How the Railroads Got Us
on the Wrong Economic Track

H. William Batt

[1998 / Part Two]

To some people this may be counter-intuitive. It may not be obvious that increasing taxes on a parcel of land will foster its improvement. Consider, however, the possibility that there are two parcels of land in roughly the same location and of equal size. You own a vacant parcel and another next to it has a twenty-story building. If only the land-value is taxed you will be paying the same tax revenue as your neighbor. What are you likely to do with your parcel? If you are rational, you will either build a twenty-story building or else sell the land to someone who will. In this way improvements tend to be clustered in high-land-value areas except where it is prohibited, perhaps for a park.

Jessica Matthews, now with the Council on Foreign Relations, recently wrote a syndicated piece observing that,

In a now familiar sequence, developers reach for the cheapest land, out in the cow pastures. Government is left to fill in behind with brand new infrastructure roads, sewerage systems and schools paid for in part by those whose existing roads and schools are left to decline. Property values rise in a ring that marches steadily outward from the city and fall in older suburbs inside the moving edge.

Because residential development can't meet the public bills, local governments compete for commercial investment with tax discounts that deplete their revenues still further. Property taxes then rise, providing an incentive for new development.

Years of such leap-frogging construction devours land at an astonishing pace.

Now if the full social opportunity cost of land occupancy were charged to landholders, the reward of (and incentive for) speculation would be obliterated, and land now locked up by speculators would be transferred to users. Users would employ more labor and engender more capital development instead of seeing it locked up in wasted space. Absent adequate taxation the regions at the periphery are the first developed, just as Ms. Matthews observes.

The economics profession is only now coming to recognize its responsibility for what it has wrought. Economists are coming to recognize the costs of sprawl, and studies show how astonishingly inefficient the suburban lifestyle is. One review of the literature on the subject of comparative development costs published by the Urban Land Institute revealed that "houses built in sprawling developments may cost 40 to 400 percent more to serve than if they were located close to major facilities, were clustered in contiguous areas, and incorporated a variety of housing types."

Transportation planners know that public transit typically takes a density of at least 8-10 households per acre in order for it to be economically viable. Because tax policies have been instituted that have the effect of deliberately fostering low density suburban sprawl, society has become dependent upon motor vehicle transportation rather than transit service. Had taxes been imposed heavily or solely upon land value, just the opposite would have occurred: development would have been most intense on the high land-value parcels, right by the transit services, making our society less dependent upon motor vehicles.

We face a far greater problem on account of the way in which America has allowed its landscape to be configured than most people today realize. Over-reliance upon the car causes inefficiencies in transportation patterns and thereby disenfranchises the poor, the disabled, the young and the old from their right to mobility. One 1993 study concludes 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. This is equal to about one-quarter of the annual GNP and is greater than our total national annual expenditure on either education or health." Just the costs of motor vehicle accidents nothing else represents a figure equal to 8 percent of the American Gross Domestic Product. Conventional American land use configurations and the automobile dependent lifestyle that goes with it sap our resources and what effort could be used for other ventures and activities. Since so much of this activity is consumption and not production, it weakens America's world economic position and precludes reinvestment in more productive areas. Because of the way in which we have encouraged development, people who need jobs are frequently too poor to own the cars necessary to get to them.

Because our society is characterized by suburban sprawl and is therefore motor vehicle dependent, community is destroyed. George Kennan expresses this well in the book cited earlier, but it is more empirically documented in a recent article entitled "Bowling Alone," which David Broder of the Washington Post considered the most important academic article of 1995. The author of that piece, Harvard Professor Bob Putnam, shows that our communal relationships are declining, and that an ever smaller proportion of the population is involved in social activities of a cooperative and communal nature. As Tocqueville noted, this used to be the unique strength of American society; we're now losing it. Suburban sprawl and the automobile play a large part in this. And the reason we have these land-use configurations is in good part, to my way of thinking, due to our property tax policies and our subsidies to motor vehicle transportation.

It doesn't take much reflection to realize that the practices which we are following are unsustainable. This is true not only environmentally but also economically and socially. Author James Howard Kunstler recently has described in his book Home from Nowhere how our cities are becoming not only ugly but unlivable.

The irony is also that, by having followed the legacy of classical economics, we could easily have provided for all our government services through taxes based on land value. Adding to this other fees to correct market failures would easily make our economy more efficient and enrich our quality of life immeasureably. A new discipline called ecological economics seeks to bring together two disciplines that have historically been at loggerheads. There is reason to believe that as badly off track as we have been there is still time to save ourselves from disaster.

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