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TECHNICAL NOTE: Planning by Markets

by Jeffery J. Smith
President, The Geonomy Society

Ordinarily, planners have as much use for markets as generals do for anarchists. Yet markets could make life for planners much easier. The key is to reverse the flows of rents and taxes.

I. Revenue alters patterns
II. Revenue reform
III. Develop well
IV. Settle well 
V. Align interests
VI. Design well
VII. Convert quickly

I. Revenue alters patterns

Taxes -- an aspect of politics, not markets -- motivate misuse of land.

  • The tax on buildings discourages maintenance and breeds slums (Lynn 1973). After the neighborhood really goes down hill and the owner has milked every last penny out of the structure, he just walks away. Thus urban cores decay (Pickard 1966), an entropy that seems inevitable yet is policy-induced(1).
  • In growing areas, custom design creates more valuable homes, hence more tax liability. To avoid the penalty, developers can under-build or sacrifice esthetics. Cookie-cutter developments all in a row reduce built value and property taxes(2).
  • Taxing sales raises the cost of living while taxing income lowers the ability to afford to live. Like a vise, regressive taxes squeeze out the discretionary income of the poor who cannot afford the city they may like. Necessity crams them into the structures that cut corners.

While taxes are creatures of legislatures, ground rent is a phenomenon of markets. What's political is what we do with it. Most of us forget it's there, letting it reward speculation and sprawl(3).

II. Revenue reform

Residents need not let rent and taxes shoot holes in metro settlement patterns and price out the building of more pleasing houses and shops. A jurisdiction could adopt geonomics: replace taxation with the collection and disbursement of rents. Since we do not collectively build homes and businesses -- homeowners and business owners do that --we ought not tax them. We do generate the value of land, higher where density is higher. Nobody by himself made density; we all do that. Via our agent, a local government, we could collect public rent for public betterment.

Planners have a litany of great ideas for rebuilding cities(4) -- set-backs, landscaping, pedestrian bridges, bridges, etc -- but have no idea of how to pay for them. One way is to let them pay for themselves. Improving a city raises its land's value. A tax or fee can collect this ground rent that can then be used to pay off the earlier investment in ecologizing the city(5). Indeed, the expected change in land value can be a perfect measure of some proposed improvement's worthiness. If it can pay its way, throw it up. If it can't, then back to the drawing board.

III. Develop well

No longer inhibited by the property tax (Oates & Schwab 1997) yet spurred by annual land dues (tax or fee), owners and developers get busy (Brueckner 1986, Pollack & Shoup 1977). Some Australian towns that tax land alone average 50 percent more built value per acre than those that don't (Kenneth Lusht) (6). Since a mix of apartments, stores, offices, schools, theaters, etc. maximizes site value and the return to builders, they could find themselves pulling on the same end of the rope with planners.

Where planners, armed with the sternest growth control measures, have failed, geonomics can succeed. By making speculation too expensive, it unplugs the "metro tub", letting the flow of development return to its natural course, filling in the vacant lots and abandoned buildings (Bourassa 1990, DiMasi 1987, Neuner et al 1974, Thrall 1987, Vickrey in Wenzer 1999). Clever local governments, no longer able to tax willy-nilly and thus more dependent upon site rent, would squeeze streets, now overly wide for traffic, replacing parking lanes with space for sidewalk cafes beneath rows of shady trees, alongside lanes for bikes, and thereby drive up site values (7).

IV. Settle well

Might collecting rent work too well? Might it spur edge-to-edge development, leaving no lot unbuilt? Not if the profit-motive is still in force. In New York, the city council keeps Manhattan's Central Park unbuilt not because Greens rule the Big Apple, but because property values overall are higher with the park than with luxury condos on the site.

Past a certain point, in-fill, covering the city with border-to-border buildings, would lower overall site value. Land value is at its maximum when land use is at its optimum, when mixed use includes non-use. Some sites raise surrounding values not by being built upon but by being left pristine: the center for a plaza, a pari-central site for an open-air market, a ridge for a park, riparian areas for paths, etc. Owners of such sites would pay more land dues than they could collect from tenants or buyers. As owners look to sell, the locality would look to buy (8). Planners could convert the core into a new commons as popular as a watering hole in the Serengheti.

To pay their high land dues, owners of large lots that cover fragile marshes or steep hillsides might want to develop, until they figure out how much higher would be their surcharges. Requiring an Ecology Security Deposit and Restoration Insurance from owners would steer them away from the riskier sites: cliffs and river banks. These owners might then want to exchange their property margins for local bonds. The locality could then link the margins up into wildlife corridors and hiking trails.

V. Align interests

Presently, owners can profit only from developing. Yet not all sites can be developed. Leaving some parcels blank, optimizing not maximizing land use, would raise over site values. Were residents to receive a share of collected ground rent (a la Alaska's oil dividend), then everyone would gain more when site values are highest. Receiving a dividend partially compensates owners for non-use of their land.

Since the land dues would eat up the gratis profit in land speculation, there'd be less wrangling over land use. The biggest US geonomic city, Pittsburgh, PA, taxes land six times more than buildings. The city converted its most valuable location, the Golden Triangle where the three rivers meet, into a park without developer resistance or an agonizing grassroots effort. Pittsburgh also renewed itself without federal subsidy and enjoys the lowest housing costs and crime rate of any major US city.

If a dispute over the use of some site arises, it could be resolved. Since land dues lower land prices, sites for parks and open space become affordable. The Nature Conservancy sets aside as much as it can, but after prices fall, even a local ecology club could raise enough money to buy land for a preserve. Assigning the land for non-use, their bond and insurance would be zero.

VI. Design well

Architecture, too, could blossom. Frank Lloyd Wright, who'd design around a tree rather than ax it, advocated de-taxing structures while re-taxing sites. As cities grow compact and integrated, people can cure themselves of the car habit. As car use wanes, so might those garage-prominent, "keep-out-snout" houses, banned by the planners of Portland (OR).

Were all the acres held in private speculation and in public procrastination put on the market, the augmented supply would drop the price. Saving money, buyers and builders could invest more in esthetics and efficiency. As in land-taxing Pittsburgh, more residents could afford to own their own homes. As owner-occupants, people have more motivation to plug heat leaks and conserve energy, put in south side windows and sun decks, convert a garage to a granny flat, etc.

VII. Convert quickly

How long would it take to ecologize cities after shifting its property tax? While Johannesburg (South African) levied a rate of only 3 percent on site value, it enjoyed the fastest site-recycling rate in the world, a little over 20 years. Within a couple decades, we could have those cities we'd love.

As cities grow more livable and lovable, their site values rise. The resultant increase in land dues would push owners to continually convert to highest and best use automatically. In this positive feedback loop, cities would constantly renew.

While generals and anarchists might not easily find common cause, planners and markets can, when planners paddle with, not against, the mighty current of rent. Correcting the market, so that taxes and rents no longer interfere with the choices of owners and developers, would attain highest and best use of sites automatically.


Copyright 1999-2000
University of Southern California
Los Angeles, California 90089-0626

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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper