Wealth and Want
... because democracy alone is not enough to produce widely shared prosperity.
Home Essential Documents Themes All Documents Authors Glossary Links Contact Us


Land Rent as Capitalized Transportation Cost


Bill Batt: Stemming Sprawl: The Fiscal Approach

We do an awful lot of driving just to do what we need to do. This is because transportation engineers and land use planners have confused two fundamental concepts: access and mobility.

By confusing these two principles, we spend an inordinate amount of money on transportation services, most of it on roads and highways. One 1993 study calculated that the total costs of motor vehicle transportation to our society equal approximately a fourth of our gross domestic product (GDP).[3] The study concluded that "when the full range of costs of transportation are tallied, passenger ground transportation costs the American public a total of $1.2 to $1.6 trillion each year. Just the costs of automobile crashes represents a figure equal to 8 percent of the American GDP.[4] Japan, by way of comparison, spends an estimated 10.4 percent to satisfy all its transportation requirements, although the figure might be a bit low because not all externalities are included in the calculation.[5] Road user fees in 1991 totaled only about $33 billion, whereas the true costs to society were ten times that;[6] put another way, drivers pay only 10 percent of the true costs of their motor vehicle use.[7] The balance is paid by society, effectively subsidizing highway use by paying for all but the marginal out-of-pocket operating costs.

The relationship between transportation costs and land values can be made even clearer by empirical study of how land values increase as one moves toward the center of the city. In an investigation for the Urban Land Institute, the author concluded that, for Portland, Oregon, each additional mile [traveled] translated into slightly more than $5,000 in housing costs; closer-in locations command a premium, those farther out save money. A ten-mile difference, all other things being equal, would amount to about $56,000 in new home value.

For a household in which one worker drives downtown (or at least to a more central location) to work, that ten-mile difference may amount to 4,600 miles annually, assuming 230 days of commuting and a round-trip of 20 miles each day. Moreover, if non-work trips to the central area and elsewhere doubled that amount, the tradeoff would be about 9,000 miles annually, which could mean a higher/lower driving cost of $3,000 annually, not counting the time saved/spent.[8]

Such are the savings for living closer to the urban center by ten miles. If the urban resident has to rely on a car nonetheless, subtracting some $3,000 annual travel expenses will still leave him paying again that much (and likely more) to own a car. Author James Kunstler put the true costs along with other experts at about $6,100 annually seven years ago.[9] The American Automobile Association calculated that a car driven 15,000 miles in 2001 cost 51 cents per mile, or $7,650.[10] This figure reflects only direct costs to the driver, not the additional costs passed on to society.

The latter figures include externalities such as pollution and the costs of highway crashes. Hortatory public pleas for people to tune up their engines so that they pollute less, to inflate tires properly, and to drive more safely are not likely to change the reality that people are forgetful and fallible. Pollution-free cars are not available; people must drive to participate in this society. The consequences of sulfur dioxide, carbon dioxide, and ozone are no longer a matter of debate; they are scientific fact. Despite frequent headlines about replacing the internal combustion engine, all the realistic substitutes also ultimately rely on fossil fuel power, solar-powered cars are far in the future, if at all, and also fail to deal with any transition. And every person driving his or her own car multiplies the probabilities of accidents. When people step into a car, they are seldom mindful of such odds. Yet if the direct pecuniary costs of driving increase in any substantial way, there will surely be significant changes in the trade-offs involved in housing/transportation choices. As will be made clear later, making costs visible and linking them to private personal behavior is one way to ensure that transportation pays its own way. ...

Sooner than Americans are likely to bear the real burden of global warming's environmental consequences, they are likely to experience the onset of price rises for petroleum. Experts are divided, but among those best insulated from the pressures of bias, there is increasing consensus that the peak of oil extraction worldwide will come sometime around 2010 if not sooner.[11] Rising prices will not induce greater supply; it will not change the fact that the world will have passed the point of most easily extracted oil and will enter a long and increasingly steep period of declining availability. It is rather a matter of physics: When it costs more in energy to bring oil from deep in the earth than what can be extracted, it is not worth the investment. Even the greater wealth of American society will not insulate it from world competition over what is a limited and fungible commodity. How this alters the calculations Americans make about where to live and work will increasingly depend on the price they are willing to pay for transportation service. ...

Land Rent

From the standpoint of an economic geographer and for some land economists, land rent is simply capitalized transportation cost. Land rent is the surplus generated by social activity on or in the vicinity of locational sites that accrues to titleholders of those parcels. Whether or not it is recaptured by public policy, rent is a natural factor deriving from the intensive use of natural capital. One must return to nineteenth-century classical economics to appreciate the importance of economic rent or land rent; neoclassical economic frameworks have largely discarded it.[13] More intensive use of high-value land sites leads to site configurations that are less dependent on transportation services. Land rent is highest where the greatest traffic and market exchanges occur, that being at the center of large conurbations. Comparing land values of urban property parcels, the highest land rent in the urban cores and traffic junctures are analogous to the contours of land elevations. Mountain peaks gradually slope down to valleys and flatland regions and continue outward until at distant points — perhaps at the poles of the earth — land sites have no market value at all.

The differentials in land values are profound, even more than most people realize. In 1995, in the small city of Ithaca, New York, the highest quintile of land had a value of over $56,000 per acre in the downtown center, whereas the lowest quintile only a mile away falls to less than $3,000.[14] Large city centers have far higher site prices. Even in Polk County, Iowa (which includes Des Moines), in the middle of cornfields where I did a study two years ago, the highest urban value land site was $31.3 million per acre, which quickly declined to about $20,000 per acre only about a mile away. In the spring of 1998, one land parcel (the building was to be razed) of less than an acre in New York City's Times Square and split in two pieces by Broadway was sold by Prudential Life to Disney for roughly $240 million.[15] To take another instance, a nine-acre tract on the East River in New York City occupied by an obsolete power plant was purchased by Mort Zuckerman to build high-rise condominiums two years ago. The sale price was in the neighborhood of $680 million and would have been higher were it not for some enormous costs associated with the demolition of the old structures.[16] It should be noted that the overwhelming proportion of land value is in cities; relatively speaking, the site values of peripheral lands, typically used for agriculture and timber growth, are negligible. Land values are high in urban areas because, over time, rent accrues to a site. Each improvement in proximity to a property parcel enhances the value of all other parcels. This makes even unimproved sites attractive objects for speculation, particularly when land sites surrounding it are to be improved by adding either transportation service or new structures. One nine-mile stretch of interstate highway in Albany, New York, costing $125 million to construct, has yielded $3.8 billion in increased land values (constant dollars) within just two miles of its corridor in the forty years of its existence.[17] This is a thirty-fold return in a time span typically used for bond repayment! The Washington Metro created increments in land value along much of the 101-mile system completed by 1980 that easily exceeded $3.5 billion, compared with the $2.7 billion of federal funds invested in Metro up until that time.[18] Any major building construction project, private or public, will have a similar effect on adjacent land sites. Differentials in land value can have a profound effect on decisions made by titleholders, either positively by inducing appropriate development in urban cores or negatively by giving monopoly titleholders power to hold sites out of use for long-term speculative gain. Such decisions of course determine the character of urban configurations and society as well. ... read the whole article

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

The other component of a real property parcel is the land value, which reflects a market price based on very different criteria. Despite the apparent reality that land is visible and tangible, land prices reflect the value of location more than they do the material content they contain. This is easy to understand when one reflects that if some earth is removed from a site and brought to another place, the prices of each site is largely unaffected.21 Location value has duration, and the value of this flow of rights for exclusive use of a site requires a flow price rather than a stock price. This flow is really what classical economists refer to as ground rent or economic rent.22 Also known as “land rent,” it is defined as “a payment to a factor beyond what is needed to put that factor into use; [it is a price for use] beyond what is needed to maintain a market for land.”23 Land has a selling price because we have come to regard land sites as objects, as commodities to be traded,24 and they are understood to have a static price, as a stock rather than as a flow. That stock price really needs to be understood instead as the “present value” of the flow of ground rent minus taxes. “Present value” is an economic term that refers to “the worth of a future stream of returns or costs in terms of their value now.”25 Consideration in this way brings to the fore other concerns and factors.

The market price of a location depends not only on ground rent and taxes, effectively its present value, but also upon the “discount rate,” or interest rate, that prevails in the market used to calculate its returns and costs. When interest rates go up, the market prices of sites fall, just as for any other economic encumbrances placed on locational sites.

The market prices of sites also fall if taxes go up and nothing else changes. However, an increase in taxes is often accompanied by improvements in any obligations linked to parcel locations. These too are sometimes easily “commodified,”26 and may vary according to time period, changed neighborhood expectations, emergency conditions, government regulations, and so on.27 These contingent links often constitute services that raise the market prices of sites more than the taxes depress them. Still another way of understanding the value of locations is to see them as capitalized transportation costs.28 Savings in transportation are likely to be expressed in the market price of sites. One way or another people are willing to pay for access to exchange markets: either in the form of site proximity or in the form of travel expenses. It is the reason why urban cores have higher site rents than peripheral areas and hinterlands. Hence the differential value of locations, dependent, not on anything titleholders do, but rather on the quality of community amenities. These all have a price.

The prices for services that raise land rents, like the services themselves, should be regarded as flows rather than as stocks. But, ironically, our payments for such services are not understood as flows affecting site values at all, but are seen rather as related to stock prices. The values of our property parcels are viewed solely as stocks, and therefore our taxes are seen as stock taxes. ... read the whole commentary


To share this page with a friend: right click, choose "send," and add your comments.

Red links have not been visited; .
Green links are pages you've seen

Essential Documents pertinent to this theme:

Top of page
Essential Documents
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper