The various Twitter threads here and here have been a kind of thinking out loud, taking observations and news stories and trying to apply the ideas of Thomas Paine, Tolstoy, and Henry George to them.
If we are serious about inequality, about putting housing within reach of working people, we need to look at why it got away from them. And the answer to that is land. Whatever city you live in, it’s a fixed size: no matter how many people move there, it won’t get any larger so those who own the existing land will be able to charge more in rent or as a sale price. Seattle is 85 square miles: adding 150,000 people since 2000 raises the value of every one of those square miles, down to the foot.
What needs to be more clearly explained is who gets that increased value and how it’s created.
The first part is easy: if the property is sold the seller gets the windfall. And I don’t use that term lightly: it could be millions of dollars on a purchase that might have been hundreds of dollars, if it goes back far enough. But if it’s a rental, like 20% of the houses in Seattle along with thousands of apartments, the landlord can set the rent to match the wages of the new arrivals. As the economy has changed from manufacturing and construction and other trades to programming and other work that is not dependent on location, the wages have gone up and with them the rents and home sale prices. We saw during the Pandemic that rents dropped as many of these location-independent workers left the city. Those jobs don’t require presence, like a teacher or firefighter or barista: they can do their work where they can get a cell phone signal. Yet here they are. The apartments didn’t become more or less valuable. The value of the location did, based on the activity around them.
The second part is a little more complicated. The value in a piece of land is created by everything going on around it, not just on it. There is a network effect, of sorts: as I develop or improve my land, yours becomes more valuable because of the potential value created. If I build an office tower, you could develop your land to accommodate a restaurant or grocer to feed the people who work in the building I made. Also, roads and utilities — public investments — make land more valuable. That cost should be recouped through taxes.
Or you could simply leave it idle, until it reaches whatever value you hope to get from it. As long as you can pay the property taxes, you can hold onto it as long as you care to.
And that value is unearned, as the illustration explains: the value of a parcel of land reflects the investment of those nearby, meaning the owner of a vacant or underdeveloped parcel is a free rider, watching the value of their property rise with no effort on their part.
What can municipalities — cities, counties, even states — do about that? They could adopt a new tax system that, as most already do, assesses land based on the highest and best use, and from that basis imposes a land value tax or ground rent based on what the land could be doing. So a parcel that has a low present value as a parking lot or a low-rise/single story retail shop when it could — and should — be a mixed-use multi-story development would be taxed on that value, what’s needed. So a parcel that is valued at $100,000 and pays 1% might suddenly be assessed a tax based on a $1,000,000 valuation, if that land is in demand or located near other developed parcels.
This would have the effect lowering the cost of buying that land…if I was considering selling it for $100,000 with a 1% tax liability and it is now assessed with a 2-5% tax, I won’t get $100,000 for it: I may have to settle for half that and be glad to get it. Or I could develop the land so that it makes more money than it did as a retail store or parking lot, so I can cover my rent. If I develop a mixed-use building with retail, offices and residential, I’ll make more, even with the taxes. Seattle has many brownfields and empty parcels, as well as surface parking lots in the heart of downtown, all of which should be taxed until they are transformed from a speculative asset to a productive one. Right now, a $1,000,000 parcel can be held, as in the image above, for $10,000/year in property taxes that don’t reflect the productive value of the land or serve as an incentive to put it to work.
The optimal price to acquire land for development is $0…the rent should be calibrated to put the land to work without any speculators cashing out. Why do we even accept that we can own land, that we can put up a fence or, as in the Eddie Izzard routine, plant a flag and claim it as our own? Owning land is like owning time. We didn’t consider either time or land as having value until we could charge for their use. But nothing we do will create more of either.
And coincidentally, land value is a function of time…the longer you hold a parcel, the more value accrues to it through the efforts of your neighbors as well as your own.
There is more to this: there are two levers cities can use to maximize and recoup the value of land, taxation and zoning. Through zoning, the density and other requirements — parking — can be addressed, and a split-rate tax that taxes land at a higher rate than what gets built on it, land can find it’s highest and best use and over time that use can change to meet the needs of the people who created that value.