Geonomics: Financing the Ecologizing of Cities

Jeffery J. Smith


[Reprinted from GroundSwell, March-April 2006]


[editor's note:. Jeff Smith made the presentation in September 2002 to the 34th International Conference on Making Cities Livable, in Austria. Robert F. Schalkenbach Foundation helped provide funding.]

At the party celebrating making their city more livable -- by clearing a plaza, day-lighting a stream, planting edible landscaping -- a landlord pats one of the urban activists on the back for his good deeds well done. Then the owner notes how properties will be worth more. One can't argue with that; public improvements do raise site values. Next, he delivers to his tenant a letter announcing that he's raising his building's rent, then walks away. Ironically, if urban advocates cannot afford the increase, all their hard work to improve their city could end up improving their city for someone else.

Not only does the money at the tail end of civic betterment flow to those who put none up -- absentee owners -- but typically, the upfront money comes from non-beneficiaries, too -- from state and federal taxpayers who don't live in the city. And without money, no one is going to make any city any more livable. Funds are the sine qua non.

For most local governments, the ideal source of funding is Other People's Money, or OPM. It sounds like "opium" and is likewise addictive. But there is a better way, one that protects hard-working residents from surprise jumps in building rents.

Self-financing

Even when they want to, citizens don't ecologize their city because they cannot afford to. They know about the great green ideas -- personal rapid transit, underground transmission lines -- but not how to pay for them. One way is to let appropriate technology (apt-tech) pay for itself.

When people improve cities -- zone for bikes, construct an amphitheater -- they cut long-term costs and draw in new people. The newcomers moving in bid up the value of land. Local government can recover this ground rent to pay off the earlier investment in efficiency.

Clever jurisdictions in the past did. Some sold bonds then paid off the debt with the resultant rise in nearby land values, collected via a site-value tax. Such self-financing paid for the initial stages of the Eire Canal in New York and for the first irrigation dams and channels in California. Without bonds, just a land tax, Uruguay and Colombia paid for new roads. Kansas City built its airport and Hong Kong its light rail without a penny of outside subsidy. (Land-Value Taxation Around the World, 2001) Nobel laureate William Vickrey said there's never been a public improvement that couldn't pay for itself from the land value it raises.

Failure is costly

Normally, jurisdictions fail to recover land rent. Leaving publicly-generated Rent in private pockets widens the eyes of landowners; some turn into speculators. Their withholding sites from best use, waiting for the price to rise, inflates the cost of land and further jacks up the cost of homes. Withholding sites from use also distorts the settlement pattern of the city. To accommodate sprawl-style growth, local government must expand infrastructure past vacant lots. To provide utilities at a higher per capita cost, cities and counties must raise taxes or borrow. Rather than pay higher property taxes, voters cap them and end up paying higher sales taxes and user fees - a higher total cost but being nickel-and-dimed-to-death lets homeowners and renters grudgingly suppress awareness of the fact.

Now localities tax buildings, which breeds slums. Were homeowners to improve their buildings by adding thicker insulation, for example, they'd increase the value of the structure and their tax liability, unless exempted. If the locality does not exempt, it makes apt-tech more expensive, discouraging most owners from making extra improvements. Knowing they'd be hit with a higher levy, many owners don't even dream of improving their property, ecologically or otherwise. For years, economists at HUD and in academia have watched the property tax drive both urban decay (Little, 1973) and urban sprawl (Neuner, 1974).

Besides burdening buildings, governments also tax sales and income. These taxes leave people with less discretionary income. Many people cannot afford to purchase apt-tech for making cities livable, unless it's a very high priority. Seeking a lower cost of housing or the next better-paying job, many people keep moving all over the map. Communities, so-called, become way stations for itinerant workers. Not staying long enough to put down roots, transients care less about the livability of their temporary city.

Now cities leak. Residents pay site rent out as mortgages to distant lenders. And they pay taxes to distant capitols. There, politicians create subsidies for activities that make cities less livable, such as more and wider roads. Other subsidies, for trucking and fossil fuels, make imported foods and energy artificially cheap, stunting local economic growth. As long as cities leak economic values, it's difficult for them to be healthy organisms.

Affordable Urban Living

Grasping the power of revenue reform, some jurisdictions have recovered land rent while reducing damaging taxes. Frank Lloyd Wright in his Living City advocated the system. Ebenezer Howard started the Green Cities to implement it. They either shifted the weight of the property tax off buildings, onto land, or replaced that levy with a site-value tax, or replaced it or other taxes with land-use fees, land dues, land leases, or resource royalties. Doing so rearranged incentives for landowners.

Owners in such areas, carrying a higher overhead, could no longer afford to speculate. Plus, they were no longer penalized for improving their property. Hence they put their land to better use, or sold to someone else who did. In Australia, towns taxing land, not buildings, enjoy 50% more built value per acre (Lusht, 1992). As untaxed owners implement efficient technologies, they can do so without incurring a tax penalty.

Building more, of course, increased the city's housing stock and decreased its housing costs. In the 1920s, New York solved its housing shortage by exempting new construction but not the underlying sites (Charles Johnson Post, 1931?, Schalkenbach Fdn). Pittsburgh, while it was the flagship geonomic city in America, year after year had the most affordable housing of any major US city.

Because most residents owned their homes, neighborhoods were stable and safe. The Steel City had by far the lowest crime rate of any major US city. In the 1980s, Rand-McNally named Pittsburgh "America's Most Livable" twice. Higher ownership rates is not only good for families and children, but also for community. The 1940s Goldschmidt study of Arven and Dinuba in California's San Joaquin Valley showed the town with more owners was much more livable: higher voter turnout, potholes got filled, parks were clean, libraries stayed open longer, etc.

Putting land to use means landowners must build and building-owners must find tenants. The Pennsy towns getting more Rent from land, less tax from buildings, experience 16% more economic action each year (Tideman & Plaschman, 1997). Spurring so much activity carries a town thru a recession. In Australia during the previous downturn, while everywhere else was losing business, the land-taxing towns were expanding manufacturing by 10% per year. All this business adds up to more jobs, and more dollars spent locally. In New Zealand for the 10 years that 80% of the towns taxed only land value, the national rate of employment was 99%. When citizens are financially secure, they can afford both the money and the mental energy for less immediate issues, such as sustainability.

Autocracy Overthrown

Prodded owners also in-fill their city. Since a city's most valuable sites are in the center, the fee or tax there is the most expensive. To pay it, owners of central lots feel the greatest motivation to develop their land. They absorb development that now sprawls onto suburban farmland and open space. The National Tax Journal ran a computer model of the property tax shift, sucking Boston's sprawl back into Boston's doughnut core (DiMasi, 1987). Speculating landowners are not alone in keeping good land fallow. City governments themselves also hold title to vast tracts of public urban wasteland. Yet if the city treasury were fed by ground rent exclusively, city councilors would quit procrastinating and lease out or auction off this surplus land. When owners upgrade, one of the blights quickly covered by a high-rise is the parking lot. Other parking spaces might disappear, too. Make a city dependent upon site rent and to raise revenue, the city councilors would soon trim their overly-wide, car-doting streets by designating bike lanes and widening sidewalks for trees, pedestrians, and cafes. Conscientious governments could also place a surcharge upon fuel, raising the cost of driving up to its true cost. Facing higher costs and less convenience, more people would turn from driving to riding, easing the auto infestation of cities.

With both city hall and urban owners spurred to develop, there's a worry that the city would become wall-to-wall buildings. However, a prickly carpet of high-rises does not raise overall site values to their peak. Overall land value is maximized where land use is optimized, where open space gives relief to built use. In New York City, each year the city council denies a permit to build luxury condos in Central Park because they'd depress site values and reduce tax revenue. Pittsburgh turned its most valuable site, where the three rivers meet, into a park without an agonizing grassroots effort or developer resistance. When there's not so much ground rent up for grabs, planners enjoy a much easier job.

Geonomics, full-throttle

Another typical worry is that there's not enough resultant Rent to finance government or a public improvement. Like a secret formula for turning lead into gold, outside of the cabal of real estate investors and lenders, few realize that site values ascend by the power of ten; from the rural fringe to the urban center, the ratio is one to 2000, rising steeply over downtown. Where politicians do collect site rent, the challenge is spending the public revenue without losing it to corruption, as happened in New York, which under Robert Moses pioneered the betterment district, and in San Diego, which leases the land surrounding the port, all of it publicly owned.

Not only is there enough Rent (the money we spend on the nature we use) for ecological projects, there's enough to forgo other taxes. Instead of lose revenue, the absence of taxes on residences and businesses would raise site value. Charging Rent, thereby bringing prime sites into use, heals the local economy, which raises land value. Similarly, repealing taxes not just on homes but on sales and income, too, frees businesses to invest and hire more and thus produce more. Both the heftier output and the zero taxes drop the prices of goods and boost the value of land. Hong Kong did not abolish taxes but kept them way low, thanks to collecting fistfuls of Rent, and made itself the world's best city for business, according to Fortune magazine, with one of the world's highest per capita incomes.

After funding its functions, a government rolling in Rent could share the surplus with its citizens, as Alaska does with the revenue from oil. Receiving this dividend would replace any lost "home equity" (actually, "location equity"). Residents could always afford apt-tech. And knowing these social shares come from Rent, they'd have a powerful motive to maintain maximal land value from optimal land use. Letting citizens spend the revenue instead of politicians also mitigates the corruption problem.

Organisms, to keep balance, need feedback loops, many and accurate. Michael Rothschild noted in his Bionomics the most crucial feedback loop in economies, price. This we distort with taxes and subsidies, thereby distorting people's choices. Seeing economies as part of the eco-system leads one beyond conventional economics to "geonomics" (economics minus the superstition) and to a non-left, non-right but organic policy. Thereby, to quit distorting price and choice, society would replace taxes with user-fees and replace subsidies with a dividend, as William Ashworth suggested in his Economy of Nature.

Win/Lose or Win/Win?

Cities as organisms also need feedback loops; they need homegrown Rents to be recycling locally. Yet wanna-be reformers try to sustain city while letting owners retain Rent. Meanwhile, even as the environment improves, it raises site values and widens the gap between real estate investors and lenders and the rest of society. Leaving Rent -- publicly generated and rapidly rising -- in private pockets guarantees that land remains an object of speculation, and that cities remain a less livable habitat for humanity.

To share Rent and de-tax effort, sustainable developers could cite famous backers (Einstein, Churchill, and Tolstoy), the dozens of places that recover Rent with success (Allentown, PA, and Mexicali, Baja California), and ally with many environmental groups (Friends of the Earth et al), neighborhood associations working on housing, jobs, and crime, and business lobbies for productive development. Advocates could begin with shifting the local property tax from buildings to locations and collect the Rent monthly instead of annually. Then they'd graduate to shifting state and federal taxes off sales and salaries, onto resources and environment as sink.

It wouldn't be long before any city today could be made rewardingly livable. When Johannesburg (South Africa) taxed land, it enjoyed the fastest site-recycling rate in the world (Dunkley, 1990). Within a score of years, the urban built environment could be transformed into a balanced blend of homes, shops, and community plazas in a healthy, green setting.

Realize the ideal

Besides improve existing cities, green city builders could start from scratch and without impediment, realize their vision. Like flowers, orient buildings to face the sun, besides the street. Like bodies, give building both a walkway to the front entrance and an alley from the back exit. Put buildings close enough for community and apart enough for privacy.

Make streets not all straight, corners not all right angles. Instead, have avenues honor the contour of the land, evoking old paths honed not by machine but by muscle of beast and man, trodding and plodding generation after generation. Draw lanes and boulevards, whose curves reward the beauty-starved eye, with inclines that are bikable. Like wrinkles, roads lead to the center. Once there, people out of the metal cocoons of cars need a place to congregate; amid the buildings, they need the market square and plaza, the heart and soul of a city. Pedestrians animate a settlement, making it more social than a mud pit peopled by a herd of elephants.

Ebenezer Howard's Garden Cities, Frank Lloyd Wright's Living City, and Paolo Solari's Arcosanti, try not to conquer nature but blend in. Other new towns, too, could settle not on erodable cliffs, floodable plains, nor wooded ridges but on nature's table tops. Let streams flow free, their banks left pristine as habitats and wildlife corridors. Broader patches of environment would stay open as parks. The result is nature in the city and the city in nature, an eco-system whole and healthy serving all life.

In California outside the capitol in Davis, people built an eco-village, New Homes, which now has higher land values. Bottom-line, as long as the multi-trillion dollar flow of Rent rewards the hoarder, the city remains unlivable. To heal cities, and put their economies in an interdependent balance with federal economies, citizens must geonomize -- forgo taxation and share the worth of Mother Earth.



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