln Institute sponsored a conference to address these issues: “Land Value Taxation in Contemporary Societies: Can It and Will It Work?” In the opening paper, William Fischel focuses on the special nature of local government in this country, stressing its importance as an instrument of enhancing property values within communities. He argues that, in pursuing that role, local land use controls actually achieve substantial efficiency advantages by more closely matching consumer preferences to local government services and taxes. This is what economists refer to as the Tiebout-Hamilton model.
Fischel maintains that there is substantial justice in this outcome, which might be improved only marginally by land value taxation. That is, land use controls permit local governments to appropriate much of the value generated by community growth. Moreover, this system is widely used, which argues that it is more workable than land value taxation, although the latter is, in principle, more fair.
Efficiency of the Land Value Tax
Two papers treated the efficiency characteristics of the land value tax. Edwin Mills examines the issue in the context of an urban economy, showing that the tax is indeed efficient in its effects on land use, as claimed. But he believes that this is immaterial because the land value tax cannot yield more than trivial revenues, even at rates that are so high that the courts would find them to be an unconstitutional “taking” of property. Moreover, it is so difficult to value land properly that the efficiency advantages cannot be realized.
Thomas Nechyba explores the land value tax in the context of a general model of the entire economy. He develops what is known as a “computable general equilibrium model” that quantitatively describes the changes in the macro-economy that will occur with the substitution of the land value tax for income taxation. Given his assumptions, the model predicts that the reduction in taxation of capital will so increase the aggregate amount of capital that the demand for land on which to use the capital will generate substantial increases in land values. That in turn will permit the land value tax to generate considerable revenues at a rate that is not confiscatory. Most economists would consider the significant increases in total national output predicted by the model to be real gains in economic efficiency.
Land Value Taxation as a Substitute for Other Taxes
Another pair of papers examines the land value tax as a substitute for other taxes used by sub-national governments in rich countries. In my own paper I argue that, although the empirical evidence on land values is poor, some reasonable estimates suggest that, at least in the United States, the land value tax could replace the conventional local property tax at reasonable tax rates. But the main thrust of my argument is that those rich countries in which substantial government spending is done by local governments are the most plausible candidates for the use of the land value tax (see Table 1). Furthermore, its use is probably most feasible in those countries familiar with the idea of valuing real property for tax purposes. The combined administrative, compliance and evasion costs of most other taxes are so large that, even if the administrative costs of land value taxation are high, land value taxation is still promising.
Andrew Reschovsky points out that the current balmy climate for state and local finance in the United States is likely to change radically, for the worse, in the not too distant future. For a variety of reasons, state governments in particular may be looking for substantial additional revenues. Is the land value tax the right, or the likely, choice for hard-pressed state governments? He concludes, first, that the economic gains from the adoption of a new land value tax would be modest, compared to increasing the rates of existing state taxes. Second, a land value tax should help improve the equity of the state tax system. Third, he believes that it would add an element of cyclical stability to state revenue systems.
Nevertheless, Reschovsky remains skeptical about the tax on administrative grounds and is not convinced that it can generate enough revenues to replace any important existing state tax source. In the case of large central cities, however, he rates the land value tax somewhat higher as a replacement for existing tax sources, largely because of the probable lack of adverse locational effects. He views it as especially appropriate for those cities like Philadelphia that now receive relatively small percentages of tax revenue from the property tax.
Roy Bahl reviews the many difficulties and deficiencies in the use of property taxes by local governments in both developing countries and former Communist countries. There is widespread agreement that the property tax is the appropriate major local government tax, and in some countries this agreement extends to site value taxation as well. But, Bahl notes, the property tax usually provides negligible revenues, because of low nominal rates, low and inaccurate valuations, and poor collection experience. Almost everywhere, the basic requisites of good administration are lacking. Moreover, the political unpopularity of the tax generally is far greater than in the United States. Nonetheless, the property tax, especially the site value tax variant, is considered the best local revenue source in these countries.
Perhaps the most surprising research finding reported at the conference was the conclusion of Edward Wolff, who has written extensively on the distribution of income and wealth in the United States. He suggests that substitution of the land value tax for the federal individual income tax would make the U.S. tax system less rather than more progressive with respect to income (see Table 2). This result may be explained by the fact that the ratio of the value of land owned to household income rises steeply with the age of the householder. That is, mean household income declines sharply with age after age 54, while the mean value of land owned declines only slowly. On the other hand, a land value tax would be much more progressive with respect to wealth than is the income tax.
Broader Principles and Questions
Nicolaus Tideman, a convinced follower of Henry George, argues that the basic principles of and justifications for land value taxation apply to much more than the problems of land use in cities and suburbs-the usual focus for discussion of this form of taxation. He offers applications to environmental, congestion and population problems and to questions of efficient resource use and economic growth on a worldwide scale. He bases his views on the general principle that “all persons have equal rights to natural opportunities and should therefore pay for their above-average appropriations of natural opportunities.”
Throughout the conference, there was lively disagreement about whether the land value tax could really produce substantial revenues. Some, like Mills, held that it could not even replace the conventional American property tax on land and buildings, much less a substantial portion of other state and local taxes as well. Others, including Tideman, Nechyba and I, presented data that suggested the possibility that land value taxation indeed could be an important factor in the American fiscal system. Participants also discussed the problems of administering a land tax so that tax liabilities actually and accurately reflect the value of individual parcels of land as bare sites, which is essential if the tax is to be a truly efficient one.
The conferees did not produce an agreed answer to the basic conference question, Can and will land value taxation work today? But they made it clear that the question remains a relevant one that deserves serious and continuing attention.
Dick Netzer is professor of economics and public administration in the Robert F. Wagner Graduate School of Public Service at New York University. He was the conference coordinator and is the editor of a book containing the eight conference papers and the remarks of the formal discussants, which will be published by the Lincoln Institute later this year.
Land Value Taxation in Contemporary Societies: Can It and Will It Work?
Authors of Conference Papers
Roy Bahl, Professor of Economics and Dean, School of Policy Studies, Georgia State University
William A. Fischel, Professor of Economics, Dartmouth College
Edwin Mills, Professor of Real Estate and Finance, Kellogg Graduate School of Management, Northwestern University
Thomas Nechyba, Professor of Economics, Stanford University
Dick Netzer, Professor of Economics and Public Administration Robert F. Wagner Graduate School of Public Service New York University
Andrew Reschovsky, Professor of Agricultural and Applied Economics, University of Wisconsin-Madison
Nicolaus Tideman, Professor of Economics, Virginia Polytechnic University
Edward Wolff, Professor of Economics, New York University
Discussants
Alexander Anas, Professor of Economics, State University of New York at Buffalo
Daniel Bromley, Professor of Agricultural and Applied Economics, University of Wisconsin-Madison Karl Case, Professor of Economics, Wellesley College
Riel Franzsen, Professor of Mercantile Law, University of South Africa
Yolanda Kodrzycki, Economist, Federal Reserve Bank of Boston
Daphne Kenyon, Professor of Economics, Simmons College
Therese McGuire, Professor of Economics, Institute of Government and Public Affairs, University of Illinois-Chicago
Amy Ellen Schwartz, Professor of Economics, Robert F. Wagner Graduate School of Public Service New York University
Robert Schwab, Professor of Economics, University of Maryland
Robert Solow, Professor of Economics, Emeritus, Massachusetts Institute of Technology
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Recent court decisions have made economic development and tax policy front-page news. The recent U.S. Supreme Court decision in Kelo v. City of New London raised a public outcry when it allowed local governments dramatic latitude in acquiring private property for economic development purposes. This case had a fiscal aspect as well, for it illustrated how financial pressures can lead local governments to seek alternatives to direct investment for economic revitalization and redevelopment.
Economic development was also the focus of a major lower court decision on state tax policy. In Cuno v. DaimlerChrysler, the 6th Circuit Court of Appeals found that Ohio’s investment tax credit, intended to attract businesses from other states, violated the Commerce Clause of the U.S. Constitution (Hellerstein 2005). These and other, similar cases raise many questions about the connections between economic development and tax policy.
Is there a relationship between economic development and infrastructure spending?
Infrastructure, that vast network of capital-intensive services including roads, water provision, sewer services, and electrical supply, is critical to current and future economic activity. However, serious economic examination of the link between infrastructure spending and economic productivity only began in the late 1980s. Aschauer (1989, 194–197) argued that declining infrastructure spending resulted in less economic growth. More recently, Bougheas et al. (2000, 520) reported findings that “highlight the importance of infrastructure accumulation” for productivity gains.
Other researchers have pointed out that the most significant recent changes in infrastructure spending have occurred at the state and local levels, rather than the federal level. Gramlich (1994, 1178) argued that federal infrastructure spending has been fairly consistent over time, but state and local spending has decreased. Holtz-Eakin (1993) cautioned that while public expenditures on infrastructure may be important, they may not directly affect economic productivity. He argued that differing state and local needs may account for many infrastructure spending disparities, and that maintenance of existing infrastructure assets may be more important than new spending for capital acquisition. Boarnet (1997) considered efficient pricing for infrastructure use as important as its actual provision.
Nevertheless, the American Society for Civil Engineers (ASCE) is sufficiently concerned about the condition of infrastructure in the U.S. to assign it a grade of “D.” ASCE (2005) argues that the country needs to spend about $1.6 trillion over the next five years to improve the situation.
What is the relationship between infrastructure spending and local tax systems?
The mechanisms for funding infrastructure and its role in state and local spending are complex. Research in this area deals with such topics as fiscal illusion (i.e., when the complexity of the revenue system obscures the true cost of public goods and services) and specific capital financing strategies used to fund infrastructure. However, there has been little research on the impact of local tax structures on infrastructure spending.
Economists have long argued that the value of publicly provided goods and services, such as infrastructure and its maintenance, are reflected in the value of the property served by those goods. Accordingly, a tax that captures the value of these public goods and services may be an important revenue source for funding them. However, in the last 30 years, local governments have moved away from such a tax, the property tax, to other sources of revenue. In many communities, this shift has produced an increased reliance on state aid, local sales tax revenues, and user fees.
In analyzing infrastructure spending in Utah, it is clear that the local revenue structure affects per capita operating and maintenance spending and new capital acquisition expenditures. Preliminary analysis indicates that communities are more likely to increase per capita infrastructure spending when it is financed by property taxes, all other funding sources held constant. It also appears that as per capita sales tax revenue increases, per capita spending for infrastructure services declines.
How constrained are local revenue systems?
One reason that local government revenue structures affect spending on infrastructure is that the states impose various constraints on local revenue sources. Although the past ten years have seen no dramatic changes in the roles of the property tax, intergovernmental aid, or the sales tax in overall local government revenues, the ratio of total revenues to personal income has fallen about 7.5 percent. This real decline highlights the increasing pressure on local governments to identify new revenue sources.
Yet, local governments face serious constraints when they seek to change their revenue systems. States impose intergovernmental restrictions, such as limits on sales tax rates that localities can impose. Less tangible but equally important is political opposition to tax increases. The third factor is the set of tax and expenditure limitations that many states have enacted, ranging from Proposition 13 in California in 1978 to the more recent taxpayer bill of rights enacted in Colorado, which drastically limited increases in government spending.
These constraints have forced local governments to become more innovative in their revenue-raising methods. An entire cottage industry of financial advisors, bond attorneys, and other public and private sector innovators has emerged to help local governments find ways of loosening or circumventing these limitations. Some strategies may have increased economic efficiency, although they give rise to equity concerns (for example, the movement toward the increased use of fees and charges); others are nearly invisible to the taxpayer. In nearly all cases, local governments have been seeking to use land as a revenue-generating device—a trend that shows no sign of abating.
What are alternative ways to finance capital infrastructure?
Two types of debt traditionally have financed infrastructure projects: general obligation (GO) bonds, backed by the full faith and credit of the issuing locality; and revenue bonds, backed by income from the capital project. Both types of debt have significant restrictions on their use, such as voter approval requirements and caps on maximum indebtedness. These debt limitations, the difficulty in raising property taxes, and the fear of political opposition have increased the use of alternative capital finance methods based on land use.
One longstanding method, tax increment financing (TIF), utilizes the increases in property value to help finance redevelopment projects. Originally designed as a financial instrument to eliminate blight and provide affordable housing, this instrument has become increasingly popular in many states for a variety of projects. Forty-seven states and the District of Columbia now allow this technique.
Capturing the property tax increment attributable to government-sponsored redevelopment in order to service this debt makes economic sense if the new development would not have occurred without the formation of the tax district. Moreover, this debt does not have to be approved by voters, but rather by a group designated by the city government. Not even these two factors explain the extraordinary recent growth in the number and size of TIF districts, however, raising suspicion that this tool may be used more often to attract and subsidize economic growth than to eliminate blight. For example, in 2003–2004, California had 33 TIF redevelopment projects, each of which covered more than 6,000 acres, a surprisingly large area to be declared “blighted” in any one jurisdiction (see Figure 1).
Another popular tool in several states is the community facilities district (CFD), which usually funds new development. Landowners within a region form a CFD to issue debt to finance the infrastructure needed to develop raw land. District members’ votes are typically a function of the amount of property each landowner holds. The local government must approve CFDs, although they are not a formal part of the government and their debt issuance is not subject to approval by the general public.
A lien for CFD assessments is placed on each lot in the district, and the CFD tax liability appears on the property tax bill of each district member as a separate line item. Variations of this technique may utilize sales taxes, impact fees, and user charges. Many rapidly growing local governments encourage the formation of these districts to help finance their community’s growth. Nevertheless, CFDs can be very complex, and may fail if anticipated growth does not occur (see Figure 2).
TIFs, CFDs, and other such techniques present an ethical dilemma to local government. Sometimes they are not fully understood by the political decision makers who authorize their use, let alone by members of the general public who will bear the burden of paying this debt in the future. Yet they remain a popular tool to finance crucial infrastructure that is basic to improving the economic well-being of the community.
Could a land tax help finance infrastructure for economic development?
The land component of property value is another potential source of revenue to encourage economic development. Since the supply of land is fixed in the short run, an increase in a land tax will not affect the tax base. However, it will encourage more intensive use of the land and may slow urban sprawl. Unfortunately, the lack of empirical data makes it difficult to determine if this theory is accurate. One example in the U.S. is the City of Pittsburgh, which in 1979–1980 restructured the tax on land to be five times that on improvements. Building activity showed a dramatic increase, although other factors may have contributed to the change as well (Oates and Schwab 1997). Pittsburgh later returned to a single-rate property tax system.
Increased use of a land tax poses significant problems. In particular, accurately assessing land can be challenging, although statistical and econometric techniques may help address this in the future. A second concern is that more intensive use of land value taxation will lead to denser development, exacerbating many of the problems associated with congestion. These effects must be weighed against the positive benefits of reducing long-distance commuting. A third problem concerns equity. Owners whose property has a high land/improvement ratio will face an increased tax liability. This shift might be mitigated by adjustments in the tax rate, special exemptions or targeted tax credits.
A land tax has the important advantages of transparency and accountability. In particular, if land value increases because of government activities, there is strong justification for recovering at least some of those costs through a tax on the land component. We would even propose a name for this additional tax—a positive externality tax (PET). We recognize that, like any proposed increase in the property tax, such a shift would be politically controversial.
Conclusions
Our current research analyzes relationships among economic development, infrastructure, and the tax system. The fiscal problems of local jurisdictions are made more complex by the use of intricate methods of infrastructure financing, such as TIFs and CFDs, to fund economic development. The use of financing mechanisms based on a land tax may be one part of a potential response to this challenge.
Jeffrey Chapman is professor and director of the School of Public Affairs at Arizona State University in Tempe. He specializes in state and local finance and administration of financial resources, and has recently published in the area of local land use responses to fiscal stress.
Rex L. Facer II is assistant professor of public management at the Romney Institute of Public Management of the Marriott School of Management at Brigham Young University in Provo, Utah. He specializes in city management, public finance, public management strategy, and public policy analysis.
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As the U.S. housing market experiences its largest contraction since the Great Depression, the Lincoln Institute of Land Policy and the Urban–Brookings Tax Policy Center took a closer look at the consequences of this crisis for state and local governments in a May 2010 conference. A major theme of the discussion was the fallibility of conventional wisdom. For example, some participants questioned whether easy credit was in fact the cause of the housing bubble and thus to blame for the subsequent loss of state and local tax revenues. Papers presented at the conference document the complexities researchers face in determining the causes and lessons of this crisis.
The Housing Market Boom and Bust
According to Byron Lutz, Raven Molloy, and Hui Shan, house prices at the national level increased by 64 percent from 2002 to 2006, before falling nearly 30 percent over the following four years. From 2006 to 2009, existing home sales dropped 36 percent and the number of newly constructed homes fell 75 percent. Could we have seen it coming? Was the housing market bust predictable? Yes, according to Yolanda K. Kodrzycki and Robert K. Triest, but only by looking at state-level data.
Conventional wisdom held that while house prices could fall in specific markets, national housing prices would not decline. This had been the historical pattern, although some markets, for example the Boston and Los Angeles metropolitan areas, experienced declines in the 1990s after strong increases in housing prices. Other areas, such as Detroit, had been declining or stagnant even when the country as a whole experienced consistent upward movement in house prices.
Much of the modeling and analysis of the housing crisis has used national-level data, which provided insufficient evidence to measure the peak of the housing bubble. Since economic cycles are more apparent at the state level and can act as early warning signs of housing trouble on a national scale, analyzing state data collectively can improve national forecasts.
Nevertheless, even the ability to recognize a housing bubble does not provide an easy prescription for preventing a crisis. Previous episodes of state-level housing price declines show that booms do not necessarily end in busts, Kodrzycki said. Rather, downturns are closely related to economic cycles. In most cases housing prices did not fall until after a recession had begun within a region—a pattern that is different from the current crisis.
The cause of the housing bubble is a crucial and unsettled question. Many economists have argued that easy credit was responsible, but Edward L. Glaeser disputed that view in a paper written with Joshua Gottlieb and Joseph Gyourko. Widely available credit and low interest rates do encourage more people to buy homes, increasing demand and raising housing prices. “This goes along with an older view,” Glaeser said, “that interest rates are very powerful in determining housing prices. There is some truth to that, but I think…those claims are overblown. Certainly the changes in the credit market can’t explain what we went through.”
Between 1996 and 2006, real housing prices rose by 42 percent, according to the Federal Housing Finance Agency price index. Glaeser and his colleagues found that low interest rates can likely explain only one-fifth of that increase. Other factors, including an elastic housing supply and credit-constrained homebuyers, can mute the effect of interest rates on prices. Buyers contemplating future moves or refinancing can take those factors into account when deciding how much to pay for a home. If the link between interest rates and house prices is smaller than expected, that knowledge can inform future federal housing policies and estimates of their effects on the housing market.
Impacts on State Revenues
State revenues plummeted in the recession, leading to record-high budget shortfalls just as demand for public services was growing. Inflation-adjusted state tax revenue fell nearly 15 percent during the downturn—the biggest drop in more than 50 years.
Donald Boyd noted that many of the first states to see their tax revenues decline also had been hit hard and early by the housing downturn. Arizona experienced its revenue peak in 2005, and by 2009 its real per capita tax revenue fell by 23.5 percent. Meanwhile, housing prices in Arizona tumbled 19.7 percent from 2006 to 2008.
States that were spared the worst of the housing crisis did not see revenue losses until the recession was in full swing. Texas had a 7.4 percent increase in housing prices from 2006 to 2008. Its tax revenues did not peak until late in 2008; roughly a year later, however, Texas saw its revenue drop by 17.5 percent.
Steven Craig and Edward Hoang examined how state government expenditures and taxes fluctuate with changes in underlying economic activity. They found that in general state responses initially tend to lag behind changes in gross state product, but in the long run states tended to overadjust to economic shocks.
Boyd found that in response to their budget gaps states cut spending in 2009 and 2010 primarily through furloughs and layoffs, and by stretching out payments of obligations into the future. States also cut grants to local governments, according to Howard Chernick and Andrew Reschovsky, who examined whether state budget crises lead to greater tax competition between states and their large cities. They find that in the long run cities with diversified revenue will be in a stronger fiscal position, but in the short run own-source revenue has declined more in cities with a diversified tax base (due in part to the strength of property tax). They also find that state aid is highly stimulative, but that increases in states sales tax rates will make it more difficult for cities to increase their sales taxes. The authors conclude that the current economic downturn will force significant public service reductions for large central cities.
Rachana Bhatt, Jonathan Rork, and Mary Beth Walker examined how higher education fared during the recession. While there have been highly publicized cuts in funding for higher education from general revenues, the overall level of expenditures for higher education has increased from 1996 to 2008. The authors find that across the business cycle states tend to substitute earmarked support for higher education (whether in the form of federal grants, lottery revenues, or other special accounts) for general fund support.
Federal stimulus spending in the American Recovery and Reinvestment Act (ARRA) helped boost state budgets and mitigate cuts in state aid to local governments, but those funds are set to expire in 2011. Boyd examined earlier recessions and found that the declines in state revenues have been more extreme this time. The good news, Boyd said, is that state tax revenue declines are showing signs of slowing and local revenues have not yet declined in aggregate.
“We might be stabilizing,” Boyd said. But, “it’s going to be a long ways before states are likely to have the capacity to finance the kinds of spending programs they have had…which means a lot of budgetary pain ahead still.” Indeed, the stabilization of state revenues on average was due in large part to tax increases in only two states, New York and California. Boyd predicts that it will be some time before other state revenues return to prerecession levels.
But, was this damage caused by the housing crisis? The recession may have been sparked by failing subprime mortgages, but it was fueled by overleveraged financial institutions—turning a housing slump into a global economic downturn. Lutz, Molloy, and Shan sought to separate the effects of the housing downturn on state and local tax revenues from the broader impact of the recession. They identified five main revenue streams that are influenced by the housing market: property tax revenues; transfer tax revenues; personal income tax revenues (related to construction and real estate jobs); direct sales tax revenues (through construction materials); and indirect sales tax revenues (when homeowners adjust their overall spending in response to changes in property value).
Property tax revenues remained high, and even grew in some states. The other four revenue streams declined, but had only a modest effect on overall state and local tax revenues. Lutz, Molloy, and Shan estimated that the combined decreases from these four revenue streams reduced total state and local tax revenues by $15 billion from 2005 to 2009, which is about 2 percent of state and local tax revenues in 2005. They found that in aggregate housing-related declines are responsible for only a fraction of the overall decline. Widespread unemployment and shrinking family incomes are more significant in cutting personal income and sales tax revenue. Thus, while the housing market and the economy are closely intertwined, the severe drop in state tax revenues can largely be attributed to the broader economic downturn, not the housing crisis specifically.
Local Governments and Property Taxes
As state revenues fell, local government revenues as a whole continued to grow because property tax revenue, which stayed strong in the recession, supported municipal budgets. States typically rely on income and sales taxes, which are more volatile than the property taxes that largely fund local governments. From 2007 to 2009, corporate and individual income tax revenue declined rapidly and sales tax revenue fell—but property taxes grew (figure 1).
In most states, housing price declines are not immediately reflected in assessed property values, and that lag makes property taxes a fairly resilient source of revenue. Also, policy makers tend to offset declines by raising tax rates (figure 2). James Alm and David L. Sjoquist backed these findings with their study of national trends in property tax collections. Although experiences varied among cities, they noted that local governments’ reliance on property taxes has been an advantage, allowing them to avoid some of the more severe effects of the recession.
Variable Effects in Selected States
While the conference focused on national trends, a recurrent theme was the dramatically variable experience of specific states and regions. Bruce Wallin and Jeff Zabel examined the effects of an earlier decline in Massachusetts house prices in the aftermath of a tax limit. Proposition 2½, passed in 1980, is a voter initiative that limits property tax levies (to 2½ percent of assessed values) and limits revenue growth to 2½ percent per year. There are exceptions for new growth, and Proposition 2½ does allow local voters to pass overrides to increase the growth percentage. Wallin and Zabel found property tax revenues overall did grow 4.58 percent between fiscal year 1981 and fiscal year 2009, largely due to these exceptions. A maximum of 547 overrides were proposed in 1991, but as few as 51 in 1999. However, poorer towns have been less likely to approve tax increases, relying instead on spending cuts, and leading to a growing gap between poor and wealthy towns over time.
Michigan, already struggling with the loss of manufacturing jobs, provides another striking case study. Poverty and unemployment rates there are higher than the U.S. average. In Detroit, housing prices plummeted—the average home cost $97,850 in 2003, but dropped to a remarkable low of $11,533 by 2009. Mark Skidmore and Eric Scorsone found that in the recession Michigan cut spending on recreation programs and delayed capital projects and infrastructure maintenance. That strategy may be effective in the short run, Skidmore said, but will likely result in higher costs down the road. He suggested that a similar fate might be in store for Las Vegas or cities in Arizona, which also experienced severe housing price declines.
Local governments in Florida and Georgia have remained fairly stable, so far. Florida experienced a tremendous increase in house prices from 1994 to 2006, before the housing market decline caused prices to fall across the state. William M. Doerner and Keith Ihlanfeldt found that city revenues in Florida rose during the housing boom, but not solely as a result of increased property values, and those revenues have stayed fairly strong following the drop in house prices. Alm and Sjoquist reported that property tax revenues in Georgia rose slightly between 2008 and 2009, while property values declined. Local governments, in many cases, maintained collections by increasing the tax rate.
What the Housing Crisis Means for Children
The housing crisis inflicted enormous costs on individuals, communities, and governments. Residents have been hurt by foreclosures and tremendous losses in property values (box 1). Vacant, deteriorating homes have weakened neighborhoods. The children caught up in the housing crisis face uncertain living situations and may have to transfer from school to school. Although researchers know these changes can harm children, they do not yet fully understand how this crisis is affecting students and schools.
David Figlio, Ashlyn Aiko Nelson, and Stephen Ross are studying how foreclosures hurt children’s educational outcomes. Their preliminary analysis indicates that schools serving neighborhoods with high foreclosure rates may experience declines in enrollment or community resources, with spillover effects on students whose families have not lost their homes.
Box 1. Foreclosure Statistics
Source: Figlio, Nelson, and Ross (2010).
The effects of the housing crisis on children, schools, and neighborhoods are also being examined by Jennifer Comey and her colleagues. The first stage of their work in New York, Baltimore, and the District of Columbia identified areas with high rates of foreclosures. They have found that foreclosures of multifamily and rental units can lead to displacement of renters, causing many families to be harmed by the upheaval in the real estate market. The second phase will track student transfers after foreclosures, comparing their former neighborhoods and schools with their new ones.
Comey and her colleagues will also analyze these students’ school performance through attendance, test scores, and dropout rates. They stressed the importance of coordinating housing and education services. Housing counselors need to know how students are affected by foreclosure and to understand relevant local school policies. A better understanding of these issues can help schools ease the burden on displaced and homeless students.
Looking Abroad . . . and Ahead
Government responses to the global housing crisis also vary around the world, and some countries may offer lessons for the United States. For example, Christian Hilber examined whether central government grants can help maintain housing prices and found that most such grants seemed to translate into increased property values.
Joyce Yanyun Man reported that local governments in China were encouraged to invest in real estate and infrastructure to stimulate economic growth. Rather than using property taxes, they turned to land leasing fees and borrowing to finance urban development. China’s GDP growth rate is rising, but local governments are heavily in debt. Given what we are learning about the stability of property taxes in the United States, China may need to consider a similar policy instead of relying on one-time leasing fees to generate extra revenue.
Although local governments have not suffered the same fate as states, at some point assessed values will catch up to housing price declines. Indeed, recent survey results from the National League of Cities indicate that cities are beginning to see their revenues soften. John E. Anderson warned that local governments are in a precarious position—the property tax base has shrunk and ARRA funding will end, which could create a delayed blow to revenue. If these forces cause local governments to raise rates, this could cause homeowners to push for property tax limits and other initiatives to reduce property tax rates. Anderson investigated the potential adjustments local governments may have to make as they reduce reliance on the property tax in favor of alternative taxes.
Hui Shan stated, “Historical data and case studies suggest that it’s quite unlikely for property tax collections to fall steeply in the next few years.” The delay between the housing downturn and a drop in property taxes may give the national economy time to recover, making up for the loss of stimulus funds and property tax revenue through higher income and sales tax revenue. The forecast is not clear, but state and local governments should be prepared for what the conference participants agreed will be a slow economic recovery ahead.
About the Authors
Kim Rueben is a senior fellow at the Urban Institute and leads the state and local research program at the Urban–Brookings Tax Policy Center.
Serena Lei is a research writer and editor at the Urban Institute.
Acknowledgments
We thank Ritadhi Chakravarti of the Urban Institute, Tracy Gordon of the University of Maryland, and Semida Munteanu and Joan Youngman of the Lincoln Institute for assistance in writing this summary. We also thank the authors and other participants at the conference for engaging in a stimulating discussion. All mistakes and errors are our own.
Conference Authors and Papers
Alm, James, Tulane University; and David Sjoquist, Andrew Young School of Policy Studies, Georgia State University: Rethinking Local Government Reliance on the Property Tax
Anderson, John E., University of Nebraska–Lincoln: Shocks to the Tax Base and Implications for Local Public Finance
Bhatt, Rachana, Georgia State University; Jonathan Rork, Reed College; and Mary Beth Walker, Georgia State University: Earmarking and the Business Cycle: The Case of Higher Education Spending
Boyd, Donald J., The Nelson A. Rockefeller Institute of Government, State University of New York at Albany: Recession, Recovery and State and Local Finances
Chernick, Howard A., Hunter College and the City University of New York; and Andrew Reschovsky, University of Wisconsin–Madison: The Impact of State Government Fiscal Crises on Vertical Fiscal Competition Between States and Local Governments
Comey, Jennifer, The Urban Institute; Vicki Been, NYU/School of Law and Furman Center; Ingrid Gould Ellen, NYU/Wagner and Furman Center; Matthew Kachura, The Jacob France Institute, University of Baltimore; Amy Ellen Schwartz, NYU/Wagner-Steinhardt/IESP; and Leanna Stiefel, NYU/Wagner-Steinhardt/IESP: The Foreclosure Crisis in Three Cities: Children, Schools and Neighborhoods
Craig, Steven G., University of Houston; and Edward Hoang, University of Memphis: State Government Response to Income Fluctuations: Consumption, Insurance and Capital Expenses
Doerner, William M., and Keith R. Ihlanfeldt, Florida State University: House Prices and Local Government Revenues
Figlio, David, Northwestern University; Ashlyn Akio Nelson, Indiana University; and Stephen L. Ross, University of Connecticut: Do Children Lose More than a Home? The Effects of Foreclosure on Children’s Education Outcomes
Glaeser, Edward L., and Joshua Gottlieb, Harvard University; and Joseph Gyourko, The Wharton School, University of Pennsylvania: Can Easy Credit Explain the Housing Bubble?
Hilber, Christian A.L., and Teemu Lyytikainen, London School of Economics and Spatial Economics Research Center (SERC); and Wouter Vermeulen, CPB Netherlands Bureau for Economic Policy Analysis, VU University and SERC: Capitalization of Central Government Grants into Local House Prices: Panel Data Evidence from England
Kodrzycki, Yolanda, and Robert K. Triest, Federal Reserve Bank of Boston: Forecasting House Prices at the State and National Level: Was the Housing Bust Predictable?
Lutz, Bryon, Raven Molloy, and Hui Shan, Federal Reserve Board of Governors: The Housing Crisis and State and Local Government Tax Revenue: Five Channels
Man, Joyce Yanyun, Lincoln Institute of Land Policy: Extra-Budget Spending, Infrastructure Investment, and Effects on City Revenue Structure: Evidence from China
Skidmore, Mark, Michigan State University; and Eric Scorsone, Michigan Senate Fiscal Agency: Causes and Consequences of Fiscal Stress in Michigan Municipal Governments
Wallin, Bruce, Northeastern University; and Jeffrey Zabel, Tufts University: Property Tax Limitations and Local Fiscal Conditions: The Impact of Proposition 2½ in Massachusetts
The complete conference papers are available for free downloading on the Lincoln Institute Web site at www.lincolninst.edu/education/education-coursedetail.asp?id=720
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Imagine for a moment that you are a political leader—a prime minister, president, or governor—and you awake to the news that natural disaster has struck. Citizens died, buildings collapsed, infrastructure is hobbled, and local leaders desperately need additional resources and support.
You respond immediately, sending personnel and equipment to the disaster zone and pledging additional assistance to local leaders. Your country, like many around the world, has institutionalized a scalable, tiered response system with regional, state, and national levels of government engaging as disaster-related demands exceed local capacities to respond. Yet within days, even hours—before all the casualties are treated and citizens are accounted for, and before the streets have been cleared of rubble and basic services have been restored—other leaders and the media are demanding answers to questions you haven’t had time to consider: How much money will be pledged to the rebuilding? What standards will guide it? Will all landowners be permitted to rebuild? Who will lead the process? Is a new institution or governance structure needed to cut through bureaucratic red tape and expedite the rebuilding?
This article summarizes ongoing research into the roles of various government levels in successful disaster recovery and rebuilding (table 1). It represents the synthesis of two decades of recovery research and planning practice following some of the largest disasters of our time in the United States, Japan, China, Taiwan, Indonesia, India, New Zealand, Australia, Chile, and elsewhere. Its purpose is to find common lessons in these disparate environments and help facilitate recovery for communities struck by disasters yet to come.
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Table 1: Recovery Management Experiences Around the World
Australia
Victoria Bushfire Recovery and Reconstruction Authority
Queensland Reconstruction Authority
Chile
Ministry of Housing and Urban Development (MINVU- Ministerio de Vivienda y Urbanismo)
China
General Headquarters for Earthquake Relief
India
Gujarat State Disaster Management Authority (GSDMA)
Abhiyan
Project Management Unit
Indonesia
Rehabilitation and Reconstruction Agency—BRR
Coordination Team for Rehabilitation and Reconstruction—TTN
Japan
National Reconstruction Agency
New Zealand
Canterbury Earthquake Recovery Authority
Taiwan
921 Post-Earthquake Recovery Commission
Morakot Post-Disaster Reconstruction Council
United States
Lower Manhattan Development Corporation
Louisiana Recovery Authority
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Recovery Management Around the World
Governments tasked with post-disaster reconstruction face an extraordinary set of management challenges. The first is the compression of activities in time, focused in space, as cities built over the course of decades if not centuries are destroyed or damaged suddenly and must be rebuilt in a fraction of the time it took to construct them. From this tension develops a second challenge: a keen tension between speed and deliberation, as the various recovery actors in stricken communities move with urgency while aiming to make thoughtful and deliberate decisions, to ensure optimal long-term recovery. From both these phenomena a third challenge arises: the need for immediate access to a deep wealth of money and information—the two currencies of the post-disaster recovery environment.
To meet these demands, governments in every country after every large disaster create new relief agencies or significantly rearrange existing organizations. The most common reason for these post-disaster governance transformations is lack of capacity. Governments still need to attend to their normal daily affairs while they coordinate the reconstruction or reinvention of impacted communities, so they appoint an entity that can focus daily attention on rebuilding while coordinating the recovery-related activities of multiple government agencies. Commonly designed to serve a variety of purposes and governmental settings, these recovery agencies provide a range of substantive functions as they rebuild infrastructure, housing, and economic activity. They differ depending on the type and scale of coordination they provide; the scope of their authority, especially regarding the flow of money and information; and the level of government they serve—at either the national, state, or intergovernmental level.
National governments handle very large disasters at the top political tier, mobilizing financial resources from national reserves or international aid and providing capacity support to lower levels of government in the disaster-stricken locality. When large disasters transcend state or provincial boundaries, national governments also assume active roles in developing recovery policies, and they create recovery organizations to assist them. Examples include Japan’s National Reconstruction Agency, established after the 2011 earthquake and tsunami; New Zealand’s Canterbury Earthquake Recovery Authority, created after the 2010 and 2011 earthquake sequence in Christchurch; and China’s General Headquarters for Earthquake Relief following the 2008 disaster in Wenchuan. Each of these international bodies hewed to the national administrative leadership, derived authority from the top rung of government, and articulated policies approved by the reigning administration.
Similarly, state-level recovery agencies are usually created in direct response to disasters that affect a region or other subnational jurisdiction. The authorities and legalities of these entities are more limited by their authorizing body’s secondary, subnational position in government. Examples include the Gujarat State’s Disaster Management Authority (GSDMA), created after the 2001 earthquake in western India; Louisiana’s Recovery Authority, founded after Hurricane Katrina in 2005; Victoria State’s Bushfire Reconstruction and Recovery Authority (VBRRA), established after the 2009 Australian bushfires; and Queensland State’s Reconstruction Authority, founded after the summer 2010–2011 floods in Australia.
A third class of organizations are designed to operate between levels of government, such as the Lower Manhattan Development Corporation, created as a state and city partnership for recovery planning and funding following the September 11, 2001, terrorist attacks in New York City. Another example, the Rehabilitation and Reconstruction Agency (BRR) created in Aceh, Indonesia, following the 2004 tsunami, consisted of three independent agencies whose membership came from a wide range of local and national stakeholders. Likewise, the Indonesian government’s Coordination Team for Rehabilitation and Reconstruction (TTN), following the 2006 earthquake in Yogyakarta and Central Java, was designed to provide a bridge between national agencies and local agencies, and it also monitored and investigated local implementation issues.
In some cases, governments choose to modify or adapt existing institutions and procedures to help manage recovery. For example, Chile established a national interministerial task force after the 2010 earthquake and tsunami, but the existing Ministry of Housing and Urban Development took on expanded roles and responsibilities and managed the national planning and implementation efforts.
The Mastery of Money, Information, Collaboration, and Time
Considering these factors, common to all post-disaster recovery settings, our research demonstrates that the key to governing large-scale crises effectively is the mastery of money, information, collaboration, and time. For this article, we offer here some best practice examples and lessons learned from our various country-organization studies.
1. Managing Money: Sourcing and distributing recovery funding efficiently, effectively, and equitably.
When large amounts of public funds are involved in a disaster cleanup, the true power over the recovery resides with the level of government that controls the flow of money and how it is acquired, allocated, disbursed, and audited. Sometimes, the recovery organization assumes all or some of these powers, and sometimes all funding authority continues to reside where it did before the disaster, in the same legislative and administrative branches. Important functions in the post-disaster environment include setting policies and priorities for allocating large sums of recovery funding and establishing accounting systems that allow for timely disbursal of critical financing while also providing transparency and minimizing corruption.
Some organizations, such as India’s state-level GSDMA, are established specifically to collect all the recovery funds in one place and then allocate and disburse them. Some, such as one of the three legs of Indonesia’s intergovernmental BRR, are created to independently audit and monitor the expenditures of recovery implementation organizations. In contrast, the state-level Louisiana Recovery Authority recommended funding priorities to the state and provided oversight as needed, but it had no direct control over recovery funds. Japan’s National Reconstruction Agency received national funding and allocates that money to the relevant national ministries and local governments.
2. Increasing Information Flows: Effectively gathering, integrating, and disseminating information to enhance decision making and actions by all recovery actors.
A critical demand is to accelerate and broaden the flows of information among recovery actors about the dynamics of reconstruction actions and emergent opportunities. This challenge includes the planning and public engagement processes that provide information to citizens and institutions involved in the recovery, facilitate communication and innovations among recovery actors, and convey citizen concerns to government agencies and NGOs in a timely manner. It also includes providing information between both governmental and nongovernmental organizations and establishing forums to facilitate coordination.
In Victoria, Australia, after the 2009 bushfires, national and state leaders worked with affected communities to form more than 30 local recovery committees, which were then charged with developing a community recovery plan that identified local priorities and projects. These committees were used by state and national governments as focal points for local funding distribution and by local communities to raise additional funds and establish local policy guidance for rebuilding. In Yogyakarta, Java, after the 2006 earthquake, TTN kept a variety of local and national agencies mutually informed of each other’s activities—which, in turn, helped to provide early alerts to officials regarding potential problems.
A critical function appropriately provided by a government-supported agency is the acquisition, synthesis, and distribution of basic information on damage, reconstruction activities, population, social and economic issues, and various recovery indicators. Such agencies issue regular progress reports and monitor recovery indicators, as both Japan’s National Reconstruction Agency and New Zealand’s Canterbury Earthquake Recovery Authority have done, using a variety of communication mechanisms, including website postings, press releases, newsletters, and forums. Frequent information from credible sources can help to ensure that all actors understand the current recovery environment, and it can also help reduce the spread of rumors and misinformation.
3. Supporting Collaboration: Building sustainable capacity and capability for long-term recovery through genuine collaboration and coordination, both horizontally among local groups and vertically among different levels of government.
Vertically organized, hierarchical agencies—with clear organizational charts and streamlined channels of communication—are usually not well suited to manage disaster recovery, because the lack of “connecting flow” across vertical hierarchies limits collaboration as well as the flow of new and updated information among organizations. U.S. national agencies involved in recovery, for example, are more adept at administering individual programs than they are at solving complex problems that cut across governmental institutional boundaries.
By contrast, horizontally organized agencies can promote interagency coordination and information sharing, allowing individual groups to adapt to new contexts and information while remaining responsible to their parent organization. If multiple states or local jurisdictions are involved, cooperation among multiple jurisdictions is essential. Technical assistance and capacity building for the key recovery actors is also important for building local capabilities to sustain long-term recovery.
After Hurricane Katrina in 2005, Governor Kathleen Blanco appointed the members of the Louisiana Recovery Authority, so it was technically an extension of the state-level administration. But the legislature eventually formalized it. As an intentionally bipartisan body, it operated independently as it interacted with both U.S. national officials and local governments, made policy recommendations, and provided oversight of state agency recovery activities. Even though its power was limited to making policy recommendations, it was able to exert considerable influence at multiple levels in a very politically contentious atmosphere. It also collaborated with U.S. national agencies to set standards for long-term community recovery planning and helped match technical assistance and provide other planning resources at regional, local, and neighborhood scales.
Because they carried the authority of state leaders, India’s GSMDA and Queensland Australia’s reconstruction authority were able to successfully coordinate the activities of other state agencies. Similarly, Chile’s MINVU and Taiwan’s national recovery agencies have had the centralized authority to coordinate activities of other national agencies. Abhiyan, an NGO officially endorsed by the Gujarat government in India but without any defined governmental authority, also played a crucial role in coordinating the work of hundreds of NGOs and in establishing a network of local subcenters to provide information and technical support.
The hierarchical recovery process after the 2008 Wenchuan Earthquake in China succeeded in quickly reconstructing buildings, but it left little room for local innovation, as it lacked genuine local capacity building and involvement in decision making. Because local conditions were not always considered, economic recovery appears to be uneven.
Likewise, in many tsunami-affected communities in the Tohoku region of Japan, recovery has stalled because the hierarchical system established under the national government and the National Recovery Agency leaves insufficient room for local innovation. Furthermore, within the complex and powerful Japanese ministry system, the National Reconstruction Agency lacks power to compel actions by other ministries.
Increasingly, research shows that if residents are partners in reconstruction planning, they are tolerant of delays, and they are more satisfied with the results. Still, even the best examples of decentralized processes involve an agency at the top establishing the framework and rules. This trend strongly suggests that governments should resist the urge to manage the details of reconstruction and act less as managers and more as coordinators and facilitators of the process.
4. Balancing Time Constraints: Effectively meeting the immediate and pressing local needs of recovery while also successfully capitalizing on opportunities for longterm betterment.
Governments face a balancing act as they confront the tensions between speed and deliberation, and between restoration and betterment. The most fundamental way to address these challenges is to increase information flows, as described above. But recovery agencies have found several other specific ways to attain both speed and improvement.
To hasten reconstruction, there are often opportunities to streamline normal bureaucratic processes of decision making, especially regarding construction permits, without compromising quality. Because such processes often involve multiple agencies, a recovery agency can be helpful to the extent that it can facilitate or compel line agencies to cooperate more effectively.
New Zealand’s parliament conferred upon the Canterbury Earthquake Recovery Authority and its minister a wide range of unilateral powers that would enable the timely and coordinated recovery of greater Christchurch. Parliament continued the emergency authorities granted under previous legislation and extended the expiration date of those authorities where appropriate; permitted the minister to acquire land compulsorily; and allowed the suspension of any part or all of the national land use, local government, and transport management, plans or policies developed under various acts. It directed CERA to prepare a draft recovery strategy within nine months of its authorization. Similarly, it issued the Christchurch city council a nine-month deadline to draft a recovery plan for the city’s damaged central business district.
Most recovery agencies include disaster risk reduction in their reconstruction policies. A common recovery slogan is “build back better.” The slogan of the Louisiana Recovery Authority was “Safer, Stronger, Smarter.” The easiest form of post-disaster betterment is to adopt disaster-resistant building standards. The incorporation of new structural standards need not slow down the rebuilding process, but land use improvements such as relocating neighborhoods or entire communities can require considerable time for planning and land acquisition. These projects involve difficult tradeoffs between speed, design quality, and public involvement. New Zealand is undertaking a major buyout of neighborhoods that sustained heavy damage in the 2010–2011 earthquakes and remain vulnerable to damage from future tremors. Japan is encouraging relocation of coastal communities from tsunami hazard areas, and some of these will likely take up to ten years to complete.
One way to manage these goals simultaneously is to support participatory planning processes to create long-term betterment while also trying to meet immediate needs. In many cases, professional planners worked with neighborhoods—in Japan, Chile, New Orleans, and Bhuj, India, for example—but each project also involved difficult compromises in order to meet time constraints. Victoria and Queensland’s creation of local recovery planning committees, however, are great examples of state and national support systems that helped build local capacity to carry forward the rebuilding processes over time.
Next Steps in our Research
Governments know that their task is to manage information and money flows among many actors in a compressed time. Up to this point, we have identified many examples of how to accomplish this. But, even better, we would like to be able to create menus of organizational and process choices, based on combinations of disaster magnitude and scope and economic, political, environmental, and governmental contexts.
We also have several remaining questions: Why do many of the same institutional problems continue to appear from one disaster to the next, and is there a way to avoid repeating some of them? What are the effective outcomes—negative and positive—of these institutional arrangements that may inform future leaders facing similar reconstruction challenges? What specific kinds of technical assistance and capacity building should international donors and national governments focus on providing for local governmental and non-governmental organizations, so they can do their jobs better during the recovery process? In large-scale disasters, how do the tiered goals of a recovery (i.e. rebuilding households, neighborhoods, cities, regions, nations) relate to each other, in terms of consistency, efficiency, and effectiveness? And what happens when these disaster-related organizations cease to exist? Is the local capacity and capability in place for long-term community sustainability? By studying varied national and organizational experiences, we can better understand how the time compression phenomenon of post-disaster recovery affects other theoretical constructs guiding public policy and city management; planning, land development and growth management; and fiscal and capital management.
About the Authors
Co-authors of Clear As Mud: Planning for the Rebuilding of New Orleans (2010, APA Planners Press), Laurie A. Johnson and Robert B. Olshansky are currently collaborating on a Lincoln Institute book and policy focus report on governing post-disaster recovery. For the past two decades, they have been researching and practicing post-disaster recovery planning following urban disasters around the world. Johnson is an urban planner based in San Francisco and specializing in disaster recovery and catastrophe risk management. Olshansky is professor of urban and regional planning at the University of Illinois at Urbana-Champaign. Contact: laurie@lauriejohnsonconsulting.com or robo@illinois.edu
References
Alesch, Daniel J., Lucy A. Arendt, and James N. Holly. 2009. Managing for Long-term Community Recovery in the Aftermath of Disaster. Fairfax, VA: Public Entity Risk Institute.
Chandrasekhar, Divya and Robert B. Olshansky. 2007. Managing Development After Catastrophic Disaster: A Study of Organizations That Coordinated Post-Disaster Recovery in Aceh and Louisiana. Milwaukee, Wisconsin.
Olshansky, Robert B., Lewis D. Hopkins, and Laurie A. Johnson. 2012. Disaster and recovery: Processes compressed in time. Natural Hazards Reviews. 13(3):173–178.
Olshansky, Robert B., Laurie A. Johnson, and Kenneth C. Topping. 2006. Rebuilding communities following disaster: Lessons from Kobe and Los Angeles. Built Environment. 32(4): 354–374.
Smith, G., and Dennis Wenger. 2007. Sustainable disaster recovery: Operationalizing an existing agenda. In Handbook of disaster research (Handbooks of Sociology and Social Research). ed. Havidan Rodriguez, 234–257. New York, NY: Springer.
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The introduction of a market-oriented economic policy in Estonia after independence in 1991 set the stage for a plethora of reforms to restore property rights and establish a price system for goods, labor, capital and land. Land and ownership reforms had two goals: the restoration to former owners of land “unlawfully expropriated” during the Soviet regime, and the treatment of land as a valuable and scarce economic resource. As one might expect, these tasks have not been easy to accomplish, and frequent revisions in the laws and methods governing restitution and valuations have been made.
Historical Overview
Despite the far-reaching reforms taking place in Estonia today, the transformation of land ownership and the patterns of land use still reflect 55 years of history, including wars, occupation and annexation. In the first of three working papers I analyze the impact of these historical developments on land use, population structure and farm wealth in pre-Soviet Estonia. Prior to annexation to the Soviet Union in 1940, Estonia had a flourishing farm sector. Land was used mostly for agriculture, with the majority of the population residing in rural communes or municipalities.
Research also shows that a market for land was well established and reflected site specific characteristics. A distinguishing feature of this market was the coexistence of a sale-purchase price determined by the forces of supply and demand and other prices reflecting the “social” character of land use. For example, land acquisition for use by landless farmers (communal land) had a much lower price than the market price. This feature, although it may have served a social purpose, impacted the value of land for compensating former owners.
Another significant finding relates to the taxation of farms in pre-Soviet Estonia. Land and improvements on land (fixed assets) were subject to taxation, although the effective rate of taxation was quite small. This tax was a local tax with the receipts allocated to local government budgets.
Land Reform
The second paper provides a framework for the analysis of valuation formulae used by the Estonian Land and Tax Boards for the valuation of land for tax purposes. It includes a brief overview of the current land stock and land use, a discussion of land and ownership reforms, including valuation laws and methods, and a statistical analysis of the valuation model used by the Land Board.
Estonia’s experience with privatizing its economy is without a doubt at the forefront of liberalization efforts undertaken by the new independent states. The transformation of collective rights to land into individual rights took place in Estonia by means of legislation. First, the new Constitution in 1992 restored to citizens the rights of ownership of productive assets, including land, and property and land reform laws established a system for the restitution of land to former owners. Second, principles for establishing land value for compensation and privatization were spelled out by the valuation law(s).
A land market, especially for urban land, is likely to develop quickly, offering the Land Board useful information for adjusting their valuation models. Once a sufficient number of observations on land transactions becomes available, a hedonic price model or present value model can be developed to provide information on the marginal valuation of each land attribute, as well as the significance of other land characteristics not included in the current model. Using the Estonia Base Map, the spatial aspect of land and other amenities (GIS variables) may be incorporated in the model to yield good estimates of the marginal product of land in both urban and rural municipalities.
Given that land value is used as a tax base, it is incumbent upon public sector officials to assess it fairly and accurately. A land tax yield hinges on the size and distribution of the base. If the tax model neglects this, revenue will suffer and land use will be suboptimal. Economies in transition can ill afford this road.
Land Taxation and Tax Reform
The third paper integrates the two aspects of land reform, valuation and taxation, beginning with an historical overview of land taxation in Estonia leading up to the current (1995) land tax. It addresses the assignment of tax sources between the state and local governments, and the significance of land taxation as a revenue source for local governments. The paper also offers a statistical model for estimating land tax revenues based on the Estonian Land Board valuation maps, the land cadastre and tax rates selected by local municipalities and then contrasts the estimates with actual data obtained from the Estonian National Tax Board.
After independence in 1991, the Estonian government introduced a new tax system that replaced the Soviet system, and the state budget was completely “decoupled” from the USSR’s All-Union budget. On May 10, 1993, the Estonian parliament passed the Law on Land Tax as part of a reform agenda dealing with budgetary reform in general and land reform in particular. The path followed by Estonia is similar to that prescribed by the World Bank for many former Soviet republics. Guided by “western” principles of taxation, the Estonian tax system was designed to achieve efficiency in resource use as well as to meet national and local budgetary needs.
The land tax is one of several revenue sources collected from people and enterprises in Estonia. Although the land tax was established as a state tax with shared revenues between the state and local governments, it was quickly designated as a local tax with its proceeds dedicated for local budgets. Estonia also recognizes the efficiency of a special tax on land value, even though at the time of this study it accounted for only seven percent of local revenues.
Several conclusions emerge from this part of the study. First, a tax on land offers special efficiency benefits, although its implementation needs to be considered carefully. Second, for land to be a viable tax source serious attempts should be made to enhance the efficiency of financial and insurance markets, especially in rural areas. Third, land valuation should reflect two elements: the value of present attributes and the value of these attributes in the future, because a parcel of land valued at the best use of these attributes today may not capture their full value in the future.
Finally and perhaps most importantly for economies in transition, valuation and taxation of land should be viewed in the context of a “learning curve.” With the progress of the economy in general and land markets in particular, land taxation should be strengthened through annual valuation to enhance the tax capacity of municipal governments and to encourage the optimal development of land use over time.
Attiat F. Ott is professor of economics and director of the Institute for Economic Studies at Clark University in Worcester, MA. This article is adapted from three new working papers resulting from research supported by the Lincoln Institute.
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The Lincoln Institute sponsored a wide-ranging international conference in June on “Land Policies for Urban Development.” A few of the major themes and messages from the presentations are summarized below.
The three most populous developing countries, China, India, and Indonesia, with 40 percent of the world’s population, are entering the stage of rapid urbanization simultaneously. By 2030, they are projected to add an additional 2.2 billion persons to urban areas, increasing the world’s urban population by nearly 80 percent over the 2000 figure of 2.8 billion. The related infrastructure investment needs are likely to reduce or eliminate any perceived savings surplus in the world. Economic growth and urbanization in most East Asian countries have occurred in coastal regions and near ports. In India, however, urbanization and growth are currently focused on inland cities and on information technology rather than on labor-intensive manufacturing. This may be due to weaknesses in traditional infrastructure services, particularly in transport.
A review of property tax practices across 25 countries found an extremely wide range of practices in terms of tax base definitions, tax rate levels, and assessment practices. In most developing countries property tax rates are very low (a fraction of one percent of market values). Nevertheless, property taxes are one of the few revenue sources under local control and are an important component of local government revenues. Simplicity was found to be a virtue of property tax regimes in developing countries, because complexity raises administrative costs and erodes public support for property taxes.
Efforts to measure land values in urban areas of the United States—either by analyzing vacant land sales or by subtracting the value of the structure from property sales—indicate that they have appreciated more rapidly than construction costs since 1985, with a 2005 value between $12 and $24 trillion. This compares to estimates for 1980 of about $3 trillion, suggesting that land values have increased four to eight times in a period when consumer prices have increased only 2.4 times. In addition, land values have been volatile, falling by around 40 percent from 1989 to 1995 in many urban markets before increasing rapidly in the past 10 years.
While average housing prices across the United States have increased faster than construction costs, increases in housing prices have been particularly sharp in urban areas on the West Coast and on the East Coast from the mid-Atlantic region to New England. In these coastal metropolitan areas, median single-family housing prices are nearly five times larger than median prices in the least expensive metropolitan areas in other regions.
Analysis across all U.S. metropolitan areas shows a strong association between the level of housing market regulation and the level of prices—metropolitan areas with the most regulations on residential development have the highest housing prices. Moreover, areas with the highest prices also have low growth rates of housing stocks. Together these findings suggest that rapid growth in housing prices in coastal cities is due in large part to growing impediments on the supply side of the market. Supply constraints may not be only a U.S. phenomenon. A review of planning experience in the United Kingdom showed that urban development corporations, which have the power to overrule local regulations, have been more effective than most other approaches in fostering urban revitalization.
The ownership of second homes (for own use, not for rent to others) has been growing rapidly in the United States, and about 5.6 percent of all U.S. housing units were second homes in 2004. The main determinants of second-home ownership are income, wealth, and age of the household head. Second-home ownership is highest for those in their sixties, suggesting that the aging of the baby boom generation will increase second-home ownership. Additional research (and better data) is required to determine if this trend is related to the location or characteristics of a household’s primary residence.
The complete collection of papers and commentaries presented at the conference will be published as an edited volume in 2007.
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Ethan Seltzer is a professor in the Nohad A. Toulan School of Urban Studies and Planning at Portland State University. He previously served for six years as the director of the school, and prior to that for eleven years as the founding director of Portland State’s Institute of Portland Metropolitan Studies.
Before joining Portland State in 1992 he served as the land use supervisor for Metro, the regional government in the Portland area; assistant to Portland City Commissioner Mike Lindberg; assistant coordinator for the Southeast Uplift Neighborhood Program in Portland; and coordinator of the Drinking Water Project for the Oregon Environmental Council.
Seltzer received his Ph.D. in City and Regional Planning and Master of Regional Planning from the University of Pennsylvania. His doctoral dissertation examined the role of citizen participation in environmental planning. Current research interests include regional planning, regionalism, regional development, and planning in the Pacific Northwest.
In addition to his current work with the Lincoln Institute, his publications include chapters titled Maintaining the Working Landscape: The Portland Metro Urban Growth Boundary, in Regional Planning for Open Space, edited by Arnold van der Valk and Terry van Dijk (Routledge 2009); and It’s Not an Experiment: Regional Planning at Metro, 1990 to the Present, in The Portland Edge, edited by Connie Ozawa (Island Press 2004).
Land Lines: How did you become associated with the Lincoln Institute of Land Policy?
Ethan Seltzer: Regional planning has been at the center of my career for a long time. I used to be the land use supervisor for Metro, the regional government in the Portland metropolitan region. In the late 1980s we were just starting work on what is now the Region 2040 Growth Concept. Part of that work involved seeking out new ideas about planning, land use, land management, and related topics, and through that search, I started to engage with the Lincoln Institute. A few years later, I was part of a planning project organized through the Regional Plan Association in New York that brought U.S. and Japanese planners together. I met Armando Carbonell (chair of the Institute’s Department of Planning and Urban Form) through that process, and we have remained collaborators on a number of projects since then.
Land Lines: What was the first project you conducted for the Lincoln Institute?
Ethan Seltzer: The first one I recall had to do with re-establishing a dialogue around regional planning and building on the ideas put forth by the old Regional Plan Association of America going back to the 1920s. I was also a part of numerous Lincoln Institute seminars, including one held in Chicago on the relationships and interdependencies between cities and suburbs. The papers were published by the Institute in 2000 in the book Urban-Suburban Interdependencies, edited by Rosalind Greenstein and Wim Wiewel. Since then I have been involved in several Institute-sponsored projects and events, most recently in conjunction with the showing of the film Portland: Quest for the Livable City as part of the Making Sense of Place documentary film series.
Land Lines: How has your association with the Lincoln Institute influenced your research?
Ethan Seltzer: I think the Lincoln Institute is one of the only, maybe the only, institution that has consistently focused on the confluence of issues associated with planning practice, place, regionalism, and land use. There are few other places that address these issues in such a thoughtful, deliberate manner. The support that the Lincoln Institute provides for thinking and writing about these issues is part of what makes it possible for me to find both an audience and like-minded colleagues. There are other networks important to me as well, notably the connections provided by the Association of Collegiate Schools of Planning. Nonetheless, the Lincoln Institute is uniquely a forum for the things that I am most interested in and where I hope to contribute.
Land Lines: What are your current projects for the Lincoln Institute?
Ethan Seltzer: I am working on a book on regional planning in America with an explicit focus on practice. I teach courses in regional planning and, though there is an interesting literature on the reasons why regional planning might make sense and the stark challenges to pulling it off, there is not much information available regarding what regional planners do, and how regional planning is distinguished from other types of planning (i.e., city, urban, transportation).
With support from the Lincoln Institute, and in collaboration with coeditor Armando Carbonell, I was able to recruit a group of talented authors and put together a series of chapters that, we expect, will more completely present what gets done in the name of regional planning in the United States today. We also hope this project will provide a basis for better understanding the unique aspects of regional planning practice.
The working title for the book is American Regional Planning: Practice and Prospect. Coauthors include Tim Beatley, Robert Fishman, Kate Foster, John Fregonese and CJ Gabbe, Frank and Deborah Popper, Manuel Pastor and Chris Benner, Gerrit Knaap and Rebecca Lewis, Fritz Steiner, and Bob Yaro. The manuscript will be completed this fall and the book will be published in the spring of 2011.
Land Lines: Regional planning seems to be a really challenging idea in America. Why are you so interested in it?
Ethan Seltzer: You are absolutely right, but it’s often hard to find a place in the scheme of things for regions and regional planning. The history of America is told with broad, sweeping regions in mind—the South, New England, the West—but the history of planning in America is largely one of local institutions, states, and the federal government.
Regional planning, then, is both present at the outset and a latecomer to the planning game. The institutional turf is quite congested. Although the need for better regional coordination and planning actually predates the “invention” of modern city planning in America (consider that the Burnham Plan for Chicago was a regional plan), regional planning has never been able to mount a convincing challenge to the profoundly local emphasis of planning.
Still, it simply makes too much sense to put aside regional planning for long. One need not be a rocket scientist to recognize that many of the things we care about and depend on are not well managed or defined by local jurisdictions. When I worked as the land use supervisor for Metro in Portland, I was struck by the fact that everyone—rich, poor, and in-between—lived regional lives. That is, households in our region were working, socializing, recreating, worshipping, schooling, and sleeping in territories of their own devising, none of which corresponded to any single local jurisdiction. Consequently, planning by jurisdiction, which is the norm in Oregon and elsewhere, becomes a more complicated proposition. It really makes one wonder for whom the planning is intended. If it is simply about maintaining local property values, then we’ve both made that task overly complicated and are poorly serving a whole host of larger values, goals, and objectives.
However, the other thing that struck me while working for Metro is that if people don’t feel empowered to address the issues right in front of them when they walk out the front of their house or apartment building, then they will never relate to the kinds of things we are talking about at the regional scale. Local empowerment made regional planning and growth management possible. Local and regional, then, go hand in hand, and you cannot have one without the other.
Having worked at the regional level, served as president of my local planning commission, and provided planning assistance to neighborhood associations early in my career, I am familiar with the ongoing tensions between these scales—the scale at which we live in the region, and the scale at which we are empowered at the locality. I think this tension is always going to be present, and I am under no illusions that it will evaporate or that the region will “win” any time in the future.
Still, I, like others, keep coming back to the region because to ignore it is to give up on things that are important to our sense of place and quality of life. The region helps us understand the world and how it works, and makes one look deeply into the causal relationships that link us together and to the natural world. I guess the ecologist in me will never give up on that.
Land Lines: What other kinds of research topics have you been investigating?
Ethan Seltzer: I guess you could summarize my work under several headings. I have written about planning in Portland, particularly regional planning and the way that Metro developed a regional growth management plan. That work has been incorporated in publications and projects in the United States, Japan, and the Netherlands.
More recently, I have been engaged in the work of America 2050 on megaregions. I have provided information about Cascadia, the megaregion of the Pacific Northwest, and participated in several research seminars organized to further our understanding of the nature of megaregions, planning for megaregions, and the utility of that concept for better understanding issues associated with sustainability and competitiveness in the years ahead.
I have also worked with Connie Ozawa, a colleague at Portland State, on the kinds of skills needed by entry-level planners, and therefore the nature of the relationship between graduate planning education and planning practice. I am also working with colleagues at the University of Oregon and Oregon State University to investigate the dynamics underlying and opportunities for bridging the “urban/rural” divide in Oregon. A book on that topic will be published by Oregon State Press in 2011. The fundamental themes that tie all of this together have to do with place and practice—the place being the Portland metropolitan region and the Pacific Northwest, and the practice being what actually gets done by planners.
Land Lines: Any last thoughts?
Ethan Seltzer: In an interesting way, the Lincoln Institute’s association with the ideas of Henry George and their extension into thematic areas of land as property, taxation, and land planning is very contemporary. The challenges we face in the United States and globally due to climate change and instability, the pressure for sustainability, urbanization, and the future of our cities and metropolitan regions all come together around these themes.
Ultimately, the challenges that we talk about in sweeping terms must make sense and be addressed democratically and locally. Pulling that off in a manner that acknowledges the global context for local action is really about infusing what we do as planners and academicians with a new ethical commitment to acknowledging and acting at the true scales at which these issues operate.
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Veintitrés estados ofrecen un incentivo para preservar el espacio abierto, que consiste en un avalúo preferencial del impuesto a la propiedad sobre las parcelas elegibles (tabla 1, pág. 17). Estas reducciones en el impuesto a la propiedad pueden considerarse como gastos, ya que reducen los ingresos disponibles para otros usos con el interés de proteger la gran cantidad de atracciones y beneficios ambientales que proporciona un terreno sin desarrollar.
Los programas varían mucho de un estado a otro, pero todos los programas de avalúo preferencial para el espacio abierto deben definir el tipo y tamaño de las parcelas elegibles, los usos permitidos, los requisitos de certificación, los métodos de avalúo, la duración del plazo de inscripción y las sanciones (de corresponder) en el caso de cancelar la condición preferencial de la parcela. Varios estados ofrecen más de un programa, cada uno de los cuales establece sus propios requisitos de elegibilidad. En el presente artículo consideramos estas diferencias, ofrecemos ejemplos del cálculo del gasto fiscal y describimos los posibles beneficios y costos sociales derivados de dichos programas.
Determinación de la elegibilidad para el avalúo preferencial
Cada estado define la elegibilidad de diferentes maneras, pero los requisitos son, por lo general, relativamente sencillos de cumplir. Una parcela puede ser elegible simplemente por no estar desarrollada. Varios estados permiten que los terrenos con valor paisajístico sean elegibles siempre que la densidad de construcción no exceda los límites establecidos. Por ejemplo, en Washington se permite que los terrenos sean elegibles si cumplen al menos con uno de once requisitos muy generales, tales como la protección de corrientes de agua o recursos hídricos, la conservación o mejora de recursos naturales o paisajísticos, la preservación de la calidad visual a lo largo de los caminos o la mejora de las oportunidades recreativas.
Aunque estos criterios son muy generales, los estados pueden elevar el nivel mediante la imposición de requisitos adicionales a los propietarios. Algunos estados requieren que los propietarios elaboren un plan de gestión de la propiedad, aprobado por el estado, con el fin de fomentar los beneficios de la vida silvestre del lugar. En Vermont se establece que una organización de conservación elegible debe poseer y gestionar el espacio abierto. Uno de los dos programas vigentes en Texas requiere que los propietarios realicen actividades de gestión de terrenos y vida silvestre con el fin de propagar una población de animales salvajes indígenas, que estén criando, migrando o hibernando, para uso humano, incluidas alimentación, medicina o recreación.
Varios estados ofrecen un avalúo preferencial a las propiedades que han obtenido la condición de espacio abierto a nivel federal. Por ejemplo, las parcelas que se encuentran limitadas por una servidumbre de conservación que cumple con los requisitos del IRS (Servicio de Rentas Internas) para ser considerada una donación de beneficencia son automáticamente elegibles para un avalúo preferencial en Illinois y Oregón. En Ohio, las parcelas son elegibles sólo si son objeto de un contrato con alguno de los cuatro programas de la USDA (Departamento de Agricultura de los Estados Unidos): el Programa de Reserva de Conservación, el Programa de Mejora de Reserva de Conservación, el Programa de Reserva de Pantanos y el Programa de Preservación de Pastizales.
Además, es posible que las parcelas deban cumplir requisitos de tamaño mínimo. El mínimo más común es de 4 hectáreas contiguas, aunque algunos programas permiten propiedades más pequeñas, de hasta 0,8 hectáreas y otros programas directamente no establecen requisitos en este sentido. Unos pocos estados limitan el total de hectáreas que un propietario en particular puede inscribir en el programa. Por ejemplo, en Tennessee se limita la elegibilidad a 607 hectáreas por propietario y condado, incluyendo tierras agrícolas, bosques y espacio abierto combinados. La declaración del tipo de uso de la propiedad puede tener influencia sobre la posibilidad de que dicha propiedad sea aceptada o no, ya que algunos estados prohíben específicamente las propiedades con fines comerciales, tales como los campos de golf. No obstante, al menos dos estados tienen programas diseñados específicamente para los campos de golf y otras propiedades con fines comerciales que brindan oportunidades de recreación al aire libre.
Criterios estatales versus criterios municipales
Los gobiernos estatales por lo general autorizan la creación de programas de avalúo preferencial y los criterios de inclusión. Seis estados permiten que los funcionarios municipales o de cada condado determinen los criterios: el estado autoriza un programa y solamente establece, por ejemplo, que las parcelas estén “incluidas en un plan de preservación aprobado por una agencia de planificación estatal o municipal” (Chervin, Gibson y Green 2009, 8) o que el organismo gubernamental respectivo acepte la propiedad mediante una resolución. Los estados que establecen este requisito son California, Connecticut, Florida, Nevada, Tennessee y Oregón. Los funcionarios municipales o de cada condado deben luego escoger los criterios de elegibilidad que, en algunos casos, incluyen la denominación de parcelas específicas. En otros casos, la oficina de avalúo determina la elegibilidad teniendo en cuenta las características de la propiedad y evaluando si ésta cumple con los criterios.
Este enfoque permite a los gobiernos municipales controlar la cantidad de gastos realizados en sus respectivas jurisdicciones y adaptar el programa con el fin de proteger las cualidades específicas que resultan más importantes para esa área en particular. Por ejemplo, es posible que los funcionarios en un entorno predominantemente agrícola prefieran utilizar los gastos fiscales en bosques o pantanos, mientras que los campos abiertos tal vez sean más valorados en un entorno más urbano.
Cálculo del valor del gasto fiscal
Los programas de avalúo preferencial de espacios abiertos por lo general utilizan uno de los tres métodos para determinar el valor fiscal de la propiedad. Nueve estados valúan el espacio abierto como si estuviera inscrito en el programa del estado para agricultura o bosques, aun cuando el terreno no se utilice para ninguna de estas actividades. Otros nueve estados ordenan a los tasadores valuar las propiedades teniendo en cuenta solamente su utilización actual, sin incluir el valor de los derechos de desarrollo (es decir, el valor de mercado como si su uso futuro estuviera permanentemente limitado a su uso actual). Cuatro estados establecen que los tasadores deben determinar el valor justo de mercado como si el terreno no estuviera inscrito en el programa y luego aplicar una fórmula establecida por ley con el fin de determinar el valor fiscal preferencial. Illinois tiene tres programas de avalúo preferencial para el espacio abierto, que varían según sus criterios de elegibilidad, aunque todos ofrecen reducciones establecidas por ley que se encuentran entre el 75 por ciento y el 85 por ciento. Nevada aplica un descuento establecido por ley más reducido del 26 por ciento.
En ocasiones, los estados deciden definir valores máximos o mínimos por hectárea para las parcelas en espacios abiertos. Por ejemplo, en Maryland se estableció un valor en todo el estado de US$187,50 por acre (US$75 por hectárea) para el año 2009. En Washington se permite que los gobiernos municipales determinen el valor de uso para su región, según un sistema de calificación de beneficios públicos; en el caso de que no exista tal sistema, los terrenos en espacios abiertos pueden recibir una valuación no menor que la valuación agrícola más baja del condado. En Massachusetts se calcula el valor preferencial como valor de uso, que no debe exceder el 25 por ciento del valor justo de mercado.
Duración del programa y sanciones por rescisión anticipada
Muchos programas establecen la renovación anual automática a menos que el propietario decida retirarse del programa. En algunos casos, la duración del contrato está predeterminada: con frecuencia es de 10 años, período que generalmente se traslada al nuevo propietario cuando se vende la propiedad, a menos que el nuevo propietario altere el uso de la propiedad e infrinja los términos del programa. Los propietarios deben pagar una multa por retirarse del programa para alterar el uso del terreno o por alterarlo sin notificar esta decisión. Las sanciones suelen ser equivalentes al valor del gasto fiscal recibido para una determinada cantidad de años antes del año en curso, más los intereses sobre dichos gastos. Varios estados aplican un monto del 10 por ciento del valor justo de mercado cuando la utilización de la parcela cambia, o cobran un impuesto a la transferencia o transmisión de la propiedad cuando una parcela inscrita en el programa se vende.
Sin embargo, si un propietario retira una parcela de un programa después de transcurrida una cantidad mínima de años, el estado puede reducir o incluso eliminar las sanciones. Por ejemplo, en Vermont se les cobra a los propietarios el 20 por ciento del valor justo de mercado por retirar la propiedad durante la primera década, y un 10 por ciento por retirarla después de los 10 años. Rhode Island deduce el 10 por ciento del nuevo valor justo de mercado por retirar una propiedad del programa después de transcurridos 6 años, pero dicha multa se va reduciendo hasta que el contrato se rescinde, es decir, a los 16 años de la inscripción en el programa.
Beneficios económicos de la preservación del espacio abierto
La abundante bibliografía en torno a los efectos que las atracciones ambientales tienen sobre los valores de las propiedades circundantes sugiere que si se evita el desarrollo en una parcela, esto traerá como consecuencia el aumento del valor de las parcelas adyacentes. Sin embargo, en estas investigaciones se observaron factores de complicación que dificultan la predicción de cambios en el valor para regiones específicas. Por ejemplo, los resultados de un estudio realizado en Maryland arrojaron que los programas para espacios abiertos tienen efectos muy diferentes en el valor de las propiedades en tres condados distintos, probablemente debido, al menos en parte, a las variaciones en la cantidad de espacios abiertos que existen (Geoghegan, Lynch y Bucholtz 2003). Muchos otros estudios indican que el valor del espacio abierto para propietarios en particular disminuye a medida que aumenta la distancia desde la parcela protegida (Chamblee y otros 2011). El tipo de hábitat o espacio verde probablemente también sea un factor de influencia: según un análisis, la presencia de árboles frondosos en un barrio se asocia con valores positivos, pero la presencia de abetos tiene un efecto negativo en los valores de la propiedad (Garrod y Willis 1992). Los resultados de un análisis de precios de viviendas en Tucson, Arizona, arrojaron que existe una preferencia por viviendas en áreas con espacios verdes, inclusive el hábitat ribereño nativo (Bark y otros 2009; 2011).
El acceso público a espacios abiertos de propiedad privada con fines recreativos o educativos probablemente también brindaría grandes bene-ficios al municipio en muchos casos. Los estados casi nunca requieren que el acceso público sea una condición para el gasto fiscal, aunque tanto Maine como Nueva Hampshire fomentan esta condición, ya que ofrecen una reducción adicional en el valor fiscal del 25 por ciento y el 20 por ciento, respectivamente.
El espacio abierto protegido también puede reducir el crecimiento en la demanda de servicios provistos por el municipio y, así, evitar los efectos negativos del desarrollo, tales como el tránsito intenso o las escuelas superpobladas, que muy probablemente se traducirían en una mayor carga fiscal para los residentes actuales. La creciente bibliografía en cuanto al costo de los servicios comunitarios indica que los impuestos a la propiedad que se pagan por los terrenos desarrollados son, por lo general, insuficientes a la hora de cubrir el costo de los servicios creados con el fin de apoyar dicho desarrollo, mientras que los espacios abiertos frecuentemente generan ingresos fiscales que exceden el costo de los servicios utilizados en la propiedad. El American Farmland Trust observó, según los resultados de 151 estudios realizados en condados y municipios de 25 estados, que los propietarios de terrenos de cultivo o espacios abiertos con frecuencia pagan impuestos superiores al costo de los servicios que reciben en dichas propiedades (e incluso llegan a ser el doble), mientras que los propietarios de inmuebles residenciales por lo general pagan menos que el costo de los servicios que reciben (Farmland Information Center 2010).
Resultados de este tipo sugieren que el avalúo preferencial puede justificarse con base en la equidad, ya que es posible que los propietarios de espacios abiertos estén subsidiando servicios prestados a los propietarios de inmuebles desarrollados. Sin embargo, el hecho de que la mayoría de los programas requieran un contrato a largo plazo e incluyan sanciones por la rescisión anticipada indica que el objetivo no es la equidad sino evitar el desarrollo durante un período determinado.
Lamentablemente, existe muy poca bibliografía sobre la estimación de si los programas de avalúo preferencial pueden evitar el desarrollo futuro en parcelas que no se encuentran protegidas en forma permanente, tales como las servidumbres. Gran parte de las evidencias que existen actualmente está basada en estudios sobre los programas de protección de terrenos agrícolas en lugar de evaluaciones del impacto que los gastos del impuesto a la propiedad tienen sobre el espacio abierto. En dos estudios llevados a cabo por el programa Greenbelt (cinturón verde) de Tennessee se evaluó una encuesta realizada a propietarios de zonas boscosas inscritos en el programa y sus resultados arrojaron muy pocas pruebas que sustentaran la hipótesis de que el avalúo preferencial reducía la probabilidad de que se llevaran a cabo desarrollos en dichas parcelas (Brockett, Gottfried y Evans 2003; Williams y otros 2004).
Es mucho más sencillo evaluar los terrenos sujetos a una protección a largo plazo o permanente, ya sea mediante una servidumbre de conservación perpetua como a través de un contrato de avalúo preferencial a largo plazo que incluya importantes sanciones en caso de rescisión anticipada. En dichos casos, es posible predecir con un gran nivel de confianza la presencia continua del espacio abierto. Lamentablemente, dichos contratos de protección pueden anteceder al avalúo preferencial o, en otros casos, no estar influenciados por dicho avalúo.
Costos del avalúo preferencial para el espacio abierto
Además del gasto fiscal en sí, estos programas pueden generar otros posibles costos. Por ejemplo, aquellos programas que requieren la aprobación de un plan de conservación podrían generar un gasto particularmente significativo. Aun cuando una agencia estatal pudiera desarrollar y aprobar dicho plan, resultaría muy costoso garantizar el cumplimiento de las condiciones del mismo.
La supervisión del cumplimiento del programa requiere evaluar no sólo los cambios en el valor de mercado de la propiedad sino también los cambios en la utilización de la propiedad. Por ejemplo, si el espacio abierto se usa para pastura del ganado, este nuevo uso podría proteger la situación de no desarrollo de la propiedad pero, aun así, los beneficios ambientales podrían verse disminuidos.
Además, los resultados de los estudios sugieren que, en algunos casos, la preservación del espacio abierto puede reducir el valor de la propiedad por transferencia de los patrones de desarrollo que, generalmente, dan como resultado el desarrollo de las propiedades adyacentes (Irwin y Bockstael 2004; McDonald y otros 2007). Si el avalúo preferencial evita el desarrollo en determinadas parcelas, dicho desarrollo podría trasladarse a otras parcelas de tal manera que aumentaría la expansión urbana descontrolada. Si se da un patrón de desarrollo discontinuo a causa de un programa que evitó el desarrollo parcela por parcela, los efectos negativos (tales como mayores costos de infraestructura) podrían superar en gran medida cualquier beneficio público que generara el programa.
Debido a la naturaleza voluntaria de estos programas y a los cambios que pueden darse en los patrones de desarrollo, en el peor de los casos, las parcelas de menor calidad podrían recibir un avalúo preferencial, lo que aumentaría la presión para llevar a cabo desarrollos en las parcelas que generan mayores beneficios públicos. Por un lado, la aprobación del gobierno municipal podría disminuir este problema, ya que permitiría que las personas que tienen un mejor conocimiento del área pudieran escoger las parcelas que merecen más protección. Por otro lado, esto podría inspirar a los funcionarios municipales a proteger el espacio abierto en sus respectivas jurisdicciones, lo que incitaría el desarrollo en las comunidades vecinas y generaría patrones de desarrollo no deseados a nivel regional. Es importante destacar además que el avalúo preferencial del espacio abierto genera, hasta cierto punto, un sistema de tarifas diferenciadas, según el cual la tarifa más alta se aplica sobre los terrenos desarrollados, especialmente sobre las mejoras realizadas a los terrenos; este problema ha sido un motivo de preocupación para muchos académicos en el campo del impuesto a la propiedad y puede afectar en gran medida los patrones de uso del suelo.
Finalmente, el valor de los beneficios públicos no es estático, ya que puede aumentar o disminuir dependiendo de la condición de la propiedad y el área circundante. Los cambios pueden ser independientes de los futuros cambios en el valor fiscal o, incluso, pueden estar negativamente correlacionados con los mismos. Por ejemplo, una presión más intensa para llevar a cabo desarrollos podría aumentar el beneficio de preservar una parcela de grandes dimensiones como espacio abierto, o podría disminuir el beneficio de preservar una pequeña parcela aislada. Un espacio abierto de 10 hectáreas en medio de una ciudad podría beneficiar en gran manera a la comunidad; sin embargo, si se llevan a cabo desarrollos en 9 de esas hectáreas, esto probablemente reduciría los beneficios ambientales de la hectárea restante. Sin embargo, en ambos casos, es probable que aumenten los ahorros fiscales derivados del avalúo preferencial, ya que la presión por el desarrollo genera un aumento en los valores de las propiedades en el lugar.
Estos factores indican que, a pesar de que el avalúo preferencial ofrece a los propietarios un incentivo para preservar los beneficios públicos, la cantidad del incentivo puede no compensar, o incluso compensar de más, el beneficio generado. Esto dará como resultado un programa ineficiente en sí mismo, aunque este tipo de programas siga dando importantes beneficios netos si se compara con el hecho de no tener ningún programa.
Consecuencias en la distribución
Los gastos en el impuesto a la propiedad con el fin de proteger el espacio abierto tendrán consecuencias en la distribución. De manera más inmediata, el programa redistribuiría la carga fiscal a otros propietarios de inmuebles en los mismos distritos tributarios, a medida que los gobiernos modifican el tipo fiscal a tanto por mil a fin de mantener la recaudación presupuestada. Los propietarios de inmuebles desarrollados constituirían así una gran parte de la base imponible y, como resultado, deberían pagar una fracción mayor de la factura de cobro total del impuesto.
Debido a que los programas de avalúo preferencial se encuentran diseñados principalmente para mantener el espacio abierto existente, las parcelas inscritas en dichos programas continúan generando beneficios, aunque dichos beneficios no aumenten necesariamente. De esta manera, sería de esperar que los beneficios públicos continuaran devengándose como hasta ahora. Sólo los residentes locales se beneficiarán con los paisajes y los costos externos previstos del desarrollo, mientras que tanto residentes como no residentes por igual podrán obtener los beneficios derivados de la protección de las cuencas de agua o los hábitats de especies en riesgo (Anderson y West 2006). No obstante, podría esperarse un aumento de los beneficios si el programa requiriera a los propietarios que mejoraran el valor del espacio abierto realizando actividades tales como la restauración de hábitats.
Varias investigaciones indican que los efectos del espacio abierto en los valores de las propiedades adyacentes dependen significativamente del tipo de protección y de su capacidad para evitar el desarrollo en el futuro. Por ejemplo, los terrenos adquiridos como parques o reservas forestales o los terrenos que se encuentran sujetos a una servidumbre de conservación tienen un efecto mucho más positivo en el valor de las propiedades adyacentes que el espacio abierto que no se encuentra protegido de forma permanente (Geoghegan 2002). La inscripción en un programa de avalúo preferencial podría tener pocos efectos, o incluso ninguno en absoluto, en los valores de las propiedades adyacentes si la protección se percibe como algo temporal, lo que puede dar como resultado reducciones permanentes en la recaudación o tasas de impuesto permanentemente altas sobre las parcelas que no se encuentran inscritas.
Cálculo del costo fiscal de los gastos del avalúo preferencial
La metodología para calcular el gasto fiscal derivado del avalúo preferencial del espacio abierto es clara. El propietario del inmueble percibiría una carga fiscal reducida, resultado de la diferencia entre el avalúo sin el programa y el avalúo preferencial. Esta disminución en el valor fiscal puede reducir la recaudación fiscal debido a la reducción de la base imponible. De forma alternativa, la pérdida de recaudación podría compensarse transfiriendo dicha carga fiscal a otros propietarios de inmuebles, a los que se les aumenta la tasa del impuesto. También es posible una combinación de ambos resultados. En el informe de gastos fiscales de Oregón (tabla 2) se observó tanto la pérdida como la transferencia del impuesto; en dicho informe se indican valores de exención de US$126 millones en el ejercicio 2009–2010 para los tres programas aplicables al espacio abierto. La pérdida de recaudación estimada en dos ejercicios es de US$3,2 millones, mientras que la recaudación estimada derivada de la transferencia del impuesto durante dicho período es de US$0,7 millones.
Los datos son desiguales de un estado a otro, lo que dificulta la estimación de los efectos del avalúo preferencial en la recaudación. Los datos totales que se presentaron respecto de Oregón son mucho más útiles que los datos presentados por otros estados. Aquellos estados que no calculan los gastos del impuesto a la propiedad con regularidad no facilitan el acceso a dichos datos; como mucho, por lo general presentan cifras totales que combinan los resultados de los programas para terrenos agrícolas, bosques y espacios abiertos. En la tabla 2 también se indican los alcances relativos del espacio abierto en dicho contexto. Los valores de exención para las zonas boscosas privadas fueron superiores a los US$5 mil millones, y los valores de exención para los terrenos de labranza y las viviendas en zonas agrícolas fueron de US$14,1 mil millones. Los tres programas de conservación combinados representan aproximadamente el 0,5 por ciento del valor total de exenciones y menos del 1 por ciento de la recaudación perdida o trasladada.
Estos cálculos también dependen de otros efectos que pueden ser muy difíciles de observar. Será imposible determinar los alcances de la transferencia de la recaudación sin tener información detallada acerca de la capacidad de respuesta del gobierno municipal a la hora de modificar el tipo fiscal a tanto por mil. En este caso, la estimación sólo corresponderá a la recaudación prevista. También será necesario ignorar los posibles efectos positivos del programa en cuanto al valor inmobiliario en las parcelas adyacentes.
Conclusión
La tarea de diseñar un programa de avalúo preferencial para el espacio abierto requiere una cuidadosa consideración. Aunque los terrenos con poco desarrollo brindan atracciones y beneficios ambientales bajo numerosas circunstancias, el valor de dichos beneficios puede variar significativamente según las condiciones de cada lugar. Si el objetivo principal del programa es proporcionar beneficios a nivel municipal en vez de regional, establecer un único conjunto de criterios para todo el estado probablemente no maximizaría los beneficios. La determinación de criterios de inscripción a nivel municipal puede otorgar la flexibilidad necesaria para reaccionar ante las mencionadas condiciones variables, mientras que los criterios a nivel estatal probablemente son necesarios para proteger los recursos regionales, tales como las cuencas de agua.
La escasez de investigaciones empíricas en esta área de estudio dificulta la tarea de evaluar la efectividad de los programas actualmente en vigencia. Si el objetivo es verdaderamente evitar el desarrollo en ciertas parcelas, al diseñar el programa debería tenerse en cuenta la duración del contrato y las sanciones por rescisión anticipada del mismo. Los retrasos a corto plazo en el desarrollo generarán beneficios principalmente para los propietarios del espacio abierto. Para que un programa tenga éxito, el espacio abierto debe generar beneficios significativos para la comunidad, ya sea mediante una protección ambiental a largo plazo como la aplicación de mayores valores inmobiliarios para otros residentes del área. Si el programa establece mayores requisitos de elegibilidad, esto debería reducir la cantidad de hectáreas inscritas; no obstante, el objetivo principal del programa no debería ser la cantidad de hectáreas inscritas, a menos que la intención de los legisladores sea únicamente la reducción del desarrollo a nivel municipal. La inscripción de una significativa cantidad de parcelas en el programa podría tener importantes implicaciones fiscales para las juris-dicciones municipales, especialmente cuando el establecimiento de criterios amplios y sanciones de poco monto por rescisión anticipada permite que los propietarios fácilmente se inscriban en el programa y luego lleven a cabo desarrollos en su propiedad. El diseño de los programas debe garantizar un máximo de beneficios públicos a cambio de los efectos fiscales.
El presente artículo es una adaptación del documento de trabajo del Instituto Lincoln titulado “Avalúo preferencial para el espacio abierto”: https://www.lincolninst.edu/pubs/dl/2281_1620_Sundberg_WP13JS1.pdf
Sobre el autor
Jeffrey O. Sundberg es profesor de Artes liberales y negocios en la Fundación James S. Kemper y profesor de Economía en la Universidad Lake Forest. Obtuvo su doctorado (Ph.D) en Economía por la Universidad de Stanford. Sus intereses de investigación actuales son la eficiencia de los incentivos fiscales estatales y federales para las donaciones de servidumbre de conservación y los programas de avalúo preferencial para el espacio abierto. Sundberg también se desempeñó como presidente del directorio de un fideicomiso de suelo en el condado de Lake, Illinois, durante cuatro años. Contacto: jsundber@mx.lakeforest.edu.
Recursos
Anderson, Soren y Sarah West. 2006. Open space, residential property values, and spatial context. Regional Science and Urban Economics 36: 773–789.
Bark, R. H., D. E. Osgood, B. G Colby y E. Halper. 2011. How Do Homebuyers Value Different Types of Green Space? Journal of Agricultural and Resource Economics 36(3): 395–415.
Bark, R. H., D. E. Osgood, B. G. Colby, G. Katz y J. Stromberg. 2009. Habitat preservation and restoration: Do homebuyers have preferences for quality habitat? Ecological Economics 68(5): 1465–1475.
Brockett, C. D., R. R. Gottfried y J. P. Evans. 2003. The Use of State Tax Incentives to Promote Forest Preservation on Private Lands in Tennessee: An Evaluation of Their Equity and Effectiveness Impacts. Politics and Policy 31(2): 252–281.
Chamblee, John F., Peter F. Colwell, Carolyn A. Dehring y Craig A. Depken. 2011. The Effect of Conservation Activity on Surrounding Land Prices. Land Economics 87(3): 453–472.
Chervin, Stan, Teresa Gibson y Harry Green. 2009. Greenbelt Revisited. Tennessee Advisory Commission on Intergovernmental Relations. http://www.tn.gov/tacir/PDF_FILES/Taxes/greenbeltrevisited.pdf.
Farmland Information Center, American Farmland Trust. 2010. Fact Sheet: Cost of Community Services Studies. http://www.farmland.org/documents/Cost-of-Community-Services-08-2010.pdf.
Garrod, Guy y Ken Willis. 1992. The environmental economic impact of woodland: a two-stage hedonic price model of the amenity value of forestry in Britain. Applied Economics 24: 715–728.
Geoghegan, Jacqueline, Lori Lynch y Shawn Bucholtz. 2003. Capitalization of Open Spaces into Housing Values and the Residential Property Tax Revenue Impacts of Agricultural Easement Programs. Agricultural and Resource Economics Review 32(1): 33–45.
Geoghegan, Jacqueline. 2002. The Value of Open Spaces in Residential Land Use. Land Use Policy 19(1): 91–98.
Irwin, Elana G. y Nancy E. Bockstael. 2004. Land Use Externalities, Open Space Preservation, and Urban Sprawl. Regional Science and Urban Economics 34:705–725.
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Local governments exercise greater land use authority in the United States than in any other advanced democracy. Yet local governments have themselves evolved piecemeal in the typical U.S. metropolitan area, producing a pattern of fragmented authority. Most notably, as metropolitan areas have exploded outward, the local government system has adapted mainly by creating new suburbs and single-function districts rather than by expanding the boundaries of existing central cities.
Illustratively, when Robert Wood studied the New York metropolitan region in the late 1950s, he counted roughly 1,400 local governments. When Jameson Doig and Michael Danielson examined the same region in the early 1980s, the number had grown to 2,200, of which more than 800 exercised land use regulatory authority.
Critics levy numerous charges against this system. Above all, they contend it invites parochialism and, in dealing with issues of regional scale, gridlock. These failings are particularly apparent when the potential ends of land use policy are controversial. But they are visible in many other circumstances as well—wherever, for example, there is substantial risk that the instruments of policy (from regional overrides of local zoning to the siting of new incinerators) will be highly controversial and no consensus has yet emerged about the severity of a crisis that might justify accepting such risk.
In other respects, however, the system is both adaptive and finely tuned to citizen desires. Numerous functions have been shifted from localities to regional authorities and higher levels of government in recent decades, yet the changes have been highly selective and incremental.
When broad agreement has emerged that a particular function—such as mass transit or environmental protection—requires decisionmaking and management at supra-local scale, the political leaders in many metropolitan areas have frequently crafted new institutional arrangements. They have typically defined the new institutions quite precisely, however, so as to avoid sapping local authority any more than necessary to deal with the specific problems that gave rise to the consensus for change. Where large numbers of voters still favor local control, moreover—as, preeminently, in the field of land use regulation—metropolitan-area political leaders have taken great care to avoid disturbing it.
To be sure, certain objectives are all but impossible to realize through this piecemeal, consensus-dependent mode of institutional adaptation (most notably, greater class and racial integration at regional scale, and prevention of urban sprawl). But others (e.g., the preservation of neighborhood character and vigorous grassroots democracy) are accomplished much more reliably than would be likely in a more “rationalized” system.
Balancing Communal and Individualistic Values
Controversies about this system invariably reflect a mix of conflicting interests and values. Since a considerable body of scholarship exists on the interests most commonly in dispute, let us concentrate here on the values.
Americans consider land use issues within the framework of two disparate ideologies: one communal and egalitarian, the other individualistic and disposed to leave distributional outcomes to the marketplace. In any given controversy, self-interested groups organize their briefs around aspects of one or the other of these ideologies. So it is easy to miss the crucial fact that both enjoy near-consensual support. Americans favor both private capitalism and government action to further collective values–each in its place. The disputes typically arise in situations where parties disagree about which ideology ought to take precedence or about how the differing ideological claims should be balanced.
The land use arena is chock full of such points. Ownership is private. Most development initiative is private. And tradition favors viewing land as a market commodity. But most human activities take place on land; the byproducts of land use profoundly affect every aspect of the human environment; and no one is an owner every place he or she goes. So everyone has a powerful stake in the preservation of some common spaces, in society’s rules for behavior in such spaces, and in some regulation of land use “overspill” effects.
Owners themselves, moreover, are eager for collective services. The value of urban real estate hinges critically on the availability and quality of such services, from highway access to public safety to education. In addition, neighborhood characteristics and the level of investor confidence in the neighborhood’s future profoundly affect real estate values. As a result, whether their aim is development or simply enjoyment of what they already have, property owners are drawn inevitably to the public realm.
Within the public realm, however, communal values–including the presumption of equal access to collective services regardless of income or wealth–predominate. This poses a severe problem for relatively affluent property owners who are reluctant to trigger wide egalitarian claims.
The fragmentation of metropolitan areas into independent suburbs, a problem for some, is for these voters a solution. It provides a means of confining the application of communal norms within relatively small population groups. And it makes available to such groups an instrument of extraordinary power for the pursuit and preservation of homogeneity: land use regulation.
Public Regulation vs Market Forces
Pressures have built in recent decades, nonetheless, for public land use action on a wider scale. Some of these pressures (e.g., for major infrastructure investments and for environmental protection) come largely from property owners themselves and do not pose much redistributive threat even when higher-level governments assume responsibility for action. Nearly all of the centralization that has occurred has been in response to pressures of this sort.
A second set of pressures for supra-local action has come primarily from less favored groups and their political representatives, seeking fiscal equalization and residential integration. There have been considerable shifts of money in response to these pressures. But resistance has been fierce to reforms that might force racial or class integration at the neighborhood level. With rare exceptions it has been successful.
The reform idea with the greatest apparent potential to override local land use parochialism would be a shift of some land use regulatory authority to the state level. Movement in this direction occurred in about one-quarter of the states during the 1970s and 1980s. Except in the notable cases of Oregon and Florida, however, the changes were slight, and the historic pattern of local land use autonomy remained firmly entrenched. Concerns about growth, moreover, rather than concerns about equality or integration drove these state land use reforms. Consequently, with weak real estate markets in the early 1990s interest in them has waned.
The question remains whether shifting land use authority from the local to the state level, if it does occur, will be likely to produce more egalitarian and integrationist outcomes than would the existing pattern of fragmented land use governance. One can plausibly argue that it will, stressing that egalitarian norms tend to prevail within (even if not between) U.S. public jurisdictions. Thinking of the immediate future, however, the likelihood is that such shifts will be rare and that, even when they occur, their egalitarian impacts will be meager.
For better or worse, the overwhelming trend of the 1990s, at all levels of government, is toward greater market deference rather than more vigorous public action to achieve redistributive objectives.
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Alan Altshuler is professor in urban policy and planning and director of the Taubman Center for State and Local Government at the John F. Kennedy School of Government, Harvard University. He is also a faculty associate of the Lincoln Institute, which distributes several of his publications. This article is reprinted with permission from the 1995-96 Annual Report of the Taubman Center.
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In the past decade, nearly 50 mansions have been demolished and replaced in the historic Chicago suburb of Kenilworth. Four demolition permits are currently pending review, while permits have been approved for two other historically significant houses. To slow the teardown trend, Kenilworth has enacted a nine-month waiting period between issuance of a demolition permit and initiation of the teardown process. However, the village does not have a historic preservation ordinance, and local officials generally support the rights of property owners to demolish and replace their houses. The National Trust for Historic Preservation included Kenilworth on its 2006 list of the 11 most endangered places nationwide (Black 2006).
The practice of demolishing and replacing houses in high-priced areas generates passionate controversy. The fight to save the Skiff House in Kenilworth is illustrative (Nance 2005). That property at 157 Kenilworth Avenue is one of the premier locations in one of Chicago’s most expensive suburbs, three blocks west of Lake Michigan and five blocks from the commuter train station in the village center.
The house was built in 1908 for Frederick Skiff, the first director of Chicago’s Field Museum of Natural History. This beautiful and historically significant house was designed by the architectural firm of Daniel H. Burnham, who was considered the preeminent architect in America at the turn of the twentieth century. He oversaw the construction of the 1893 World’s Columbian Exposition and helped design a series of lakefront parks as part of the 1909 Plan of Chicago.
Plans to demolish the Skiff House shortly after it was purchased in 2004 for $1.875 million created an uproar. While many neighbors supported the owner’s right to tear down the property—after all, they might want to do the same—others saw it as an assault on the community’s character. “Save 157 Kenilworth” signs began to appear in front yards throughout the village, and a neighborhood group, Citizens for Kenilworth, led a campaign to save the house. After months of controversy, and only days after an auction to sell off valuable parts of the house before demolition, a neighbor purchased the house for $2.35 million in order to save it.
Historic houses continue to be torn down in Kenilworth and elsewhere, but not all teardowns generate controversy. Residents of many Chicago suburbs have been supportive of the teardown trend. Naperville is a representative case. Founded in 1831 and incorporated in 1857, Naperville grew slowly until plans for the East-West Tollway (I-88) were announced in 1954. The population grew from 7,013 in 1950, to 21,675 in 1960, to 140,106 today.
Naperville’s downtown has undergone a renaissance over the last decade, attracting new restaurants, shops, and residences. Although the city has a historic district just to the east of the downtown area, teardown activity has been concentrated in what were formerly more humble areas. Small, older houses are being purchased for about $400,000 and replaced by much larger houses that may sell for $1 million.
The teardown trend in Naperville is illustrated by one small house being sold as a teardown, with an announcement of an upcoming public hearing posted in the yard. It is likely to be replaced by a house that is similar to the recently constructed house next door (see pages 6 and 7). Though teardown activity is not entirely without controversy in Naperville, it does not generate the same passion as the Skiff House did.
How Widespread is the Teardown Phenomenon?
Nationwide the teardown phenomenon has attracted much media and public attention. The decennial Census of Population and Housing offers a way to quantify the practice using the “net replacement method.” For example, suppose the Census lists 10,000 housing units in an area for 1990 and 10,500 units in 2000—an increase of 500 units. Now suppose the Census shows that 800 housing units were built during the decade. Then 300 of the newly built units must have simply replaced existing units. The 300 replacement units are a crude but nonetheless enlightening measure of teardown activity in that community.
Figure 1 shows counties where at least one census tract had a net replacement rate in excess of 4 percent. Teardown activity is clustered in older urban areas in the Northeast, Midwest, and California. In fact, the map does not look substantially different from a map of population density in the United States. This simple analysis shows that replacement of the preexisting housing stock is an extensive phenomenon that is national in scope.
Nevertheless, it is surprisingly difficult to track teardown activity on a case-by-case basis. The classic teardown is a house whose sale is followed by the issuance of both demolition and building permits, but timing is a key factor in tracking these permits. If a demolition permit is issued four years after a sale, was the house really sold as a teardown? Similarly, a building permit may be issued long after a dilapidated house was demolished, yet this situation is not what most people have in mind when they think of teardowns.
Some teardowns are carried out by the current owner without a sale. Other houses are so extensively remodeled that they are effectively teardowns, even though no demolition permit is issued. Even when data on sales, demolition permits, and building permits are available, it is difficult to merge the different sources of information since they frequently come from different agencies that vary in the quality of their database management.
The National Trust for Historic Preservation has described the Chicago metropolitan area as the “epicenter of teardowns.” Aside from Kenilworth, teardowns are common in both the city of Chicago and its suburbs. The Village of Skokie (2005) surveyed 20 of its neighbors in Chicago’s near north suburbs and compared the number of detached single-family housing unit demolition permits from 2000 to 2003 to the total number of such units as reported in the 2000 U.S. Census. Thirteen of the 20 communities reported demolition permits representing more than 1 percent of the housing stock over the four-year period.
Richard Dye and I (forthcoming) have used data from Chicago and six suburban communities to document the degree of teardown activity in the region. We were able to obtain data on house sales and demolition permits for Chicago; one of its suburbs to the west, Western Springs; the northwest suburb of Park Ridge; and four suburbs on the North Shore—Glencoe, Kenilworth, Wilmette, and Winnetka.
Between 1996 and 2003, the number of demolition permits ranged from 29 in Kenilworth to 273 in Winnetka and 12,236 in Chicago. Of course, Kenilworth has only 2,494 residents, whereas Winnetka’s population is 12,419, and Chicago has 2.9 million residents. Figure 2 shows the number of demolition permits as a percentage of total housing units for each community. More than 9 percent of Winnetka’s housing stock was torn down between 1996 and 2003, and teardown rates were also quite high in Winnetka and Kenilworth. Even Chicago, with more than 400,000 housing units, had a demolition rate near 3 percent.
These six suburbs were not chosen randomly. All had high median incomes in 2000, ranging from $73,154 in Park Ridge to more than $200,000 in Kenilworth. All of these suburbs have stations on commuter train lines to downtown Chicago, little or no vacant land on which to build, and good schools and other local public services. In other words, demand to live in these suburbs is high. Teardown activity in Chicago is concentrated in comparable neighborhoods within the city, such as Lincoln Park, West Town, and Lakeview on the near north side.
The Costs and Benefits of Teardowns
Teardowns can impose significant social costs. Local residents often complain that new houses destroy the character of a neighborhood. Those houses may be built to the limits of the zoning code, tower above their neighbors, and reach to the edge of the property line. Sometimes neighbors simply dislike the design of new buildings, particularly those that replace historic houses. When tall apartment buildings replace single-family houses or two-family houses in the city, neighbors complain of the loss of sunlight, lack of parking spaces, and increased traffic congestion. The construction process itself can be noisy and disruptive. New, expensive houses may cause assessments to increase in the neighborhood. And, teardowns may reduce the stock of affordable housing.
Teardowns also carry some benefits, however. In places that rely on the property tax to fund local services, the additional revenue from high-priced replacement houses is often quite welcome. Not all teardown buildings are historic, architecturally significant, or mourned when they are demolished. Some teardowns are simply eyesores.
Some of the new houses being built today will eventually be viewed as historically significant properties in their own right. Once entire blocks are rebuilt, the new housing no longer looks out of place. It is surprising to discover how stark and incompatible some properties built in the early 1900s appear in historic photographs taken before trees grew and the neighborhood filled in with similar houses.
It also is important to recognize that teardowns may help to curb sprawl. One reason people move to the urban fringe is to build a new house in a contemporary construction style. Allowing people to tear down a small, outdated house and replace it with a modern house may induce them to stay in centrally located areas. In general, encouraging housing and economic growth helps maintain the vitality of previously developed areas, which is a strategic complement to anti-sprawl policies designed to limit growth at the fringe.
Policy Responses
Local jurisdictions have been creative in responding to teardowns. Some policies are designed to the slow the amount of teardown activity by making it more costly, through demolition fees and fines for illegal demolitions. Others, such as a moratorium on new demolition permits or an enforced waiting period between permit issuance and the time when demolition can start, are simply designed to cool a potential teardown fever. Such policies also raise the cost of teardowns by making developers wait for some time after purchasing a property before being able to recoup their costs. Complementary policies include landmark designation and historic district designation, which make it more difficult or even impossible to tear down existing structures.
Policies on the other side of the balance sheet may give developers an incentive not to demolish existing structures. Communities may offer tax breaks to owners who rehabilitate existing houses rather than demolish them to build new ones. Or, owners may be granted variances from restrictive zoning provisions in order to enlarge rather than demolish an existing house.
At the same time, jurisdictions often use zoning to influence the type of new housing that is built in their community. Lot-coverage and floor-area restrictions are used to ensure that new structures do not dwarf their neighbors. Other policies include maximum building sizes; set-back and open space requirements; and restrictions on such design elements as garage and driveway locations, roof pitch, bulk limits, solar access, and the alignment of the new house with neighboring structures. Many communities have design review boards that can revoke building permits for structures that are not in compliance. These standards are not always clear beforehand, however, and they can increase the level of uncertainty for developers, delay construction, and raise costs.
Even if communities do not attempt to curb teardown activity, they often adopt policies designed to reduce the disruption caused by new construction. The builder may be required to notify neighbors when construction is about to begin, and a time window may be imposed for completion of the building. Construction activity may be limited to certain hours of day, the site may need to be fenced, and work vehicle and dumpster location requirements are often imposed. Communities also may require that contractors be bonded and certified.
How successful are these policies in slowing the rate of teardown activity? As we have seen, the Skiff House was saved because Kenilworth’s nine-month waiting period between permit issuance and the start of demolition provided enough time for a buyer to step forward before the house was razed. However, the potential for profits in such transactions make it difficult to stop teardowns completely. If a developer can purchase an existing property for $300,000, demolish it for $20,000, and spend $400,000 to build a new house according to current construction standards, then he has incurred $720,000 in costs. With new upscale houses routinely selling in excess of $1 million in communities with many teardowns, it should not be surprising that developers continue this practice.
Implications for Land Values
Assessors encounter enormous difficulties in placing a value on land in built-up areas. When few vacant lots exist, it is nearly impossible to find enough sales of vacant land to assess the value of land accurately. In the absence of direct land sales data, land values can be estimated by subtracting construction costs less depreciation from the sale price of improved properties in the area.
Statistical analysis of mass appraisal data can account for such structural characteristics as square footage in order to control for the contribution of the building to total property value. With a complete set of these characteristics, the residual from the regression reflects the contribution of location to property value—in other words, land value. Unfortunately, any unobserved structural characteristic will also be part of the residual.
Teardowns can help estimate the value of land in developed areas. Consider the earlier example of a property that is purchased for $300,000, demolished for $20,000, and replaced by a million-dollar house. If the developer could purchase a vacant lot of the identical size next door for $290,000, which property would he prefer? If there is no salvage value for parts of the existing house, it will cost the developer $320,000 before it is possible to build on the lot with the existing house. Yet the vacant lot is available in the same general location for $30,000 less. The vacant lot is preferable even though it does not include a house—in fact, it is preferable precisely because it does not include an existing structure.
If the price of the vacant lot rises to $310,000, the developer still obtains a lot that is ready to build upon for $10,000 less than the cost of building on the neighboring lot. Only at $320,000 will the developer be indifferent between the two lots. It follows that the value of land in this case is $320,000. This key insight leads to an extremely useful method of valuing land in areas experiencing teardowns. The value of land is simply the sales price of a teardown property plus any demolition cost.
An important implication of this line of reasoning is that only location determines the value of a teardown property; characteristics of the structure are irrelevant except insofar as they influence demolitions costs or salvage value. This implication is somewhat surprising to people who think that a historic house has intrinsic value. Though it is tempting to think that the Skiff House in Kenilworth is worth approximately $2 million because of its historic and architectural value, a vacant lot next door would sell for nearly the same price. Any house near Lake Michigan in Kenilworth will sell for well more than $1 million. The conclusion to be drawn is simply that land is expensive along Chicago’s North Shore.
Richard Dye and I (forthcoming) test the prediction that only location characteristics influence sales prices in our sample of seven communities in the Chicago area. Our measures of location include such variables as lot size, distance from the nearest commuter train station, and proximity to Lake Michigan. Structural characteristics include such variables as building size, age, and whether the house is built of brick and has a basement, garage, or fireplace. We identify teardowns as houses for which a demolition permit was issued within two years of a sale. As predicted, structural characteristics do not significantly influence the sales price of teardown properties. Teardowns are purchased for the land underneath.
Final Thoughts
The teardown phenomenon is not new. Houses have been demolished and replaced for as long as they have been built. American cities grew rapidly in the late nineteenth and early twentieth centuries and again in the years just after World War II. Tastes now appear to be changing toward larger houses with spacious rooms and high ceilings. Many people find the existing housing stock less desirable than new construction. In this situation, it is not surprising that buyers purchase, demolish, and build new houses, especially in high-demand areas. The trick for local governments is to keep the costs of teardown activity from overwhelming the less obvious benefits.
Daniel P. McMillen is professor in the Department of Economics and the Institute for Government and Public Affairs at University of Illinois at Chicago. He has published widely in urban economics, real estate, and applied econometrics. He is a visiting fellow in 2006–2007 at the Lincoln Institute.
References
Black, Lisa. 2006. Kenilworth added to list of endangered historic towns. Chicago Tribune, May 20.
Dye, Richard, and Daniel P. McMillen. Forthcoming. Teardowns and land values in the Chicago metropolitan area. Journal of Urban Economics.
Nance, Kevin. 2005. Teardown ‘madness has to stop’: Developer rescues historic Burnham house, but says it’s just a start. Chicago Sun-Times, November 6.
Village of Skokie. 2005. Comprehensive Plan Appendix C: Near north suburban housing activity study. http://www.skokie.org/comm/Appendix%20C.pdf.
