Urban Growth Boundaries: Boon to Landowners?

Edward J. Dodson

[May 2005]

Fly over any metropolitan area in the United States and the evidence is clear: we are spread out over enormous distances with an enormous amount of land in urban and close in suburban areas left vacant - and sometimes abandoned because of lingering environmental contamination or rotting industrial complexes that stretch out along riverbanks and empty rail lines.

While cities try to entice higher-income residents and businesses back and concentrate on "in-fill" development schemes as well as the more large-scale neighborhood revitalization initiatives, this "carrot" approach is increasingly offset by the "stick" in the form of stiffening regulations on how land can be developed and where. For some very sound reasons, we have entered the age where land use planning for "smart growth" and where "new urbanism" is in play.

We have all read about the urban growth boundaries established in cities such as Portland, Oregon, designed to preserve agricultural use of land in close proximity to urban centers. Absent these restrictions on development the only option communities feel they have available is to purchase the development rights from landowners who commit to keep farming. Not a bad deal for the farmers who loves to farm, but certainly a costly deal for remaining taxpayers.

Recently, officials in the Maryland county of Prince George added a new twist to the development process. The County Council voted in November to permit residential construction only if police and fire departments meet certain standards for staffing and emergency response times. The concerns over public safety are real, of course. For a very long time now new, sprawling residential development has outpaced the creation of infrastructure and public services required to support additional properties and residents. A bill introduced in the Maryland General Assembly proposes imposing a surcharge of $8,000 per unit on developers, the proceeds offsetting the costs of providing additional police and fire protection to these new properties. These measures are vigorously opposed by many landowners and by developers, although this surcharge would simply be passed on to homebuyers. A similar surcharge of $12,000 already exists to cover increased costs to schools of making room for more children.

Whether the Maryland measures will help or aggravate the problem of sprawling development is yet to be seen. We know from experience that developers are adept at leap-frogging over vacant land that is too expensive or where gaining approval for development is too costly and time-consuming. Distance is no longer measured by miles but by minutes, and people continue (it seems) to willingly commute an hour to and from work each day in their automobile in order to enjoy the greater sense of open space of housing in subdivisions carved out of formerly rural communities.

The Facts on Portland

The Portland story is a complex one (as our colleague Jeff Smith could attest). One the one hand, the urban growth boundaries have stimulated investment in the city that most likely would not have otherwise occurred. City neighborhoods are becoming more close-knit, and city officials have taken steps to make the city more walkable, pedestrian friendly urban environment.

At the same time, the absence of meaningful land-value taxation has given landowners even more leverage to raise their prices. Data I have looked at indicates that land prices in areas not yet developed but within the urban growth boundary have risen considerably each year, with $500,000 for an acre of land not uncommon. Depending upon the zoning and maximum density of units-per-acre, land prices could skyrocket far above this level in response to demand for decent, affordable housing. Many people who work in Portland have been forced by high housing prices to seek housing across the state line in the suburbs of Vancouver, Washington. At the same time, a large number of formerly California-based businesses and their employees have relocated to Portland because of the relatively lower cost of doing business and dramatically lower median price of housing.

An analyst at Portland State University's School of Urban Studies and Planning, Ethan Seltzer, has written: "… data suggests the rate of growth in the 1990s is a far more important factor" in the rising cost of land than the existence of the urban growth boundary. He raises the point that "Portland is required to have a 20-year supply of residential land within the UGB." This means that the UGB is flexible and subject to expansion as needed.

We might be surprised to learn that a principal of one of Portland's large building firms, Jim Irvine of The Conifer Group" has put his finger on a big part of the problem:

"If you have a farm-use designation, you don't pay property taxes. To get that designation, you don't have to do much more than put a cow on the site and grow grass. There are 8,000 acres inside the UGB where owners have that designation and are sitting on land without any carrying costs. The land is appreciating faster than the stock market. Corporations and investors hold much of it. Yet that land is classified as part of the 20-year inventory of developable land. Our tax policy contradicts our land-use policy."

Well, Jim, a shift to land-value taxation would not solve that particular problem. The land ought to be assessed at full market value, which will be influenced by when the land would be approved for development. An owner with deep pockets might be willing to hold on to the land for 15 or 20 years subject to taxation based on restricted use. In the meantime, the demand on the remaining supply of land will have a strong tendency to increase its value, and such increases are appropriately captured via taxation. The status quo means a continuing boon to landowners at the expense of the community as a whole.