How to Get A Bricktown Surface Parking Lot Developed?
Not sure how I missed it when Charles Hill at Dustbury first referred to the below comments at ULI. But I’m going to reprint in whole (forgive me Charles) and let the discussion ensue:
First, from ULI:
Thoughts on Property Tax
This post was written for The Ground Floor by Bill Hudnut, senior resident fellow/Joseph C. Canizaro Chair Public Policy at the Urban Land Institute.
How about restructuring the property tax across America to install a two-tiered system? More tax on those horizontal pieces of empty land and asphalt, less on the buildings. That is, reduce the tax rate on homes and other improvements, and substantially increase the rate on the site value. I think such a system would induce more compact development and more infill work.
Pittsburgh has used the system for years until problems arose with the way assessments worked out, as my colleague and former Pittsburgh Mayor Tom Murphy has told me. Nonetheless, if assessments are fair, the higher land tax would bring vacant or woefully under-used central sites into use, giving new life to inner cities and reducing sprawl. It would also stem land speculation, which is the big engine behind house price escalation, thus stabilizing neighborhoods and keeping sale prices and rents more affordable. The land tax returns to government–the values it creates with bridges, roads, and other infrastructure–helping to pay for maintenance and necessary improvements.
Years ago, in 1972, ULI issued a Research Monograph (No. 19) by R.W. Archer, discussing the Australian States’ use of the site value system of taxation. It quoted an American land economist, Professor M. Mason Gaffney: “If the real estate tax as it continues to grow (in America) is not to scorch the earth, it must be modified to exempt improvements. That can be done by focusing it on the base of land value or site capability, which not only permits improvement but positively prompts it.” In short, a two-tiered property tax system taxes land and building values separately. Higher taxes on the land, lower taxes on the building, discourages a land holder from leaving his land fallow and speculating on its increased value, and conversely, encourages improvements on the land and redevelopment. The monograph used Sydney Australia as a case study, but its general point, that a site value tax system puts “pressure on owners to sell their property for redevelopment if they cannot or will not redevelop it themselves.”
1972 was over a quarter of a century ago; but could there be here an idea whose time has come?
And now from Charles at Dustbury (again, please forgive me for violating blog etiquite, but this is an important item to discuss, in my view, and shouldn’t be cut short with a link):
Emptiness tax (follow-up)
In late December I mentioned a proposal by Bill Hudnut of the Urban Land Institute for a two-tiered property-tax structure that taxed vacant land at a higher effective rate than developed land, reasoning that the higher tax would spur development.
This Market Urbanism post says that a Hudnut-like scheme would be beneficial in the short run, not so much in the long run:
Speculators essentially hold the land until development is optimal for the site, and all sites cannot optimally [be] built at once. Discouraging speculation drives the land into the hands of developers at cheaper prices than current market prices.
At the same time, all the new developers will compete … for users of the space they build on the vacant land in reaction to the new tax regime. This either means they’ll build smaller in anticipation of the glut of new development, or vacancy rates will be much higher.
De rigueur Jane Jacobs reference:
[The proposal] will harm the diversity of building age that Jane Jacobs claims as a key ingredient that makes for great cities. The stock of buildings will be disproportionately represented by buildings built shortly after the tax scheme is enacted. As new development occurs, affluent people will be attracted to the developing areas. As these buildings depreciate, the more affluent will relocate. Without enough diversity, over a long period of time a neighborhood will be predominantly lower-class residents.
And an alternative scheme is proposed:
I do favor some regional, state, or other tax based upon acreage. (if offsetting income tax or other productivity-stifling taxes) However, I would implement the tax to discourage sprawl, not to discourage speculation. Thus, I would tax each acre equally, whether developed or vacant.
The one thing both proposals have in common is separating the tax on the actual land from the tax on whatever structures may have been built on it, which seems a rational approach: you can always replace a building, but they’re not making any more land. (Well, there’s always the Dutch, but they have other motivations these days.)
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Comments
My comment originally posted at: http://www.dustbury.com/archives/7613
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Mr. Hill -
First, thanks for bringing this up and now making it a part of a broader dialogue. I must say that the quote from ‘Market Urbanism” above is completely missing the point:
“This either means they’ll build smaller in anticipation of the glut of new development, or vacancy rates will be much higher. ”
In truth, the Market Urbanism quote actually confirms Hudnut’s point – he says, “…they will build…” Who cares if they are building smaller buildings than they might otherwise at some point decades down the road. The problem in downtown Oklahoma City – and many other cities like it – is not that we don’t have enough big buildings, and certainly not that we have too many small buildings, the problem is that we don’t have enough buildings of any size…BUT we have plenty of vacant land and too many surface parking lots – both problems that Hudnut’s proposal would certainly address.
As for the immediate changes in the market, a similar scenario would be true anytime regulations are changed. If we have an opportunity to improve the tax code so that it makes the real estate market more efficient and improves our cities, we should not allow a fear of initial market correction deter us from doing so. Further, this can be addressed by staging in the tax code change to create a more gradual shift in the market. We don’t have to remain prisoners to the policies and tax-codes of yesterday.
The best real estate economist in the world know this works, Henry George knew this worked, but wealthy property speculators are – and have always been – more difficult to convince!
For more info on Land Value Taxation (LVT), check out: http://www.urbantools.org/
Whoops…I see that Mr. Vincent already beat me to it. He is the gentleman that operates http://www.urbantools.org
I am dubious as to whether this system would be ideal or beneficial for Bricktown (let alone, legal). Although it appears that there were, at one time, no shortage of entities that desired to operate in Bricktown I hesitate to change taxing policy to punish those who do not develop. I certainly want our Bricktown property owners to come to the realization that their current asking prices are unreasonable, but I am not prepared to argue for such a penalizing tax structure.
I agree that the outcome of immediate affluent construction followed by relocation is unlikely, but this tax system could very well just create a different real estate bubble. Do we really want buildings to be built, just for the sake of building them? It seems that this sets Bricktown up for a myriad of constructed buildings which could very well remain vacant after they are built. Seems like we have enough of those as it is. I would be more in favor of increased incentives to bring businesses, residences, retail, etc. to Bricktown, rather than set up a potential punitive tax structure. If we prefer to eliminate the uncertainty that goes along with private land ownership, we should just have the property seized by eminent domain and build public buildings (I doubt many are in favor of this position though).
I also highly doubt that this tax system would be legal under current Oklahoma law. Article X Section 5 of the Oklahoma Constitution currently requires that all real property taxes “shall be uniform upon the same class of subjects,” i.e. you can not have a different tax rate for one part of real property from another. Thus, since land and buildings are all considered real property, you can not have a differing tax rate for the two. This is codified in Title 68, Chapter 1, Article 28, Section 2803. I am not in favor of changing the Oklahoma Constitution just for the sake of potentially encouraging development in Bricktown, as much as I would like to see more construction.
Let’s discuss additional/differing incentives for Bricktown if we would like to see increased development–a special TIF structure for additional public projects to bring additional people and businesses to Bricktown or implement a localized version of the Oklahoma Jobs program, all thereby increasing developmental desire to build. I would love to see a world class museum in the Bricktown area (although I love Science Museum Oklahoma, moving it to Bricktown and making it the quality of, say, the Boston Science Museum would be great). I appreciate the outside-the-box thinking, but this tax system does not seem to be the way to go.
Land value taxation brings to the attention of those who aren’t using their well-located land the notion that they might want to develop it now, instead of waiting another decade or two. They might very well decide that they aren’t interested in developing, and that it is no longer in their best interests to hold that land out of use. So instead of putting a huge price on it, they might lower their asking price to a level which an entrepreneur or developer can afford, and still have some funds left to invest in improving the land.
Improving it creates housing, or commercial spaces, or some combination of them; which it will be depends on local zoning and the local market. Sometimes it will be the beginning of a neighborhood’s transition, if it is centrally located and the community is growing. In my city of 120,000, there are places where, in the 30 years I’ve lived here, single family homes got divided into multiple apartments, then were torn down and replaced with townhouses which provided owner-occupied homes for several families where 30 years ago, only one lived. And I know that some of the midrise office buildings occupy land which 30 years ago were the sites of single-family homes that had been subdivided into small offices. And in the place where I grew up, the same thing has happened; newcomers might not realize that the well-located buildings hadn’t always been there and had been preceded by single family homes.
If our taxes are going to penalize something, I don’t think it should be productive activity, like work, or sales, or building or maintaining a building. I’d much rather place our taxes on the land value; the only thing that gets discouraged by a tax on land value is speculation in land.
In general, we do better if we align the incentives with where we want to go, and if we treat everyone similarly. “Special” programs favor some over others, and require others to subsidize some — robbing Peter to pay Paul; a sort of a Ponzi scheme, which by definition has its limits. Wise tax policy treats us as equals, and puts us on an equal footing with each other; land value taxation seems to me to be the wisest of the wise!
Brent, you are probably right that a constitutional change might be required. Such things were written into many constitutions because some big-time landholding folks with access realized that it was in their best interests not to be taxed on their holdings. There was a widely read book on the topic about 125 years ago, and these ideas were well understood and discussed.
Connecticut currently has two bills in its legislature to permit LVT in its cities. Pennsylvania has had the enabling legislation for nearly 100 years, and several of its cities and towns use LVT to good effect. Click on the link associated with Joshua Vincent’s name, above, to learn more.
With all due respect to our friends in Pennsylvania and Connecticut (home of the Kelo case), I am suspicious of implementing any taxing system coming from the Northeast. I have read the information on Mr. Vincent’s website and others, and an LVT scheme does not sound like the ideal system for Bricktown. There is no inherent problem with private people owning land for investment purposes. An LVT system appears primarily intent on halting urban sprawl and even though most of us would like to see Bricktown and downtown OKC built up more than it is, Oklahoma City in general seems to have little to no issue with the size of our city…for better or worse.
LVT does not treat everyone equally, that is what our current taxing system accomplishes. Hence the reasons for using the term “uniformity” in our Constitution. We would be making the personal preferential decision that “Jim” does not know how to use his land efficiently if he has not built a building and if we tax him high enough he will be forced to sell it to “Tom” who will build us a building. Again, I would prefer that we build up Bricktown more than it is, but it is too big of a leap for me to force that personal preference into law.
Based on the information from the downtown website of Harrisburg, PA, there does not appear to be a consensus that an LVT system is the reason for any urban renewal. It seems more likely that the downtown beautification projects and other implemented measures are the reasons for their current downtown success. There can certainly no consensus among analysts that an LVT system would lead to a Bricktown full of occupied businesses and successful entrepreneurs.
Additionally, a constitutional change sounds fairly easy to accomplish in CT, but Oklahoma requires a 2/3 vote of the entire state and I would imagine that you would have few takers when the change is to theoretically enhance the chances of building in Bricktown, a small part of Oklahoma City. I would forsee some serious issues and concerns that would undoubtedly arise from those outside of Oklahoma City. If anything, we should take it as a source of pride that Bricktown has become a such a destination that people think it is a good investment. It seems like a better solution is to use more tried and true methods for business/urban growth than revamping our state’s Constitution, tax code and tinkering with private land ownership. I’m not sure how those methods can be classified as Ponzi schemes though, we have used them now in TIF and BID districts to significant success.
Oops, sorry, forgot that Oklahoma Constitutional changes only require a majority state vote after either petition or legislative vote.
In Connecticut, all we’re looking for is the enabling legislation, so that cities that want to use this have the option. No one would have to use it.
Do you see harm in providing cities this tool? It seems to me to be a way to give them the local option of partially or completely untaxing buildings, for everyone within their borders.
Some cities will choose to reduce the tax burden on buildings and increase the millage rate on land value.
Others will decide that it is better to keep taxing buildings and land at equal millage rates, particularly if the owners of the most valuable sites in town are active in city government, as is often the case.
But it decisions on what millage rates to use should be very local.
I disagree that the Jacobsean vision of a city would be threatened by a land value tax. As used in over 20 Pennsylvania cities, the oldest and densest parts of the city benefit the most.
In Philadelphia, the proposed land value tax is shows a great decrease for the row home blocks of the older neighborhoods.
Harrisburg’s Mayor Steve Reed (US Mayor of the Year 2006) asserts that the land value tax has turned the empty downtown into a place of thriving activity, while shifting the burden of taxation away from organic neighborhoods. to preserve the character of these older cities, a program that supports rehabilitation of existing buildings is paramount.
I think evidence should trump assertion.