Cities Need Help
Mike Curtis
[
GroundSwell, January 2012]
The mayor of Los Angeles is now advocating revenue sharing from the
Federal Government. With high rates of unemployment and large
concentrations of poverty it seems like it might be the only
reasonable way for cities to meet their expenses. Most old industrial
cities have large distressed areas where unemployment, robbery,
murder, and drugs make them unprofitable for business and incapable of
providing the tax revenues they consume.
Although American cities have been grossly less efficient than they
could have been, they have been largely self-sufficient throughout
most of our history. Now, however, with the transition from
traditional manufacturing to high-tech production and office buildings
during the last 50 years, most old industrial cities have lost
population and jobs, leaving vast regions where there are more idle
factories and empty houses than those that are in use where
unemployment, crime, and violence are high, and reinvestment is no
longer profitable.
The primary reason that cities are in financial trouble is the empty
factories that were shut down in the 60s and 70s when many
manufacturers could not compete with cheaper imports. They may have
been waiting for tariff protection or other subsidies, but many
companies shut their factories down and left them idle. As
unemployment increased many workers moved to other regions in pursuit
of work. As workers left, houses became vacant and whole neighborhoods
declined.
Had each of those idle factories been sold to the highest bidder, no
matter how little was offered when they first shut them down, it is
more than likely some other businesses would have found a profitable
use for the sites. Therefore, the same number of people would probably
be employed and living in those neighborhoods. None-the-less, they did
leave them idle. They let the buildings deteriorate, they got reduced
assessments, and they paid lower taxes. One motive for not selling is
that the land must be free of pollutants and inspected by the E.P.A.
before it can be sold. In some cases it was cheaper to pay or even owe
real estate taxes on the land, which was falling in value, than to pay
the cost of cleaning up the pollutants. And some of those corporate
owners are out of existence and the cities now own the sites, which
they must eventually clean up.
Now, 40 or 50 years later, these extremely distressed areas have
degenerated to the point where, under the present circumstances, they
have no potential to rejuvenate themselves. Anyone who would invest in
buildings, machinery, and inventory within these areas would on
average get little or no return on their investments at all.
However, even in the most distressed cities there are large
residential and commercial areas that are desirable, profitable, and
yield ample revenue for the maintenance of the streets, sewers, and
public services within them. It is true that all taxes, whether levied
on buildings or wages are paid out of what would in their absence go
to the owners of land. But, because buildings cost the same amount to
build no matter where they are built, workers must be paid the same
wages no matter where they work, the same tax rates that are
completely affordable in the best areas of any city are unaffordable
and prohibit investment, employment, and production in the worst
areas.
Every time tax rates are increased it lowers the income of
landowners, but in areas where the income from land is already very
low, it is often the factor that makes them unprofitable. Economists
have long advised old industrial cities that, at some point, an
increase in tax rates will so stifle investment and production in the
less valuable areas that the city, as a whole, will actually get less
revenue.
Nonetheless, all cities have the potential to be self supporting
entities with profitable business opportunities and jobs for their
residents. The more densely populated an area becomes, the greater the
potential for subdivisions and specializations and the more efficient
each worker becomes. The greater the concentration of people the
greater the potential to produce things with automation, from
automobiles to bank statements. And an infrastructure with paved
streets, water, sewer, police and fire departments enables a far
greater density of population, which results in far greater
productivity.
In Karachi, Pakistan, more than half of its 13 million people live in
areas without paved roads and working sewage systems. Although Karachi
is acutely crowded, New York City is far more than twice as densely
populated and many times more productive per person. With an efficient
infrastructure and good public services cities can accommodate
high-rise buildings with thousands of people per acre, with the space
to specialize and employ machines for every facet of each production.
People who work in cities with the right infrastructure and public
services have the potential to become many times more productive than
they are in sparely populated regions.
This greater productivity that results from the cooperation of people
living and working in close proximity, which is enabled by the
infrastructure and public services, attaches itself to the land and is
accounted for in its rental value. As it is, the reduction of taxes on
buildings, wages, and sales in some less severely distressed areas
would make some of them profitable for business, jobs, and housing,
but any reduction in tax rates that helped the distressed areas would
reduce taxes in the prosperous areas as well, and this would reducing
the total revenue that is needed. Taxes are levied at the same rate
throughout each city. Therefore, tax reform is necessary to change the
equation.
By shifting all municipal taxes from buildings, wages, and sales to
the rental value of land, taxes would be zero in the most distressed
areas and proportional to the value of land in all others. This gives
the city ample revenue and stimulates the redevelopment of the city as
a whole. Not only would it not give up any revenue in the process of
eliminating taxes in distressed areas, but it would create an
incentive for all landowners to put each site to its highest and best
use, for the tax would have to be paid whether the land was actually
used or not. For this reason, taxing the rental value of land would
also create more jobs and housing in the valuable areas, than are
currently present.
By taxing the rental value of land, redevelopment would eventually
radiate back into the distressed areas, and with increased population
and economic activity, those areas would again become valuable and
provide their fair share of the citys revenue.
Surprisingly, when cities shift their taxes to the rental value of
land, it not only creates significantly more jobs and housing, but
because it so encourages economic activity and redevelopment, it
increases the rental and selling value of their land as well.
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