Pur Autre Vie

I'm not wrong, I'm just an asshole

Saturday, July 05, 2014

Urban Landowners as Utilities

I have been thinking a bit about property taxes.  This is one of those things that I'm sure already has an extensive literature, but I want to do a little thinking about it before seeing what has already been written.  (Realistically I probably won't go looking for articles on this topic, though.)

So here is the key insight.  Assuming property taxes are predictable, they should be fully factored into the purchase price of the house.  That is, the parties should discount back the stream of payments to its present value, and that should be deducted from the purchase price of the house.  If you are not a homeowner, but you want to buy a house in the future, then you should be (roughly) indifferent to changes in the property tax rate.  If property taxes go up, then when you buy a house you will have a larger tax burden, but on the other hand, the purchase price will be lower.  (It is quite possible I have this wrong, by the way.  It seems intuitively plausible, but it's not as though I've rigorously worked it through.  But let's go with it for now.)

So changing the property tax rate should operate primarily to give wealth to landowners, or to take it away from them.  This raises the possibility that you could use property taxes to capture the value created by government-funded amenities.  Imagine that you start with an "isolated state" as in von Thünen.  Then as you add amenities, you could adjust tax rates lot-by-lot so that property values remain stable relative to each other.  So for instance, let's say you add a subway stop in a neighborhood.  If previously land values were essentially flat across the neighborhood, then you could raise property taxes as a function of proximity to the subway station, so that property values remain flat after the subway station starts operating.  (You might even measure distance to the station using a Voronoi diagram—that is, you might measure walking distance as opposed to simple distance, because presumably walking distance has more bearing on land value.  [Edited to add:  specifically I am thinking of "Manhattan distance."]  But really, you might not have to think about it that hard.  Just adjust taxes lot-by-lot until land values are flat again.  And keep doing this every few years.)  A lot of the value of a subway system is reflected in increased land values, but that value mostly accrues to private landowners in the status quo.  If the city were able to capture the value of its investments in mass transit, then it might be much easier to finance mass transit.  And the landowners have no grounds to complain—the city gives with one hand and takes away with the other.  Landowners should be mostly indifferent as to the location of the subway station, because any increase in value will be taxed away.  No one is losing money because a subway station is located near to him, or far from him.  The city is just recouping the value created by its investments.

Now there is a serious problem here, which is that it may be very difficult to measure the contribution the subway station makes to land value.  In my example it seemed straightforward because we started with flat land values, so it would seem that the only factor that might elevate land values is the construction of the subway stop.  But it's not so simple.  It is probably a good idea to build especially densely near subway stations, so as to locate as many people as possible near mass transit.  But once landowners have invested in new, bigger structures near the subway station, then some of the land-value increase is attributable to their infusion of capital, and not merely to proximity to the subway station.  So you can't actually tax away all land-value increases, or you will deter the appropriate development of property near subway stations.  Ideally you would tax only the increase in value that is caused by proximity to the subway station.  (Causation is incredibly tricky to work out, though.)

One way to deal with all of this would be to treat landowners like utilities.  That is, you would permit landowners to operate their buildings for a profit, and you would allow them to profit from capital infusions (so as to develop land appropriately).  But the rate of profit would be bureaucratically determined, and all "excess profits" would accrue to the city via tax increases.  Land would be a safe, stable investment, but would not hold any potential for big speculative gains.  The city would be able to count on big revenue increases every time it enhances property values (and likewise it would suffer revenue losses every time it allows property values to fall, for instance by failing to control street crime or graffiti or whatever—in those cases, the city might be compelled to lower tax rates to hold land values steady).

I note that in New York City, rent-controlled apartments are already treated very much like utilities.  It is expected that the owners should earn roughly enough to cover their expenses, but not much more.  (My understanding is that some landlords lose money every month—that is, rent is not high enough to cover taxes and maintenance.  Imagine being put in that situation with one of your investments!)  Here is what Mayor Bill "the Blaze" de Blasio said when rents were increased by 1%:

“It’s quite striking that we’ve had a pattern in recent years of tenants being charged substantial increases while the actual costs to landlords did not increase anywhere near the same amount,” the mayor said. “So, in fact, there’s been a pattern of unfairness in the last few years.”
So it's unfair for landowners to increase the profit from their investments.  This attitude would be unthinkable in almost any other context (imagine applying the same logic to restaurant owners, or for that matter to owners of non-rent-stabilized buildings).  But one context in which this attitude makes complete sense is in the utility sector.  That's exactly how people think about utilities:  they should be able to increase rates only to the extent necessary to cover increased costs.  (Of course, the flip side is that no one expects utilities to operate at a loss over extended periods of time.  So in that respect owners of rent-stabilized buildings are treated worse than utilities.)

So de Blasio already thinks of owners of rent-stabilized buildings as utilities.  It's not such a stretch to apply the same logic to all landowners in a city (especially since most of the changes in their wealth are attributable to factors outside their control—basically you could have gotten very rich in New York City simply by purchasing land and then doing nothing).  Though of course it's worth noting that one would expect the system to operate with a fair amount of corruption, arbitrariness, and inefficiency, since it's not as though we've solved all the problems in utility-regulation (and we would be talking about millions of little utilities, each one subject to perverse incentives in terms of cost-control, information-hiding, etc.).  So I'm not actually advocating this approach, just noting it as a potential alternative to our current way of doing things.

And now I realize that I am probably just reinventing the "single tax" promoted by Henry George.  Oh well.  I never claimed to be particularly original.

[UPDATE:  You learn a lot by clicking around Wikipedia.  Check out "The Landlord's Game," which was invented by a Georgist.  Truth really is stranger and more fascinating than fiction.]

2 Comments:

Anonymous Anonymous said...

This does not seem a terrible solution, though I haven't thought about it much. I am increasingly of the view that public policy should deter people from investing heavily in real estate, because in general this leads to various obvious toxic social effects -- here is yet another instance that I was just reading, http://www.washingtonpost.com/business/economy/ncs-outer-banks-got-a-scary-forecast-about-climate-change-so/2014/06/24/0042cf96-f6f3-11e3-a3a5-42be35962a52_story.html -- and certainly the idea that most profits will be recaptured by the govt. is potentially a useful deterrent, even if the govt. doesn't use the captured money well. Of course any proposal that accomplishes the desired ends is likely to be unrealistic but so are most good ideas.

10:56 AM  
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9:35 PM  

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