Creating A Land Boom

Some older cities are playing with an idea that would encourage landowners to develop or sell their 'fallow' lots.
August 2003
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

Brownfields. Infill. Redevelopment. Land recycling. One of the biggest trends in economic development isn't about jobs or taxes--it's about land. Specifically, it's about reusing land that's already been urbanized but is "lying fallow" in the form of vacant buildings, parking lots and so forth. The public policy efforts in this arena are intense these days--cleaning up contaminated land, winning political support for increased densities, cataloging vacant and underutilized land in a more sophisticated way than ever before.

But there's one factor that's hard for public policy to change, and that's the recalcitrant attitude of a lot of the property owners themselves. In city after city, especially in depressed areas, property owners sit on their land--usually if they've owned the property for a long time and taxes are low. Landowners often view their property as their retirement investment or a nest egg for their grandchildren. If carrying costs are low, there's little motivation to compromise their financial dreams for short-term gain.

Now some older cities are playing with a new idea that might change the thinking of urban property owners. Actually, it's an old idea, going all the way back to Henry George, the 19th-century social reformer: the "two-rate" property tax, which imposes a much higher tax rate on the value of the land itself than on the buildings. George's idea, of course, was that land should be taxed extensively to recapture the windfall profits of speculation, which rarely came about as the result of the landowners' own actions. Today, the two-rate tax idea is being put forward with a different idea in mind: to get urban landowners off their backsides.

The idea of a two-rate system is simple. If you make it more expensive to own land and less expensive to own buildings, landowners are more likely to be aggressive about building on their land. This system has not been widely used in the United States. But many cities in Pennsylvania use it, and other depressed cities in the Northeast and Midwest are talking about it.

In many of the 20 Pennsylvania cities that use the two-rate system (Altoona recently became the latest), the tax rate on land is four times higher than the tax rate on buildings. There is considerable evidence that the system helps. One widely cited example is Harrisburg, the state capital, which was once one of the most distressed cities in the nation. Since the early 1980s, when the two- rate system was put into place, the number of vacant structures in Harrisburg has dropped from 4,000 to 500. Another widely cited example is Pittsburgh, where the value of building permits grew by 70 percent after the city increased its land-to-building tax ratio from 2:1 to 5:1 in 1979. Of course, lots of other things changed during that period--an urban renaissance occurred practically everywhere--but the two-rate system clearly played a role.

Not surprisingly, the idea has been examined by a number of localities in depressed Upstate New York. But in Amsterdam, the only city where it was actually implemented, it was repealed after getting caught up in confusion about a reassessment that happened to move forward at about the same time.

Then there's the question of what to do about the political clout of low-tax landowners who want a system that rewards them for sitting on their land. That's the dilemma in California, which just celebrated the 25th anniversary of Proposition 13, the tax-cutting initiative. Proposition 13 caps the property-tax rate at 1 percent, which does little to motivate landowners. But it also permits reassessment only on sale, which discourages property owners who are "sitting" on property from selling it to someone who might be more construction- oriented.

Understandably, Proposition 13 has the steadfast support of the state's millions of homeowners. But it may be also part of the reason why--in spite of astronomical land prices and bottomless demand for practically everything--older parts of Los Angeles remain a sea of parking lots, mini-malls and swap meets.

Building economic development off of a property-tax system can be tricky. To overcome the Proposition 13 problem, a two-rate system can be constructed so that homeowners' property taxes go down while non- residential taxes go up. But that brings with it a whole separate set of political problems. (The similar "split roll" idea, in which commercial property is simply taxed at a higher rate, has been a non- starter in California because of opposition from business leaders.)

Also, the need to motivate landowners is not the same everywhere; it's more urgent in depressed cities and depressed neighborhoods. And what about all those property-tax abatements? Isn't that using exactly the opposite tool to try to stimulate growth?

Property taxes can be political minefields. But a two-rate tax may be part of the solution to the economic development puzzle--especially in older cities and older neighborhoods, where landowners don't always act in the rational way that economists would expect them to.