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A Mercifully Brief Chapter on a Frightening, Tedious, But Important Subject
Our system of property taxes may be the single most insidious, pathogenic factor contributing to the geography of nowhere. It is almost impossible to discuss. It involves numbers and formulae resembling mathematics, from which many otherwise healthy adults shrink in tearful bewilderment. It implies the confiscation of one's earnings and chattels (i.e., one's security and well-being), which provokes a mindless terror that no mere talk can overcome. The impenetrable jargon of economists does not make it any more inviting -- they don't call it the dismal science for nothing. So, we complain about taxes, and vote for candidates who promise vaguely to make them lower (and are eternally disappointed by them), but we leave the details to presumed experts because taxes are too painful and baffling to think about. This being said, I will undertake to discuss the undiscussable.
Our system of property taxes punishes anyone who puts up a decent building made of durable materials. It rewards those who let existing buildings go to hell. It favors speculators who sit on vacant or underutilized land in the hearts of our cities and towns. In doing so it creates an artificial scarcity of land on the free market, which drives up the price of land in general, and encourages ever more scattered development, i.e., suburban sprawl. In tandem with zoning, the taxing of buildings rather than land itself promotes such wasteful practices as putting up cheap one-story burger joints in huge parking lots on prime city land. It is one of the biggest impediments to the free market creation of affordable housing. As a consequence of all these things it is a drag on economic productivity and employment.
This happens because we tax buildings much more heavily than the land under them. These buildings are visited by an official assessor who determines their value. The higher the buildings value, the higher the tax. Under this system, a rational person has every reason to put up crappy buildings that will not be highly assessed, or he has every reason to let his property run down, or build nothing at all. This is a major reason for the current desolation of American towns and cities.
The alternative to this is to tax land itself and not the buildings on it. The criteria for assessing the value of land minus buildings is based on its location or site. If it is one block away from Main Street, for instance, it is considered to have high site value because it is very close to other things that people like to be near, public utilities, the post office, civic amenities such as parks, museums, libraries, schools, other businesses and other services, and so on. The theory behind this is that in human society land derives value from both explicit public investment (sewers, water lines, streets), and from the aggregate of private human activities that go on around it. This is termed socially created value. Owners of prime real estate derive large benefits from socially created value and therefore should be taxed on that basis rather than on the basis of whether they choose to use or squander those benefits -- for example, whether they chose to use it in the form of a vacant lot or a seven-story hotel. I will try to make it clear why our current system favors the vacant lot and discourages the hotel.
Viewed over the millennia one sees a strong tendency toward centrality in human settlement. People like to be around other people for safety, comfort, and excitement, and business enjoys certain advantages where there are other businesses. This is both the essence of civilization as a social construct, and of its physical manifestation in towns and cities. Through history the site value of land close to the center has always been high. In our century, motorized transport and single-use zoning have undermined this tendency but by no means extirpated it. (Indeed, it is my view that Americans are suffering deeply from the centerlessness of suburbia.) Even in the face of these forces, land close to the center remains desirable. It still has high site value and high market value. Such land near the center, enjoying high socially created value, should therefore be said to have a higher taxable site value than land farther out, regardless of the buildings on it.
Living in America today, one would scarcely believe this. But even places as desolate as downtown Detroit have a high site value -- apart from all the disincentives operating to discourage the current landowners (including the city) from doing anything useful with the property. If nothing else, this land retains proximity to major streets, public services, and geographic amenities like waterfrontage, and we recognize its potential high utility.
In America today, much downtown land stands vacant, or contains decrepit buildings, or is underused in the form of parking lots. This land is being held in speculation. Someone is making a bet that at some point in the future it can be sold for lots more money than he paid for it. Land speculation is a form of hoa