Taxes And The Death Of Cities

Perry Prentice

[Reprinted from The Architectural Forum, November 1965]

At the time this article appeared, Perry Prentice was the former Editor and Publisher of The Architectural Forum, and for twenty-five years a Vice President of Time Inc.. He then became active as a consultant to business and government on technical and economic matters relating to the building industry.

FOR a problem so vast and complex as urban renewal and urban development there can be no one, no simple, no easy solution, and we need all the tools we can get -- including, in many instances, all the tools the Federal government has offered.

What I am about to suggest is not offered as a substitute for the tools now being used, but I do think an essential concomitant and perhaps an essential prerequisite to making the other tools work. It is a tool that has never been tried in this country; but it is working successfully in Australia, in New Zealand, in South Africa, in Denmark, and in parts of Canada -- and in each instance its effectiveness seems to vary in direct proportion to how strongly it is applied.

This is a strictly free-enterprise, profit-motive tool, so perhaps I had better start off by loudly affirming my personal faith in free enterprise and the profit motive. By and large I don't think there can be any substitute for free enterprise and the profit motive when it comes to satisfying a multiplicity of similar but hot identical human needs. And, specifically, there can be no substitute for free enterprise in meeting a problem as unbelievably complicated as the problem of urban development.

When we find a notorious example where free enterprise and the profit motive have failed to meet a complex human need, I believe very strongly that -- before we decide to ask the Government to step in and vise tax dollars to do the job -- we should first try to find out why private enterprise failed in this particular case and see if we cannot eliminate the cause of its failure.

I think we can all agree that the two most notorious examples of this failure are:

First, the failure of private enterprise to provide good homes for the urban poor (i.e., the failure to wipe out slums);

Second, the failure of private enterprise to use urban and suburban land wisely and economically (i.e., the creation of urban blight and suburban sprawl).

The reason for those failures is not far to seek. The reason -- not quite the only reason but by far and away the biggest reason -- is that today's tax policies (Federal as well as local) harness the profit motive backwards when it comes to land use, land development, and redevelopment.

The profitable slums

These tax policies make slums the most profitable of all housing investments; they often make it more profitable to let property decay than to keep it up or improve it; they often make it more profitable to mis-use or under-use land than to put land to its optimum use; they give speculation in vacant land such preferemial tax treatment that (to quote an article in Fortune) they "set [such speculation] apart from the market action of supply and demand."

Ours is a tax-activated, tax-accelerated, tax-directed, tax-dominated economy. Every business decision has to be checked against its tax consequences; and when property owners check the tax consequences of using land better versus using land worse, or spending money for improvements versus letting properties decay, they find, too often, that our tax system penalizes what is socially desirable and subsidizes what is socially undesirable.

Here is the two-fold way our tax system harnesses the profit motive backwards in the building industry:

The first way is that our system taxes the value of unimproved or underimproved land so lightly that land owners are under no pressure to sell until they are offered many times what their land is worth; and so lightly that there is no tax restraint on its price. So the price of our land -- which reflects the capitalized difference between the rent the land can be expected to earn and the taxes it must expect to pay -- has soared clear through the roof. The home builders have voted three to one that this land price inflation is their number one problem in trying to meet this country's need for better housing. I will go even further than that: this intolerable, tax-subsidized inflation in land prices is the only reason why private enterprise cannot hope to build new big-city housing cheap enough to meet the needs of middle income families and the biggest reason why private enterprise cannot meet the housing needs of low income families.

To cite only one example: The average price of New York City land taken for re-development has recently been $486,000 an acre. How can private enterprise be expected to provide low-cost housing in the face of land prices like that? When you have to pay too much for your land, you have no choice but to build high-rise structures to spread the too-high land cost over as many units as possible -- and building high-rise structures costs at least 50 per cent more per square foot than building low-rise structures. So the higher cost of paying too much for the land gets compounded by the cost of having to pay too much for construction.

Deterring development

The second way our tax system operates against our best interests is the manner in which it taxes improvements Our system taxes improvements so heavily that it makes slums the most profitable of all real estate investments. And so our slums are still spreading faster than urban redevelopment can clear them out. As all bankers know (but too few tax men seem to realize) a 1-1/2 per cent-a-year tax on improvements works out over the years like paying a single 30 per cent completion tax on the installment plan. And a 30 per cent tax, quite obviously, can be a terrific deterrent.

More than 50 years ago Lloyd George warned the British Parliament that "low rent public housing bills will never ho effective until you tackle the taxation of land values." And five years ago the report of the Mayor's Special Committee on Housing in New York echoed the same thought, asserting:

"The seemingly unstoppable spread of slums has confronted the great cities of the nation with chronic financial crisis. …The $2 billion public housing program has not made any appreciable dent in the number of slum dwellings. ... No amount of code enforcement … will be able to keep pace with slum formation until and unless the profit is taken out of slums by taxation."

Abetting sprawl

As for suburban sprawl, here are some of the ways our tax system abets it:

• Under-assessment makes it cheap and easy for speculators to hold desirable land off the market for years, thus forcing premature subdivision of land farther out by forcing developers to "leap-frog" out into the countryside to find land they can afford to buy. In Nassau County, Long Island, for example, there is evidence that idle land is assessed at an average of less than 1 per cent of its market value.
• Land speculation profits are taxed not more than half as heavily as ordinary income provided the land owner does nothing to develop his property (if he does do something constructive, he is then taxed as a land developer at income tax rates).
• Even the small local tax carried by land is fully deductible from state and Federal income taxes. This is another way of saying that a rich land speculator (and most idle land is in the hands of rich men) can deduct most of his land tax from his income tax.

Landowner's bounty

Today, land carries a much smaller share of the realty tax load and a very much smaller share of the total tax load than ever before.

Fifty years ago land carried two-thirds of the realty tax load; homes and other improvements carried only one-third. Today the proportions are almost exactly reversed. Improvements carry two-thirds of the realty tax load; land carries only one-third.

Fifty years ago land carried nearly half the total tax load -- state, national, and local. That was before the income tax, the inheritance tax, the corporation tax, the gasoline tax, the taxi-ride tax, and most of the other nuisance taxes that have since been piled on. Today land -- which is one-third of our total national wealth -- carries less than 5 per cent of the total tax load.

Just why the owners of slums and idle land should be the beneficiaries of such undertaxation seems impossible to explain or justify. A hundred and sixty years ago the pioneer classical economist Ricardo pointed out that "the interests of the land owner are directly contrary to the interests of every other element in the economy."

The public investment

Actually, the value of unimproved suburban land and underimproved urban land derives 100 per cent, and perhaps more than 100 per cent, from money the community has had to invest in roads, streets, sewers, schools, water supplies, fire protection, police protection, and other community facilities without which that land would be neither accessible nor livable. A recent study in Montreal came up with this fascinating statistic: if local land owners had to pay the city 5 per cent interest on the city's investment in. these community facilities without which their land would be unusable and therefore worth almost nothing, then the city could run its government and operate its plant without collecting any taxes at all!

That fantastic statistic may be hard to believe, but an example nearer at hand suggests that the Canadian statisticians may have actually understated their case:

The New York Regional Plan Association has said that it will cost $7,100 per additional family to provide the necessary roads and streets needed for the region's population growth from now to 1970, and $4,100 per additional family for new schools -- $11,200 per additional family for these two plant investments alone. Change that phrase "per family" to read "$11,200 per lot" and you may get some idea of the vast investment of other people's tax dollars that is needed to make urban and suburban land usable and thus to make land speculation so profitable.

Or take a simpler example of how our system of public investment for private profit works: The tax payers spent more than $400 million to build the New York Thruway, and the first effect of that public investment was to add much more than $400 million to the land prices along the Thruway route.

The value of almost all other kinds of private property derives from the efforts of the owner and/or of the people the owner employs. For example: if a company's stock is worth $250 million today, it is worth that because the company's employees have worked together successfully on the owner's payroll to make it worth that much.

But if a corner in Midtown Manhattan is worth $15 million today, hardly a dollar of that $15 million derives from anything the owners of that property -- past or present -- have done to make that corner valuable. Every dollar of that $15 million derives from the growth 'of the metropolitan community around that corner, and from the enormous multibillion-dollar investment the community has made in facilities without which that corner would be good only for truck farming -- and not very good at that.

The private rewards

In 1963, the New York Herald Tribune rounded off its six-part feature on "Who Owns New York" by asking "What have these men who have made millions out of the soaring price of the city's land contributed to the city's development?" And the Tribune answered that question with just one word: "Nothing."

What moral justification can there be for giving land speculation more favorable tax treatment than any other income source? How can anyone argue that deflating the price of land by making land owners pay all the community costs needed to make their land saleable is an attack on our whole system of private property? Do land owners-have some special right (in Millais' words) to "get rich in their sleep"? What is so sacred about land speculation profits whose magnitude (in Winston Churchill's words) is "apt to vary in direct proportion to the disservice the speculator has done to the community" by holding his land off the market until other people's investment has maximized its price? Is it more important to keep America safe for land speculation than to make America a better place to live in? Is heavy taxation of income morally right but heavy taxation of the community created location value of land morally wrong?

Harnessing profits

And why should we go on pouring billions of tax dollars into public housing and urban redevelopment without first exploring whether it might not be possible to get the job done better and faster by private enterprise if the profit motive were harnessed forwards instead of backwards -- that is, by untaxing the improvements which are now so discouragingly overtaxed, and by shifting most of the local tax burden to the community created location values now almost scandalously undertaxed?

None of this .is theory: It has worked in practice: for in Brisbane, Australia, state law since 1896 has forbidden any taxes at all on improvements, but the unimproved value of the land is subject (above a small exemption) to a 9 per cent ad valorem tax -- regardless of whether you build a 50-story building on it or use it for a parking lot. According to Colin Clarke, the Oxford economist, who lived in Australia for 20 years, the city of Brisbane, with a metropolitan population of nearly three-quarters of a million, is "the only great city in the world without a slum."