A Proposal to Get Buffalo Going Again

Perry Prentice

[A Talk Before the Buffalo Area Chamber of Commerce, 17 May 1972]

When I accepted your Invitation to take counsel with you here this morning I took it for granted that Buffalo must be in trouble just like most of our other cities; otherwise you wouldn't have asked me to meet with you.

But I had no idea how big and how deep your trouble is, and I can't help wondering how many people right here in Buffalo and Amherst and Orchard Park realize how big your trouble is.

For example:

I didn't realize that Buffalo is running neck and neck with Cleveland and Pittsburgh for the unhappy distinction of losing population faster than any other important city except St. Louis -- losing population so fast that at this rate it won't be too long before your city population has shrunk down to only a little over half what it was 40 years ago -- and most of the people still here will be the poor and very few of them will be white. I didn't know that the last eight-year count showed nearly a quarter of all the businesses in Buffalo had folded up or moved away. I didn't know Buffalo had lost the local operations of so many important employers, including among others Swift and Curtis-Wright and Cargill Milling and Hunt Foods and Otis Elevator and Texaco and Lehigh Cement and Ralston Purina and Iroquois Beer and Bond Baking and Quaker Oats and Fedders and International Milling.

But by far the most important thing I did not know was that your combined city and county property tax rate on both land an improvements is a nominal 9.92%, which at your 55% assessment ratio works out to 5.45%-of-true-value.

That 5.45% is a perfectly acceptable tax to impose on unimproved land values, partly because land can't run away to escape the tax, but mostly because by definition unimproved land value means what land in that location would be worth if its past and present owners had never done anything or spent anything to improve it; unimproved value of land is 99-44/100% an unearned increment created by an enormous investment of other people's money and other taxpayers' money to develop the community around it and make land in that location reachable, livable, and richly saleable, so there is neither equity reason nor economic reason why the community should not tax land heavily to recover through taxation as much as it chooses of this community-created-value.

But on the improvements for which the owner has had to spend his own money your 5.45%-of-true-value is a completely impossible tax and Lackawanna's 4%-of-a-somewhat-dubious-true-value-tax rate is almost impossible. Nobody without a special non-profit incentive would invest good money in property improvements where his investment will be taxed anything like 5.45%, because after paying that 5.45% there will be little if any profit left for the investor and there are plenty of other communities where he could invest his money without having all his prospective profits taxed away.

Your 5.45% property tax rate may not sound high to you compared with a Federal income tax that scales up to 70% and actually taxes away about 11.25% of consumer income, but it sounds low only because that 5.45% is 5.45% of the capital value, whereas the income tax, as its name makes clear, is just a percentage of the income earned on that capital.

So perhaps the enormity of your 5.45% rate will become clearer if we restate it in income tax and in sales tax terms. Then it should be pretty obvious that Buffalo is trying to tax the improvements needed to revitalize your city more heavily than any other product of American industry is taxed, not excepting hard liquor, not excepting cigarettes, and not excepting gasoline.

First let's restate, your 5.45%-a-year tax on improvements in sales tax terms:

Your 5.45% tax on improvements works out to the installment plan equivalent of a 93% sales tax, i.e., it will cost the improver as much each year as a 93% single-payment sales tax would cost him if he could finance the improvement at 5% interest over the 60-year life of the improvement. If any of you doubt that statistic I can only suggest that you should go down and check it with your bank as I did at the First National City Bank in New York.

And now in income tax terms:

My friend Phil Klutznick, who, I guess, is America's biggest real estate developer, reported to the Milwaukee Development Group, Inc., (prototype of your Greater Buffalo Development Foundation) that Milwaukee's 4%-of-true value tax on improvements taxes away 27% of the prospective gross income on any improvement there and makes any investment in new construction in Milwaukee "marginal or submarginal". My friend Walter Nelson, Chairman of the Downtown Association in Minneapolis, a city that is making an outstanding effort to revitalize its downtown, tells me that Minneapolis' 4% property tax taxes away 30% of the gross income a new building could earn, so he is finding it impossible to interest any developer in building the close-to-downtown apartments needed to bring enough people back to the city to keep his downtown alive after 6 o'clock.

If the 4% tax in Milwaukee and the 4% tax in Minneapolis come so close to being a 100% income tax on new improvements, would you agree that your 5.45%-of-full-value tax must be more than a 100% income tax?

So after I found out that your tax rate on improvements is 5.45% of full value I was far from surprised to learn that in twenty years there has been almost no new construction in Buffalo without at least one kind of government subsidy -- sometimes a payment subsidy, sometimes a tax exemption or a tax abatement subsidy, sometimes (as on most of your Shore Line Project) four different kinds of Federal, state, and local subsidy piled one on top of another. I wasn't surprised to learn that to keep your famous hotel from closing down you had to promise the owner a million dollar assessment cut plus a $3,000,000 assessment exemption! I wasn't surprised to learn that to keep your biggest employer from closing down with a loss of 9,000 present jobs and 19,000 peak-production jobs Lackawanna is now trying to find a way to cut its assessment $30,000,000. I wasn't surprised to learn that 17,000 homes are vacant or abandoned in the city. I wasn't too surprised to learn that your unemployment rate is running 8.4%.

I wasn't surprised when I was told that you haven't been able to attract any important new in-city industrial employer and your main inducement to get your present employers to expand or modernize inside the city instead of moving out has been that you have issued more tax-exempt industrial revenue bonds for them than any other city in the state and you are taking maximum advantage of the Job Incentive Board program that allows them city and county property tax exemption for 10 years plus corporate income tax exemption for 10 years.

I wasn't surprised to read that in the years since 1958, while your municipal costs have more than doubled your property tax base has been shrinking, so your assessed valuation subject to property taxation is quite a bit less now than it was fourteen years ago, with the whole increase in property values here since 1958 completely tax exempt. And looking through the 24-page picture book the Chamber of Commerce published to show quote "The Progress of Business" hereabouts I was not too surprised to see that only one of the 71 pictures showed any building in Buffalo that had not been built entirely with government money or given some sort of government subsidy -- and I'm not too sure that even the one exception did not enjoy some kind of tax break.

Now of course some of you may be consoling yourselves with the thought that thank goodness you live or have your business In Amherst where the tax rate Is only 2.2%-of-true value or in Orchard Park where the tax rate is only 2%, and anyhow, as outsiders you don't have to be too concerned about Buffalo's decline.

But, alas, good suburbs can't stay good long without a good central city to subtend. If it weren't for what's left of the city of St. Louis, for example, the St. Louis suburbs that have been booming at St. Louis expense would be just a too-close-together huddle of country towns, none of them big enough to offer their people the choice and variety of job opportunity, social opportunity, cultural opportunity and recreation opportunity that only the nearness of a sizable central city can provide and none of them big enough to offer business the choice and variety of labor skills, supporting services, local markets, and local supply sources that are so essential to all but the biggest and most self-contained companies; and sooner or later pretty much the same truth will be apparent in your suburbs that are now growing at Buffalo's expense.

How many able-to-choose people do you think would choose to live in Shaker Heights if Shaker Heights was not so accessible to Cleveland? How many able-to-choose people would choose to live in Sewickly or Rolling Rock if those suburbs were not so near to Pittsburgh? Would 60,000 able-to-choose people choose to live in Greenwich, Connecticut, if Greenwich was not nearer to New York than any other place where anybody can live on open water without paying New York taxes? And how many of you could live as you do in Amherst and Orchard Park or would choose to live in Amherst or Orchard Park if Buffalo should go down the drain?

And anyhow, how many of the people everywhere who have fled from the cities to escape the cities' problems would be happy in the suburbs if the cities were not there to leave those problems behind in -- all the problems the suburbs are now so busily and successfully zoning out?

If you stay on the Niagara Frontier you just plain can't get away from Buffalo's problems, so let's stop talking about the problems and give thought to what can be done about them.

You can't reopen the Erie Canal that once boomed Buffalo as the gateway to the west. You can't close the St. Lawrence Seaway that now lets hundreds of cargo carriers steam right past Buffalo on their way to market instead of stopping at your port to reship their cargoes by rail or barge. You can't bring back the Empire State Express and you can't bring Phoebe Snow and get the passenger trains running again.

If you had time to listen to them I could give you a long list of things you could do, should do, and need to do if you want to get Buffalo going again -- some of them big things, some of them little things. But you don't have time to listen so I'll just tell you most of them are at least mentioned in this consensus of a Round Table of urban experts on "What Can Our Cities do to Help Themselves?" that I moderated for our magazines and the Council of State Governments and the Conference of Mayors and the National League of Cities and the National Association of Counties and the International City Management Association. I brought a few copies of this consensus with me and you are more than welcome to take one home with you.

But none of the big things suggested by these urban experts and none of the little things suggested will get Buffalo very far on the come-back road unless and until you face up to the property tax problem that is making Buffalo an unprofitable place for private investment in the improvements you need to stop the decline of your city and get Buffalo going again.

I am not so naive as to suggest that just untaxing improvements will solve all your problems, but this much I will tell you without fear of informed contradiction:

Unless you take drastic steps to reduce the impossible tax burden Buffalo now lays on improvements or -- better still -- stops putting any tax burden at all on improvements you are not going to get Buffalo really going again.

Now I suppose all of you are shocked by my suggesting such a radical solution to your tax problem, so let me remind you that you have been taking half-hearted measures and half-way steps in that direction for years. That's why practically every new improvement in Buffalo since 1949 has been given some sort of tax exemption or tax abatement and that's why every dollar and more than every dollar of Buffalo's assessment growth is tax exempt and pays no tax at all.

Many other cities are taking similar half-way steps to lessen their tax deterrent on improvements. Pittsburgh gives much of the credit for the widely-publicized Pittsburgh Renaissance to its graded tax plan, under which the city tax on all improvements -- past, present, and future -- is only half as heavy as the city tax on land values. Boston and Newark have come up with a complicated mechanism under which new improvements built after the scheme was legalized are taxed only half as heavily as improvements built before. Milwaukee got three big new buildings started by a special assessment freeze limited to big buildings only -- an assessment freeze that promised investors in these three structures that for five years they would be taxed no more than the tax paid on the little old buildings that previously occupied the site. St. Louis is giving ten-year tax exemption and 25-year tax abatement to all new improvements in blighted areas and the Board of Aldermen has taken the strange and somewhat embarrassing step of declaring all downtown St. Louis blighted. This could be a fine step towards harnessing the profit motive to urban betterment instead of (as now) to urban decay in St. Louis except that the same law that permits the tax abatement specifically forbids making more than a limited profit! Minneapolis is working on the most complicated tax abatement scheme of all strictly limited to new high-rise apartments downtown-a scheme under which the city would buy the land with tax-exempt bonds and rent it to the apartment owners, who would then be taxed at only half the regular Minneapolis rate on the improvement.

All these schemes are moves in the right direction towards shifting the weight of the property tax off improvements, but I'm afraid most of them do as much harm as good by limiting their application instead of facing the tragic fact that almost everything in almost all our central cities either needs to be replaced or improved right now or will need to be improved or replaced in the fairly near future. By giving a special property tax break to a limited number of projects they just increase the property tax burden on all other properties. Here in Buffalo, for example, the special tax breaks enjoyed on one-third of your assessed valuations increase the tax burden on the other two-thirds by 50%!

And that brings us to the question of how could Buffalo afford to abolish the 5.45% tax on improvements, that now provides $79,200,000 of your property tax revenue.

You can't expect more state aid or Federal revenue sharing to give you anything like an extra $79,200,000 to make up for your not collecting $79,200,000 you now collect from your 5.45% tax on improvements. Governor Rockefeller has already told you the cupboard in Albany is bare, and it is close to nonsense, to suggest that the Federal government has a lot excess revenue to share; on the contrary, the Federal deficit is already running almost as big as all the state deficits plus all the local government deficits combined.

You can't get the money by piling a heavy city income tax on top of the Federal income tax and the state income tax. That would just give your in-city taxpayers a new reason to move out faster.

You can't get the money by piling an extra city sales tax on top of the state sales tax and the county sales tax. That would just drive more sales out across the city line.

Land is the only taxable that can't run away to escape taxation, so the only way you could make up for the revenue lost by untaxing improvements would be an equal -- repeat, equal -- increase in your tax on land. And I am happy to tell you that increasing your tax on land would do as much to stimulate the renaissance of Buffalo as abolishing your tax on improvements, for this would combine the carrot of tax exemption on improvements with the stick of a fairly heavy tax on the land.

And please don't be too surprised when I tell you that shifting the tax from improvements to land would also be good for many if not most of your landowners, for land on which you can erect a tax-exempt improvement can be much more valuable than land on which any improvement will be taxed so heavily that no one can afford to improve it. Landowners in Buffalo have a bigger stake than anyone else in revitalizing Buffalo, for land here won't be worth much if you let Buffalo keep on losing population, losing taxpayers, and losing business at the present rate and Buffalo comes to the end of the century only half as big as in 1930 inhabited mostly by the poor.

Unless land is taxed quite heavily -- and I mean a lot more heavily than it is now assessed and taxed anywhere -- any reduction in the tax on improvements would be capitalized overnight into higher land prices, because land on which you can erect a tax-free improvement is worth a lot more than land on which any improvement will be heavily taxed. Today, almost universal underassessment and undertaxation of land is the No. 1 reason why the Douglas Commission found land prices in this country soaring 6.19 times as fast as the rest of the pried level. It is the No. 1 reason why St. Louis, where the property tax is too low, is in even more trouble than Buffalo where the property tax is so high. It is the Number 1 reason why in Europe, where the property tax is close to zero, land prices are so crazy high that, for example, a 50 by l00' lot in a quite ordinary suburb 15 miles from the Capital of Switzerland costs 220,000 Swiss Francs, which is more than $60,000, the number one reason why land zoned residential on the fringe of London sells for $120,000 an acre in Hendon, $168,000 an acre in Hampstead, $183,000 an acre in Ealing, and $192,000 in Wimbledon, the number one reason why more than 80% of all the new homes being built in Europe today have to be land-thrifty high-rise apartments, and the number 1 reason why private enterprise has been priced out of 45% to 80% of the housing market there.

Now you don't need to tell me that many of you think multiplying your land tax from $15,000,000 a year to $95,000,000 to make up for untaxing improvements is a perfectly preposterous suggestion. It would not sound so preposterous if you would just recognize that your present improvement value to land value assessment ratio of 5 to 1 is highly questionable and, I fear, itself preposterous. In most big cities the assessment ratio runs around 3 to 1. Dr. Gaffney's detailed study of Milwaukee -- another city like Buffalo with lots of aging improvements on its tax rolls and very few new ones -- found that in Milwaukee the true improvement-value-to-land-value ratio is very close to 1 to 1 instead of 3 to 1, and I suspect your true ratio here is not far from 1 to 1. In that case just correcting what's wrong with your assessments would increase the land tax component of the $95 million you now get from your property tax from $l5,800,000 to $47,500,000.

Beyond that, you must remember that land on which you can build a tax-exempt improvement is worth a lot more than land on which any improvement will be heavily taxed, so with good assessment reflecting the untaxing of improvements you could expect to get perhaps $20 million more from your land tax without having to raise your tax rate on land alone above the present 5.45%.

But now get a good grip on your seats while I try to explain to you why, even if you don't correct your assessments, shifting the entire weight of your $95 million property tax to land only would in practice make comparatively little difference in the property tax bills of most of your property owners.

This was the hardest point for me to understand when America's No.l land economist, Dr. Mason Gaffney of Resources for the Future, tried to explain to me that a city can collect just as big a real estate tax by taxing location values only as it can collect by taxing both improvement values and location values. The only difference -- repeat, the only difference -- in tax collections would be that property owners whose improvement-value-to-location-value ratio is above the citywide average would pay less; property owners whose improvement-value-to-location-value ratio is below the city average would pay more -- in some cases a whole lot more. But the great majority of property owners whose assessment-to-land-assessment ratio is close to your citywide average of five to one would pay just about the same property tax they pay now.

In other words, property owners who put their land to good use by spending good money to erect an improvement fully commensurate with the desirability and accessability of the location -- the owners of good well-maintained homes and apartments and good commercial and industrial properties -- would be rewarded by a tax cut; some of them might even find their tax bills cut in half. Property owners who persist in underusing their sites might find their tax bill three or four times as big -- so big that they could not afford not to put their land to better use.

The big change would be at the two ends of the scale -- a big change upwards in the tax bills of those who underuse their land and let their improvements decay, a big change downward in the tax bills of those who make the best and fullest use of the site.

And Dr. Gaffney's big Milwaukee study instigated by the Urban Land Institute and financed by the Lincoln and Schalkenbach Foundations found that this shift in a city whose property tax rate is 4% or more would so change the arithmetic of property ownership that no subsidy at all would be needed to make it profitable for the owners of almost all the vacant land and obsolete inadequate or run-down buildings that now preempt so much valuable land near the heart of most big cities and replace them with new buildings that would put the site to its "highest and best" use.

The shift would not only end the need of any subsidy for urban renewal it should provide such a stimulant to new construction and redevelopment that it could create Just the opposite problem. The old problem has been how to end the construction stagnation that results in slums and decay; the new problem would be how to control a building boom that could wildly overtax the construction labor and construction financing resources of the city as thousands of property owners rush to take advantage of the tax shift.

The shift would, in fact, be such strong medicine for what ails our cities (including your city) that it would have to be given in small doses spread over a period of perhaps 10 years (as was done 50 years ago when Pittsburgh and Scranton shifted to the graded tax plan making the city tax on land twice as heavy as the-tax on improvements.)

That's enough for today's lesson about what property tax reform could do for Buffalo and why you can't expect to get Buffalo going again as long as you let your present misapplication of the property tax continue to harness the profit motive backwards.

But perhaps before I close I should read you these words from the consensus of another Round Table of urban experts I moderated -- a round table on urban finance whose panel Mayor Lindsay described as "The Who's Who of Urban Development." These words will give you some assurance that what I have been trying to help you understand is not just a crazy idea of mine, but the consensus of some of the best thinkers on today's urban crisis. Said the Round Table:

"Wisely applied, the property tax on which local governments depend for 87 per cent of their tax revenue could be one of the wisest and fairest of all taxes; but as most cities apply it today it may well be the very worst -- a weird combination of overtaxation and undertaxation, an incentive tax for what we don't want and a disincentive tax for what we do want. It harnesses the profit motive backward instead of forward to both urban renewal and urban development. Too often it makes it more profitable to misuse and underuse land than to use it wisely and fully, more profitable to let buildings decay than to improve them or replace them.

"Too few tax levyers seem to understand that the property tax is not just one tax; on the contrary, it combines and confuses two completely opposite and conflicting taxes, and it would be hard to imagine two taxes whose consequences for urban renewal and urban development would be more different.

"One of the two conflicting taxes fused and confused in the property tax is the tax on the improvement -- the tax on what past, present, and future owners of the property have spent or will spend to improve it. And it must be obvious to anyone that heavy taxes on improvements are bound to discourage, inhibit, and often prevent improvements.

"The other levy confused in the property tax is the land tax -- the tax on the location value of the site, the tax on what the property would be worth if the owners had never done anything or spent anything to improve it, the tax on the value that derives mostly from an enormous investment of other peoples' money and other taxpayers' money. And it must be obvious to anyone that heavy taxes on the location cannot discourage or inhibit improvements; on the contrary, heavy taxes on location could put effective pressure on the owners to put their sites to better use so as to bring in enough income to earn a good profit after paying the heavier tax.

"All this is so obvious that you would think every city would try to tax land heavily and tax improvements lightly if at all."

And finally, since this is a Chamber of Commerce Meeting, let me call special attention to the quotation from the quotation from Dr. Carl Madden, the Chief Economist for the National Chamber in the little blue folder you found at your seats and then close by reading you this unanimous -- repeat, unanimous -- recommendation of the Urban and Regional Affairs Committee of the National Chamber:

The policy statement of the Chamber of Commerce of the United States says clearly and unequivocally that:

"Distincentives that inhibit private enterprise from helping to solve social and economic problems should be eliminated."

To implement this Chamber policy and give it specific application to encouraging private enterprise to take a more active part in urban development and so lessen the need and pressure for costly subsidies, the Urban and Regional Affairs Committee recommends that the Chamber should take this same strong and unequivocal stand for reforming the administration of the local property tax. Such reform should include shifting the principal weight of property taxation off the owner-created value of the improvement onto the community-created value of the location, i.e., to what land in that location would be worth if its past and present owners had never done or spent anything to improve it.

We believe it obvious that heavy taxes on improvements inhibit and often prevent private investment in improvements. Conversely we believe heavier taxation of location values could put effective pressure on the owners of underused or misused locations to put their property to better use or sell it to someone who will.

We believe that many businessmen have insufficient understanding of the harm today's widespread misadministration of the property tax may be doing in their communities.

Therefore, the Urban and Regional Affairs Committee urges that the National Chamber devote all feasible resources to developing and using information materials to inform its membership of the costs and the alternatives to ineffective property tax systems.

[Resolution on Property Tax Reform adopted by The Urban and Regional Affairs Committee, Chamber of Commerce of the United States, 17 February, 1971]