Noema Magazine
How To Harness Cities’ Hidden Public Wealth
Making urban land a community asset could make cities more livable and equitable.
BY MATT PREWITT AND JOEL ROGERS
AUGUST 2, 2022
Excerpts:
There is a project that cities could embark upon, more or less immediately, to improve their citizens’ collective quality of life. They could turn the land under their jurisdiction into a source and reserve of shared public wealth, rather than a divisive private speculative asset. In doing so, they could overcome the unending conflicts among developers, homeowners and renters that stand in the way of development that is beneficial, fair, sustainable, and publicly accountable.
We make this argument in four distinct steps. First, we highlight the vastly underestimated land wealth that many American cities already enjoy, which we suggest be used better. Second, we argue that a version of Henry George’s land value tax is a way to unlock this value. Third, relying on more recent work, we suggest a way to improve on George’s thinking by even more clearly limiting speculative gain. Fourth, we suggest applying this idea in urban wealth funds that could be started immediately to potentially great public benefit.
Updating The Public’s Balance Sheet
To motivate this project we should first observe something that’s hidden in plain sight: In the United States, many municipalities own real property whose estimated value exceeds their city’s gross product. But the publics of most cities — and, in some cases, their elected leadership — don’t even know what they own.
Many U.S. cities have not fully inventoried their property assets. Even fewer have assigned them a current market value, which is sometimes tens of times higher than the book value in city ledgers.
When they do this exercise, which is not expensive or time-sucking, their balance sheets look radically different. In 2014, Boston’s balance sheet showed liabilities of $4.6 billion outweighing declared assets of $3.8 billion, of which $1.4 billion was real estate, for a negative net worth of $800 million. But examination showed that that the declared $1.4 billion in property holdings was actually worth $55 billion — nearly 40 times the initial estimated value — putting Boston very far into positive net worth territory. A similar story unfolded in Pittsburgh, when it did the analysis (taking only two weeks and $20,000) and found it had undervalued its property holding by nearly 70 times!
We expect the demand for better strategic management of municipal assets will only grow. But first, cities need to account for that wealth and update their own balance sheets, which only a few have done.
Recognizing The Ultimate Source of Urban Wealth
As land values increase, owners find they can charge non-owners ever more in rent for the privilege of living and working near one another. Owners are thus enriched merely for owning the land — independent of anything they do to make the activity on or near it more productive of value. Henry George pointed out the injustice and economic irrationality of this way back in 1879, in the wildly popular “Progress and Poverty,” which helped inspire the Progressive movement of the early 20th century.
To address it, George prescribed a simple remedy: land value taxes. Unimproved land doesn’t magically shrink when taxes are put on it — in economist-speak, it’s quintessentially “inelastic.” That means taxes put on land are among the most efficient.
Unlike other kinds of tax, the cost cannot be passed on to renters without consequence. It is instead “fully capitalized,” or built into the price of the land, decreasing that price and lowering the hurdle to anyone who’d like to purchase land as a location for some profitable enterprise. The decreased land price lowers the rents owners can feasibly charge. Land value taxes are therefore good for those who want to unlock land for valuable uses — building shelter or new commercial projects — and bad for those who primarily want to hold it and watch its price climb over the years.
Many countries and cities around the world have versions of land value taxes — with predicted effects on land prices and tenancy costs. Land value taxes were successfully implemented in early 20th-century German cities such as Berlin, Cologne and Frankfurt, after proving their ability to tamp down harmful speculation.
Land value taxes also worked well in numerous Pennsylvanian cities and lasted for the better part of the 20th century. Indeed, as a recent overview of theoretical literature on and reports of practical experience with land value taxes show, there is overwhelming substantiation of the concept. George believed, not completely unreasonably, that land value taxes could eventually replace all other taxes; he called it the “single tax.” There’d be enough money to fund any number of worthy social investments for the public good.
Land value taxes are today more prevalent elsewhere — in places like Estonia and Taiwan — than in the U.S., where the idea originated. There are many reasons for this, but one can hardly fail to see that there are a lot of rich and politically powerful people in the United States who prize the ability to speculate on land prices and pocket unearned rents.
Splitting The Property Atom – [An Urban Wealth Fund]
We can still improve upon land value taxes, devising new methods of administration that accurate reveal land values, insulate assessments from political pressure, and truly place markets in the service of the public.
Work since George suggests a promising avenue toward the ideal of efficient abundance. Sun Yat-Sen proposed a method for land assessment in the early 1900s: owners assessed the value of their own land, and the state could then purchase the land at that value. More recently, economists E. Glen Weyl and Anthony Lee Zhang have sketched an elegant update of this idea, which could form the basis of a kind of land use license.
Without using the eminent domain power, and even without raising existing property taxes, cities could thus gradually shift property markets away from the buying and selling of permanent property rights, and toward the buying and selling of a special sort of land-use license.
Here’s how the licenses work: They resemble conventional time-based leases, except that they are a form of equity for their holders. At the time of their expiry after, say, six or 12 months, they go on a public auction block. But the amount of the winning bid is paid to the former license-holder, rather than to the public. Importantly, their holders periodically pay a license fee to the public, which generates revenue in proportion to license’s price, like a tax.
Among the communities of scholars and practitioners developing this system, it’s known alternately as plural property, partial common ownership, and self-assessed licenses sold at auction (SALSA). It’s possible to imagine SALSA replacing the role of common municipal property tax regimes. Instead of relying on a city assessment of, respectively, property value or unimproved land value and then paying whatever tax on that, the licensor pays the license fee rate the city has set, applied to the most recent price of their license.
This would truly split the property atom, unleashing tremendous democratic and economic energy. It would separate land values from productive use, ensuring the public a fair share of the former, as Georgists have long advocated, and as traditional land ownership has always failed to do.
If it is as beneficial and popular with the public as we suspect, such an urban wealth fund might grow to acquire much private real estate. Its purchasing activities would make real estate prices increase, pleasing incumbent homeowners. All this together would happily start to dissolve the dysfunctional caste system that now divides urban renters, developers and homeowners, impeding the high-road livable densification we urgently need.
Matt Prewitt is President of RadicalxChange Foundation. He is a lawyer, writer and technologist focused on new institutions for power sharing and collective intelligence. Joel Rogers is a professor of law, public affairs, and sociology at the University of Wisconsin-Madison and director of COWS and the Mayor’s Innovation Project.
Comment:
Changing urban land into a source of shared public wealth is certainly an idea we could support; and it is line with the precepts of Henry George who long ago promoted the land value tax as the best means to unlock the value of land for the public good.
As Prewitt and Rogers noted, land is typically under-assessed. As we have previously stated “It makes no sense to base LVT tax levies on what are in effect false assessments. Doing so would distort the desired incentives the land tax is designed to produce”. This is why we have proposed legislation authorizing a local option to exempt jurisdictions from Measure 50 limits on individual property assessments, and instead base them on true market values.
The article’s authors then proposed an “urban wealth fund” whereby cities could gradually shift property markets away from the buying and selling of permanent property rights, and toward the buying and selling of a special sort of land-use license.
While this proposal makes good sense, it is a radical step, possibly too extreme for the American polity to accept. We believe that for the public to agree to changes to taxation and public finance laws, any alterations will have to address problems that are widely acknowledged. Currently, the need to promote construction of more affordable housing units is a pressing problem. In Oregon, legislators and city councils have stepped up to help meet this need.
The passage of House Bill 2001 in 2019 strikes down local bans on duplexes for every low-density residential lot in all cities with more than 10,000 residents and all urban lots in the Portland metro area. Portland City Council followed by approving new zoning rules under the Residential Infill Project (RIP) that legalize four to six homes on any lot including those zoned for single family residential. The RIP policy makes it viable for nonprofits including community land trusts (CLT) to intersperse below-market housing anywhere in the city.
Local officials have also adopted the view that more accessory dwelling units (ADUs) could help address the affordability problem. HB 4015, passed in the 2020 legislative session, authorizes the Housing and Community Services Department to grant moneys to nonprofit organizations for pilot programs that develop accessory dwelling units (ADU) for moderate income homeowners to be made available for rent by low income tenants.
But financing a low density housing unit or an auxiliary housing unit is out of reach for many homeowners. What is needed is a public source of low-interest loan funds for low and moderate-income homeowners applying for ADU permits.
For over twenty years, elected officials and citizens have been calling for the creation of a Bank of Oregon, which would keep money in the state and invest in sustainable development. Public banking is distinguished from private banking by its mandate to serve the public interest. An Oregon State Bank would be a repository of revenues collected by state and local governments, and partner with local community banks and credit unions to make loans. Eligible programs will include local public infrastructure projects and affordable housing. Eligible clients will include governmental entities, local businesses, farmers, non-profit organizations, and lower income homeowners.
An alternative solution is being proposed in a bill drafted by Common Ground OR/WA. The bill establishes a Housing Opportunity Fund, to be established in the State Treasury, separate and distinct from the General Fund. The fund is a repository of revenues collected by state and local governments. The HOF funds partners with local financial institutions such as credit unions and local community banks. Eligible clients include governmental entities, local businesses, farmers, non-profit developers, and lower income homeowners.
These proposals, a local option LVT, state bank, and housing opportunity fund, are realistic solutions to a broken property tax system, and the looming crisis of housing affordability. Let’s first implement the land value tax remedy, then we can look into ways to “improve on George’s thinking”.
Tom Gihring, Research Director
Common Ground OR-WA
