By Rick Rybeck, Director, Just Economics
If smart growth is so smart, how come there’s so much dumb growth? Economic incentives for sprawl are partly to blame. If we understand the economic incentives for sprawl, the remedies become clear. Properly applied, these remedies can create jobs, enhance housing affordability and reduce tax burdens.
Today, infrastructure such as transit can be a double-edged sword. We create it to facilitate development. Yet, the resulting inflation in land prices near transit stations often drives development (particularly affordable development) to cheaper but more remote sites. We then extend the infrastructure to these remote sites only to have the process repeat. Thus infrastructure created to facilitate development ends up chasing it away. We run after sprawl with more infrastructure, but never catch up. This process destroys both the countryside and urban budgets as cities end up with much more infrastructure per capita than they would need if development was more compact.
Part of the problem stems from the ability of private landowners to appropriate publicly-created land values. This is the fuel for land speculation. Utilizing value-capture techniques can recapture publicly-created land values and return them to the agencies that created them (such as transit authorities). In this way, infrastructure can become financially self-sustaining.
Additionally, if properly designed and implemented, value capture can actually encourage the development of high-value land. High-value land, typically adjacent to urban infrastructure such as transit, is where we want development to occur. The more we can accommodate development at these high-value locations, the more compact development patterns will become. This will facilitate walking, cycling and transit while preserving rural areas for agriculture, conservation and recreation.
Some jurisdictions have accomplished this by transforming their traditional property tax into a value capture fee. This is accomplished by reducing the property tax rate on privately-created building values while increasing the tax rate on publicly-created land values.
The lower tax rate on buildings makes it cheaper to construct, improve and maintain them, reducing rents for residents and businesses. (The typical property tax on buildings is only 1% or 2%, but has the economic impact of a 10% to 20% sales tax on construction labor and materials.) The higher tax on land values reduces land speculation and helps keep land prices low. This reform concentrates development near transit and other urban infrastructure. It promotes jobs by making it cheaper to improve and maintain existing buildings and by keeping business rents low. Check out Break the Boom and Bust Cycle.