UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

Local taxes and urban spatial development Hyndman, Jean 1982

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-UBC_1982_A8 H96.pdf [ 5.97MB ]
Metadata
JSON: 831-1.0095542.json
JSON-LD: 831-1.0095542-ld.json
RDF/XML (Pretty): 831-1.0095542-rdf.xml
RDF/JSON: 831-1.0095542-rdf.json
Turtle: 831-1.0095542-turtle.txt
N-Triples: 831-1.0095542-rdf-ntriples.txt
Original Record: 831-1.0095542-source.json
Full Text
831-1.0095542-fulltext.txt
Citation
831-1.0095542.ris

Full Text

LOCAL TAXES AND URBAN SPATIAL DEVELOPMENT by JEAN HYNDMAN B.A., The U n i v e r s i t y of B r i t i s h Columbia, 1976 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF GRADUATE STUDIES School of Community and Regional P l a n n i n g We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA A p r i l 19 82 (c) Jean Hyndman, 19 82 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the head of my department or by h i s or her representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department of 'community and Regional Planning The University of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 D a t e April 21, 1982 - i i -ABSTRACT P o l i c y makers have tended to ignore the connec t i o n between l o c a l f i s c a l p o l i c y and urban development, i n s p i t e of the f a c t t h a t t a x a t i o n i n f l u e n c e s development and i s e n t i r e l y under the c o n t r o l of the p u b l i c s e c t o r . Through a review of the l i t e r a t u r e , t h i s t h e s i s p r o v i d e s a t h e o r e t i c a l a n a l y s i s o f the e f f e c t s on s p a t i a l p a t t e r n s o f development of the e x i s t i n g p r o p e r t y tax and of a number of a l t e r n a t i v e taxes. I t i s concluded t h a t the e x i s t i n g p r o p e r t y tax c o n t r i -butes to urban sprawl by d i s t o r t i n g the market i n two ways. The p o r t i o n of the tax l e v i e d on improvements depresses investment i n r e p a i r s and c o n s t r u c t i o n . A s h i f t to a tax s o l e l y on land or l o c a t i o n v a l u e s should i n c r e a s e the i n t e n -s i t y of l a n d use. Because the p r o p e r t y tax i s not d i r e c t l y r e l a t e d to the be n e f i t s and c o s t s o f s u p p l y i n g s e r v i c e s , e s p e c i a l l y those t h a t are d e n s i t y and d i s t a n c e r e l a t e d , p r i v a t e l o c a t i o n a l d e c i s i o n s are made without regard f o r p u b l i c e x p e n d i t u r e s . M a r g i n a l c o s t p r i c i n g , through m u l t i - p a r t t a r i f f s and s p e c i f i c p r o j e c t betterment l e v i e s , f o r f i n a n c i n g e xtensions o f s e r v i c e s ' t o new development on the urban p e r i p h e r y , would produce more compact forms of expansion. S e v e r a l forms of taxes p a r t i c u l a r l y a p p l i c a b l e to the urban p e r i p h e r y have the p o t e n t i a l t o i n c r e a s e c o n t r o l over new development. Betterment l e v i e s , i n the form of l a n d v a l u e increment and p r o g r e s s i v e development value taxes, induce e a r l i e r development. Of the v a r i o u s p r e f e r e n t i a l taxes f o r a g r i c u l t u r a l and open space lands, use v a l u e assessment wi t h a f l a t r a t e tax p e n a l t y , independent of development v a l u e and l e v i e d upon change of use, i s the most e f f e c t i v e i n d e l a y i n g development. A tax system i n c o r p o r a t i n g these a l t e r n a t i v e s to the p r o p e r t y tax has the p o t e n t i a l to i n c r e a s e the i n t e n s i t y of land use i n developed areas, to promote i n f i l l w i t h i n s c a t t e r e d development, and to reduce the premature c o n v e r s i o n of p e r i p h e r a l l a n d . These tax reforms combined w i t h t r a d i t i o n a l p l a n n i n g c o n t r o l s o f f e r g r e a t e r c o n s i s t e n c y between f i s c a l and p l a n n i n g p o l i c i e s . - i v -TABLE OF CONTENTS PAGE A b s t r a c t i i T a b l e o f C o n t e n t s i v L i s t o f T a b l e s v i i L i s t o f F i g u r e s v i i i TEXT: CHAPTER I - INTRODUCTION , 1 Urban Sp r a w l 4 C r i t i c i s m s o f Sprawl 5 Causes o f Spr a w l 8 The Impact o f P r o p e r t y Taxes on Urban Development 10 Scope o f A n a l y s i s 12 CHAPTER I I - THE PROPERTY TAX - ECONOMIC NONNEUTRALITY AND INVESTMENT 14 C o n t r a s t Between the S u p p l y o f Land and the S upply o f Improvements 14 Economic E f f e c t s o f T a x a t i o n 19 A Note on the Demand f o r Land and Improvements 2 3 I n c i d e n c e 25 I n c i d e n c e and t h e E m p i r i c a l E v i d e n c e , v 2 7 N o n n e u t r a l i t y 30 -v-CHAPTER I I I - LAND VALUE TAXATION ..32 Land as a Tax Base 32 T r a n s i t i o n to a Land Value Tax 36 Developed S e c t i o n s of Urban Areas 38 Vacant Land and Underdeveloped Land i n the Urban Core...38 Urban Renewal and the T r a n s i t i o n t o Higher I n t e n s i t y Land Use 41 Downward-Transitional Areas 41 S t a b l e Areas 4 4 R e h a b i l i t a t i o n and Maintenance 46 Urban Sprawl and Suburban Development 50 Summary of S p a t i a l E f f e c t s 53 CHAPTER IV - ECONOMIC NEUTRALITY AND THE PROVISION OF SERVICES 55 Property Values, S e r v i c e s and Tax C a p i t a l i z a t i o n 56 The B e n e f i t P r i n c i p l e and Ma r g i n a l Cost P r i c i n g 63 F i x e d Versus V a r i a b l e Costs 67 S p a t i a l E f f e c t s 68 P u b l i c , P r i v a t e and M e r i t Goods - The Scope of Mar g i n a l Cost P r i c i n g 70 A d m i n i s t r a t i v e Costs and Impact on Sprawl 73 A l t e r n a t i v e s 76 The Land Value Tax 76 M u l t i - P a r t T a r i f f s 77 P r o j e c t F i n a n c i n g L e v i e s 80 - v i -CHAPTER V - ECONOMIC NONNEUTRALITY AND TAXATION ON THE URBAN PERIPHERY 82 Taxes and the Timing of Urban Development 83 Betterment L e v i e s 89 A n a l y s i s of the E f f e c t of Betterment L e v i e s on the Timing of Development 93 P r e f e r e n t i a l Forms of Taxes 96 C l a s s i f i e d P r e f e r e n t i a l Taxes and Assessment. at Use Value 98 De f e r r e d Taxes 101 Con t r a c t s and R e s t r i c t i v e Agreements 102 Conclusions 105 CHAPTER VI - CONCLUSIONS 10 8 D i s c u s s i o n of O b j e c t i v e s and R e s u l t s 108 I n t e r n a l Consistency of F i s c a l O b j e c t i v e s i n a System of Taxes 110 Consi s t e n c y with F i s c a l Standards 115 The E f f e c t o f Tax Reform on Urban Sprawl 120 J u r i s d i c t i o n f o r Reform and the M e t r o p o l i t a n Region.... 122 Recommendations f o r F u r t h e r Study and Concluding Comments 12 4 BIBLIOGRAPHY 12 7 - v i i -LIST OF TABLES PAGE Table I - Summary 107 - v i i i -LIST OF FIGURES PAGE F i g u r e 1 - T a x a t i o n of Improvements and the E f f e c t on Investment i n Improvements... 22 F i g u r e 2 - E f f e c t s on Quantity and P r i c e of the Removal of the Tax on Improvements 22 F i g u r e 3 - Incidence 26 F i g u r e 4 - E f f i c i e n t P r i c i n g of P u b l i c S e r v i c e s 65 F i g u r e 5 - Ma r g i n a l Cost D e f i c i t 65 F i g u r e 6 - L o c a t i o n a l Choice and Marginal Cost P r i c i n g 69 F i g u r e 7 - L o c a t i o n a l Choice and Average Cost P r i c i n g 69 F i g u r e 8 - Tax Reduction and the Timing of Development 77 F i g u r e 9 - Land Value Increment Taxes and the Timing of Development 9 5 - 1 -CHAPTER I INTRODUCTION T h i s t h e s i s examines the r e l a t i o n s h i p between a l t e r n a -t i v e forms of l o c a l taxes and the s p a t i a l development of urban areas. Although t a x a t i o n i s one of the v a r i a b l e s a f f e c t i n g the a l l o c a t i o n of land by the pro p e r t y market, the e f f e c t s of t a x a t i o n on urban growth have been n e g l e c t e d by planners and l i t t l e attempt has been made by p o l i c y makers to c o o r d i n a t e t a x a t i o n p o l i c y i n a p o s i t i v e manner with plans f o r urban development. The purpose of t h i s t h e s i s i s to suggest a p o s s i b l e framework f o r i n t e g r a t i n g f i s c a l and pl a n n i n g p o l i c i e s . More s p e c i f i c a l l y , the f i r s t o b j e c t i v e of t h i s a n a l y s i s i s to determine how the e x i s t i n g p r o p e r t y tax a f f e c t s the market's s p a t i a l d i s t r i b u t i o n of urban l a n d . The second o b j e c t i v e i s to examine the s p a t i a l e f f e c t s of a change from t h i s tax to forms which are eco n o m i c a l l y n e u t r a l to the op e r a t i o n s of the pr o p e r t y market. The f i n a l o b j e c t i v e i s to assess the e f f e c t s on urban development of other forms of l o c a l taxes which produce nonneutral e f f e c t s and to c o n s i d e r t h e i r f u n c t i o n i n a t a x a t i o n system designed to complement p l a n n i n g g o a l s . The a n a l y s i s i s based on a review of the l i t e r a t u r e . T r a d i t i o n a l forms of l a n d use c o n t r o l s , among them zoning, s u b d i v i s i o n c o n t r o l s , development permits and b u i l d i n g - 2 -codes, have l a r g e l y been r e s t r i c t i v e measures o p e r a t i n g a g a i n s t the powerful market mechanisms which a l l o c a t e l a n d i n u r b a n i z e d areas. The l a n d market and p l a n n i n g e f f o r t s d i r e c t e d towards the promotion of sound urban growth have been d e s c r i b e d as c o m p e t i t i v e f o r c e s (Neutze, 1973, p. 1). Often t h e r e are s t r o n g market i n c e n t i v e s to circumvent p l a n -ning r e s t r i c t i o n s which produce unintended r e s u l t s . However, the philosophy of p l a n n i n g i n the North /American context i s based on the premise t h a t the f u n c t i o n of p l a n n i n g i s not to r e p l a c e the market as a determinant of land use, but merely to guide the outcome toward more s o c i a l l y d e s i r a b l e ends. Through the c o o r d i n a t i o n of t a x a t i o n p o l i c y and p l a n n i n g o b j e c t i v e s , the p l a n n i n g f u n c t i o n can be strengthened by i t s connection to a f a c t o r which i s an i n t e g r a l p a r t of market o p e r a t i o n s . H i s t o r i c a l l y , l o c a l governments p e r c e i v e d t h e i r mandates simply as p r o v i d e r s of b a s i c m u n i c i p a l s e r v i c e s a s s o c i a t e d with p r o p e r t y ( P l u n k e t t , 1976). The p r o p e r t y tax, which o r i g i n a l l y s u p p l i e d almost a l l l o c a l government revenues, was t h e r e f o r e seen as the most a p p r o p r i a t e means of matching r e s p o n s i b i l i t i e s w i t h funds. However, as c i t i e s became more h i g h l y urbanized, the scope of m u n i c i p a l r e s p o n s i b i l i t i e s broadened and the revenues f o r meeting these new r e s p o n s i b i -l i t i e s came i n c r e a s i n g l y from h i g h e r l e v e l s of government, mostly i n the form o f p r o v i n c i a l g r a n t s . Today l o c a l governments and the p l a n n i n g f u n c t i o n t h a t has evolved along - 3 -w i t h them a r e concerned w i t h many i s s u e s t h a t c o l l e c t i v e l y make up t h e " q u a l i t y o f urban l i f e . " These i s s u e s have r e s u l t e d i n i n c r e a s e d demands from m u n i c i p a l i t i e s f o r revenue s h a r i n g and f o r a c c e s s t o new revenue s o u r c e s from s e n i o r l e v e l s o f government t o supplement the l o c a l p r o p e r t y t a x . Many o f t h e s e i s s u e s - t h e r e v i t a l i z a t i o n o f the commercial c o r e , r e h a b i l i t a t i o n o f nei g h b o r h o o d s , development o f t r a n s p o r t a t i o n n e t w o r k s , p r o v i s i o n o f r e c r e a t i o n a l a r e a s , p r e s e r v a t i o n o f a g r i c u l t u r a l l a n d on t h e urban p e r i p h e r y - a r e r e l a t e d t o t h e e f f e c t s o f t a x a t i o n on p a t t e r n s o f s p a t i a l development. I n view o f the c o n t i n u i n g , i f d i m i n i s h e d , i mportance o f the p r o p e r t y t a x , i t would seem p r e f e r a b l e t h a t a more e c o n o m i c a l l y r a t i o n a l use of t h i s l o c a l s o u r c e o f revenues be e x p l o r e d b e f o r e f u r t h e r demands f o r revenue are i n i t i a t e d . The use o f f i s c a l i n s t r u m e n t s t o promote p l a n n i n g o b j e c t i v e s i s a r e l a t i v e l y new and u n t r i e d n o t i o n ; t h e use o f p l a n n i n g measures t o a c h i e v e f i s c a l o b j e c t i v e s i s a common s t r a t e g y used by competing m u n i c i p a l i t i e s w i t h a s h o r t term p e r s p e c t i v e based on s e l f i n t e r e s t . Zoning i s sometimes used as a means o f a t t r a c t i n g urban uses w h i c h are h i g h l y produc-t i v e o f revenues and o f e x c l u d i n g l e s s d e s i r a b l e u s e s . Zoning f o r low r e s i d e n t i a l d e n s i t i e s i s a l s o used t o c o n t r o l p o p u l a t i o n growth and t o reduce the a s s o c i a t e d c o s t s o f p r o v i d i n g s e r v i c e s . These and o t h e r s i m i l a r measures ( E n g e l b e r t , 1969, p. 107-109) can be m a n i p u l a t e d t o t h e -4-advantage o f i n d i v i d u a l m u n i c i p a l i t i e s w i t h o u t r e g a r d f o r the s o c i a l and economic s t a b i l i t y o f the urban a r e a as a whole. The s u b v e r s i o n o f p l a n n i n g t o f i s c a l p o l i c y can be a v o i d e d t h r o u g h e x p l i c i t and c o n s t r u c t i v e a t t e m p t s t o e x p l o i t the r e l a t i o n s h i p t o the b e n e f i t o f t h e e n t i r e m e t r o p o l i t a n a r e a . URBAN SPRAWL The phenomenon known as urban s p r a w l has been s i n g l e d out as one o f the for e m o s t urban p l a n n i n g problems ( A r c h e r , 1971). I n s p i t e o f the c o n s i d e r a b l e a t t e n t i o n devoted t o i t i n the l i t e r a t u r e , i t has e l u d e d p r e c i s e d e f i n i t i o n . I n p u r e l y d e s c r i p t i v e terms, s p r a w l i s s i m p l y t h e p r o c e s s o f u r b a n i z a t i o n o f the p e r i p h e r y , b u t the term has come t o r e f e r t o a l l forms o f s p a t i a l development t h a t r e p r e s e n t , i n some way, a s u b o p t i m a l a l l o c a t i o n o f l a n d from a s o c i e t a l p o i n t o f view. I n t h i s s e c t i o n , the t y p e s , c r i t i c i s m s and causes o f urban s p r a w l w i l l be more c l o s e l y examined, i n o r d e r t o d e f i n e the problem and p r o v i d e the terms o f r e f e r e n c e f o r the e n s u i n g c h a p t e r s . Three main forms o f s p r a w l have been i d e n t i f i e d (McKee and S m i t h , 1972, p. 182; B a h l , 1977, p. 248). The f i r s t i s low d e n s i t y , c o n t i n u o u s development on t h e urban p e r i p h e r y o f p r i m a r i l y r e s i d e n t i a l d w e l l i n g s on l o t s l a r g e r e l a t i v e t o th o s e found n e a r e r the urban c o r e . The second form o f s p r a w l i s r i b b o n development e x t e n d i n g r a d i a l l y from the c o r e a l o n g -5-major t r a n s p o r t a t i o n routes. The t h i r d form i s discontinuous or l e a p f r o g development o c c u r r i n g i n separate, p o s s i b l y compact p a r c e l s separated from more h e a v i l y urbanized areas by undeveloped land. Some combination of a l l three forms of sprawl may be evident i n a s i n g l e urban area. There are a number of problems w i t h d e s c r i b i n g the p h y s i c a l aspects of sprawl. For one, i t s dynamic nature i s understated, i f not ignored i n these n e c e s s a r i l y s t a t i c d e s c r i p t i o n s . Harvey and Cla r k (1965) argue that sprawl merely represents an intermediate stage i n the process of urban growth. An e a r l y p e r i o d of s c a t t e r e d development may r e s u l t i n futu r e i n f i l l or compaction. The long term r e s u l t may be no d i f f e r e n t i n density than t h a t produced by more o r d e r l y , s e q u e n t i a l development. These i m p l i c a t i o n s w i l l be discussed more f u l l y l a t e r i n t h i s s e c t i o n . In a d d i t i o n , s t a t i c d e s c r i p t i o n s emphasize the e f f e c t s of sprawl on the periphery although an important f a c t o r may be underdevelop-ment of the urban core i t s e l f , i n the form of land w i t h h e l d from i t s highest p o t e n t i a l l y productive use. CRITICISMS OF SPRAWL Sprawl has been c r i t i c i z e d f o r a c c e l e r a t i n g conversion of a g r i c u l t u r a l and open space lands on the periphery to urban use (Gloudemans, 1974). The l e a p f r o g form i n p a r t i c u l a r has been blamed f o r increased demands on p u b l i c revenues f o r -6-extensions of p u b l i c u t i l i t i e s and s e r v i c e s to prematurely de v e l o p i n g areas. Lower d e n s i t y and s c a t t e r e d developments have been found t o be more expensive to s e r v i c e i n some cases than more compact land uses (Bahl and McGuire, 1977). R a d i a l sprawl i s a form o f t e n c i t e d f o r i t s unbalanced mix or i n c o m p a t i b i l i t y of r e s i d e n t i a l , commercial and i n d u s t r i a l land uses (McKee and Smith, 1972) . P u b l i c and p r i v a t e t r a n s p o r t a t i o n c o s t s and a s s o c i a t e d energy consumption have r i s e n more r a p i d l y as a r e s u l t of sprawl. Furthermore, these e f f e c t s are l i k e l y to become even more s e r i o u s as urban p o p u l a t i o n s , s e t t l i n g a t i n c r e a s i n g l y lower d e n s i t i e s , cause p r o g r e s s i v e l y higher r a t e s of land a b s o r p t i o n f o r urban uses (Gloudemans, 1974, p. 3). The outcome of a l l these e f f e c t s i s a p a t t e r n of development t h a t i s f r e q u e n t l y judged to be economically i n e f f i c i e n t r e l a t i v e to more compact forms of s p a t i a l expansion. The c o s t s of sprawl have been s t u d i e d e x t e n s i v e l y by v a r i o u s r e s e a r c h e r s and have been found to be s i g n i f i c a n t (Real E s t a t e Research C o r p o r a t i o n , 1974). E s s e n t i a l l y , then, urban sprawl may be c o n s i d e r e d a r e s u l t of the land market's f a i l u r e t o a s s i g n the f u l l s o c i a l c o s t s of sprawled develop-ment. I t i s t h i s economic aspect o f the problem t h a t the f o l l o w i n g chapters e x p l o r e . Before the r e l a t i o n s h i p of l o c a l taxes to urban sprawl i s d i s c u s s e d , i t i s important to note t h a t there are some advantages to sprawl. L e s s i n g e r (1962) argues t h a t s c a t t e r e d - 7 -developments are b e n e f i c i a l i n the long run because they allow f o r f l e x i b i l i t y , p r o v i d i n g vacant land f o r f u t u r e i n f i l l i n response t o new forms of demand and changes i n technology. The o p p o s i t e of sprawl, compaction, reduces the p o t e n t i a l f o r urban a d a p t a t i o n and r e c o n s t r u c t i o n because of the c o s t s of demolishing o b s o l e t e s t r u c t u r e s and the economic r i s k i n e s s of i n d i v i d u a l e f f o r t s t o r e h a b i l i t a t e s i n g l e u n i t s i n l a r g e neighborhoods of d e t e r i o r a t i n g s t r u c t u r e s . Although L e s s i n -g e r 1 s comments are an important c o n t r i b u t i o n to the c o m p a c t i o n - s c a t t e r a t i o n debate, he understates the importance of the s h o r t run incremental s o c i a l c o s t s imposed by s c a t t e r e d development. These c o s t s may w e l l overshadow the p r i v a t e c o s t s of land assembly and d e m o l i t i o n of e x i s t i n g b u i l d i n g s as the o p t i m a l p a t t e r n of land use changes. L e s s i n g e r a l s o does not d i s c u s s the impact of s c a t t e r a t i o n on commercial and i n d u s t r i a l land uses. I t i s l i k e l y t h a t d e c e n t r a l i z a t i o n of these f u n c t i o n s has a d e b i l i t a t i n g e f f e c t on the economic v i t a l i t y o f the urban core. F i n a l l y , L e s s i n g e r ' s concept r a i s e s the q u e s t i o n of how p l a n n i n g would proceed - how much land should be r e s e r v e d and where should i t be l o c a t e d - f o r s c a t t e r e d development plans i n c o r p o r a t i n g f u t u r e u n c e r t a i n t y . Because of these problems, i t appears t h a t n e i t h e r extreme of compaction or s c a t t e r a t i o n i s e n t i r e l y advantageous. Some balance between these extremes i s l i k e l y d e s i r a b l e , but -8-because the d i s c i p l i n e of p l a n n i n g l a c k s the r e q u i s i t e degree of f o r e s i g h t , a p r a c t i c a l d e f i n i t i o n of the a p p r o p r i a t e s o c i a l balance cannot be determined w i t h any assurance. Without t h i s f o r e s i g h t i n t o the long run m e r i t s o f s c a t t e r a t i o n and c o n s i d e r i n g the s u b s t a n t i a l immediate c o s t s of sprawl, t h i s a n a l y s i s proceeds on the assumption t h a t the r e d u c t i o n of urban sprawl i s a d e s i r a b l e p l a n n i n g o b j e c t i v e . CAUSES OF SPRAWL There are a l a r g e number of causes of urban sprawl, i n v o l v i n g p r i v a t e a c t i o n s w i t h i n the p r o p e r t y market and p u b l i c s e c t o r a c t i o n s a f f e c t i n g the market. An i n i t i a l f a c t o r i n f l u e n c i n g s p a t i a l development may be the nature of the p h y s i c a l topography. Some areas are uneconomic f o r development because of the expense of c o n s t r u c t i o n on d i f f i c u l t t e r r a i n , and are skipped over i n f a v o r of more amenable s i t e s . The p a t t e r n and h i s t o r y of landownership -a l a r g e number of owners w i t h d i f f e r e n t motives f o r h o l d i n g l a n d - r e s u l t s i n a supply of land f o r urban uses o f f e r e d f o r s a l e i n d i s c r e t e , as opposed to continuous p a r c e l s (Harvey and C l a r k , 1965, p. 6). Developers f r e q u e n t l y r e q u i r e l a r g e s e c t i o n s of land f o r s u b d i v i s i o n and must match t h e i r demand with the a v a i l a b l e supply. Independent s p e c u l a t i v e e v a l u a -t i o n s of r i s k and of the l i k e l i h o o d of f u t u r e p r o f i t r e s u l t i n d i s c o n t i n u o u s p a t t e r n s o f development (Bahl, 1968, p. 199). Consumer p r e f e r e n c e s , i n p a r t i c u l a r the p o p u l a r i t y o f s i n g l e -9-f a m i l y r e s i d e n c e s , complete the supply and demand r e l a t i o n -s h i p s which promote sprawl. P u b l i c s e c t o r c o n t r i b u t i o n s to sprawl i n c l u d e d e c i s i o n s on the l o c a t i o n of t r a n s p o r t a t i o n routes and on the a v a i l -a b i l i t y of p u b l i c t r a n s p o r t a t i o n , which produce l o c a t i o n a l t e r n a t i v e s by making the c e n t r a l c i t y a c c e s s i b l e from the p e r i p h e r y . The ex t e n s i o n of p u b l i c s e r v i c e s to p e r i p h e r a l s u b d i v i s i o n s has a l s o i n c r e a s e d the d e s i r a b i l i t y of suburban l o c a t i o n s . D i f f e r e n c e s i n p l a n n i n g r e g u l a t i o n s between m e t r o p o l i t a n and suburban j u r i s d i c t i o n s make some areas more f a v o r a b l e than others f o r immediate development. Prospects f o r changes i n zoning by-laws c r e a t e u n c e r t a i n t y i n the land market which i n c r e a s e s the c o n t r i b u t i o n of s p e c u l a t i o n to sprawl (Clawson, 1962, p. 97). Inadequate p l a n n i n g , r e s u l t i n g from r a p i d growth or the absence of j u r i s d i c t i o n a l r e s p o n s i -b i l i t y f o r pl a n n i n g may a l s o be r e s p o n s i b l e f o r sprawl. P u b l i c p o l i c i e s s u p p o r t i n g home ownership encourage demand p r i m a r i l y f o r s i n g l e f a m i l y r e s i d e n c e s , thus promoting low d e n s i t y land uses. These s u b s i d i e s are o f f e r e d i n the form o f income or p r o p e r t y tax b e n e f i t s . They i n c l u d e exemption from income tax of imputed r e n t from owner-occupied homes and of income saved f o r the purpose of purchasing homes (e.g. the R e g i s t e r e d Home Ownership Savings P l a n ) . Home owner grants o r income tax c r e d i t s a p p l i e d t o pr o p e r t y taxes are a l s o s u b s i d i e s f a v o r i n g home ownership. F i n a l l y , t h e l o c a l p r o p e r t y tax, through i t s e c o n o m i c a l l y nonneutral -10-e f f e c t on land a l l o c a t i o n , also contributes to sprawl. Because there are many determinants of sprawl, any changes to l o c a l taxes can have only a limited impact as a solution to the problem. However, many of the causes out-li n e d above are esse n t i a l elements i n the operation of the land market and the patterns of development they produce may more clos e l y approximate a s o c i a l l y optimal balance between sprawl and compaction. Other factors, including the property tax, are d i s t o r t i o n s within the realm of public control. As w i l l be seen, the property tax i s also i n t e r r e l a t e d with other elements contributing to sprawl. Their combined effects may be quite important from the planning perspective. THE IMPACT OF PROPERTY TAXES ON URBAN DEVELOPMENT Decisions on the location of development are based on the relati o n s h i p between the anticipated p r o f i t a b i l i t y of the type of development, on the costs of land a c q u i s i t i o n and on any costs assigned for services which bring the land into urban productivity. I f the land has already been assembled, the opportunity costs of land i n d i f f e r e n t uses must be considered. Local taxes are also a factor a f f e c t i n g develop-ment decisions. Any form of l o c a l tax, including the exis t i n g property tax on land and improvements, which i s not propor-t i o n a l to land values or which i s not a payment for services received, w i l l therefore d i s t o r t l o c a t i o n a l choices. -11-The p r o p e r t y tax a f f e c t s the investment d e c i s i o n s of a l l p a r t i c i p a n t s i n the urban l a n d market. Although the primary motives f o r owning land d i f f e r , l a n d i n a developing urban area i s an a s s e t which i n c r e a s e s i n v a l u e over time. I t i s t h i s r i p e n i n g e f f e c t which f o r c e s a l l landowners to make d e c i s i o n s on the l e n g t h of time land i s h e l d i n i t s p r e s e n t use, the o p t i m a l time of c o n v e r s i o n to a new use and the types of investment i n improvements which w i l l maximize the p r o f i t s from ownership. The o r i g i n a l owner i s f r e q u e n t l y not the developer who makes the a c t u a l d e c i s i o n on the type of i n v e s t -ment most p r o f i t a b l e to undertake, but the expected r e t u r n s from the optimal development of a l o c a t i o n are r e f l e c t e d i n the market value of the l a n d . S p e c u l a t i o n i n l a n d v a l u e s i s d e f i n e d as " o c c u r r i n g i f the l a n d i s w i t h h e l d from the market f o r economic reasons by a r a t i o n a l (a p r o f i t maximizing) i n d i v i d u a l " (Bahl, 1968, p. 199). More s p e c i f i c a l l y , the main v a r i a b l e s a f f e c t i n g i n v e s t -ment d e c i s i o n s a r e : r e t u r n s from the l a n d i n i t s present use; r e t u r n s from p o s s i b l e new uses (net of income t a x ) ; c o s t s of c o n v e r s i o n , i n c l u d i n g d e m o l i t i o n of e x i s t i n g s t r u c t u r e s ; the i n t e r e s t r a t e ; and the p r o p e r t y tax r a t e . A more complete examination of these v a r i a b l e s i n undertaken i n Chapter V, but i t i s p o s s i b l e here to determine the approximate magnitude of the e f f e c t s . The p r o p e r t y tax r a t e i s a s m a l l p r o p o r t i o n (1-2%) of market value and can be expected to have onl y a l i m i t e d e f f e c t on s p e c u l a t i v e d e c i s i o n s (Bahl, 1968).. Only - 1 2 -where d e c i s i o n s are economically marginal w i l l the tax determine the l o c a t i o n a l c h o i c e s t h a t a f f e c t s p a t i a l develop-ment. These marginal cases i n c l u d e d e c i s i o n s i n which the owner i s n e a r l y i n d i f f e r e n t between de v e l o p i n g and not developing, or d e v e l o p i n g i n one l o c a t i o n or another because the net r e t u r n s are b a r e l y s u f f i c i e n t to be economically d e s i r a b l e . Not only the s m a l l p r o p o r t i o n of t o t a l value r e p r e s e n t e d by the p r o p e r t y tax, but the even s m a l l e r d i f f e r -ence between the tax burdens of two l o c a t i o n s a l s o reduces the impact of the tax on l o c a t i o n a l d e c i s i o n s . In cases i n which d e c i s i o n s on the d e n s i t y of development or investment i n improvements permits choices on the b a s i s of incremental a d d i t i o n s to investment, the p r o p e r t y tax w i l l be a determining f a c t o r . Despite the expected s m a l l magnitude of e f f e c t , however, the d i s t o r t i o n s produced i n the market by the p r o p e r t y tax may be very important because of t h e i r impact on a l l o c a t i o n a l e f f i c i e n c y through t h e i r f a i l u r e to a s s i g n a p p r o p r i a t e s o c i a l c o s t s . SCOPE OF ANALYSIS There are a number of assumptions and l i m i t a t i o n s on the scope of the a n a l y s i s to be undertaken. Although other forms of t a x a t i o n may have an impact on urban s p a t i a l development, the s o l e concern here i s w i t h l o c a l taxes. In a d d i t i o n to the p r o p e r t y tax, the g e n e r a l term, l o c a l taxes, r e f e r s t o other -13-p r o p e r t y - r e l a t e d charges and fees i n c l u d i n g development c o s t charges, s e r v i c e charges, and other s i m i l a r revenue forms. The d i s c u s s i o n i s s p e c i f i c a l l y concerned w i t h urban areas t h a t have reached a stage i n t h e i r development i n which problems a s s o c i a t e d w i t h sprawl are e v i d e n t . However, the a n a l y s i s i s g e n e r a l l y a p p l i c a b l e to the somewhat d i f f e r e n t problems of growth i n r u r a l areas and to urban development i n d e v e l o p i n g c o u n t r i e s , from which t h e r e has emerged a c o n s i d e r a b l e i n t e r e s t i n i n n o v a t i v e forms of l o c a l t a x a t i o n as a guide to s p a t i a l growth (Macon and Manon, 19 77; Grimes, 19 77). Although the process of implementing tax reforms i s beyond the scope of t h i s a n a l y s i s , the taxes reviewed are examples which have been implemented i n some form here and i n other c o u n t r i e s . Experience w i t h these forms of taxes has g e n e r a l l y suggested t h a t they are f e a s i b l e a l t e r n a t i v e s . Tax reforms r e l a t e d to the a d m i n i s t r a t i o n of the p r o p e r t y tax are a l s o not d i s c u s s e d although they too may be r e l e v a n t to s p a t i a l development. Among these i s s u e s are u n i f o r m i t y of assessment a t market value and r e l a t e d e f f e c t s of i n t e r - a r e a tax d i s p a r i t i e s . T h i s a n a l y s i s a l s o does not address q u e s t i o n s concerning the a b s o l u t e l e v e l of t a x a t i o n and the degree of impact on investment i n improvements. I t i s assumed t h a t the p r o p e r t y tax w i l l r e t a i n i t s c u r r e n t r o l e as a major source of m u n i c i p a l revenues. - 1 4 -CHAPTER I I THE PROPERTY TAX - ECONOMIC NONNEUTRALITY AND INVESTMENT T h i s chapter i n v e s t i g a t e s the impact of the pr o p e r t y tax on investment i n c e n t i v e s which a f f e c t s p a t i a l p a t t e r n s of land a l l o c a t i o n . In r e l a t i o n s h i p to the problem of sprawl, t h i s d i s c u s s i o n focusses on the i s s u e of the i n t e n s i t y of land use i n the developed s e c t i o n s of urban areas. The a n a l y s i s of the e f f e c t o f the p r o p e r t y tax on investment d e c i s i o n s demonstrates one form of the tax's economic n o n n e u t r a l i t y i n the d i s t r i b u t i o n of r e s o u r c e s . T h i s c r i t i q u e of the prop e r t y tax p r o v i d e s the b a s i s f o r the d i s c u s s i o n , i n Chapter I I I , of a form of tax which complies with the standard of economic n e u t r a l i t y . CONTRAST BETWEEN THE SUPPLY OF LAND AND THE SUPPLY OF  IMPROVEMENTS Economic t h e o r i s t s have g e n e r a l l y argued t h a t , f o r a n a l y t i c a l purposes, the base on which the pr o p e r t y tax i s l e v i e d can be separated i n t o two components - l a n d and improvements. Although there are some conceptual d i f f i c u l t i e s i n d i s t i n g u i s h i n g the v a l u e of a s i t e from t h a t of i t s improvements, c u r r e n t assessment p r a c t i c e s demonstrate the p r a c t i c a l v a l i d i t y of t h i s d i s t i n c t i o n . For the purpose of -15-t h i s a n a l y s i s , improvements are d e f i n e d as a l l a d d i t i o n s to a p a r t i c u l a r p a r c e l of l a n d brought about by p r i v a t e e f f o r t s to b r i n g l a n d i n t o p r o d u c t i v e use. Together, lan d and improvements supply the three b a s i c c h a r a c t e r i s t i c s of r e a l p r o p e r t y - l o c a t i o n , space and q u a l i t y . The value of a l o c a t i o n i s determined by f e a t u r e s unique to land, i n c l u d i n g s c e n i c p o t e n t i a l and s u i t a b i l i t y f o r c o n s t r u c t i o n , by the aggregate l e v e l of p r i v a t e improve-ments and by p u b l i c a c t i o n s such as the p r o v i s i o n of i n f r a -s t r u c t u r e and c r e a t i o n of a m e n i t i e s . The most important determinant of l o c a t i o n value over much of the urban landscape i s a c c e s s i b i l i t y to economic a c t i v i t i e s - to commercial / f u n c t i o n s and p l a c e s of work p r o v i d e d i n the c e n t r a l business d i s t r i c t of the urban core. Here aggregate p r i v a t e and p u b l i c investment i n improvements are the h i g h e s t . As Becker (1969, p. 16) has d e s c r i b e d i t , "In a l a r g e r sense, i t i s the presence of an urban p o p u l a t i o n and i t s many a c t i v i t i e s t h a t endows urban land w i t h l o c a t i o n a l or s i t e v a l u e . " Two elements can be d i s t i n g u i s h e d i n the supply of improvements - space and the q u a l i t y of the a r c h i t e c t u r a l environment. The p o t e n t i a l f o r useable space i s p r o v i d e d by the e x i s t e n c e of l a n d . The a c t u a l space, h o r i z o n t a l and v e r t i c a l , i s p r o v i d e d by the nature of the improvements. The amount of space s u p p l i e d by improvements can be measured e i t h e r i n terms of the number of u n i t s (e.g. r e s i d e n t i a l ) c r e a t e d or the amount of space per u n i t . T h i s l a t t e r a t t r i b u t e - 1 6 -of space and a l l other c h a r a c t e r i s t i c s which c r e a t e a r c h i t e c -t u r a l v a r i a t i o n s among r e a l p r o p e r t y are a p a r t of the q u a l i t y of the environment s u p p l i e d by improvements. Both space and q u a l i t y of improvements w i l l be r e f e r r e d to h e r e a f t e r as the q u a n t i t y of improvements. The e s s e n t i a l economic d i s t i n c t i o n between t a x i n g land and t a x i n g improvements l i e s i n the nature of supply. Land, as a f i n i t e r e s o u r c e , i s i n f i x e d supply. In c o n t r a s t , improvements of a p o t e n t i a l l y i n f i n i t e range are p o s s i b l e . Although i n an abs o l u t e sense the supply of land i s f i x e d , from an urban p e r s p e c t i v e the a v a i l a b i l i t y of land appears to be c o n s t r a i n e d only by j u r i s d i c t i o n a l boundaries. However, urban land uses are not the only p o s s i b l e or d e s i r a b l e uses of la n d . Other uses land may be put to i n c l u d e a g r i c u l t u r e , f o r e s t r y and mining. I t may be d e s i r a b l e t o leave land i n i t s n a t u r a l s t a t e f o r r e c r e a t i o n a l purposes or to preserve i t as a watershed. Sometimes i t i s d e s i r a b l e simply f o r a e s t h e t i c reasons t o preserve unimproved l a n d as open space i n urban areas. W i t h i n urban areas, commercial, i n d u s t r i a l and r e s i d e n t i a l s e c t o r s a l s o compete f o r access to la n d . A l l of these competing uses f o r land make i t a sca r c e resource i n r e l a t i v e l y f i x e d supply compared wit h improvements. In economic terms, lan d i s a f a c t o r of p r o d u c t i o n which i s s a i d to be i n i n e l a s t i c supply. E l a s t i c i t y of supply i s d e f i n e d as the percentage change i n q u a n t i t y s u p p l i e d i n response to the percentage change i n p r i c e . Because i n the - 1 7 -a b s o l u t e sense the supply of land i s f i x e d , i t i s s a i d t o be i n p e r f e c t l y i n e l a s t i c supply. In an urban co n t e x t where more l a n d can be a c q u i r e d (although only a t the expense of another use), l a n d f o r a p a r t i c u l a r use i s i n l i m i t e d and i n e l a s t i c , but l e s s than p e r f e c t l y i n e l a s t i c supply. D i f f e r e n c e s i n the time h o r i z o n f o r urban development r e f l e c t the degree to which lan d f o r urban purposes i s i n l i m i t e d supply. In the s h o r t run, an i n c r e a s e i n demand r e s u l t i n g from p o p u l a t i o n growth or expansion of economic a c t i v i t y w i l l r e s u l t o n l y i n a high e r p r i c e f o r la n d . I n s t i t u t i o n a l and t e c h n o l o g i c a l b a r r i e r s to c o n v e r s i o n of land from undeveloped to urban use prevent an immediate supply response commensurate with demand. In the i n t e r m e d i a t e run, as some of these b a r r i e r s are overcome, land w i l l be made a v a i l a b l e f o r urban use and the supply w i l l become more e l a s t i c - the h i g h e r p r i c e r e s u l t i n g from i n c r e a s e d demand w i l l induce an i n c r e a s e i n the supply o f la n d . Land w i l l be converted t o urban uses and d e n s i t i e s i n a l r e a d y developed areas w i l l be i n -creased. In the long run, however, an i n c r e a s e i n demand and i n c r e a s e i n the p r i c e o f f e r e d f o r more land w i l l e l i c i t a smaller- and s m a l l e r supply response because t h e r e w i l l be l e s s remaining l a n d t h a t can be s h i f t e d from i t s e x i s t i n g use to an urban use. The c o s t s o f t r a n s p o r t a t i o n , n a t u r a l p h y s i c a l b a r r i e r s and r e s t r i c t i o n s on c o n v e r s i o n of a g r i c u l t u r a l and open space lands are examples of f a c t o r s c o n s t r a i n i n g the -18-c o n v e r s i o n of more l a n d . T h i s long run p o s i t i o n d e s c r i b e s h i g h l y developed urban areas i n which a l a r g e p r o p o r t i o n of the l a n d i s a l r e a d y committed, by way of b u i l d i n g s and i n f r a s t r u c t u r e , to c e r t a i n urban uses and d e n s i t i e s u n t i l replacements are necessary. Although more land f o r develop-ment can s t i l l be a c q u i r e d by o u t - b i d d i n g a g r i c u l t u r a l and open space land uses, the f u r t h e r c o n v e r s i o n to urban use may exceed the s o c i a l l y o p t i m a l balance between d i f f e r e n t uses. Thus over time the supply of l a n d f o r a p a r t i c u l a r urban area grows more i n e l a s t i c (Becker, 1969, p. 18-19). In order to c o n t r a s t the supply of l a n d w i t h the supply of improvements, c o n s i d e r the p o t e n t i a l f o r development of a s i n g l e p a r c e l of land i n an urban area. The owner's a b i l i t y to change the l o c a t i o n value of t h i s p a r c e l i s extremely l i m i t e d because t h i s value i s l a r g e l y e x t e r n a l l y c r e a t e d . I f the p a r c e l i s very l a r g e ( f o r example land assembled i n order to b u i l d a shopping c e n t e r ) , i t i s capable of c r e a t i n g some l o c a t i o n v a l u e , but only r a r e l y a f f e c t i n g to a major extent the t o t a l p a t t e r n of l o c a t i o n v a l u e s i n an urban area. The amount of h o r i z o n t a l space a l s o cannot be a l t e r e d . I g n o r i n g zoning r e g u l a t i o n s and b u i l d i n g codes f o r the moment, a change i n the q u a n t i t y of improvements i s w e l l w i t h i n the a b i l i t y of the owner. A s m a l l , s i n g l e f a m i l y r e s i d e n c e may be b u i l t , or a medium d e n s i t y apartment, or a m u l t i - s t o r e y o f f i c e tower. The q u a l i t y of c o n s t r u c t i o n may vary from the b a r e s t degree of improvement e s s e n t i a l to a s t r u c t u r e to the - 1 9 -most t e c h n o l o g i c a l l y advanced forms of c o n s t r u c t i o n and q u a l i t y of m a t e r i a l s . There i s a g r e a t range i n the p o s s i b l e types of improvements and the supply i s t h e r e f o r e h i g h l y e l a s t i c . I t i s not p e r f e c t l y e l a s t i c because of i n s t i t u t i o n a l c o n t r o l s ( i . e . zoning and b u i l d i n g codes), t e c h n o l o g i c a l l i m i t a t i o n s and t a s t e s . However, i n r e l a t i v e terms the supply of l a n d i s c o n s i d e r e d i n e l a s t i c and the supply of improvements e l a s t i c . ECONOMIC EFFECTS OF TAXATION The f o l l o w i n g i s a s i m p l i f i e d d e s c r i p t i o n of the economic e f f e c t s which r e s u l t from t a x i n g each component of the p r o p e r t y base. For the purpose of c l a r i t y , i t i s assumed t h a t the supply of land i s p e r f e c t l y i n e l a s t i c and the supply of improvements p e r f e c t l y e l a s t i c . I t i s a l s o assumed t h a t demand and supply d e c i s i o n s are r a t i o n a l i n economic terms and t h a t a l l other f a c t o r s , i n c l u d i n g average c o s t s of b u i l -d ers, funds a v a i l a b l e , i n t e r e s t r a t e s and other taxes remain unchanged. In response to the i n t r o d u c t i o n of a tax on improvements, landowners w i l l be motivated to r e e v a l u a t e t h e i r investments and reduce the supply of improvements. Because improvements have a f i n i t e u s e f u l l i f e , they r e q u i r e economic s t i m u l i f o r maintenance and e v e n t u a l replacement. In the s h o r t run the e f f e c t on supply w i l l be minimal, but i n the long run, a tax -20-on improvements w i l l cause a r e d u c t i o n of investment i n r e p a i r s and replacement u n t i l the new e q u i l i b r i u m i s reached at the p o i n t where the marginal c o s t s of the landowners are equal to t h e i r m arginal revenues net of a l l taxes. T h i s r e d u c t i o n i n the supply of improvements, assuming demand has remained constant, has r e s u l t e d i n a s h i f t i n g of the tax burden from the owners of the improvements to the consumers of t h e i r s e r v i c e s . The owners r e g a i n t h e i r p r e v i o u s l e v e l of r e t u r n on investment and the consumers now pay the same f o r a l e s s e r q u a n t i t y of improvements. In the case of r e n t a l housing, the tax has been s h i f t e d from l a n d l o r d s to tenants. Commercial e n t e r p r i s e s s h i f t the t a x t to consumers i n the form of higher p r i c e s f o r goods and s e r v i c e s ( B a i l s , 1973, p. 286). For owner-occupied housing, a tax on improvements decreases the value of the p r o p e r t i e s , which reduces the r e t u r n s r e -c e i v e d by b u i l d e r s , who lower t h e i r investments and r e s t r i c t supply. As demand begins to exceed supply, p r i c e s of e x i s t i n g houses are b i d upwards by housing consumers. There i s no e s s e n t i a l d i f f e r e n c e i n these economic e f f e c t s between owner-occupied and r e n t a l housing or commercial e n t e r p r i s e s . In each case the tax i s passed on to the consumer. In the case of owner-occupied housing, the consumer i s a l s o the owner. I f a tax s o l e l y on the land or l o c a t i o n v alue i s imposed, i t cannot be s h i f t e d forward i n the long run because the supply cannot be reduced. Assuming t h a t l a n d l o r d s are -21-motivated by economic f a c t o r s i n a c o m p e t i t i v e market, are aware of the o p p o r t u n i t y c o s t s of t h e i r c a p i t a l ( i . e . , the b e n e f i t s which would be o b t a i n e d from i n v e s t i n g c a p i t a l i n a l t e r n a t i v e u s e s ) , and are not prevented from a c t i n g by i n s t i t u t i o n a l b a r r i e r s (e.g. r e n t c o n t r o l s ) , the p r i c e they charge f o r the r e a l e s t a t e w i l l be determined by what the market can bear. Rather than being s h i f t e d , the tax w i l l f a l l on the landowner's economic r e n t . Economic re n t i s a pure s u r p l u s which, i n the case of land, may be d e f i n e d as the p r i c e consumers are w i l l i n g to pay f o r the e x c l u s i v e use of a l o c a t i o n ( B a i l s , 1973, p. 285). Economic rent i s a d i r e c t r e s u l t of the demand f o r a f a c t o r i n f i x e d supply. The tax on land w i l l be c a p i t a l i z e d i n the form of lower p r o p e r t y v a l u e s . C a p i t a l i z a t i o n i s the phenomenon by which the market value of p r o p e r t y r e f l e c t s the stream of f u t u r e b e n e f i t s and c o s t s . Thus, the e x p e c t a t i o n of succeeding years of tax payments w i l l r e s u l t i n the p r o p e r t y values dropping by an amount equal to the p r e s e n t value of expected f u t u r e annual tax payments. The e f f e c t on the development of a s i t e of the removal of the improvements component of the p r o p e r t y tax has been demonstrated by Becker (1969, p. 28-29). In F i g u r e 1, curve A r e p r e s e n t s the p o t e n t i a l average r e t u r n s and curve M the marginal net r e t u r n t o the s i t e . The two f a c t o r s a f f e c t i n g the r a t e of investment i n improvements (at l e v e l of investment H) are the r a t e of r e t u r n on investment i n improvements (GC), r e f l e c t i n g the o p p o r t u n i t y c o s t of c a p i t a l , and the tax on the - 2 2 -FIGURE 1 TAXATION OF IMPROVEMENTS AND THE EFFECT ON INVESTMENT IN IMPROVEMENTS Return on Investment i n Improvements C H J Amount of Investment FIGURE 2 EFFECTS ON QUANTITY AND PRICE OF THE REMOVAL OF THE TAX ON IMPROVEMENTS J L Q Q' Quantity of Improvements -23-value of improvements (GQ). Where the sum of these two r a t e s i n t e r s e c t s the net marginal r a t e of r e t u r n (R), the most p r o f i t a b l e l e v e l of investment i n improvements i s found (CH). Area CSTH r e p r e s e n t s the annual gross value of the s i t e and improvements, of which GQRD re p r e s e n t s the tax on improvements and CGDH r e p r e s e n t s the net r e t u r n on investment i n improve-ments . Removal of the tax on improvements (area GQRD) i n c r e a s e s the o p t i m a l l e v e l of investment i n improvements to CJ, f o r which the i n t e r e s t r a t e equals the marginal net r a t e of r e t u r n . The annual value of the s i t e r i s e s to GPLF, some p o r t i o n or a l l of which i s the tax on s i t e v a l u e . Because the component of the tax on land value i s independent of marginal net r e t u r n s , the amount of investment i n improvements w i l l not be a f f e c t e d by the s i z e of the tax. On an aggregate l e v e l , the removal of the tax on improve-ments s h i f t s the supply curve f o r improvements forward (Figure 2). The q u a n t i t y of improvements i n c r e a s e s from Q to Q', the market p r i c e d e c l i n e s from P to P'. A NOTE ON THE DEMAND FOR LAND AND IMPROVEMENTS In order to determine the f u l l e x tent of the e f f e c t s ' of each component of the p r o p e r t y tax on the a l l o c a t i o n of investment, the e l a s t i c i t y of the demand curves should be examined. However, l i t t l e a t t e n t i o n has been devoted to the -24-p r i c e e l a s t i c i t i e s of the demand f o r land and improvements and t h e r e are c o n f l i c t i n g r e s u l t s from the v a r i o u s e m p i r i c a l s t u d i e s which have been undertaken ( H e i l b r u n , 1966, p. 40-41). Because of the h i g h l y i n e l a s t i c nature of the supply curve f o r land , the importance of the demand curve i n terms of economic e f f e c t s i s reduced. T h i s w i l l be demonstrated more f u l l y i n the f o l l o w i n g s e c t i o n . Demand f o r improvements i n c l u d e s demand f o r the number of u n i t s f o r a p a r t i c u l a r use and f o r q u a l i t y , i n c l u d i n g space per u n i t . The demand f o r the number of u n i t s i s l i k e l y to be i n e l a s t i c because, at any given time, a f i n i t e number of u n i t s , e s p e c i a l l y f o r r e s i d e n t i a l purposes, w i l l be r e q u i r e d ( H e i l b r u n , 1966, p. 39-42). V i r t u a l l y no one w i l l be w i l l i n g t o pay l e s s f o r a decrease. The e l a s t i c i t y of demand f o r q u a l i t y i s l e s s c e r t a i n . An i n e l a s t i c demand i s g e n e r a l l y the r e s u l t o f a l a c k of c l o s e s u b s t i t u t e s . In the case of demand f o r improvements, assuming there are enough u n i t s a v a i l a b l e , the demand f o r q u a l i t y can be s u b s t i t u t e d to some degree by l o c a t i o n , a f a c t o r s u p p l i e d by land. Without f u r t h e r e m p i r i c a l i n f o r m a t i o n on the r e l a t i v e importance of these two f a c t o r s , i t can onl y be assumed t h a t the aggregate demand f o r improvements i s n e i t h e r h i g h l y e l a s t i c , because of the demand f o r u n i t s of space, nor h i g h l y i n e l a s t i c because of the e x i s t e n c e of l o c a t i o n as a s u b s t i t u t e . - 2 5 -INCIDENCE The concept of tax i n c i d e n c e , or who bears the burden of the tax, b r i n g s together the elements of supply and demand and demonstrates the extent to which the tax on improvements i s e c o n o m i c a l l y n o n n e u t r a l . In the f o l l o w i n g d i s c u s s i o n , the importance of the assumptions about e l a s t i c i t y i s c l a r i f i e d . F i g u r e 3 shows g r a p h i c a l l y the e f f e c t of a tax under v a r i o u s c o n d i t i o n s of supply and demand e l a s t i c i t y from the viewpoints of owner and consumer. The f i r s t case (a) co n s i d e r e d r e p r e s e n t s the conven-t i o n a l view of the e f f e c t of the pro p e r t y tax under c o n d i t i o n s of p e r f e c t i n e l a s t i c i t y i n the supply of land. The impact of the tax from the owner's p o i n t o f view i s e f f e c t i v e l y a drop i n demand. For the same q u a n t i t y s u p p l i e d , the owner r e c e i v e s a lower r e t u r n . There i s no e f f e c t on the consumer (or te n a n t ) , who pays the same p r i c e f o r the same amount s u p p l i e d . The e l a s t i c i t y of the demand curve f o r land has no impact on t h i s r e s u l t . I f the supply of land i s l e s s than p e r f e c t l y i n e l a s t i c , a s m a l l p o r t i o n of the tax w i l l be borne by the consumer. Case (b) r e p r e s e n t s the e f f e c t expected i f the supply and demand f o r improvements i s moderately e l a s t i c (between u n i t a r y and p e r f e c t e l a s t i c i t y ) . To the owner, the e f f e c t of a tax i s again the same as a r e d u c t i o n i n demand. The t o t a l amount p a i d by the consumer a f t e r the tax i s represented by area FIGURE 3 INCIDENCE a h i a h i Q(Improvements) Q(Improvements) E l a s t i c S u p p l y / E l a s t i c Demand - Owner and consumer bear tax Q(Improvements) Q(Improvements) E l a s t i c S u p p l y / I n e l a s t i c Demand - Both bear tax, but consumer bears p r o p o r t i o n a t e l y more than i n case (b) - 2 7 -agdh, of which the owner r e c e i v e s aech. The amount of the tax i s r e p r e s e n t e d by egdc. The p r i c e per u n i t of improve-ments r e c e i v e d by the owner has decreased from f to e. The p r i c e p a i d by the consumer has i n c r e a s e d from f to g. The consumer pays the p o r t i o n of the tax f g d j and the owner, e f j c . From the viewpoint of the buyer, the tax has e f f e c t i v e l y s h i f t e d the supply curve from S to S', with the same r e s u l t s (point d i s at the same l e v e l ) . Case (c) r e p r e s e n t s moderately e l a s t i c supply and i n e l a s t i c demand f o r improvements. The g e n e r a l e f f e c t i s i d e n t i c a l to case (b), but area f g d j , the amount of the tax p a i d by the consumer, i s p r o p o r t i o n a t e l y l a r g e r than i n case (b). T h e r e f o r e , the l e s s e l a s t i c the demand curve f o r improvements becomes, the more of the tax w i l l be borne by the consumer. In g e n e r a l , the more the tax burden can be s h i f t e d forward from owner to consumer, the more d i s t o r t i o n i s c r e a t e d i n the market a l l o c a t i o n of r e s o u r c e s . As t h i s d i s c u s s i o n of i n c i d e n c e has demonstrated, g r e a t e r d i s t o r t i o n i s produced by a tax on improvements and the r e s u l t , where s h i f t i n g o c c u r s , i s a r e d u c t i o n i n the q u a n t i t y of improve-ments . INCIDENCE AND THE EMPIRICAL EVIDENCE To t h i s s i m p l i f i e d d i s c u s s i o n of i n c i d e n c e may be added other c o n s i d e r a t i o n s t h a t i n c r e a s e the complexity of a -28-t h e o r e t i c a l a n a l y s i s of the r e a l e s t a t e market i n an urban area. In r e f e r e n c e to the supply of improvements, Gr i e s o n (1974) has noted t h a t because of t e c h n o l o g i c a l l i m i t a t i o n s i n c o n s t r u c t i o n , an i n c r e a s e i n b u i l d i n g h e i g h t causes an i n c r e a s e i n the marginal c o s t s of c o n s t r u c t i o n per s t o r e y . A r n o t t and MacKinnon (1976), u s i n g Grieson's model, conclude t h a t the burden of the improvement component of the prop e r t y tax i s s t i l l mainly passed on to tenants i n the long run. The importance of the assumptions r e g a r d i n g the e l a s t i c i t y of demand f o r improvements has been thoroughly reviewed by Simon (194 3) i n a c r i t i q u e of the debate between P i e r s o n and Edgeworth concerning the d i f f e r e n c e s i n demand f o r land a t the c i t y c e n t e r and on the p e r i p h e r y . A problem with t h e i r a n a l y s i s , as Simon p o i n t s out, i s t h a t the two types of land are not simply two aspects of a s i n g l e commodity, but are more p r o p e r l y viewed as competing commodities. He assumes, as i n t h i s d i s c u s s i o n , t h a t the demand f u n c t i o n s are s i m i l a r (Simon's case 3 and 4) and concludes t h a t the tax on improvements w i l l be s h i f t e d , i f demand i s not h i g h l y i n e l a s t i c , only i n p a r t on to the tenant (or consumer). Orr's e m p i r i c a l a n a l y s i s (1968) of the Boston area l e d him to conclude t h a t because the supply of c a p i t a l i n housing i s not p e r f e c t l y e l a s t i c and because demand i s l i k e l y to be e l a s t i c i n the case of numerous t a x i n g j u r i s d i c t i o n s due to comp e t i t i o n among comparable s i t e s , the tax on improvements i s not s h i f t e d from owners to r e n t e r s . I t should be noted -29-t h a t where t h e r e are fewer s m a l l t a x i n g j u r i s d i c t i o n s i n an urban a r e a , l e s s c o m p e t i t i o n reduces the e l a s t i c i t y o f demand f o r improvements i n any one j u r i s d i c t i o n and ( a c c o r d i n g t o the a n a l y s i s i n t h e p r e v i o u s s e c t i o n ) the t a x w i l l be s h i f t e d on t o t e n a n t s . B l a c k ' s s t u d y o f t h e C i t y o f B o s t o n (1974) e x c l u d e d t h e s u r r o u n d i n g m e t r o p o l i t a n a r e a s i n O r r ' s a n a l y s i s . B l a c k found l e s s than complete s h i f t i n g f o r w a r d o f the p r o p e r t y t a x and c o n c l u d e d t h a t the demand f o r improvements ( r e n t a l h o u s i n g i n t h i s case) i s l e s s e l a s t i c i n t h e c i t y than i n t h e urban a r e a as a whole. T h i s r e s u l t a g a i n i s s i m i l a r t o cases (b) and (c) i n which b o t h consumer and owner (or l a n d l o r d and tenant) share t h e burden of the improvement p o r t i o n o f the t a x . CAPITALIZATION As has been s t a t e d p r e v i o u s l y , i f a t a x i s not s h i f t e d f o r w a r d , i t must be c a p i t a l i z e d . The improvements p o r t i o n n o t s h i f t e d t o the t e n a n t o r consumer i s c a p i t a l i z e d i n t o a lower v a l u e f o r improvements, thus a c t i n g as a d i s i n c e n t i v e to owners t o i n v e s t i n improvements. The t o t a l amount o f the t a x on l a n d w i l l be c a p i t a l i z e d i n t o lower s i t e v a l u e s . I t i s f r e q u e n t l y m a i n t a i n e d t h a t a t a x s o l e l y on l a n d v a l u e s w i l l have t h e a g g r e g a t e e f f e c t o f r e d u c i n g l a n d v a l u e s and p r o m o t i n g development. But as B e c k e r (1969, p. 30) has argued, removing t h e t a x on improvements and compensating -30-i n the aggregate by a tax on l a n d w i l l make i t more p r o f i t a b l e to improve, i n c r e a s i n g the demand f o r la n d . The f i n a l r e s u l t i s i n d e t e r m i n a t e , but may be an i n c r e a s e i n aggregate l a n d v a l u e . There have been a number of attempts to determine the extent o f the c a p i t a l i z a t i o n e f f e c t (Netzer, 1966; Oates, 196 9), but the r e s u l t s are o f t e n c o n t r a d i c t o r y (Wales and r Wiens, 1974; Smith, 1970). Although i t would seem to be a simple problem of determining whether a more h i g h l y taxed b u i l d i n g would s e l l f o r a lower p r i c e , i t i s d i f f i c u l t t o make comparisons h o l d i n g a l l other c h a r a c t e r i s t i c s , such as l o c a t i o n and q u a l i t y , c onstant. P u b l i c s e r v i c e s , which are l i k e l y to i n c r e a s e the value of a l o c a t i o n , a l s o vary through-out urban and suburban areas. The r e l a t i o n s h i p between the p r o v i s i o n of s e r v i c e s and pro p e r t y taxes i s a s u b j e c t r e s e r v e d f o r c o n s i d e r a t i o n i n Chapter IV. NONNEUTRALITY The p r o p e r t y tax has been found to be economically nonneutral to the a l l o c a t i o n o f urban r e s o u r c e s . In the s h o r t run, to the extent t h a t the supply of improvements can be r e s t r i c t e d , o n l y p a r t o f the tax can be s h i f t e d forward onto consumers. The remainder i s c a p i t a l i z e d i n t o a lower v a l u e f o r improvements. In the long run, when the supply of improvements i s more e l a s t i c , a f u r t h e r r e d u c t i o n i n supply - 3 1 -r e s u l t s i n h i g h e r p o r t i o n s of the tax being s h i f t e d t o consumers. Under c o n d i t i o n s of p e r f e c t e l a s t i c i t y i n the supply of improvements, a l l of the tax i s e v e n t u a l l y s h i f t e d forward and no c a p i t a l i z a t i o n o c c u r s . Consumers, whether tenant or owner-occupiers, pay a h i g h e r p r i c e f o r improvements and the supply i s lower than i f there were no tax on improve-ments. The more e l a s t i c the demand curve f o r improvements, the more supply w i l l have to be r e s t r i c t e d i n order to s h i f t the tax. In the case of land, long run i n e l a s t i c i t y of supply r e s u l t s i n v i r t u a l l y f u l l c a p i t a l i z a t i o n r a t h e r than s h i f t i n g . In s p a t i a l terms, the improvements component of the p r o p e r t y tax t h e o r e t i c a l l y discourages i n t e n s i v e l a n d use, both i n the form of h i g h e r d e n s i t i e s and more complete use of land i n urban areas. As a r e s u l t of i t s n o n n e u t r a l i t y , the p r o p e r t y tax c o n t r i b u t e s to i n c e n t i v e s f o r the s p e c u l a t i v e h o l d i n g of vacant or underdeveloped land i n the urban core. In e f f e c t , i t p e n a l i z e s the landowners who improve t h e i r s i t e s and so c o n t r i b u t e to l o c a t i o n values i n f a v o r of those t h a t allow t h e i r p r o p e r t i e s to d e t e r i o r a t e or remain i n a l e s s than o p t i m a l s t a t e of development. Although the magnitude of the e f f e c t i s not l i k e l y to be l a r g e , the p r o p e r t y tax i n i t s present form works i n the o p p o s i t e d i r e c t i o n to p l a n n i n g o b j e c t i v e s i n v o l v i n g the r e d u c t i o n of urban sprawl. - 3 2 -CHAPTER I I I LAND VALUE TAXATION The d i f f e r e n c e s i n economic e f f e c t s between t a x i n g l a n d and improvements support the concept of a tax based s o l e l y on land v a l u e s . Most of the e x i s t i n g l i t e r a t u r e on l o c a l t a x a t i o n and the p a t t e r n s of urban growth has conc e n t r a t e d on the c o n t r a s t between a tax l e v i e d on land and improvements and a tax e x c l u s i v e l y on s i t e v a l u e . V a r i o u s l y r e f e r r e d to as the land, s i t e or l o c a t i o n value tax, i t has been the s u b j e c t of much co n s i d e r e d debate (and o c c a s i o n a l mere s p e c u l a t i v e whimsy) d a t i n g back i n modern economic h i s t o r y to Henry George, an advocate of s i g n l e tax reform (George, 1879). Through a review of these debates, t h i s chapter examines land as a tax base and the e f f e c t s of a s h i f t from the proper-ty tax t o a land value tax on urban development. LAND AS A TAX BASE The n e u t r a l i t y of the tax on land v a l u e s to the a l l o c a t i o n of r e s o u r c e s , i n p a r t i c u l a r to investment i n improvements, has been i n v e s t i g a t e d i n Chapter I I . Because of the unique nature of each s i t e i n terms of access to urban amen i t i e s , the t a x a t i o n o f economic ren t through the tax on land values r e p r e s e n t s the a p p r o p r i a t i o n of a p o r t i o n of the e x t e r n a l l y - 3 3 -generated b e n e f i t s which c r e a t e l o c a t i o n v a l u e . In order to d e f i n e these b e n e f i t s more p r e c i s e l y , i t i s necessary to d i s t i n g u i s h between improvements to l a n d an improvements on land. In the urban context, the former i n c l u d e s such s e r v i c e s as land c l e a r i n g or l e v e l l i n g and i n s t a l l a t i o n of drainage, sewerage and water supply f a c i l i t i e s . The l a t t e r i n c l u d e s c o n s t r u c t i o n of b u i l d i n g s , p a r k i n g f a c i l i t i e s , e t c . Although improvements on land are c l e a r l y determined by p r i v a t e i n c e n t i v e s and cannot be taxed without d i s t o r t i n g the a l l o c a t i o n of r e s o u r c e s , t h e r e i s g r e a t e r u n c e r t a i n t y about whether improvements to land should be taxed, e s p e c i a l l y because these tend to be p u b l i c l y p r o v i d e d . B a i l s (1973, p. 2 85) argues t h a t improvements to land should be taxed because they c o n t r i b u t e to l o c a t i o n v a l u e s . H a r r i s s (1970, p. 215-16) maintains t h a t t h i s form of improvement r e p r e s e n t s " c a p i t a l investment no l e s s than the s t r u c t u r e s r i s i n g above" and should be t r e a t e d as b u i l d -i n g s . Unless these improvements are a l s o exempted from the lan d value tax, economic d i s t o r t i o n w i l l remain. A r e s o l u t i o n to t h i s debate i s suggested when these arguments are c o n s i d e r e d with r e s p e c t to a vacant l o t i n the downtown core. I t s value as an undeveloped p a r c e l of land i s not due simply to i t s l o c a t i o n near other b u i l d i n g s and the economic a c t i v i t i e s p r e v a l e n t i n the core, but to the e x i s -tence of urban i n f r a s t r u c t u r e - s t r e e t s , sidewalks, sewerage and water mains, e t c . - even though i t does not d i r e c t l y -34-b e n e f i t from i t , because the i n f r a s t r u c t u r e i s a p a r t of the economic r e n t d e r i v e d from the uniqueness of a l o c a t i o n . To the extent t h a t value a t t r i b u t a b l e to i n f r a s t r u c t u r e r e p r e s e n t s past or sunk c o s t s from p u b l i c y c r e a t e d b e n e f i t s , i t may be i n c l u d e d i n the land v a l u e tax base without d i s t o r t i n g economic e f f i c i e n c y . The d i r e c t c o s t s a r i s i n g from improve-ments which b r i n g a p a r t i c u l a r p a r c e l of land i n t o p r o d u c t i v e use are those which r e s u l t from connection to the e x i s t i n g i n f r a s t r u c t u r e , e.g. hookups to water mains, and should not be c o n s i d e r e d a p a r t of the l a n d value tax base. These, however, may be taxed on another b a s i s c o n s i d e r e d i n Chapter IV. The land value tax r e f l e c t s the h i g h e s t and b e s t economic use of the s i t e - the most p r o d u c t i v e use r e g a r d l e s s of how f u l l y i t s p r e s e n t use i n the form of improvements on land takes advantage of i t s l o c a t i o n v a l u e . How land v a l u e s can be determined f o r the purpose of tax assessment i s a s u b j e c t which cannot be examined i n d e t a i l here (Holland, 1970). However, Browning (1963, p. 303-304) has reviewed the e s t a b l i s h e d methods f o r a p p r a i s i n g l a n d v a l u e s . Comparison of recent market s a l e s f o r p r o p e r t y with s i m i l a r c h a r a c t e r i s t i c s i s the most f r e q u e n t l y used method f o r determining assessments, although no two p a r c e l s are p e r f e c t l y i d e n t i c a l and s a l e s i n f o r m a t i o n on a l l types of p r o p e r t y i s not always a v a i l a b l e . Where market data i s u n a v a i l a b l e , another p r a c t i c e i s to assess s i t e v alue as a c e r t a i n percentage of t o t a l p r o p e r t y value f o r neighborhoods -35-of c o n s i s t e n t s t r u c t u r a l type and age. Another method, used p r i m a r i l y t o determine the value of undeveloped lan d on the urban p e r i p h e r y , i n v o l v e s estimates of the value of land i n i t s c u r r e n t h i g h e s t p r o d u c t i v e use, the c o s t s of b r i n g i n g the land i n t o development and the c o s t of a c q u i r i n g the l a n d i n i t s present s t a t e . The l a n d r e s i d u a l method r e q u i r e s the c a l c u l a t i o n of imputed income to l a n d on the b a s i s of assumptions about b u i l d i n g v a l u e , net income to p r o p e r t y and the c a p i t a l i z a t i o n r a t e f o r the b u i l d i n g . Net imputed income can then be c a p i t a l i z e d f o r land to determine present land v a l u e . In the f o l l o w i n g d e s c r i p t i v e a n a l y s i s , i t i s assumed th a t t o t a l revenues from the land value tax w i l l match those p r e s e n t l y c o l l e c t e d by the p r o p e r t y tax. The only changes w i l l be the exemption of the improvements component and an i n c r e a s e i n the r a t e of t a x a t i o n on the l a n d component ac c o r d i n g t o the d i s t r i b u t i o n of land v a l u e s . The revenue adequacy of t h i s form of land value tax has been questioned, but because of d i f f i c u l t i e s i n conducting e m p i r i c a l t e s t s , the i s s u e has not been r e s o l v e d . E s s e n t i a l l y the d i s p u t e i s whether the land value tax would have t o be set a t such high r a t e s t h a t the economic rent of the l a n d would be e n t i r e l y removed. H e i l b r u n (1966, p. 234-245) has suggested t h a t the economic r e n t would be destroyed and t h a t t h e r e f o r e a t h e o r e t i c a l maximum on la n d v a l u e revenues e x i s t s . -36-Stone (1975) has argued t h a t the q u e s t i o n must be c o n s i d e r e d through a dynamic approach i n which the r a t e s of i n c r e a s e i n expenditures and of revenue growth are taken i n t o account. However, as Netzer (1966, p. 212) has concluded, even i f a l l expenditures cannot be f i n a n c e d by the l a n d value tax, t h i s f a c t o r does not d e t r a c t from the economic d e s i r a b i l i t y of exempting improvements, but merely r a i s e s the i s s u e of f i n d i n g another source of revenues to o f f s e t any d e f i c i t s produced. The q u e s t i o n of revenue adequacy i s t h e r e f o r e c o n s i d e r e d i n the context of a l o c a l tax system d i s c u s s e d i n Chapter VI. TRANSITION TO A LAND VALUE TAX Most treatments of the l a n d value tax have been l i m i t e d to an overview of the g e n e r a l e f f e c t s or have concentrated on s p e c i f i c types of areas. The purpose of t h i s s e c t i o n i s to b r i n g t o g e t h e r these arguments concerning the p o s i t i v e and negative impacts of the tax on the d i f f e r e n t s e c t i o n s of the c i t y i n order to assess the s u i t a b i l i t y of the l a n d value tax i n the p l a n n i n g c o n t e x t . I t i s important to note t h a t these e f f e c t s w i l l be e v i d e n t only from the p e r s p e c t i v e of a change from the p r o p e r t y tax t o a tax on l a n d v a l u e s . As Nowlan (1976) has observed, the p r o p e r t y tax i s o f t e n c r i t i c i z e d f o r i t s nonneutral e f f e c t by advocates of l a n d value t a x a t i o n who then a s s e r t t h a t the -37-l a n d value tax, r a t h e r than being n e u t r a l , w i l l a ct as a stimulus to development. A s h i f t to the land v a l u e tax removes the d i s i n c e n t i v e to i n v e s t i n improvements c r e a t e d by the pro p e r t y tax. The changes i n s p a t i a l p a t t e r n s which r e s u l t are merely caused by the removal of a market d i s t o r t i o n . A s h i f t t o a tax on land v a l u e s w i l l not a f f e c t the tax burden of a l l s i t e s . For those s i t e s which have made average use o f t h e i r l o c a t i o n e a r n i n g p o t e n t i a l , the land value tax w i l l impose no g r e a t e r a tax burden than the present p r o p e r t y tax. S i t e s improved t o g r e a t e r than average w i l l be "rewarded" by a drop i n taxe s . Only the s i t e s i n a l e s s than average s t a t e of improvements f o r t h e i r l o c a t i o n w i l l pay more taxes. The tendency w i l l be f o r o l d e r b u i l d i n g s to be r e p l a c e d by newer s t r u c t u r e s and low d e n s i t y by high e r d e n s i t y land uses (Netzer, 1962, p. 195-196). In the absence of zoning c o n t r o l s , o r, more r e a l i s t i c a l l y , i n t r a n s i t i o n a l or mixed-use areas, m u l t i p l e f a m i l y housing would r e p l a c e s i n g l e f a m i l y r e s i d e n t i a l u n i t s and commercial s i t e s would a l s o become more i n t e n s i v e l y used. I f tax l i a b i l i t y i s not based, i n the aggregate, on d i f f e r e n t c l a s s i f i c a t i o n s of land use, a s h i f t i n the burden between r e s i d e n t i a l , commercial and i n d u s t r i a l uses i s probable. D i f f e r e n c e s i n the r e s u l t s o f e m p i r i c a l analyses suggest t h a t the nature of the s h i f t among land use c l a s s e s v a r i e s w i t h d i f f e r e n t urban areas (Rawson, 1961, p. 27; C i t y of Vancouver, 1976, p. 40) . Although commercial, and - 3 8 -to some exten t , i n d u s t r i a l s i t e s tend t o be l o c a t e d i n c e n t r a l c i t y areas where land v a l u e s are the h i g h e s t , the tax i s l i k e l y a s m a l l and not s i g n i f i c a n t p o r t i o n of t o t a l c o s t s ( P i c k a r d , 1966, p. 15). Less p r o d u c t i v e e n t e r p r i s e s -small commercial o p e r a t i o n s and i n d u s t r i a l s i t e s with low p r o d u c t i v i t y r e l a t i v e to the amount of land occupied - may be f o r c e d to r e l o c a t e . I t i s probable t h a t most f i r m s w i l l be able to absorb h i g h e r taxes and the ge n e r a l mix of commercial, i n d u s t r i a l and r e s i d e n t i a l land use i n the c i t y w i l l not be a l t e r e d . However, the land value tax may prove d e t r i m e n t a l to s i n g l e f a m i l y r e s i d e n t i a l neighborhoods l o c a t e d near the core. Commercial e n t e r p r i s e s and m u l t i p l e u n i t r e s i d e n t i a l d w e l l i n g s , because of t h e i r g r e a t e r c a p a c i t y to absorb taxes, may d r i v e out l e s s p r o d u c t i v e s i n g l e f a m i l y r e s i d e n t i a l land uses. In order to a l l e v i a t e t h i s p o s s i b i l i t y , the presen t p r a c t i c e of d i f f e r e n t i a l assessments a c c o r d i n g to land use should be prese r v e d . DEVELOPED SECTIONS OF URBAN AREAS VACANT LAND AND UNDERDEVELOPED LAND IN THE URBAN CORE In the urban core and surrounding developed areas there are o f t e n many p a r c e l s o f land t h a t are t o t a l l y unimproved or t h a t have a very s m a l l value of improvements r e l a t i v e to l o c a t i o n v a l u e (e.g. p a r k i n g l o t s ) . With the ex c e p t i o n of -39-l a n d u n s u i t a b l e f o r development because of problems r e l a t e d to the n a t u r a l topography, t h i s vacant or n e a r l y vacant land i s w i t h h e l d from development i n a n t i c i p a t i o n of f u t u r e s p e c u l a t i v e p r o f i t s . P a r t i c u l a r l y i n the urban core where land v a l u e s are the h i g h e s t , the i n t r o d u c t i o n of a land value tax would r e s u l t i n the g r e a t e s t i n c r e a s e s i n the tax burdens f o r owners of vacant l a n d . T h i s major i n c r e a s e i n the c o s t of w i t h h o l d i n g land from development would a c t as an i n c e n t i v e f o r s p e c u l a t o r s to make land a v a i l a b l e t o developers at an e a r l i e r date than was p r e v i o u s l y optimal under the p r o p e r t y tax (Becker, 1969, p. 27). C a p i t a l i z a t i o n of the h i g h e r tax, as e x p l a i n e d i n Chapter I I , would r e s u l t i n lower market values f o r vacant la n d , making i t e a s i e r f o r developers to a c q u i r e (Clark, 1961, p. 80) . A frequent c r i t i c i s m of the land value tax i s t h a t i t w i l l i n c r e a s e the d e n s i t y of core development to an u n d e s i r a b l e degree. T r a f f i c c o n g e s t i o n , the l a c k of open spaces, and other a s s o c i a t e d problems with the i n n e r c i t y environment would be aggravated by the development of vacant land and redevelopment of o b s o l e t e b u i l d i n g s at h i g h e r d e n s i t i e s ( C l a r k , 1961, p. 79). However, the p o t e n t i a l f o r core development i s not u n l i m i t e d and c o n g e s t i o n i n i t s e l f i s one of the f a c t o r s encouraging d e c e n t r a l i z a t i o n of urban f u n c t i o n s to suburban and other l e s s prime areas. D e c e n t r a l i z a t i o n f o r t h i s reason r e p r e s e n t s both a d e s i r a b l e and e f f i c i e n t - 4 0 -a l l o c a t i o n of resources determined i n the market and by i t s nature, the land value tax w i l l not e l i m i n a t e t h i s t r e n d . The land value tax w i l l a l s o not c r e a t e a sharp and immediate r i s e i n c o n s t r u c t i o n on vacant s i t e s or i n the d e n s i t y of redevelopment. In the core areas where the tax i n c r e a s e i s the g r e a t e s t , the a n t i c i p a t e d p r o f i t s are a l s o the h i g h e s t . The changes t h a t would be induced by the l a n d value tax would occur g r a d u a l l y and would allow planners s u f f i c i e n t time t o assess the impact of pr o p o s a l s f o r development on neigh b o r i n g areas. A l s o , vacant land i n the in n e r c i t y does not o f t e n provide d e s i r a b l e forms of open space. The p r o v i s i o n of useable and a e s t h e t i c a l l y p l e a s i n g open space depends on p l a n n i n g r a t h e r than the haphazard a l l o c a t i o n of vacant l a n d . A r e l a t e d c r i t i c i s m of the land value tax i s t h a t i t weakens the p o s i t i v e r o l e p l a y e d by s p e c u l a t i o n i n the urban development market. A vacant l o t , i f i t were developed immediately t o i t s h i g h e s t present use, might produce l e s s p r i v a t e p r o f i t s and p u b l i c b e n e f i t s than i f i t were w i t h h e l d from development, or minimally improved u n t i l some f u t u r e time when a l a r g e r b u i l d i n g demanded by an expanded market c o u l d be b u i l t (Nowlan, 1976, p. 16-17). C r i t i c s o f the land v a l u e tax have termed t h i s "premature development." The f a l l a c y of t h i s argument r e l a t e s again to the nonneutral nature of the p r o p e r t y tax i n c o n t r a s t to the n e u t r a l i t y of the l a n d value tax. In an urban area i n which the pro p e r t y - 4 1 -tax has been i n e f f e c t , the market a l l o c a t i o n of land a l r e a d y has been d i s t o r t e d . Despite demand f o r the kinds of uses v a l u a b l e vacant and underdeveloped l a n d i n the urban core c o u l d be put to, i t i s allowed t o be h e l d at r e l a t i v e l y low r a t e s under the p r o p e r t y tax. The n e u t r a l l a n d value tax pro v i d e s an i n c e n t i v e f o r p u t t i n g the land to use under c u r r e n t market c o n d i t i o n s and t h i s does not c o n s t i t u t e "premature development." URBAN RENEWAL AND THE TRANSITION TO HIGHER INTENSITY LAND USE Downward-transitional Areas A phenomenon common to h i g h l y urbanized areas i s the e x i s t e n c e of t r a c t s of d e t e r i o r a t i n g housing stock and b l i g h t e d i n d u s t r i a l zones, both f r e q u e n t l y near the c e n t r a l c o re. Because of the p r o x i m i t y o f these areas to the core, the p o t e n t i a l f o r high land values e x i s t s , but the aggregate negative e f f e c t s o f minimal investment i n improvements have kept land v a l u e s depressed. In s t r i c t l y economic terms, these areas r e p r e s e n t an i n e f f i c i e n t a l l o c a t i o n of land as an urban r e s o u r c e . Because the r a t i o of improvements to land v a l u e s , d e s p i t e the a r t i f i c i a l d e p r e s s i o n of the l a t t e r , are low i n comparison t o a c i t y - w i d e average, a move to land value t a x a t i o n would r e s u l t i n an i n c r e a s e i n taxes f o r the h o l d e r s o f these p r o p e r t i e s . The market i n downward-transitional p r o p e r t i e s -42-i s f r e q u e n t l y composed of s m a l l - s c a l e o p e r a t o r s w i t h s h o r t term, low volume p r o f i t s t o be gained (Peterson, 1972, p. 68). These i n v e s t o r s o p e r a t i n g a t the margin and those who own and occupy housing i n these areas would be h a r d e s t h i t by i n c r e a s e d taxes. The owners unable to o f f s e t the r i s e i n tax payments through i n c r e a s e d improvements and h i g h e r charges to consumers w i l l be f o r c e d to s e l l , the c a p i t a l i z e d v a lue of the higher taxes r e s u l t i n g i n a lower s e l l i n g p r i c e . Purchasers of the p r e s e n t l y economically u n p r o f i t a b l e land w i l l f i n d t h a t there are no p e n a l t i e s f o r improvements and w i l l be encouraged to convert the p r o p e r t i e s to a h i g h e r l e v e l of i n t e n s i t y of use. Although the d i s c u s s i o n has focussed on r e s i d e n t i a l areas, i t i s a l s o a p p l i c a b l e to b l i g h t e d i n d u s t r i a l and commercial areas. The renewal e f f e c t would be somewhat l e s s because taxes are a l e s s s i g n i f i c a n t item of o p e r a t i n g e x p e n d i t u r e s . The redevelopment of b l i g h t e d areas i s dependent on the demand f o r c e n t r a l l o c a t i o n s . Although much of the renewal witnessed c u r r e n t l y i n urban areas has been i n the form of h i g h c o s t , h i g h d e n s i t y apartments and o f f i c e s near r e c e n t redevelopment, market demand i s probably not a c c u r a t e l y r e f l e c t e d by t h i s t r e n d . I f renewal were to take p l a c e on a l a r g e r s c a l e , moderate income apartments, f o r which there i s c e r t a i n to be some demand, are a l i k e l y r e s u l t . Because i t r e p r e s e n t s the minimum p o s s i b l e redevelopment investment, - 4 3 -moderate income housing i s a r e s i d u a l l a n d use i n the second stage of urban development i n much the same way t h a t s i n g l e f a m i l y homes are the b e s t s h o r t term investment i n the f i r s t stage of development (Neutze, 1969, p. 119). To the exte n t t h a t l a n d value t a x a t i o n would be e f f e c t i v e i n promoting urban renewal, the p a t t e r n of land v a l u e s i n the o l d e r areas o f the c e n t r a l c i t y would be expected t o change (Netzer, 1962, p. 200). As p r e v i o u s l y b l i g h t e d areas are added t o the c e n t r a l b u s i n e s s d i s t r i c t through redevelop-ment, the supply of h i g h l y valued, c e n t r a l l y l o c a t e d l a n d would i n c r e a s e . T h i s i n c r e a s e i n supply i n the longer run would reduce pre s s u r e s f o r high e r d e n s i t y development i n the core. Although t a x a t i o n theory (Turvey, 1957) and s e v e r a l e m p i r i c a l s t u d i e s c o n t r a s t i n g the e f f e c t s of a s h i f t from pro p e r t y to land value taxes have g e n e r a l l y supported the expected d i r e c t i o n of the e f f e c t , the magnitude remains u n c l e a r ( P o l l o c k and Shoup, 1977; Smith, 1970). In the s p e c i f i c case of downward-transitional urban areas, i t would be expected t h a t the e f f e c t would be st r o n g e r f o r redevelop-ment because of the g r e a t e r importance of t a x a t i o n as a f i x e d c o s t r e l a t i v e to t o t a l o p e r a t i n g expenditures and t o p r o f i t s . However, there are s e v e r a l important f a c t o r s t h a t weaken the response of slum p r o p e r t y to the t a x a t i o n e f f e c t . U n l i k e vacant land, b l i g h t e d neighborhoods are p r o d u c t i v e to t h e i r owners and may be p r o f i t a b l y h e l d out of optimal use - 4 4 -f o r l o n g e r p e r i o d s (Grey, 1969, p. 9 1 ) . D e s p i t e t h e i r s u b o p t i m a l e f f i c i e n c y , slum neighborhoods p e r f o r m the i m p o r t a n t economic f u n c t i o n o f p r o v i d i n g h o u s i n g f o r t h e low income p o p u l a t i o n and slum l a n d l o r d s have a c a p t i v e c l i e n t e l e . As C l a r k (1961, p. 82) n o t e s , the s h o r t term market f o r r e d e v e l o p e d slum p r o p e r t i e s i s l i k e l y t o be q u i t e l i m i t e d and i t would be u n r e a l i s t i c t o e x p e c t one p r o p e r t y owner i n the m i d d l e o f a b l i g h t e d neighborhood t o improve w i t h o u t a s s u r a n c e t h a t the r e s t o f the s u r r o u n d i n g p r o p e r t i e s w i l l f o l l o w . There i s a p o s s i b l e advantage t o the a c q u i s i t i o n o f s m a l l h o l d i n g s by l a r g e - s c a l e d e v e l o p e r s . Assembly o f l a r g e t r a c t s o f l a n d reduces the r i s k o f redevelopment because o f known p o s i t i v e e x t e r n a l i t i e s . I f urban renewal i s a m u n i c i p a l p o l i c y , a more a c t i v e r o l e must be sought by p l a n n e r s and o t h e r t a c t i c s must be used t o p r o v i d e d e v e l o p e r s w i t h a more c e r t a i n c l i m a t e f o r i n v e s t m e n t and t o ensure the e x i s t e n c e o f a s u p p l y o f a l t e r n a t i v e low income h o u s i n g f o r t h o s e who would be d i s p l a c e d i n the p r o c e s s . S t a b l e Areas Another urban a r e a i n w h i c h t a x e s a r e l i k e l y t o i n c r e a s e under a system o f l a n d v a l u e t a x a t i o n i s the p r e d o m i n a n t l y s i n g l e f a m i l y r e s i d e n t i a l s e c t o r i m m e d i a t e l y s u r r o u n d i n g the c i t y c o r e . G e n e r a l l y t h i s h o u s i n g i s o f o l d e r s t o c k , i s owner-occupied and has low t o moderate income o c c u p a n t s . - 4 5 -U n l i k e the downward-transitional slum areas, t h i s area i s r e l a t i v e l y s t a b l e i n i t s p r e s e n t c o n d i t i o n (Peterson, 1972, p. 89-91). The l e v e l o f maintenance and the r a t e of i n v e s t -ment i n improvements may be f a i r l y low, but the housing q u a l i t y i s not q u i c k l y d e t e r i o r a t i n g . C r i t i c s have argued t h a t a t r a n s i t i o n t o land value as a tax base would impose an u n j u s t i f i a b l e burden on these s t a b l e areas (Clark, 1961, p. 81). C e r t a i n l y p r e s s u r e s f o r redevelopment to high e r d e n s i t i e s , f r e q u e n t l y a l r e a d y i n evidence, would i n c r e a s e on these areas because of t h e i r p r o x i m i t y to the urban core, and the f a m i l i a r c a p i t a l i z a t i o n e f f e c t would r e s u l t i n lower la n d values f o r the owners of these p r o p e r t i e s . To the extent that the demand f o r l o c a t i o n exceeds demand f o r lower d e n s i t y and high e r per u n i t space, p r e s s u r e s f o r redevelopment i n these n o n c e n t r a l s t a b l e areas w i l l be eased by the expected i n t e n s i f i c a t i o n of core land use. However, demand f o r s i n g l e f a m i l y r e s i d e n c e s i s c e r t a i n t o p e r s i s t , e s p e c i a l l y i n these w e l l l o c a t e d areas. U n l i k e the owners of vacant land and land i n downward-transitional areas, the owner-occupiers of p r o p e r t i e s i n s t a b l e areas are not long term s p e c u l a t o r s able t o absorb an i n c r e a s e i n h o l d i n g c o s t s r e s u l t i n g from h i g h e r t a x e s . Both the market f o r t h i s type of l a n d and the l e s s e r r e s i s t a n c e of these owners to an i n c r e a s e i n taxes make i t reasonable to expect a c o n s i d e r a b l e redevelopment e f f e c t and some turnover i n ownership of s i n g l e f a m i l y r e s i d e n c e s , p a r t i c u l a r l y those w i t h low income owners. - 4 6 -D e s p i t e the l a n d value tax's economic e f f i c i e n c y which b e n e f i t s the urban p o p u l a t i o n as a whole, i n t h i s case through an i n c r e a s e i n the number of r e s i d e n t s able to enjoy a b e t t e r l o c a t i o n , the tax w i l l have i n e q u i t a b l e e f f e c t s t h a t may be q u i t e s i g n i f i c a n t . Land val u e s t h a t have been a r t i f i c i a l l y depressed may take some time to r e f l e c t a c t u a l l o c a t i o n v a l u e s , thus e a s i n g the tax impact on low income owners, however, the e q u i t y problem seems to be i n h e r e n t i n the l a n d value tax. I t may be argued t h a t the problems of low income groups are b e s t c o n s i d e r e d o u t s i d e the framework of the p r o p e r t y tax system and should not be addressed at the d i r e c t expense of optimal urban development. In a d d i t i o n , i t should be noted t h a t although those a f f e c t e d i n t h i s case may be income poor, t h e i r very ownership of p r o p e r t y of r e l a t i v e l y high value i m p l i e s t h a t other options f o r housing c h o i c e s - i n p e r i p h e r a l areas or i n m u l t i p l e f a m i l y u n i t s - remain open. REHABILITATION AND MAINTENANCE The main focus of the d i s c u s s i o n has been on the e f f e c t of the l a n d v a l u e tax on redevelopment (or development i n the case of vacant l o t s ) , but there are s e v e r a l a l t e r n a t i v e s r e q u i r i n g l e s s investment i n improvements which are l i k e l y to dominate i n the s h o r t run. In response to the removal of the tax on improvements and a t the lowest end of the s c a l e -47-of c a p i t a l o u t l a y , r e p a i r s and replacement of worn s t r u c t u r a l f e a t u r e s may be undertaken. Depending on demand c o n d i t i o n s i n the p a r t i c u l a r l o c a t i o n , r e h a b i l i t a t i o n and r e m o d e l l i n g may be more p r o f i t a b l e o p t i o n s . R e h a b i l i t a t i o n and maintenance are l e s s c a p i t a l i n t e n s i v e and l e s s r i s k y t h a t development or redevelopment. These a l t e r n a t i v e s are a l s o i n c r e m e n t a l . They allow landowners t o upgrade b u i l d i n g s at a pace e a s i l y measured a g a i n s t demand. These e f f e c t s would t h e r e f o r e be more immediate i n the g e n e r a l l y somewhat unresponsive economic s h o r t run. The removal of the tax on improvements thus i n c r e a s e s the a d a p t a b i l i t y of the housing stock t o changes i n demand (Heilbrun, 1976, p. 76). In response to a i n c r e a s e d demand from hi g h e r r e n t payers, the q u a l i t y of b u i l d i n g s can be r a i s e d . When demand s h i f t s t o lower income r e n t e r s , r e n o v a t i o n can be undertaken t o pr o v i d e more u n i t s with l e s s space per u n i t . In e i t h e r s i t u a t i o n , a land value tax removes a d i s i n c e n t i v e which causes a l a g between change i n demand and i n supply response. H e i l b r u n (1976, p. 71) has argued t h a t the tax component on improvements has no e f f e c t on o p e r a t i n g expenditures because p r o p e r t y i s assessed a t market value and not on the s e r v i c e s the owner p r o v i d e s t o p r o p e r t y . Although owner-pr o v i d e d s e r v i c e s and normal r e p a i r s are not assessed f o r t a x a t i o n purposes, an i n d i r e c t e f f e c t e x i s t s . A p o o r l y maintained b u i l d i n g i n need of p h y s i c a l r e p a i r s w i l l have a - 4 8 -lower market v a l u e than one o p e r a t i n g a t the optimal l e v e l . T h e r e f o r e a tax on improvements encourages lower maintenance. Removing the tax permits i n c r e a s e d maintenance. Owners of under-maintained b u i l d i n g s who are f o r c e d to improve because of b u i l d i n g r e g u l a t i o n s w i l l no longer be p e n a l i z e d by h i g h t e r taxes ( L a i , 1972, p. 63). Again, the i n c r e a s e i n investment i n improvements i s not c o n f i n e d to r e n t a l p r o p e r t i e s , but w i l l a l s o occur i n the case of owner-occupied b u i l d i n g s . Owners w i l l improve, without p e n a l t y , i n order to d e r i v e h i g h e r u t i l i t y from i n c r e a s e s i n the q u a l i t y of t h e i r s t r u c t u r e s . The r e s u l t i n g r i s e i n p r o p e r t y values allows the r e t u r n to investment to be r e a l i z e d at the time of s a l e . Landlords r e c e i v e a more immediate r e t u r n , where demand perm i t s , through h i g h e r r e n t s . Although a s h i f t to the land value tax w i l l a l s o be an inducement to improve i n downward-transitional areas, r e n t a l earnings and p r o f i t s from s a l e s are l i m i t e d by the g e n e r a l l y low incomes of r e n t e r s and the l e s s e r p r o s pects f o r r e h a b i l i t a t i o n on a neighborhood s c a l e . The owners of the cheapest forms of r e n t a l accommodation, because t h e i r low income r e n t e r s are able to pay o n l y f o r the minimum ac c e p t a b l e s h e l t e r requirements and cannot respond w i t h h i g h e r r e n t s f o r changes i n q u a l i t y , w i l l probably not r e h a b i l i t a t e , but s e l l f o r l a n d assembly and redevelopment. With t h i s important e x c e p t i o n , the aggregate r e s u l t of a t r a n s i t i o n t o land value t a x a t i o n should be b e t t e r q u a l i t y -49-r e n t a l housing at a lower p r i c e than was p r e v i o u s l y a v a i l a b l e . Because i n c e n t i v e s would be the same f o r every landowner and assuming a reasonably c o m p e t i t i v e market f o r r e n t a l housing, any owner who f a i l e d t o i n c r e a s e maintenance or r e h a b i l i t a t e to the optimum l e v e l , where marginal c o s t s are equal t o marginal r e n t s , would l o s e t h e i r tenants to the owners of apartments who i n v e s t e d i n improvements. In the immediate s h o r t run, the supply of the number of u n i t s of r e n t a l accommodation might be r e s t r i c t e d and tenants f o r c e d to pay somewhat high e r r e n t s f o r the b e t t e r q u a l i t y housing. In the i n t e r m e d i a t e run, the sti m u l u s d e s c r i b e d i n the preceeding s e c t i o n s f o r i n c r e a s e d c o n s t r u c t i o n would allow demand to be matched by supply and r e n t l e v e l s would drop to the e q u i l i b r i u m p o i n t . For owner-occupied housing i n good l o c a t i o n s , l e v e l s of maintenance and r e h a b i l i t a t i o n would probably a l s o i n c r e a s e , e s p e c i a l l y as new owners appear. An i n c r e a s e i n demand, p a r t i c u l a r l y i f due to hig h e r net incomes, would l i k e l y r e s u l t i n hig h e r l e v e l s of investment because of the popu-l a r i t y o f the s i n g l e f a m i l y home as an investment c h o i c e . In u p w a r d - t r a n s i t i o n a l areas - the o l d e r r e s i d e n t i a l neigh-borhoods wi t h h i g h land v a l u e s i n which the process of r e g e n t r i f i c a t i o n has a l r e a d y begun - the r a t e of r e h a b i l i t a t i o n would i n c r e a s e under lan d v a l u e t a x a t i o n . -50-URBAN SPRAWL AND SUBURBAN DEVELOPMENT To the extent t h a t the s h i f t from the pr o p e r t y tax to the land value tax r e s u l t s i n the more i n t e n s i v e use of land i n t he developed urban area, p e r i p h e r a l growth would be reduced. The land value tax encourages a s u b s t i t u t i o n of investment p r e f e r e n c e s f o r improvements r a t h e r than land. An important l i m i t i n g f a c t o r i s the extent t o which l o c a t i o n can be s u b s t i t u t e d f o r g r e a t e r per u n i t space - whether the highe r d e n s i t y environment of areas c l o s e to the urban core can d i v e r t demand from s i n g l e f a m i l y homes on l a r g e l o t s i n more d i s t a n t suburban l o c a t i o n s . With the ex c e p t i o n of Simon (1959), these c r o s s - e l a s t i c i t i e s o f demand have r e c e i v e d l i t t l e a t t e n t i o n i n the l i t e r a t u r e . I t i s p o s s i b l e only to suggest t h a t the importance of space to the demand p r e f e r e n c e s of landowners on the p e r i p h e r y may make some r e s i d e n t s i n d i f f e r e n t to the o p t i o n of g r e a t e r p r o x i m i t y to the core. Without e m p i r i c a l evidence i t i s d i f f i c u l t to g e n e r a l i z e about the l e v e l of t a x a t i o n on p e r i p h e r a l land r e s u l t i n g from a s h i f t t o the land value tax. I f the improvement to land v a l u e r a t i o i s l e s s i n the core than on the p e r i p h e r y , taxes on the l a t t e r w i l l d e c l i n e a f t e r the s h i f t . S e v e r a l e m p i r i c a l s t u d i e s (Smith, 1970; Brodsky, 1972) have i n d i c a t e d t h a t t h i s would be the case. Although l a n d values on the p e r i p h e r y are low, a g r i c u l t u r a l land has a l s o a low improve-ment to land v a l u e r a t i o and the r e v e r s e e f f e c t i s p o s s i b l e . -51-The i s s u e of how t a x a t i o n a f f e c t s the development of urban f r i n g e l a n d i s complex. On c r i t i c i s m of c u r r e n t p r o p e r t y tax l e v e l s , Netzer (1962, p. 196) has noted, The two p r i n c i p a l a c c u s a t i o n s are wholly c o n t r a d i c t o r y . On the one hand, i t i s a s s e r t e d t h a t i n c r e a s i n g tax burdens on a g r i c u l t u r a l or wooded land as u r b a n i z a t i o n draws near makes i t more d i f f i c u l t to r e s e r v e l a n d f o r open space purposes. On the other hand, i t i s (more f r e q u e n t l y ) claimed t h a t r e l a t i v e l y l i g h t tax burdens on p o t e n t i a l l y developable land on the urban f r i n g e encourages s p e c u l a t i v e h o l d i n g s and produces l e a p -f r o g g i n g or d i s c o n t i n u o u s development, wi t h un-p l e a s a n t e s t h e t i c e f f e c t s and high e r u l t i m a t e c o s t s of development f o r the urban area as a whole. The c o n f u s i o n stems from whether the land i s being h e l d by a farmer or by a s p e c u l a t o r and the problem i n c r e a s e s when the two r o l e s are combined. The s u b j e c t of t a x a t i o n and the p r e s e r v a t i o n of a g r i c u l t u r a l land i s d e a l t with more f u l l y i n Chapter V. One r e l a t i v e l y more c e r t a i n e f f e c t of the land value tax r e q u i r e s a t t e n t i o n here. F r e q u e n t l y m e t r o p o l i t a n areas c o n t a i n t r a c t s of a g r i c u l t u r a l l a n d i n the areas skipped over d u r i n g development. Surrounded by r e s i d e n t i a l s u b d i v i s i o n s , these areas of h i g h land and low improvement valu e s would c e r t a i n l y be exposed t o hi g h e r taxes. T h i s i n c r e a s e i n taxes, as i n underimproved areas i n the c i t y , would encourage t r a n s i t i o n t o high e r i n t e n s i t y land uses because h o l d i n g c o s t s are i n c r e a s e d (Rawson, 1961, p. 28). The s m a l l e r and l e s s p r o d u c t i v e the t r a c t s of a g r i c u l t u r a l land are, the more l i k e l y they would be redeveloped. S i m i l a r l y , l a n d value t a x a t i o n would cause a l o s s of open space between areas of s c a t t e r e d development -52-(Grey, 1969, p. 93-95). Because open space, u n l i k e a g r i c u l t u r a l land, produces no p r i v a t e p r o f i t s t o o f f s e t taxes, an i n c r e a s e i n taxes i s more of an i n c e n t i v e to put i t i n t o p r o d u c t i v e use. In the suburbs of the m e t r o p o l i t a n area, the t r a n s i t i o n to the land v a l u e tax can be expected t o encourage more compact development around r e g i o n a l subcores i n the same manner t h a t the tax i n c r e a s e s the i n t e n s i t y o f land use around the primary urban core. Compaction of both these types has the f u r t h e r b e n e f i c i a l e f f e c t of reducing p r e s s u r e s f o r development i n the i n t e r v e n i n g area between the c i t y and i t s suburbs. The spread of low d e n s i t y continuous sprawl, which absorbs a g r i c u l t u r a l and open space land, would be reduced. To some extent, the land value tax w i l l o f f s e t the tendency i n suburban communities to implement minimum l o t s i z e r e g u l a t i o n s and other measures (Moss, 1977, p. 424) t h a t f o s t e r low d e n s i t y development f o r the purpose of m a i n t a i n i n g low tax r a t e s i n r e l a t i o n to the l e v e l of p u b l i c s e r v i c e s p r o v i d e d . However, these p o s i t i v e e f f e c t s of the land value tax are dependent on planned e f f o r t s to guide the development of subcores so t h a t they become f u n c t i o n a l c e n t e r s of economic a c t i v i t y around which r e s i d e n t i a l areas and t r a n s p o r t a t i o n systems develop. Unless p a t t e r n s of l o c a t i o n values i n the suburbs can be d e f i n e d w i t h r e s p e c t t o these subcores, suburban la n d v a l u e s would be more s t r o n g l y determined by f - 5 3-p r o x i m i t y t o t h e urban c o r e . The r o l e o f t h e l a n d v a l u e t a x i n r e l a t i o n s h p t o p l a n n i n g f o r more o p t i m a l forms o f d e v e l o p -ment i s s u p p o r t i v e , b u t not d e t e r m i n a n t . SUMMARY OF SPATIAL EFFECTS T h i s c h a p t e r has p r o v i d e d an a n a l y s i s o f t h e advantages and problems of a s h i f t from p r o p e r t y t o l a n d v a l u e t a x a t i o n f o r d i f f e r e n t t y p e s of a r e a s w i t h i n t h e m e t r o p o l i t a n complex. I n t h e d e v e l o p e d p o r t i o n s o f the c i t y , a s h i f t t o t h e l a n d v a l u e t a x s h o u l d t h e o r e t i c a l l y d e c r e a s e s p e c u l a t i v e w i t h h o l d i n g o f v a c a n t l a n d and i n c r e a s e redevelopment of o b s o l e t e s t r u c t u r e s . However, the h i g h p r o f i t a b i l i t y o f s p e c u l a t i o n i n v a c a n t l a n d , t h e demand f o r low income h o u s i n g and t h e l a c k o f i n c e n t i v e s f o r i n d i v i d u a l owners t o u n d e r t a k e r e n e w a l i n b l i g h t e d a r e a s are f a c t o r s which would be e x p e c t e d t o reduce th e b e n e f i t s o f t h e l a n d v a l u e t a x . I n downward-t r a n s i t i o n a l and s t a b l e r e s i d e n t i a l a r e a s i n c e n t r a l l o c a t i o n s , urban r e n e w a l , which c r e a t e s more e f f i c i e n t use o f l o c a t i o n p o t e n t i a l , has t h e n e g a t i v e e f f e c t o f d i s p l a c i n g low income landowners and r e n t e r s . P a r t i c u l a r l y i n u p w a r d - t r a n s i t i o n a l a r e a s , t h e removal o f t h e t a x on improvements s t i m u l a t e s maintenance and r e h a b i l i t a t i o n , t h e more i n c r e m e n t a l forms o f urban r e n e w a l . More i n t e n s i v e use o f urban l a n d reduces s p e c u l a t i v e p r e s s u r e s on p e r i p h e r a l a r e a s and t h e e x t e n t o f urban s p r a w l . -5 4 -However, neither preservation of a g r i c u l t u r a l land nor conservation of open space would be ensured by a s h i f t to the land value tax. Suburban subcores would tend to take on more compact forms of development. E s p e c i a l l y i n peripheral and suburban areas, land value taxation would have to be used i n conjunction with other planning strategies to be e f f e c t i v e i n promoting desirable and e f f i c i e n t patterns of growth. Positive effects r e s u l t only from the perspective of a s h i f t from the property tax to a land value tax. The tax merely represents the return of the market equilibrium to ne u t r a l i t y with respect to investment. As such the tax w i l l not encourage "premature" development but w i l l remove the b a r r i e r presented by the e x i s t i n g property tax to investment in improvements. From the point of view of urban planning, the land value tax i s the optimal base on which to proceed. The stimulus for development, a nonneutral e f f e c t i n a d i r e c t i o n consistent with planning objectives, can be provided through market mechanisms i n the form of other types of taxes to be discussed i n Chapter V. CHAPTER IV ECONOMIC NEUTRALITY AND THE PROVISION OF SERVICES I n o r d e r f o r a l o c a l t a x t o be e c o n o m i c a l l y n e u t r a l t o the a l l o c a t i o n o f l a n d , i t must be a charge commensurate w i t h b e n e f i t s r e c e i v e d i n the form o f s e r v i c e s a t t h e l e v e l o f the i n d i v i d u a l p r o p e r t y owner. I n t h i s c h a p t e r , t h i s second c r i t e r i o n f o r economic n e u t r a l i t y i s used t o e v a l u a t e t h e p r o p e r t y t a x , and the e f f e c t s on urban s p a t i a l development o f o t h e r t y p e s o f l o c a l t a x e s based on n e u t r a l i t y a re examined. T h i s d i s c u s s i o n i s g e n e r a l l y a p p l i c a b l e t o a l l urban s e c t o r a c t i v i t i e s , b u t f o c u s e s p r i m a r i l y on r e s i d e n t i a l l o c a t i o n a l c h o i c e s . A c o n s i d e r a b l e amount o f l i t e r a t u r e has a l r e a d y been devoted t o t h e more s p e c i f i c e f f e c t s o f t a x e s on l o c a t i o n d e c i s i o n s w i t h i n the commercial and i n d u s t r i a l s e c t o r s . A l s o n ot c o n s i d e r e d here i s d i s t r i b u t i o n -a l e f f i c i e n c y i n a l l o c a t i n g , c o s t s among urban a c t i v i t y g r oups. To t h e e x t e n t t h a t l o c a l t a x e s a r e not c o l l e c t e d i n p r o p o r t i o n t o b e n e f i t s r e c e i v e d among r e s i d e n t i a l , commercial and i n d u s t r i a l s e c t o r s , d i s t r i b u t i o n a l e f f i c i e n c y i s reduced. I n a d d i t i o n , as N e t z e r (1966, p. 67-68) has n o t e d , the p r e v a l e n t use o f a l a r g e p r o p o r t i o n o f l o c a l t a x e s f o r e x p e n d i t u r e s on s e r v i c e s t o p e o p l e (e.g. e d u c a t i o n ) , r a t h e r t h a n on s e r v i c e s t o p r o p e r t y has r e s u l t e d i n t h e net o v e r a l l -56-s h i f t i n resources from " p r i v a t e p h y s i c a l investment to investment i n human development." T h i s has been j u s t i f i e d by the b e l i e f t h a t t h i s s h i f t produces net advantages of h i g h e r l e v e l s of economic growth and t h i s assumption i s not c h a l l e n g e d here. PROPERTY VALUES, SERVICES AND TAX CAPITALIZATION One p o s s i b l e method of determining whether the p r o p e r t y tax i s equated with b e n e f i t s r e c e i v e d i s through an examination of the c a p i t a l i z a t i o n e f f e c t . I f the p r o p e r t y tax burden on a s i t e and i t s improvements were e x a c t l y o f f s e t by the b e n e f i t s from s e r v i c e s p r o v i d e d , the tax would impose no deadweight l o s s and there would be no market d i s t o r t i o n (Hamilton, 1975, p. 13). For the homeowner, the net c a p i t a l i z a t i o n e f f e c t should leave p r o p e r t y v a l u e s u n d i s t u r b e d . For the l a n d l o r d , the c o s t can be passed on t o the tenant and the former's p r o f i t l e v e l s remain the same. The tenant's r e n t r i s e s , but the b e n f i t s of a d d i t i o n a l s e r v i c e s are t h e o r e t i c a l l y s u f f i c i e n t to be t r a n s l a t e d i n t o w i l l i n g n e s s to pay. The c a p i t a l i z a t i o n and s h i f t i n g e f f e c t s d i s c u s s e d i n Chapter I I would be removed. Even i f the tax were to i n c r e a s e w i t h the l e v e l of improvements, as long as the a d d i t i o n a l s e r v i c e s p r o v i d e d were of equal value to the a d d i t i o n a l tax, the e q u i l i b r i u m s i t u a t i o n would produce no net c a p i t a l i z a t i o n or s h i f t i n g . However, the c e n t r a l -57-c o n t e n t i o n of Chapter I I - n o n n e u t r a l i t y w i t h r e s p e c t to improvements - would remain v a l i d because an aggregate s h i f t to investment i n s e r v i c e s over improvements i s e f f e c t e d . U n l i k e l a n d , the e l a s t i c i t y of supply of improvements w i l l allow supply t o be a f f e c t e d . The extent of net c a p i t a l i z a t i o n of a tax on p r o p e r t y values should be an i n d i c a t o r of the degree of divergence between the value of p u b l i c s e r v i c e s and the tax c o s t . However, there are a number of reasons why the b e n e f i t s from s e r v i c e s may not be f u l l y r e f l e c t e d i n i n c r e a s e d p r o p e r t y v a l u e s . C i t i e s are o f t e n i n the p o s i t i o n of a monopoly s u p p l i e r of s e r v i c e s . L acking the normal market feedback s i g n a l l i n g demand responses to p r i v a t e s u p p l i e r s , the m u n i c i p a l i t y may simply be over or under s u p p l y i n g s e r v i c e s . A d m i n i s t r a t i v e i n e f f i c i e n c y may l e a d to o v e r p r i c e d s e r v i c e s . M u n i c i p a l governments are a l s o i n the p o s i t i o n t o compel the purchase of c e r t a i n s e r v i c e s to ensure p o s i t i v e p u b l i c e x t e r n a l i t i e s . The l e v e l s of r e q u i r e d s e r v i c e s may exceed demand. T h i s i s a problem i n h e r e n t i n the supply of p u b l i c goods because i t i s p o s s i b l e t h a t p r i v a t e b e n e f i t s , even i n the aggregate, are not commensurate with the c o s t s imposed by taxes. A f i n a l p o s s i b i l i t y i s t h a t some s e r v i c e s do not a f f e c t the value of p r o p e r t y . However, even s e r v i c e s to people, as opposed to s e r v i c e s to p r o p e r t y , are l i k e l y to be r e f l e c t e d i n l o c a t i o n v a l u e s and hence i n p r o p e r t y v a l u e s . With a l l these -58-p o s s i b i l i t i e s i n mind, net c a p i t a l i z a t i o n can be taken as only a rough i n d i c a t o r o f the r e l a t i o n s h i p between b e n e f i t s r e c e i v e d from s e r v i c e s and the taxes used t o pay f o r them. There i s a l a c k of e m p i r i c a l evidence on i n t r a u r b a n d i f f e r e n c e s between the l e v e l of taxes and expenditures on s e r v i c e s as measured by c a p i t a l i z a t i o n . There i s a l s o l i t t l e i n f o r m a t i o n on the r e l a t i o n s h i p between the tax p o r t i o n l e v i e d on improvements and the l e v e l of b e n e f i t s r e c e i v e d from s e r v i c e s . Although such e m p i r i c a l s t u d i e s would be v a l u a b l e , p a r t i c u l a r l y i n ad d r e s s i n g the i s s u e s important here, d i f f i c u l t i e s i n d i s a g g r e g a t i n g l e v e l s and q u a l i t y of s e r v i c e s along with tax l e v e l s f o r d i f f e r e n t areas of the c i t y have apparently made t h i s type of r e s e a r c h i m p r a c t i c a l . The l i t e r a t u r e on the r e l a t i o n s h i p between l o c a l taxes, expenditures on s e r v i c e s and r e s i d e n t i a l p r o p e r t y values has tended t o focus on comparisons of d i f f e r e n t tax r a t e s and d i f f e r e n t l e v e l s of s e r v i c e s p r o v i d e d w i t h i n the m e t r o p o l i t a n r e g i o n or among m u n i c i p a l i t i e s surrounding l a r g e urban c e n t e r s . The reason has been t h a t most of the r e s e a r c h i s d i r e c t e d a t the adequacy of the T i e b o u t model t o e x p l a i n r e s i d e n t i a l l o c a t i o n d e c i s i o n s . T i e b o u t (1956) f i r s t proposed the theory that d i f f e r e n t tax r a t e s f o r d i f f e r e n t l e v e l s of s e r v i c e s , among independent t a x i n g j u r i s d i c t i o n s , r e p r e s e n t an e f f i c i e n t market e f f e c t . I f the Tie b o u t model i s a p p l i c a b l e , i t c o u l d be concluded t h a t the pr o p e r t y tax i s roughly a payment f o r s e r v i c e s -59-r e c e i v e d among communities i n s p i t e of the l a c k of evidence on c a p i t a l i z a t i o n w i t h i n an urban area. In the model, consumers of p u b l i c s e r v i c e s are able to choose the types and q u a l i t i e s of s e r v i c e s and combinations of s e r v i c e s capable of s a t i s f y i n g v i r t u a l l y a l l p o s s i b l e p r e f e r e n c e s . Because some p u b l i c goods are extremely expensive to p r o v i d e and r e q u i r e a l a r g e number of consumers to make them worth-w h i l e to m a i n t a i n , the T i e b o u t model has been a p p l i e d to suburban communities which presumably are a b l e t o take advan-tage of these types of b e n e f i t s a v a i l a b l e i n the c e n t r a l c i t y . A l s o , the expected h e t e r o g e n e i t y of p r e f e r e n c e s f o r s e r v i c e s among the l a r g e numbers of r e s i d e n t s e f f e c t i v e l y excludes the c e n t r a l c i t y from the a p p l i c a b i l i t y of the model. In a d d i t i o n to a l a r g e number of communities, Tiebout has a l s o assumed complete consumer m o b i l i t y and a c curate i n f o r -mation and awareness of the t r a d e o f f s between the b e n e f i t s and c o s t s of r e s i d i n g i n each of the communities ( H i r s c h , 1977). L o c a t i o n a l c o n s t r a i n t s , such as the presence of employment, are a l s o assumed not to e x i s t . In the Tiebout model, the U-shaped average c o s t curve f o r p u b l i c s e r v i c e s as a f u n c t i o n of p o p u l a t i o n i m p l i e s that a lump sum tax i s imposed to cover o p e r a t i n g expenses and t h a t r e s i d e n t s bear the m a r g i n a l c o s t s of t h e i r presence i n the community. The o p t i m a l p o i n t of o p e r a t i o n i s a t the bottom of the curve. Before t h i s p o i n t i s reached, the community w i l l attempt to a t t r a c t new r e s i d e n t s ; a f t e r t h i s p o i n t i t w i l l d iscourage r e s i d e n t s i n order to lower the average c o s t s of p r o d u c t i o n of s e r v i c e s . In the e q u i l i b r i u m s o l u t i o n , p o p u l a t i o n i s d i s t r i b u t e d o p t i m a l l y among a l l j u r i s d i c t i o n s (Hyman, 1974). The assumptions of the Tiebout model reduce i t s a p p l i c a -b i l i t y to the r e a l world, even t o the suburban case i t most c l o s e l y approximates. In the absence of the k i n d of market balance governing the Tiebout model, i t i s a l s o p o s s i b l e to f i n d communities of high p r i c e d r e s i d e n t i a l l a n d where high l e v e l s of s e r v i c e s are p r o v i d e d a t r e l a t i v e l y low tax r a t e s because of high per c a p i t a assessments (Netzer, 1962, p. 192). Often c i t e d i s the use, i n these communities, of l a r g e l o t zoning to r e s t r i c t the number of e n t r a n t s with f a m i l i e s r e q u i r i n g high l e v e l s of e d u c a t i o n a l and r e c r e a t i o n a l s e r v i c e s . Because i t i s i n the i n t e r e s t of suburban communities to e x p l o i t whatever l o c a t i o n a l advantages they possess and to t r y to a t t r a c t r e s i d e n t s l e s s demanding on the p u b l i c budget, the Tiebout e f f e c t i s undermined. In s p i t e of i t s appeal as a means by which the present p r o p e r t y tax system c o u l d achieve e f f i c i e n c y i n the a l l o c a t i o n of p u b l i c s e r v i c e s , the Tiebout v e r s i o n of suburban land use tends to be r a t h e r myopic. I t i s an outcome of primary b e n e f i t to high income r e s i d e n t s s i n c e o n l y they are able t o a f f o r d the q u a l i t y and l e v e l of s e r v i c e s t h a t presumably everyone would p r e f e r i f the o p t i o n e x i s t e d . I t i s i n the nature of m e r i t goods t h a t are p u b l i c l y p r o v i d e d t h a t everyone should be p r o v i d e d w i t h a t l e a s t a minimum l e v e l , -61-y e t the model o f f e r s no assurance t h a t the minimum r e s u l t i s an a c c e p t a b l e one. The s a c r i f i c e of e q u i t y f o r e f f i c i e n c y may have p a r t i c u l a r l y u n d e s i r a b l e r e s u l t s i f , f o r example, educa t i o n i s s t r i c t l y r a t i o n e d on the b a s i s of a b i l i t y to pay. Although i t o f f e r s a g r e a t e r range of a l t e r n a t i v e s f o r those who can a f f o r d t o choose, the Tiebout e f f e c t would probably reduce i f not r e s t r i c t low income housing i n the suburbs (White, 1965). Homogeneity w i t h i n suburban communities i s a l s o not a phenomenon of u n i v e r s a l appeal and much has been w r i t t e n p r e v i o u s l y about the problems a s s o c i a t e d w i t h suburban g h e t t o i z a t i o n . But perhaps the s t r o n g e s t argument a g a i n s t the Tie b o u t e f f e c t from the p o i n t of view of e f f i c i e n t land a l l o c a t i o n i s t h a t i t encourages consumption of land f o r housing and urban sprawl. The number of t a x i n g j u r i s d i c t i o n s necessary to s a t i s f y the range of p r e f e r e n c e s would unquestionably need to be l a r g e and the need f o r some e x c l u s i o n a r y mechanism such as minimum l o t s i z e s or p o p u l a t i o n quotas w i t h i n each community ( H i r s c h , 1977) would expand suburban land consump-t i o n . The m e t r o p o l i t a n area-wide negative e x t e r n a l i t i e s of l o s s of a g r i c u l t u r a l land and open space, and i n c r e a s e d t r a n s p o r t a t i o n c o s t s have been d i s r e g a r d e d . Yet another r e s u l t of the model's assumptions i s t h a t the uncompensated use of c e n t r a l c i t y s e r v i c e s by suburban r e s i d e n t s i s overlooked. The r e l a t i o n s h i p of the Tiebout e f f e c t i n the suburbs to the c i t y has g e n e r a l l y been ignored -62-i n the l i t e r a t u r e . An important e x c e p t i o n i s Hamilton's (1975) es t i m a t e of the e x t e n t to which c e n t r a l c i t y r e s i d e n -t i a l consumption i s depressed r e l a t i v e to the suburbs, because i n n e i t h e r j u r i s d i c t i o n do taxes resemble an accurate p r i c e f o r s e r v i c e s r e c e i v e d . E m p i r i c a l s t u d i e s examining the T i e b o u t e f f e c t w i t h i n m e t r o p o l i t a n r e g i o n s have p r o v i d e d some evidence on the c o r r e l a t i o n of p r o p e r t y taxes and l e v e l s of s e r v i c e s . Oates' (1969) c r o s s - s e c t i o n a l study of 53 moderate s i z e New J e r s e y communities i n the New York m e t r o p o l i t a n r e g i o n concluded t h a t p r o p e r t y values were n e g a t i v e l y r e l a t e d to the p r o p e r t y tax r a t e and p o s i t i v e l y r e l a t e d to p u b l i c s e r v i c e s , represented by s c h o o l expenditures per p u p i l . A m o d i f i e d v e r s i o n of Oates' model t e s t e d i n the San Francisco/Oakland/San Jose m e t r o p o l i t a n r e g i o n again r e v e a l e d the expected r e l a t i o n s h i p between taxes, expenditures and housing v a l u e s , although the model was found to be s e n s i t i v e t o f a c t o r s d i f f e r e n t i a t i n g urban.areas (P o l l a k o w s k i , 1973). As Gustley (1976) has p o i n t e d out, Oates' mono-centered r e g i o n may have been the cause of r e s u l t s not a p p l i c a b l e t o the p o l y - c e n t e r e d P o l l a k o w s k i study. The r e s u l t s of Orr's (196 8) study of the r e n t a l housing market i n communities i n the Boston m e t r o p o l i -tan area showed no evidence t h a t r e s i d e n t i a l r e n t s were a f f e c t e d by taxes and e x p e n d i t u r e s . Heinberg and Oates' (1972) c r i t i q u e of the Orr model's s p e c i f i c a t i o n l e d t o a r e f o r m u l a t i o n , t h i s time r e v e r s i n g the r e s u l t s , but w i t h a l e s s - 6 3 -than 50% s h i f t i n g ( O r r , 1972). B l a c k ' s (1974) use of O r r 1 s . model f o r t h e B o s t o n a r e a a l s o found the f o r w a r d s h i f t i n g o f the p r o p e r t y t a x t o r e n t e r s t o be l e s s than complete, i m p l y i n g some degree o f net c a p i t a l i z a t i o n . From t h i s b r i e f r e v i e w of t h e main r e s u l t s o f e m p i r i c a l s t u d i p s , i t i s e v i d e n t t h a t t h e r e l a t i o n s h i p between t a x e s , e x p e n d i t u r e s and p r o p e r t y v a l u e s demonstrates a tenuous e q u a t i o n o f t a x e s t o the v a l u e o f s e r v i c e s , even a t aggregate m u n i c i p a l l e v e l s . THE BENEFIT PRINCIPLE AND MARGINAL COST PRICING Economic n e u t r a l i t y i n the p r o v i s i o n o f s e r v i c e s i s d e r i v e d from th e b e n e f i t p r i n c i p l e o f t a x a t i o n . I n a nalogy t o p r i v a t e t r a n s a c t i o n s i n t h e market, p u b l i c s e r v i c e s s h o u l d be p r i c e d a c c o r d i n g t o b e n e f i t s r e c e i v e d . More s p e c i f i c a l l y , the t a x f o r a p a r t i c u l a r s e r v i c e s h o u l d be s e t , not t o r e c o v e r the unknown t o t a l b e n e f i t s r e c e i v e d by each t a x p a y e r , b u t a t a r a t e such t h a t t h e m a r g i n a l t a x e q u a l s th e m a r g i n a l b e n e f i t s r e c e i v e d from th e l a s t u n i t o f the s e r v i c e p r o v i d e d ( B i r d , 1976, p. 1 1 ) . From the t a x p a y e r ' s p o i n t o f v i e w , t h i s arrangement would be f u n d a m e n t a l l y e q u i t a b l e . However, i t i s n o t e c o n o m i c a l l y e f f i c i e n t because i t i m p l i e s t h a t s e r v i c e s s h o u l d be s u p p l i e d r e g a r d l e s s o f t h e c o s t s . Because of e v e n t u a l d i m i n i s h i n g m a r g i n a l u t i l i t i e s , t h e b e n e f i t p r i n c i p l e i m p l i e s t h a t consumers s h o u l d be charged l e s s as more o f t h e s e r v i c e i s p r o v i d e d d e s p i t e t h e f a c t t h a t m a r g i n a l c o s t s may -64-be i n c r e a s i n g . As F i g u r e 4 demonstrates, the tax should be s e t where the marginal c o s t s of s u p p l y i n g the s e r v i c e s are equated w i t h the marginal b e n e f i t s . At t h i s p o i n t the w e l f a r e of the community i s maximized. I f the s e r v i c e i s p r i c e d a t l e s s or more than P, resources w i l l be i n e f f i c i e n t l y a l l o c a t e d to the p r o d u c t i o n of t h i s s e r v i c e ( B i r d , 1976, p. 33). However, the very nature of a p u b l i c or q u a s i - p u b l i c good prevents the exact equation of marginal c o s t s and bene-f i t s . W i c k s e l l (1896) and L i n d a h l (1919) have argued t h a t an e q u i t a b l e d i s t r i b u t i o n of p u b l i c resources i s more important than e f f i c i e n c y . Although more p r e c i s e d i s t i n c t i o n s between p u b l i c and p r i v a t e goods w i l l be p r o v i d e d l a t e r , i t i s evident t h a t the p o s i t i v e b e n e f i t s to the community as a whole of c e r t a i n s e r v i c e s cannot be e v a l u a t e d i n any exact way by the marginal b e n e f i t s to i n d i v i d u a l s . Samuelson (19 54) has suggested t h a t because of e x t e r n a l i t i e s among t a x i n g j u r i s -d i c t i o n s , i t i s i m p o s s i b l e to determine, at the l e v e l of one j u r i s d i c t i o n , an o p t i m a l l e v e l f o r the p r o v i s i o n of pure p u b l i c goods or s e r v i c e s . Even i f the b e n e f i t p r i n c i p l e and marginal c o s t p r i c i n g theory are not a c h i e v a b l e i n any r e a l system of t a x a t i o n , a c l o s e r approximation of marginal c o s t s to b e n e f i t s remains a d e s i r a b l e o b j e c t i v e . As B i r d (1976) concluded from h i s study of p u b l i c p r i c i n g , the importance of b e n e f i c i a r y charges i s not so much as a method f o r r a t i o n i n g l i m i t e d -65-FIGURE 4 EFFICIENT PRICING OF PUBLIC SERVICES Q Output FIGURE 5 MARGINAL COST DEFICIT -66-p u b l i c r e s o u r c e s , but as a s i g n a l to governments of the p u b l i c ' s e v a l u a t i o n of the worth of s e r v i c e s . Without t h i s k i n d of s i g n a l on which the p r i v a t e market operates, s e r v i c e s w i l l almost c e r t a i n l y be i n e f f i c i e n t l y p r o v i d e d . The p r o p e r t y tax does not r e p r e s e n t a marginal c o s t p r i c e f o r s e r v i c e s , but i t i s not as d i s t r i b u t i o n a l l y i n e f -f i c i e n t as average c o s t p r i c i n g , i n which t o t a l c o s t s are borne e q u a l l y by a l l b e n e f i c i a r i e s r e g a r d l e s s of i n d i v i d u a l b e n e f i t s r e c e i v e d and c o s t s imposed. The p r o p e r t y tax appears to f a l l somewhere between the extremes of average and marginal c o s t p r i c i n g because p r o p e r t y values have some r e l a t i o n s h i p to the value of s e r v i c e s p r o v i d e d (Downing, 1973, p. 631). Property taxes per u n i t of r e s i d e n t i a l space tend t o i n c r e a s e as d e n s i t i e s d e c l i n e and the c o s t s of some s e r v i c e s , as w i l l be d i s c u s s e d more s p e c i f i c a l l y l a t e r , a l s o i n c r e a s e with lower d e n s i t i e s (Hyman, 1977, p. 241). However, where s p e c i a l assessments are l e v i e d on s e r v i c e s p r o v i d e d i n a d d i t i o n to the p r o p e r t y tax, average r a t h e r than marginal c o s t p r i c i n g i s f r e q u e n t l y implemented because the former i s s i m p l e r to a d m i n i s t e r . The succeeding a n a l y s i s c o n t r a s t s average w i t h marginal c o s t p r i c i n g i n order to make the d i f f e r e n c e s between the two mechanisms c l e a r not o n l y i n the case of these s p e c i a l assessments, but a l s o because the p r o p e r t y tax does not r e p r e s e n t a marginal c o s t assessment f o r s e r v i c e s . -67-FIXED VERSUS VARIABLE COSTS Ma r g i n a l c o s t p r i c i n g i s b e s t a p p l i e d t o the f i n a n c i n g of o p e r a t i n g expenditures - the v a r i a b l e or i n c r e m e n t a l c o s t s t h a t occur once a system has been put i n t o p r o d u c t i o n . To the degree t h a t an expansion i n p r o d u c t i o n can be c a r r i e d out i n s m a l l u n i t s of c a p i t a l o u t l a y , the f i x e d c o s t component can a l s o be i n c o r p o r a t e d i n t o the marginal c o s t p r i c i n g formula. But a s i g n i f i c a n t amount of p u b l i c expenditures on s e r v i c e s are, at l e a s t i n i t i a l l y , i n d i v i s i b l e and c r e a t e a f i x e d c ost independent of the volume of s e r v i c e s produced and consumed. I f there are i n c r e a s i n g r e t u r n s to s c a l e i n p r o d u c t i o n , i n the long run, average c o s t s , which r e f l e c t recovery of t o t a l c o s t s , w i l l be h i g h e r than marginal c o s t s ( M i l l i m a n , 1972, p. 34). I f marginal c o s t p r i c i n g i s i n e f f e c t , a d e f i c i t i n f i n a n c i n g w i l l occur. F i g u r e 5 (Paul, 1972, p. 83) i l l u s -t r a t e s t h i s s i t u a t i o n , assuming i n c r e a s i n g r e t u r n s to s c a l e . The output (Qj) produced would be, under marginal c o s t p r i c i n g , a t the i n t e r s e c t i o n of the marginal c o s t and demand curves. T o t a l revenues would be represented by the area abcQ^, but the f u l l c o s t s , r e p r e s e n t e d by the average c o s t curve, would be aP^dQ^. The gap between revenues and expen-d i t u r e s would be area bP^dc. In the o p p o s i t e case of d e c r e a s i n g r e t u r n s to s c a l e , revenue s u r p l u s e s would be c r e a t e d . Both the f i n a n c i n g of the d e f i c i t f o r a s e r v i c e from the g e n e r a l tax base and the r e a l l o c a t i o n of a s u r p l u s to -68-other p u b l i c expenditures are i n e q u i t a b l e s o l u t i o n s because those who have imposed the c o s t s w i l l be s u b s i d i z e d by the e n t i r e m u n i c i p a l i t y . Because the primary focus of marginal c o s t p r i c i n g i s on a d d i t i o n a l u n i t s of p r o d u c t i o n , i t i s most a p p r o p r i a t e to the s h o r t run incremental c o s t s which tend to be termed " v a r i a b l e " c o s t s even though an element of f i x e d c o s t s may be i n v o l v e d (Vickery, 1972, p. 55). Not only i n i t i a l c o s t s , but f u t u r e expansions r e q u i r i n g l a r g e lump-sum investments are d i f f i c u l t to d e a l with i n the marginal c o s t p r i c i n g framework. SPATIAL EFFECTS Downing (1977) has made one of the few attempts to apply the theory of user charges to urban s p a t i a l development. His a n a l y s i s examines the r e l a t i o n s h i p between l o c a t i o n i n c e n t i v e s f o r two adjacent communities. In F i g u r e 6, A and B r e p r e s e n t s i t e s of p r o d u c t i o n of a s e r v i c e w i t h i n two communities. For a f i x e d l e v e l of output s e r v i n g a given number of r e s i d e n t s , AA 1 r e p r e s e n t s the l e v e l of the long run marginal c o s t of p r o d u c t i o n . a 1 ° a r e p r e s e n t s the d i s t r i b u t i o n c o s t f u n c t i o n . Assuming c o s t s i n c r e a s e l i n e a r l y w i t h d i s t a n c e , the l e v e l of d i s t r i b u t i o n c o s t s i s lowest a t s i t e A. Because community B i s s m a l l e r than A, i t s long run marginal c o s t s (BB 1) are h i g h e r . B ^ D B r e p r e s e n t s i t s d i s t r i b u t i o n c o s t f u n c t i o n . P o i n t Z, where the two c o s t f u n c t i o n s o v e r l a p , r e p r e s e n t s the most e f f i c i e n t market s i z e f o r each community. Under FIGURE 6 LOCATIONAL CHOICE AND MARGINAL COST PRICING FIGURE 7 LOCATIONAL CHOICE AND AVERAGE COST PRICING Cost; E / i N i >er6^ts p f | ^ , p r o d u c t i o n and 1 d i s t r i j b u t i o n | ' i i 1 D i s t a n c e -70-marginal c o s t p r i c i n g , as long as there are d e c r e a s i n g c o s t s of p r o d u c t i o n , m i g r a t i o n of r e s i d e n t s from B to A because s e r v i c e s are cheaper w i l l produce no i n e f f i c i e n t e f f e c t s , s i n c e AA 1 w i l l merely decrease and BB 1 i n c r e a s e . I f constant or i n c r e a s i n g c o s t s of p r o d u c t i o n are the case, t h i s w i l l be r e f l e c t e d i n the p r i c e f o r s e r v i c e s and e v e n t u a l l y e f f i c i e n t market s i z e w i l l become s e t . In c o n t r a s t , average c o s t p r i c i n g c r e a t e s s u b s i d i z a t i o n of p e r i p h e r a l areas by c e n t r a l l y - l o c a t e d r e s i d e n t s . In F i g u r e 7, using the same n o t a t i o n , an average c o s t charge (AA^) i s now l e v i e d . The c o s t s of d i s t r i b u t i o n are now shared e q u a l l y by the whole community and the r e s u l t can be compared to the previous marginal cost charge (A"*"D ) s i t u a t i o n . Residents l o c a t e d between A and X s u b s i d i z e those between X and Z. Because both r e c e i v e the same l e v e l of s e r v i c e , Downing has noted t h a t there i s more i n c e n t i v e to l o c a t e beyond X and pressure to extend s e r v i c e s to Z 1. Perhaps more a c c u r a t e l y , there i s no p e n a l t y f o r those who choose to r e s i d e i n p e r i p h e r a l areas where the a c t u a l c o s t s of the s e r v i c e are h i g h e r . PUBLIC, PRIVATE AND MERIT GOODS - THE SCOPE OF MARGINAL COST PRICING The main c h a r a c t e r i s t i c s of a pure p u b l i c good are t h a t i n d i v i d u a l s cannot be excluded from the consumption of i t and t h a t one person's consumption does not i n t e r f e r e w i t h -71-another's. In contrast, private goods can be rationed through prices so that only those w i l l i n g to pay w i l l receive the benefits. A merit good has been defined as "a private good that has been endowed with the public i n t e r e s t " (Milliman, 1972, p. 40). In other words, i t i s possible to rat i o n the good or service, but because of certain p o s i t i v e e x t e r n a l i t i e s derived by the community from i n d i v i d u a l consumption, i t i s deemed in the public i n t e r e s t to ensure that everyone consumes at least some minimum amount. Other reasons that an e s s e n t i a l l y private good may be p u b l i c l y supplied are economies of scale and the necessity of certain supply (Downing, 1977, p. 443). A l l these reasons are based on the acknowledgement of some type of e x t e r n a l i t y . I t seems generally agreed that d e f i c i t s from the provision of these quasi-public goods or services should be financed by a subsidy from the general tax base. The r e s u l t i n g r e d i s t r i -bution of income has been j u s t i f i e d on the basis of equity (Mushkin, 1972, p. 11). In the case of true public goods, marginal cost p r i c i n g has no relevance because the marginal cost imposed by an additional consumer i s zero (Milliman, 1972, p. 40). But some p u b l i c l y provided services with private c h a r a c t e r i s t i c s are amenable to marginal cost p r i c i n g . A service provided primarily on the grounds of e f f i c i e n c y can be rationed on a more or less s t r i c t marginal cost basis. Where the exter-n a l i t i e s are large, marginal cost p r i c i n g has less -72-a p p l i c a b i l i t y . In some cases i t may s t i l l be p o s s i b l e to r e l a x marginal c o s t r u l e s by a d j u s t i n g charges to account f o r these e x t e r n a l i t i e s (Downing, 1977, p. 443). Because the z e r o - p r i c e o p t i o n r e s u l t s i n o v e r - p r o d u c t i o n and over-consumption, even f o r some goods with more p u b l i c c h a r a c t e r -i s t i c s some loose form of marginal c o s t p r i c i n g i s d e s i r a b l e ( B i r d , 1976, p. 347). In g e n e r a l , the a p p l i c a b i l i t y of marginal c o s t p r i c i n g i s dependent on whether the b e n e f i t s are d i v i s i b l e - where pr e f e r e n c e s can be r e v e a l e d and the a b i l i t y to exclude e x i s t s . Some element of v o l u n t a r y purchase must be e v i d e n t , although t h i s must be balanced by the c o n s i d e r a t i o n t h a t some l e v e l of purchase may need to be compelled i n order to e l i m i n a t e the i n c e n t i v e t o buy l e s s than i s s o c i a l l y d e s i r a b l e . P a r t i c u l a r l y good cases f o r marginal c o s t p r i c i n g are where e x t r a p u b l i c s e r v i c e s are i n demand and where people are w i l l i n g to pay f o r d i f f e r e n t q u a l i t i e s of s e r v i c e (Mushkin, 1972, p. 22-23). Although i t i s f r e u q n e t l y argued t h a t the scope of mar-g i n a l c o s t p r i c i n g of p u b l i c goods and s e r v i c e s i s much broader than c u r r e n t p r a c t i c e s would i n d i c a t e , the concern here i s s p e c i f i c a l l y w i t h those s e r v i c e s t h a t have d e n s i t y and d i s t a n c e dependent c o s t s . F a i l u r e to a s s i g n a p p r o p r i a t e c o s t s i n these i n s t a n c e s w i l l allow l o c a t i o n a l d e c i s i o n s to be made without c o n s i d e r a t i o n f o r h i g h e r a c t u a l c o s t s borne by the e n t i r e t a x i n g j u r i s d i c t i o n . Downing and Gustley (1977) have reviewed p r e v i o u s s t u d i e s and conducted t h e i r own r e s e a r c h on the r e l a t i o n s h i p of d e n s i t y and d i s t a n c e to the c o s t s of s u p p l y i n g v a r i o u s s e r v i c e s . They concluded t h a t the c o s t s of water supply, storm drainage, s a n i t a r y sewers and s o l i d waste d i s p o s a l and c o l l e c t i o n are d e n s i t y dependent. Distan c e r e l a t e d c o s t s , i n order of extremes i n d i f f e r e n t i a l s , were water supply, s a n i t a r y sewers and storm drainage. In both cases the d i f f e r e n t i a l s f o r c a p i t a l c o s t s were hig h e r than f o r o p e r a t i n g c o s t s . Downing (1977), V i c k e r y (1963), K a f o g l i s (1969) and P l u n k e t t (1976) have maintained t h a t these s e r v i c e s are among those with a c o n s i d e r a b l e s i m i l a r i t y to p r i v a t e goods which makes them amenable to marginal c o s t p r i c i n g . The use of s e r v i c e charges and s p e c i a l assessments f o r these s e r v i c e s i s a l r e a d y f a i r l y p r e v a l e n t , but i n most cases there remains room f o r g r e a t e r use of marginal c o s t p r i c i n g . Downing (1977) and Mushkin (1972) have suggested more s p e c i f i c a l l y how charges can be s e t and have d e a l t with the s p e c i a l problems of each of these s e r v i c e s . ADMINISTRATIVE COSTS AND IMPACT ON SPRAWL There are two major i s s u e s r e l e v a n t to t h i s d i s c u s s i o n t h a t have not y e t been r a i s e d . The f i r s t i s the d i f f i c u l t y of implementing a user charge system corresponding more c l o s e l y w i t h marginal c o s t p r i c i n g . An important adminis-t r a t i v e problem t h a t c o u l d p r o h i b i t marginal c o s t p r i c i n g , -74-even on a l e s s s t r i c t t h e o r e t i c a l b a s i s , i s the h i g h c o s t of c o l l e c t i n g the i n f o r m a t i o n needed to a s s i g n more a p p r o p r i a t e charges. E f f e c t i v e p r i c i n g a l s o r e q u i r e s p e r i o d i c r e a s s e s s -ment to a v o i d o b s o l e t e p r i c e s t r u c t u r e s . For s e r v i c e s which are a l r e a d y p a r t l y p r o v i d e d on a user-pay b a s i s the problem i s not a s e r i o u s o b s t a c l e . Even f o r other s e r v i c e s , the i n i t i a l i n c r e a s e d a d m i n i s t r a t i v e c o s t s may w e l l be j u s t i f i e d by l a t e r savings i n expenditures where the c o s t of p r o v i d i n g these s e r v i c e s prove to have been too low ( B i r d , 1976) . In a d d i t i o n , the e x t e r n a l b e n e f i t s to the m u n i c i p a l i t y from more e f f e c t i v e p l a n n i n g and tax c o o r d i n a t i o n may h e a v i l y outweigh the disadvantages. The second i s s u e i s whether marginal c o s t p r i c i n g a c t s as a c o n s t r a i n t to urban sprawl. A user charge, u n l i k e a tax, which i s a compulsory payment due as long as r e s i d e n t s t a t u s i s kept, allows the consumer of s e r v i c e s some feedom to a d j u s t consumption, perhaps to the p o i n t t h a t the p r i c e p a i d i s low enough t o make a l o c a t i o n a l c h o i c e a c c e p t a b l e at a c o n s i d e r a b l e d i s t a n c e from the c i t y (Mushkin, 1972, p. 437). B a s i c s e r v i c e s such as those mentioned p r e v i o u s l y are to some extent compelled or e s s e n t i a l purchases which must be s u p p l i e d a t a minimum l e v e l . M a r g i n a l c o s t p r i c i n g f o r these s e r v i c e s imposes some unavoidable c o s t s . But t o the degree t h a t r e s i d e n t s w i l l be w i l l i n g to pay h i g h e r charges a s s o c i a t e d w i t h p e r i p h e r a l l o c a t i o n s or are able to a d j u s t consumption, marginal c o s t p r i c i n g w i l l not reduce sprawl (Downing, 1977, -75-p. 438). The o b j e c t i v e of marginal c o s t p r i c i n g i s simply to ensure t h a t r e s i d e n t s pay more of the s o c i a l c o s t s of t h e i r l o c a t i o n a l c h o i c e s . I n d i r e c t l y , i t i s a d i s i n c e n t i v e to sprawl because i t f o r c e s consumers to e v a l u a t e p r e f e r e n c e s f o r l o c a t i o n and s e r v i c e s . W i t h i n these l i m i t a t i o n s , t here are s e v e r a l ways i n which marginal c o s t p r i c i n g w i l l a f f e c t development. Newly developing areas around the c i t y ' s p e r i p h e r y w i l l be f o r c e d to pay the f u l l p r i c e f o r extensions of s e r v i c e s . Among suburban areas, c o m p e t i t i o n w i l l be a f a c t o r i n determining p r i c e s and the d e n s i t y / d i s t a n c e r e l a t e d charges w i l l be of some e f f e c t i n c r e a t i n g suburban cores. Between the c i t y and suburb, however, intergovernmental b a r g a i n i n g over t r a n s f e r payments i s necessary where s p i l l o v e r e f f e c t s r e s u l t when economies of s c a l e f a i l to correspond with p o l i t i c a l j u r i s d i c t i o n s . Bahl and McGuire (1977), have c o n s i d e r e d the q u e s t i o n of e f f e c t i v e n e s s of taxes from the viewpoints of homeowner, s p e c u l a t o r and developer. Where f u l l i n c r e m e n t a l c o s t s are recovered w i t h charges v a r i a b l e by d i s t a n c e as opposed t o lump sum charges, homeowners are l i k e l y to choose more c e n t r a l l o c a t i o n s . S p e c u l a t o r s h o l d i n g undeveloped land r e q u i r i n g no s e r v i c e s w i l l not be i n f l u e n c e d by marginal cost p r i c i n g , but by the p r o p e r t y tax. Developers do c o n s i d e r the a v a i l a b i l i t y o f s e r v i c e s , but t h i s i s but one f a c t o r among a l a r g e number t h a t i n f l u e n c e t h e i r d e c i s i o n s . However, -76-n e i t h e r s p e c u l a t o r nor developer w i l l b e n e f i t i f t h e i r c l i e n t s , the p r o s p e c t i v e homeowners, are not w i l l i n g to pay the s e r v i c e c o s t s f o r more remote l o c a t i o n s . ALTERNATIVES The Land Value Tax A number of w r i t e r s ( V i c k e r y , 1972, p. 63; Roberts, 1977, p. 47; B a i l s , 1973, p. 387-288; M i l l i m a n , 1972, p. 44) have suggested t h a t the land value tax i s an a p p r o p r i a t e means of r e c o v e r i n g expenditures on s e r v i c e s . They argue t h a t p u b l i c l y p r o v i d e d s e r v i c e s are a l a r g e c o n t r i b u t o r to land values and, as noted i n Chapter I I , land value t a x a t i o n i s not a d e t e r r e n t to development. However, land v a l u e s provide only a rough measure of p u b l i c s e r v i c e s . Other f a c t o r s comprising e x t e r n a l l y generated b e n f i t s - p r o x i m i t y to p l a c e of work, shopping, r e c r e a t i o n a l and c u l t u r a l f a c i l i t i e s and aggregate p r i v a t e b e n e f i t s w i t h a p u b l i c c h a r a c t e r (the g e n e r a l l e v e l of improvements) - a l s o have an i n f l u e n c e on land v a l u e s . I t should a l s o be noted t h a t the areas of the h i g h e s t land values are u s u a l l y areas of compact development w i h i n the urban core t h a t may be l e s s expensive to s e r v i c e . P e r i p h e r a l urban and suburban areas r e q u i r i n g extensions of s e r v i c e s may be the most expensive to s e r v i c e . The important d i s t i n c t i o n here i s between the sunk c o s t s of the g e n e r a l p r o v i s i o n of -77-i n f r a s t r u c t u r e and o p e r a t i n g c o s t s . In c o n s i s t e n c y with the d e f i n i t i o n s p r o v i d e d a t the beginning of Chapter I I I , o n l y the former c o s t s may be recovered through the l a n d value tax. The l a t t e r c o s t s r e p r e s e n t improvements to land which should p r e f e r a b l y be recovered through user charges. Land value t a x a t i o n seems an a p p r o p r i a t e means of r e c o v e r i n g c o s t s f o r s e r v i c e s only where marginal c o s t s and b e n e f i t s are v i r t u a l l y i m p o s s i b l e to determine. The p l a n n i n g of new s e r v i c e s or extensions of s e r v i c e s t o the p e r i p h e r y and suburbs where those c o s t s can be assigned on an i n d i v i d u a l or zonal b a s i s permits a s t r i c t e r adherence to marginal c o s t p r i n c i p l e s . M u l t i - P a r t T a r i f f s A more a p p r o p r i a t e a l t e r n a t i v e f o r these areas i s the m u l t i - p a r t t a r i f f , designed to recover d i s t a n c e or d e n s i t y r e l a t e d c o s t s and the marginal c o s t s of consumption. A number of v e r s i o n s have been proposed. The t a r i f f may be as simple as a f i x e d charge f o r connection p l u s an incremental charge f o r the amount used ( B i r d , 1976, p. 40). Downing (1973, p. 637) suggests, as an example f o r sewer s e r v i c e s , a f r o n t a g e charge f o r pipes to cover c o l l e c t i o n c o s t s , a c o n n e c t i o n fee and a f l a t r a t e t o cover any other o p e r a t i n g c o s t s . Frontage charges, which d i s c r i m i n a t e by s i z e of premises, are f o r r e s i d e n t i a l consumers a more e q u i t a b l e -78-means of assessment s i n c e they a c t i n f a v o r of s m a l l e r s i t e s more l i k e l y to be occupied by lower income groups (V i c k e r y , 1972, p. 62). B i r d (1976) has a l s o suggested a consumer p r i c e based on the marginal c o s t s of consumption, a connec-t i o n fee and a s p e c i a l assessment on d i s t r i b u t i o n charges. The m u l t i - p a r t t a r i f f o f f e r s an o p p o r t u n i t y to recover both " f i x e d " and " v a r i a b l e " c o s t s . The former can be assessed on a f l a t r a t e b a s i s f o r those types of c o s t s f o r which i t i s d i f f i c u l t to get consumers to r e v e a l t h e i r p r e f e r e n c e s and the l a t t e r on c o s t s f o r which l e v e l s of consumption or l o c a t i o n p r e f e r e n c e s can be a d j u s t e d . I t i s thus a s o l u t i o n to the dilemma of determining optimal l e v e l s of o p e r a t i o n f o r p u b l i c goods posed by Samuelson (1954). I t i s a l s o a means f o r i n c o r p o r a t i n g long run " f i x e d " c o s t s and extensions of s e r v i c e s i n t o the marginal c o s t p r i c i n g framework r a t h e r than having to r e l y on g e n e r a l revenues to fund s p e c i f i c s e r v i c e d e f i c i t s . I d e a l f o r these purposes would be a f l a t r a t e f o r a l l consumers to cover any remaining i n i t i a l c a p i t a l c o s t d e f i c i t ; a connection f e e , a d i s t r i b u t i o n fee and an expansion c a p i t a l c o s t fee f o r new consumers; and a consumption fee based on the marginal c o s t s imposed by i n d i v i d u a l consumers. The f i r s t component and p a r t of the second of t h i s proposed t a r i f f would recover the " f i x e d " c o s t s and c o s t s of expansion to make t h i s a case of long run marginal c o s t p r i c i n g . The t h i r d component re p r e s e n t s s h o r t run marginal c o s t p r i c i n g -79-c l o s e r to the t h e o r e t i c a l i d e a l . The second component i s a d i s t a n c e dependent v a r i a b l e t h a t i s a d i s i n c e n t i v e to l o c a t e i n areas r e q u i r i n g new s e r v i c e s . Since the c a p i t a l c o s t s f o r expansion of s e r v i c e s i s even more s i g n i f i c a n t than o p e r a t i n g expenditures f o r d i s t a n c e d i f f e r e n t i a l s (Downing and G u s t l e y , 1977), t h i s t a r i f f would have a more s i g n i f i c a n t e f f e c t on l o c a t i o n a l c h o i c e s . The developer would presumably bear the connec t i o n f e e , the homeowner the d i s t r i b u t i o n fee i n a d d i t i o n to the f i r s t and t h i r d p a r t s of the t a r i f f . Because the supply of new development i s probably q u i t e e l a s t i c , the developer would l i k e l y be able to pass h i s share on to the homeowner. The assignment of the expansion c a p i t a l c o s t fee co u l d be worked out between developer and pr o s -p e c t i v e homeowner, ensu r i n g t h a t the impact of l o c a t i o n choice o u t s i d e s e r v i c e d areas i s f u l l y r e a l i z e d by the consumer. M u l t i - p a r t t a r i f f s are a compromise between s t r i c t m arginal c o s t p r i c i n g and a d m i n i s t r a t i v e c o s t s . Formulas l i k e the one suggested above may s t i l l be expensive to ad m i n i s t e r . However, the b e n e f i t s i n the form of more e f f e c t i v e p r i c i n g , which s i g n a l s p r e f e r e n c e s to the m u n i c i p a l i t y a t the same time as r e s t r i c t i n g demand on the b a s i s o f w i l l i n g n e s s to pay, and the impact on l o c a t i o n a l c h o i c e which works i n c o o r d i n a t i o n with o t h e r p o l i c i e s to reduce urban sprawl may w e l l be worth the a d d i t i o n a l c o s t s . - 8 0 -P r o j e c t F i n a n c i n g L e v i e s Although betterment l e v i e s are d i s c u s s e d more f u l l y i n Chapter V, betterment l e v i e s f o r s p e c i f i c p r o j e c t s enlarges the scope of t a x a t i o n on the b a s i s of the b e n e f i t p r i n c i p l e and i s economically n e u t r a l i f a p p l i e d to new development. D e c i s i o n s to undertake p r o j e c t s at p u b l i c expense are o f t e n the stimulus f o r new development. Expansion of the t r a n s -p o r t a t i o n network, extensions of a l l p h y s i c a l i n f r a s t r u c t u r a l s e r v i c e s and c o n s t r u c t i o n of s u b s t a t i o n s are examples of the k i n d of p u b l i c p r o j e c t s t h a t i n c r e a s e the d e s i r a b i l i t y of c e r t a i n l o c a t i o n s . A charge which recovers a l l or some p o r t i o n of the p r i v a t e b e n e f i t s of these p r o j e c t s , which tend t o be undertaken i n order to b r i n g p e r i p h e r a l land i n t o urban use, w i l l be n e u t r a l and w i l l a s s i g n s o c i a l c o s t s of development i n a more optimal manner. An important q u a l i f i -c a t i o n i n the a p p l i c a t i o n of t h i s form of betterment l e v y i s th a t b e n e f i c i a r i e s and b e n e f i t s must be f a i r l y easy to i d e n t i f y . New development on the p e r i p h e r y g e n e r a l l y p r o v i d e s such a b a s i s f o r assessment. Macon and Manbn (1975, p. 19-25) have d e s c r i b e d the process of a s s i g n i n g l e v i e s . Determination of the b e n e f i t area, q u a n t i f i c a t i o n of aggregate b e n e f i t s and c a l c u l a t i o n of i n d i v i d u a l b e n e f i t s w i t h corresponding l e v y o f t e n r e q u i r e s i m p l i f i c a t i o n to reduce a d m i n i s t r a t i v e c o s t s . Aggregate b e n e f i t s may be c a l c u l a t e d by sampling p r o p e r t y value - 8 1 -i n c r e a s e s , which are e x t r a p o l a t e d on t h i s b a s i s f o r the e n t i r e area. Increases i n p r o p e r t y v a l u e s are the most d e s i r a b l e proxy f o r b e n e f i t s r e c e i v e d because they i n c l u d e the immediate and the f u t u r e stream of b e n e f i t s i n c a p i t a l i z e d form. I f t h i s i n f o r m a t i o n i s not r e a d i l y a v a i l a b l e , t o t a l p r o j e c t c o s t s are p r o r a t e d a c c o r d i n g to d i f f e r e n t i a l b e n e f i t s among the r e c i p i e n t s . Some type of b e n e f i t - c o s t a n a l y s i s should be conducted i n order to determine whether the p r o j e c t should be undertaken. S p e c i f i c p r o j e c t f i n a n c i n g i s a more s o p h i s t i c a t e d form of the more common development c o s t charge or s p e c i a l a s s e s s -ment. U n l i k e marginal c o s t p r i c i n g , i t i s a one time assessment f o r i n i t i a l p h y s i c a l improvements. Because the c o s t s of some p u b l i c works p r o j e c t s are h e a v i l y concentrated on the i n i t i a l investment i n c o n s t r u c t i o n with r e l a t i v e l y minor f u t u r e expenditures r e q u i r e d f o r maintenance - the type of p r o j e c t not amenable to forms of marginal c o s t p r i c i n g - a betterment l e v y may be more a p p r o p r i a t e . I t may a l s o p r o v i d e a b e t t e r b a s i s f o r recovery of the " f i x e d " c o s t component of investment i n s e r v i c e s where marginal c o s t p r i c i n g i s a p p l i c a b l e i n r e c o v e r i n g o p e r a t i n g c o s t s . - 8 2 -CHAPTER V ECONOMIC NONNEUTRALITY AND TAXATION ON THE URBAN PERIPHERY Economic n e u t r a l i t y p r o v i d e s the b a s i s f o r reforming t a x a t i o n w i t h the o b j e c t i v e o f removing d i s t o r t i o n s i n the pro p e r t y market which c o n t r i b u t e to urban sprawl, but i t i s not a means of i n c r e a s i n g c o n t r o l over urban growth p a t t e r n s . I t may be d e s i r a b l e to supplement the tax system with taxes that are economically nonneutral to the develop-ment process i n a manner c o n s i s t e n t w i t h p l a n n i n g o b j e c t i v e s . T h i s chapter explores two groups of taxes with which there has been some p r a c t i c a l experience and which come c l o s e s t to a merger between l o c a l f i s c a l p o l i c y and o b j e c t i v e s f o r urban development. N e i t h e r of these tax groups has been designed s p e c i f i c a l l y to i n c r e a s e c o n t r o l over l a n d use i n t e n s i t y . However, t h e i r primary o b j e c t i v e s - recovery of b e n e f i t s c o n f e r r e d by p u b l i c a c t i o n s , i n the case of betterment l e v i e s and improvement of e q u i t y , w i t h r e s p e c t t o p r e f e r e n t i a l tax treatment o f a g r i c u l t u r a l and open space land - are c l o s e l y r e l a t e d to the i s s u e of urban sprawl. T h e i r e f f e c t s on the premature development of p e r i p h e r a l urban l a n d t h e r e f o r e warrant i n v e s t i g a t i o n . -83-TAXES AND THE TIMING OF URBAN DEVELOPMENT Before d i s c u s s i n g these groups of taxes, the nature of a tax w i t h the p o t e n t i a l to reduce sprawl on the p e r i p h e r y must be examined. Sprawl r e s u l t s from premature development of urban f r i n g e l a n d d e s p i t e the e x i s t e n c e of more c e n t r a l l y l o c a t e d l a n d which i s a s u i t a b l e l o c a t i o n a l s u b s t i t u t e except f o r d i f f e r e n c e s i n the p r i c e of a c q u i s i t i o n . A tax which i n c r e a s e s the l e n g t h of time p e r i p h e r a l land i s w i t h h e l d from development a l t e r s the balance of d e c i s i o n s to develop i n fa v o r of more c e n t r a l l y l o c a t e d land. I t does so by redu c i n g the p r o f i t a b i l i t y from development of p e r i p h e r a l r e l a t i v e to more c e n t r a l l o c a t i o n s . The r e l a t i v e s i g n i f i c a n c e of the prope r t y tax to other f a c t o r s determining d e c i s i o n s on the tim i n g of development has been reviewed i n Chapter I. At i s s u e here i s the d i r e c t i o n r a t h e r than the magnitude of the e f f e c t . The f o l l o w i n g a n a l y s i s has been d e r i v e d from Shoup's (1970) study of the optimal t i m i n g o f urban develop-ment. The e conomically o p t i m a l time t o develop urban land may be expressed as: T q = f f r , a , V ( T ) , A J where: T q = the optimal time of development, r = the i n t e r e s t r a t e , a = the tax r a t e on the pr o p e r t y i n i t s presen t use, V(T) = the development value at any time T, and -84-A ( t , T Q ) = any earnings from the land i n i t s present use. A major assumption here i s t h a t l a n d w i l l be developed only f o r i t s h i g h e s t and b e s t economic use. T h i s i s r e f l e c t e d i n the term V ( T ) , which may a l s o be d e s c r i b e d as the present v a l u e a t some time T of net r e t u r n s from the developed prop-e r t y i f development occurs at T. I t i s i m p l i c i t l y acknow-ledged t h a t over time the most p r o f i t a b l e type of development changes i n response to demand as u r b a n i z a t i o n i n c r e a s e s . In a d d i t i o n t o earnings i n present use, term A a l s o i n c l u d e s the c o s t of any temporary improvements t h a t may be made t o i n c r e a s e the p r o f i t a b i l i t y of w i t h h o l d i n g land from major redevelopment. I t i s assumed t h a t the b e s t type of temporary improvement i n terms of p r o f i t maximization i s c a r r i e d out and the f u t u r e c o s t s of demolishing improvements to make way f o r development are a l s o i n c l u d e d i n t h i s c a l c u l a t i o n . The p r o p e r t y tax r a t e and the i n t e r e s t r a t e reduce present and f u t u r e p r o f i t s from h o l d i n g the land f o r gains upon development. A decrease i n the p r o p e r t y tax, h o l d i n g a l l o ther f a c t o r s constant, w i l l i n c r e a s e the p r o f i t a b i l i t y of w i t h h o l d i n g land from development, thus lengthening the time b e f o r e development o c c u r s . F i g u r e 8 i l l u s t r a t e s the e f f e c t o f a decrease i n p r o p e r t y taxes on the t i m i n g of development. In t h i s graph, P(t) r e p r e s e n t s the p r e s e n t v a l u e a t some time t of the r e t u r n s from i n t e r i m use, net of the p r o p e r t y tax, p l u s the p r e s e n t v a l u e of the development value a t the -85-FIGURE 8 TAX REDUCTION AND THE TIMING OF DEVELOPMENT Value V ( T ) = development value a t some time T P(t) = market value at time t P*(t) = market value at time t i f the tax i s reduced T q = optimal development time a t the present tax r a t e T * = optimal development time a t a reduced tax r a t e - 8 6 -o p t i m a l time. Because P(t) r e f l e c t s a l l f a c t o r s which determine the va l u e o f the lan d , i t i s equal to the market value of the land a t time t . The p o i n t a t which the P(t) and V(T) curves i n t e r s e c t determines the optimal time of development, T . A r e d u c t i o n i n the pr o p e r t y tax i s c a p i t a l i z e d i n t o the market value of the land and the P*(t) curve i s s h i f t e d upwards, d e l a y i n g development. Shoup (1970) has d e s c r i b e d t h i s r e l a t i o n s h i p mathemati-c a l l y . Although he l a t e r i n c l u d e s i n t e r i m r e t u r n s i n h i s equations, they are omitted at t h i s stage i n order to make the e f f e c t o f the tax c l e a r . The equation to be maximized i s : P(t,T) = V ( T ) e " r ( T _ t ) - j £ a P ( i , T ) e ~ r ( l _ t ) d i (1) (Shoup, 1970, p. 38). The market value at time t f o r a given development time T i s dependent upon the present value of the. development value a t T minus the present - value of the tax bef o r e development. D i f f e r e n t i a t i o n and s i m p l i f i -c a t i o n y i e l d : V (T) = r + a (2) V(T) (p. 39). T h i s r e s u l t i n d i c a t e s t h a t development occurs when the r a t e of i n c r e a s e i n development value equals the sum of the i n t e r e s t and tax r a t e s . Land w i l l be w i t h h e l d from development f o r as long as the r a t e of i n c r e a s e i n develop-ment value exceeds the h o l d i n g c o s t s , which i n c l u d e the i n t e r e s t and tax r a t e s , o f f s e t by any r e t u r n s from pres e n t use. Lowering the tax r a t e allows land t o be h e l d p r o f i t a b l y - 8 7 -when the r a t e of i n c r e a s e i n development value f a l l s to a lower l e v e l , thus postponing development. The e f f e c t of the p r o p e r t y tax l e v i e d p r i o r to develop-ment has been demonstrated, but the case of a tax l e v i e d at the time of development, p o s s i b l y a f t e r the tax has been kept at low l e v e l s , has y e t to be i n v e s t i g a t e d . Expanding on Shoup's a n a l y s i s , a term D(T), r e p r e s e n t i n g a tax l e v i e d a t the time of development, can be i n t r o d u c e d i n equation (1). P(t,T) = [V(T) - D(T)] e " r ( T _ t ) - \ T t a P ( i , T ) e " r ( i _ t ) d i . (3) The optimal time of development i s then given by aP(t,T) = -r [v(T) - D(T)J e " r ( T _ t ) + [v'(T) - D ' (T)] e ~ r ( T _ t ) dT -aP (T,T) e " r ( T _ t ) - J£ a p P ( i , T ) j e " r ( l " t ) d i = 0. (4) S i m p l i f i c a t i o n y i e l d s : -r [v(T) - D(T)] + [y1 (T) - D'(T)] - a[v(T) - D (T)J = 0, (5) and V (T) - D' (T) = r + a. (6) V(T) - D(T) T h i s r e v e a l s t h a t the l a r g e r the value o f ' D ' ( T ) , or the f a s t e r the r a t e a t which the tax i n c r e a s e s over time, (e.g. to r e f l e c t h i g h e r development v a l u e s , the e a r l i e r w i l l be the o p t i m a l time of development. The l a r g e r the value of D(T), or the g r e a t e r the s i z e of the tax a t the time of develop-ment, the l a t e r w i l l be the o p t i m a l time of development. From t h i s g e n e r a l mathematical form two more s p e c i f i c types of taxes l e v i e d a t the time of development can be -88-examined. A f i x e d or f l a t r a t e tax l e v i e d on development means t h a t D 1(T) = 0, and equation (6) becomes: V (T) = r + a. (7) V(T) - D(T) The h i g h e r D(T) or the development tax i s , the longer develop-ment w i l l be postponed. T h i s e f f e c t i s g r e a t e r than i n the g e n e r a l case where D'(T) > 0. In the case of a tax propor-t i o n a l t o development v a l u e , D(T) = c V ( T ) , where c i s some constant, 0 < c < 1 . S u b s t i t u t i n g i n t o equation (6) y i e l d s : V (T) - c V (T) = r + a. (8) V(T) - cV(T) T h e r e f o r e , V (T) = r + a, (9) V(T) the same r e s u l t t h a t Shoup d e r i v e d i n equation (2). The p r o p o r t i o n a l tax on development value has no e f f e c t on the op t i m a l t i m i n g of development. Development w i l l occur at the same time as i f no tax were l e v i e d . T h i s r e s u l t i s not i n t u i t i v e l y obvious, but i t s g e n e r a l e x p l a n a t i o n l i e s i n the o b s e r v a t i o n t h a t , because both increments i n development value and the market value of the land are decreased p r o p o r t i o n a t e l y w i t h the tax, the net r a t e of a p p r e c i a t i o n of the land w i t h h e l d f o r f u r t h e r development i s not a f f e c t e d and a c c o r d i n g t o equation (2), the o p t i m a l time of development i s unchanged. T h i s g e n e r a l a n a l y s i s i s a p p l i e d i n the f o l l o w i n g s e c t i o n s to two major groups of taxes having p o t e n t i a l to i n f l u e n c e land use p a t t e r n s on the urban p e r i p h e r y . -89-BETTERMENT LEVIES S e v e r a l forms of betterment l e v i e s have been used to reca p t u r e b e n e f i t s c o n f e r r e d by p u b l i c a c t i o n s . Although none has been a p p l i e d e x c l u s i v e l y to the urban p e r i p h e r y , these l e v i e s may be p a r t i c u l a r l y r e l e v a n t here i n view of the o f t e n great p r e s s u r e s f o r development which c r e a t e expec-t a t i o n s f o r w i n d f a l l gains through s p e c u l a t i o n . There are two j u s t i f i c a t i o n s f o r the a p p l i c a t i o n of betterment l e v i e s to convers i o n of the urban f r i n g e . The f i r s t and more f r e q u e n t l y c i t e d argument i s t h a t the w i n d f a l l gains from i n c r e a s e s i n development p o t e n t i a l a c c r u i n g to s p e c u l a t o r s on these lands are made p o s s i b l e not j u s t by p r i v a t e a c t i o n s but by p u b l i c a c t i o n s l i k e the g r a n t i n g of development permiss i o n and by "general community i n f l u e n c e s such as the growth of urban p o p u l a t i o n s " (Grimes, 1977, p. 360). These gains are o f t e n r e f e r r e d to as "unearned increments". T h i s v iewpoint has been c h a l l e n g e d by those who have s t r e s s e d t h a t s p e c u l a t i o n p l a y s an important r o l e i n the Operation of the pr o p e r t y market and the d i s t i n c t i o n between a normal and a w i n d f a l l g a i n i s d i f f i c u l t to d e f i n e . A second r a t i o n a l e f o r such a le v y i s t h a t the a c t i o n s o f many p r i v a t e o p e r a t o r s may c r e a t e negative s o c i a l e x t e r n a l i t i e s through urban sprawl. In economic terms, the s o c i a l d i s c o u n t r a t e f o r f u t u r e b e n e f i t s i s lower than t h a t of p r i v a t e developers, r e s u l t i n g i n g r e a t e r than optimal investment i n -90-development wi t h s h o r t term b e n e f i t s and lower than optimal investment i n a g r i c u l t u r a l and open space la n d uses which o f f e r long term b e n e f i t s (Ladd, 1978, p. 4). In the case of a g r i c u l t u r a l and open space lands, value i s inad e q u a t e l y r e f l e c t e d by the market mechanism. T a x a t i o n of s p e c u l a t i v e gains i n t h i s c ontext i s perhaps b e s t j u s t i f i e d as recovery of c o s t s imposed by negative e x t e r n a l i t i e s i n the process o f c r e a t i n g p r i v a t e b e n e f i t s . The k i n d of betterment l e v i e s designed f o r the recaptur e of unearned increments may be d i v i d e d i n t o two groups on the b a s i s of the assessment method. Land value increment taxes may be assessed p e r i o d i c a l l y on i n c r e a s e s i n land value or may be l e v i e d at the time the increment o c c u r s , through s a l e . In order to be f u l l y e f f e c t i v e , the land value i n c r e -ment tax should be c o l l e c t e d whether or not the s p e c u l a t i v e gains are r e a l i z e d . However, problems with determining u n r e a l i z e d gains have made t a x a t i o n on the b a s i s of s a l e a more common p r a c t i c e . In t h i s form, the tax resembles a t r a n s f e r tax or tax on s p e c u l a t i v e gains from land s a l e s (Grimes, 1975). The d i f f e r e n c e between land value increment taxes and t r a n s f e r taxes tends to be one of degree. The la n d value increment tax i s g e n e r a l l y designed to recover a l l s p e c u l a t i v e g a i n s . Because i n c r e a s i n g increments i n land value r e f l e c t not onl y "unearned increments" due to w i n d f a l l gains but a l s o normal s p e c u l a t i v e r e t u r n s , the tax i s u s u a l l y l e v i e d a t l e s s than 100% of the d i f f e r e n c e between the value - 9 1 -of the land at the time the tax i s put i n t o e f f e c t and the v a l u e at the time of s a l e . The second type of betterment l e v y , the development value tax, comes i n t o e f f e c t e i t h e r a t the time .development p e r m i s s i o n i s given or when development a c t u a l l y o c c u r s . The r e l a t i o n s h i p between land value increment and development value taxes i s very c l o s e s i n c e l a n d value i n c r e a s e s r e f l e c t development p o t e n t i a l . Land value increment taxes based on s a l e s may be, i n e f f e c t , the same as development value taxes because the motive f o r s a l e i s o f t e n to change land use i n order to r e a l i z e development p o t e n t i a l . A t t a c h i n g the tax to the grant of development p e r m i s s i o n p r o v i d e s a c l e a r s i g n a l of the means by which p r i v a t e betterment has been conveyed. The problem becomes one of determining the value of develop-ment p e r m i s s i o n . The B r i t i s h betterment levy i s a p r a c t i c a l example of how t h i s was attempted through a combination of land value increment and development value t a x e s . I t was l e v i e d on the increment between p r i o r use value and value accorded by development p e r m i s s i o n ( H a r r i s s , 1972 , p. 5 6 8 ) . In s p i t e of the arguments f a v o r i n g the r e t u r n of s p e c u l a -t i v e gains to p u b l i c revenues, t a x a t i o n t h a t removes a s i g n i f i c a n t p r o p o r t i o n of these gains i s l i k e l y to be s t r o n g l y opposed, e s p e c i a l l y i f d e v i s e d f o r s p e c i f i c areas, on the b a s i s of e q u i t y . Such a d r a s t i c change i n the r u l e s on which the p r o p e r t y market operates c r e a t e s a need' f o r a remedy by way of the c o u n t e r p a r t to betterment - compensation. -92-In the case of the B r i t i s h experiment w i t h the betterment l e v y , compensation was awarded by means of the compulsory purchase of development r i g h t s (Archer, 19 71). Development p l a n s , which decreased the market value of some areas l i k e open space l a n d on the p e r i p h e r y and i n c r e a s e d the market value of other areas through zoning and p u b l i c improvements, p r o v i d e d the b a s i s f o r compensation and betterment. Where development r i g h t s were f r o z e n , the government compensated owners f o r the r e d u c t i o n i n the market value of t h e i r l a n d s . When development p e r m i s s i o n was granted f o r these lands, the owners purchased back t h e i r r i g h t s through the development value tax. The B r i t i s h approach to the betterment i s s u e , an inno-v a t i v e combination of tax p o l i c y w i t h p l a n n i n g o b j e c t i v e s , has proven t o be h i g h l y c o n t r o v e r s i a l ( H a r r i s s , 1972). Among the major problems were the d i f f i c u l t y i n a s s i g n i n g amounts of compensation and betterment and determining the types of pl a n n i n g p e r m i s s i o n which would q u a l i f y f o r betterment. The e f f e c t o f the le v y on the t i m i n g of development and the i n c i -dence of the tax have been the s u b j e c t of c o n s i d e r a b l e and un r e s o l v e d debate (Rose, 1972; Neutze, 1974; F o s t e r and G l a i s t e r , 1975; Rose, 1976) . However, land value increment and development value taxes may prove f e a s i b l e without compensation on the b a s i s of recovery o f p u b l i c e x t e r n a l i t i e s i f they are assessed on some l e s s e r p r o p o r t i o n of land value i n c r e a s e s or development g a i n s . -93-ANALYSIS OF THE EFFECT OF BETTERMENT LEVIES ON THE TIMING OF DEVELOPMENT The case of a tax l e v i e d on the increment i n land value between p r e s e n t market value and value a t the time o f develop-ment w i l l f i r s t be examined. M a i n t a i n i n g the n o t a t i o n used i n the f i r s t s e c t i o n , a simple form of t h i s s p e c i a l tax, d i s r e g a r d i n g the general p r o p e r t y tax and any r e t u r n s from the land i n i t s present use, may be expressed as: P(t,T) = V ( T ) e ~ r ( T _ t ) - b[p(T,T) - P ( t , T)] e ~ r ( T _ t ) , (10) where b = the r a t e at which the incremental tax i s l e v i e d at the time of development. Because P(T,T) = V ( T ) , s i m p l i f i c a t i o n y i e l d s : P(t,T) = ( l - b ) V ( T ) e " r ( T " t ) . (11) , , - r ( T - t ) 1-be In order to maximize, aP (t,T) = dT [ l - b e " ^ - ^ d-b) [ ^ • ( T ) e - r ( T - t ) - rV(T) e " r - [ ( l - b ) V ( T ) e - r ( T - t l | b r e - r ( T - t ) l - b e - r ( T - t ) 2 = 0. (12) With the r e s u l t : V (T) = r (13) V(T) 1 _ b e - r ( T - t ) T h e r e f o r e , the h i g h e r b, or the r a t e of the incremental tax on la n d v a l u e s , the e a r l i e r development w i l l occur. T h i s r e s u l t i s c o n s i s t e n t w i t h the r e s u l t s o f the e a r l i e r a n a l y s i s -94-because i f b = 0, o r no s p e c i a l tax i s a p p l i e d , the equation r e v e r t s to the form of equation (2) i f the g e n e r a l p r o p e r t y tax i s i g n o r e d . Both a tax l e v i e d on the increment i n value between e x i s t i n g use value and development value and a land value increment tax, whether c o l l e c t e d p e r i o d i c a l l y or a t the time of s a l e , can be expected to have s i m i l a r e f f e c t s . The increments i n e i t h e r case i n c r e a s e more than p r o p o r t i o n a t e l y with t o t a l development value (Figure 9). At time T£ the increment on which the l a n d v a l u e increment tax i s based i s p r o p o r t i o n a t e l y g r e a t e r compared to development value a t time T^. The e f f e c t f o r a tax based on the increment between use value and development value i s s i m i l a r . The taxes are of the form: D(T) = d[y(T) - k] (14) where 1> d > 0 and k > 0, and k does not vary with T. "K" r e p r e s e n t s e i t h e r e x i s t i n g use value or p r e s e n t market v a l u e . Then, D' (T) = d V (T) (15) and s u b s t i t u t i o n i n t o equation (6) y i e l d s : V (T) - D' (T) = r + a, (16) V(T) - D(T) which reduces t o : V ( T ) = r + a. (17) V(T) + dk 1-d S i n c e _dk >0; V (T) > V (T) . 1-d V(T) + _dk V(T) 1-d T h i s r e s u l t i n d i c a t e s t h a t e i t h e r form of betterment tax w i l l - 9 5 -FIGURE 9 LAND VALUE INCREMENT TAXES AND THE TIMING OF DEVELOPMENT V ( T ) = d e v e l o p m e n t v a l u e a t t i m e T P ( T ) = m a r k e t v a l u e a t t i m e T I = i n c r e m e n t -96-cause development to occur sooner. A tax w i t h a r a t e based on f u l l development v a l u e , whether c a l c u l a t e d on the p o t e n t i a l v alue accorded by develop-ment p e r m i s s i o n or a c t u a l value at the time of development, has a l r e a d y been examined i n the f i r s t s e c t i o n (equations 8 and 9). I t i s a form of p r o p o r t i o n a l development value tax which w i l l have no e f f e c t on the o p t i m a l time of development. I f a p r o g r e s s i v e tax i s l e v i e d , i . e . one t h a t i n c r e a s e s more than p r o p o r t i o n a t e l y w i t h development v a l u e , again i t would be expected t h a t development would occur e a r l i e r . The t h r e e main forms of betterment levy c o n s i d e r e d e i t h e r r e s u l t i n e a r l i e r development or have no e f f e c t on the time of development. This i n d i c a t e s t h a t recovery of specu-l a t i v e w i n d f a l l s produced by the pre s s u r e s of growing urban p o p u l a t i o n s and p u b l i c investment i n new i n f r a s t r u c t u r e i s a f i s c a l p o l i c y c o n s i s t e n t w i t h p l a n n i n g o b j e c t i v e s only i n areas where new development i s d e s i r a b l e . The taxes which reduce optimal development times may be u s e f u l i n producing i n f i l l on the p e r i p h e r y and t h e r e f o r e i n p r e v e n t i n g l e a p f r o g forms of urban sprawl. PREFERENTIAL FORMS OF TAXES Th i s second major group of taxes i s more c l o s e l y r e l a t e d t o l a n d use, s p e c i f i c a l l y f o r the p r e s e r v a t i o n of a g r i c u l t u r a l l a n d and open space. However, these p r e f e r e n t i a l tax forms -97-have evolved from p e r c e p t i o n s of i n e q u i t y i n the tax system, and i t i s to t h i s primary concern t h a t the d e s i r a b i l i t y o f these taxes i s s t i l l o f t e n addressed. With the growing concern over l o s s of a g r i c u l t u r a l land and open space on the urban p e r i p h e r y , a more s p e c i f i c i n t e n t to r e t a i n land i n these uses has emerged. Forms of p r e f e r e n t i a l taxes w i l l be t r e a t e d i n t h i s d i s c u s s i o n i n the order of t h i s p r o g r e s s i o n i n tax p o l i c y to a more broadly based frame of r e f e r e n c e . A problem common to a l l p r e f e r e n t i a l tax forms i s determining e l i g i b i l i t y . In some cases, l o c a t i o n w i t h i n a g r i c u l t u r a l or open space r e s e r v e s b r i n g s automatic or mandatory p a r t i c i p a t i o n i n s p e c i f i c tax programs, while i n others p a r t i c i p a t i o n depends on v o l u n t a r y a p p l i c a t i o n . A v a r i e t y of standards has been d e v i s e d on which t o base e l i g i b i l i t y , l a r g e l y i n order to d i s c r i m i n a t e between farmer and s p e c u l a t o r . A g r i c u l t u r a l use c r i t e r i a may i n c l u d e any combination o f the f o l l o w i n g : p r o p o r t i o n o f income d e r i v e d from a g r i c u l t u r e , minimum gross income from a g r i c u l t u r e , length of p r i o r a g r i c u l t u r a l use, minimum acreage, p r o d u c t i v i t y , c u l t i v a t i o n p r a c t i c e s , and f a m i l y ownership (Atkinson, 1977, p. 199; Gloudemans, 1974, p. 22; Hady, 1974, p. 4-5). Open space lan d d e s i r e d f o r p r e s e r v a t i o n i s more d i f f i c u l t to d e f i n e and l e g i s l a t i o n has tended to be even more s p e c i f i c . Types of open space which may be covered by p r e f e r e n t i a l taxes i n c l u d e land c o n s i d e r e d v a l u a b l e f o r resource conser-v a t i o n , r e c r e a t i o n , e c o l o g i c a l i n t e r e s t , or f o r the purpose - 9 8 -of c o n t a i n i n g c o n c e n t r a t i o n s of urban development. The use of zoning as a b a s i s f o r e l i g i b i l i t y has become more common because of problems t h a t have a r i s e n from weaknesses i n l e g i s l a t i v e d e f i n i t i o n s of open space. G e n e r a l l y the a p p l i -c a b i l i t y of p r e f e r e n t i a l taxes to a g r i c u l t u r a l and open space land r e q u i r e s l i t t l e d i s t i n c t i o n and the f o l l o w i n g d i s c u s s i o n r e f e r s to both as a g r i c u l t u r a l land. CLASSIFIED PREFERENTIAL TAXES AND ASSESSMENT AT USE VALUE C l a s s i f i e d p r e f e r e n t i a l taxes and c u r r e n t use value assessments f o r a g r i c u l t u r a l land have i n common the o b j e c t i v e of reducing tax l e v e l s r e l a t i v e t o those t h a t would be i n e f f e c t under market value assessment. The tax r e d u c t i o n i s o f f e r e d f o r as long as a g r i c u l t u r a l land i s r e t a i n e d i n i t s c u r r e n t use and assessments r e v e r t t o market value t h e r e a f t e r . P r e f e r e n t i a l taxes based on a g r i c u l t u r a l c l a s s i f i c a t i o n are a n a l y t i c a l l y no d i f f e r e n t from d i f f e r e n t i a l assessments on r e s i d e n t i a l , commercial and i n d u s t r i a l c l a s s e s of land use. They are founded on the r a t i o n a l e t h a t e a r n i n g power should be c o n s i d e r e d i n determining the amount of taxes to be p a i d f o r d i f f e r e n t types o f p r o p e r t y . C l a s s i f i e d p r e f e r e n t i a l taxes f o r a g r i c u l t u r e are g e n e r a l l y assessed a t a lower p r o p o r t i o n of market value than f o r urban types of land use. U n l i k e use value assessments, c l a s s i f i e d taxes r e f l e c t the p o t e n t i a l h i g h e s t and b e s t use of the land as represented by -99-market v a l u e . Because use value assessment ignores a l l a l t e r n a t i v e s other than c u r r e n t use, a g r i c u l t u r a l land under p r e s s u r e f o r development i s more f a v o r a b l y t r e a t e d i n com-p a r i s o n to the c l a s s i f i e d p r o p e r t y tax a l t e r n a t i v e . Determining a g r i c u l t u r a l use value i s an o b s t a c l e f o r t h i s form of p r e f e r e n t i a l tax because the t r a d i t i o n a l market va l u e approach, based on s a l e s , i s i n a p p l i c a b l e . Although no s i n g l e , undisputed standard has been d e f i n e d , a number of methods have been developed and implemented. The income c a p i t a l i z a t i o n approach i s based on a c a l c u l a t i o n of the present and f u t u r e stream of the tenant's r e n t or the owner's net income (Gloudemans, 1974, p. 15). In a d d i t i o n to the u s u a l d i f f i c u l t i e s i n determining the r a t e of c a p i t a l i z a t i o n , t h i s approach i s complicated by problems with e x t r a p o l a t i n g farm income over time and accounting f o r v a r i a t i o n s i n managerial a b i l i t i e s . S a l e s p r i c e s f o r comparable land t r a n s f e r r e d f o r continued a g r i c u l t u r a l use are a l s o a b a s i s f o r use value assessment (Hady, 1974, p. 5). However, data may be l i m i t e d and i t may be d i f f i c u l t to f i n d t r u l y compar-abl e l a n d on which t h e r e has been a r e c e n t s a l e s t r a n s a c t i o n . In a d d i t i o n , even a g r i c u l t u r a l l a n d s o l d f o r a g r i c u l t u r a l use w i l l have b u i l t i n t o the s a l e s p r i c e the c a p i t a l i z a t i o n of p o s s i b l e f u t u r e changes i n use to h i g h e r p r o d u c t i v i t y . A t h i r d approach t o determining use value i s to a s s i g n to an a d v i s o r y committee the task of p r e p a r i n g g u i d e l i n e s on values based on s o i l c l a s s i f i c a t i o n s , and a d j u s t e d a c c o r d i n g to -100-other f a c t o r s i n c l u d i n g p r i o r y i e l d s , l o c a t i o n and drainage (Gloudemans, 1974, p. 16). As i s e v i d e n t from the a n a l y t i c a l i n t r o d u c t i o n to t h i s c hapter, c l a s s i f i e d p r e f e r e n t i a l taxes and use value a s s e s s -ments are simply tax r e d u c t i o n s , which have the e f f e c t of d e l a y i n g development. However, i n cases where the d i f f e r e n c e between use value and market value i s s u b s t a n t i a l , n e i t h e r of these taxes w i l l have a s i g n i f i c a n t e f f e c t on development t i m i n g (Atkinson, 1977, p. 202). In m a r g i n a l cases where market value i s only s l i g h t l y h i g h e r than use v a l u e , the tax break i s more l i k e l y to persuade owners to continue a g r i c u l -t u r a l use. I t has been argued t h a t use value assessment i s an i n e f f i c i e n t method of encouraging p r e s e r v a t i o n because a l l a g r i c u l t u r a l landowners w i l l b e n e f i t , but t h e r e may be only a s m a l l response i n supply (Ladd, 1978, p. 5). In a d d i t i o n , these taxes w i l l i n c r e a s e a d m i n i s t r a t i v e c o s t s a t the same time as r e d u c i n g the p r o p e r t y tax base. Even the o r i g i n a l equity-based arguments f o r use value assessments have been c h a l l e n g e d . Although market value assessments do not r e f l e c t income d e r i v e d from use, a b i l i t y to pay i s not wholly dependent on income. Land ownership r e p r e s e n t s c o l l a t e r a l f o r borrowing to meet taxes (Ladd, 1978, p. 3). Because of the i n c r e a s e d complexity i n t r o d u c e d by any type of exemption based on c o n s i d e r a t i o n s of e q u i t y , i t i s f r e q u e n t l y maintained t h a t d i r e c t s u b s i d i e s are a more s u i t a b l e approach to t h i s problem. -101-D e f e r r e d Taxes P r e f e r e n t i a l treatment has a l s o been extended to a g r i -c u l t u r a l areas through d e f e r r e d t a x a t i o n . A change i n use brought about by some form of redevelopment causes p r e f e r e n -t i a l use value assessment t o r e v e r t t o assessment a t market va l u e , i n c l u d i n g a tax "penalty" f o r c o n v e r s i o n . E a r l i e r forms of d e f e r r e d t a x a t i o n r e q u i r e d the as s e s s o r to r e c o r d both a use and market value assessment on a y e a r l y b a s i s . Upon a change i n use, e i t h e r some p o r t i o n of d e f e r r e d market value taxes or d e f e r r e d taxes f o r a c e r t a i n time p r i o r to conv e r s i o n became due. A more rec e n t v a r i a n t has r e p l a c e d the d e f e r r e d tax with a pen a l t y upon co n v e r s i o n based on some p o r t i o n of market value d i r e c t l y determined by s a l e or by r e a p p r a i s a l upon development (Hady, 1975, p. 2). The i n t e n t of t h i s l a t t e r tax remains the same as the former, but the assessment process i s s i m p l i f i e d . D e f e r r e d taxes are an attempt t o recover m u n i c i p a l revenues l o s t from use value assessment. In some cases i n t e r e s t i s charged on the taxes d e f e r r e d , but r a r e l y are the r e requirements t h a t allow the f u l l tax c o s t s of p r e f e r e n -t i a l treatment to be recovered. A problem in h e r e n t i n d e f e r r e d taxes i s t h a t the r o l l b a c k p e r i o d must have some time l i m i t or land r e t a i n e d i n a g r i c u l t u r a l use f o r long p e r i o d s i n s p i t e of market p r e s s u r e s f o r development w i l l be taxed more h e a v i l y r e l a t i v e to land h e l d s p e c u l a t i v e l y f o r only a s h o r t time b e f o r e change of use. -102-A p a r t of the r a t i o n a l e behind d e f e r r e d taxes i s t h a t a tax " p e n a l t y " at the time of t r a n s i t i o n to a new use w i l l tend to delay development (Hady and S i b o l d , 1974, p. 15; Gloudemans, 1974, p. 40). However, a t r u e d e f e r r e d tax which recovers the e n t i r e r o l l b a c k i s merely a loan from the govern-ment which a l l e v i a t e s the farmer's cash flow problem. I t i s not a tax p e n a l t y a t the time of development and w i l l t h e r e f o r e have no e f f e c t on the t i m i n g o f development r e l a t i v e to the b a s e l i n e case of market value assessment while the land i s b e i n g farmed. A d e f e r r e d tax with a l i m i t on the r o l l b a c k p e r i o d f o r which taxes may be charged i s , i n e f f e c t , a tax r e d u c t i o n and, as demonstrated i n the f i r s t s e c t i o n of t h i s chapter (equation 2), w i l l t h e o r e t i c a l l y lengthen the time land i s h e l d from development. Because the t o t a l f i n a l tax burden i s g r e a t e r than f o r simple use value assessment, d e f e r r e d taxes w i l l cause land to be developed somewhat more r a p i d l y than the use value tax. A d e f e r r e d tax f o r which the recovery i s l e v i e d on some p r o p o r t i o n of market value a t the time of s a l e i s a type of p r o p o r t i o n a l development value tax because market val u e s r e f l e c t development p o t e n t i a l . The tax w i l l have no f u r t h e r e f f e c t on the t i m i n g of development than the p r i o r d e l a y i n g e f f e c t o f use value assessment. C o n t r a c t s and R e s t r i c t i v e Agreements A more r e c e n t h y b r i d of d e f e r r e d t a x a t i o n , the c o n t r a c t or r e s t r i c t i v e agreement, i s an attempt t o secure a commitment -103-from farm owners t h a t the land w i l l be h e l d i n i t s present use f o r a determinate p e r i o d of time. On e n t e r i n g i n t o a c o n t r a c t , the farm owner i s granted some type of tax conces-s i o n f o r the d u r a t i o n of the p e r i o d . The tax c o n c e s s i o n may be i n the form of a use v a l u e assessment (Hansen and Schwartz, 1975, p. 242), an income tax c r e d i t on p r o p e r t y taxes (Hady, 1975, p. 2), or a payment of some p o r t i o n of assessed market value i n compensation f o r p r o p e r t y tax l i a b i l i t i e s (Barlowe et a l . , 1973, p. 207). C o n t r a c t s are o f t e n renewed automati-c a l l y , but t e r m i n a t i o n may be made e i t h e r by the government or the owner. S e v e r a l years n o t i c e i s r e q u i r e d , a f t e r which the land r e v e r t s to market value assessment and o f t e n with a d e f e r r e d tax payment and i n t e r e s t , or a gradual r e d u c t i o n i n tax compensation where payments are made by the government. A tax p e n a l t y based on assessed value i s a l s o o f t e n imposed upon v i o l a t i o n of the c o n t r a c t or upon c a n c e l l a t i o n of the c o n t r a c t by the farmer and change i n land use. Because e l i g i b i l i t y f o r c o n t r a c t s i s determined by the government, the process i s c l o s e l y c o n t r o l l e d by p l a n n i n g a u t h o r i t i e s , who base t h e i r d e c i s i o n s on development p l a n s . Where use value assessments and r o l l b a c k payments are i n v o l v e d , the c o n t r a c t s add a degree more s t a b i l i t y to land use p a t t e r n s and o f f e r more d i s c r i m i n a t o r y c o n t r o l to govern-ments than do the d e f e r r e d taxes d i s c u s s e d e a r l i e r . Income tax c r e d i t s on p r o p e r t y taxes and payments to o f f s e t p r o p e r t y taxes are g e n e r a l l y c o n s i d e r e d to be a form of purchase of - 1 0 4 -d e v e l o p m e n t r i g h t s f o r t h e c o n t r a c t p e r i o d . When t h e c o n t r a c t i s t e r m i n a t e d , i n e f f e c t t h e owner b u y s b a c k t h e d e v e l o p m e n t r i g h t s a t t a c h e d t o t h e l a n d . C o n t r a c t s and r e s t r i c t i v e a g r e e m e n t s w i t h p r o v i s i o n s s i m i l a r t o t h o s e f o r d e f e r r e d t a x e s w i l l h a v e t h e same e c o n o m i c e f f e c t s and n e e d n o t be r e p e a t e d h e r e . A few new v a r i a n t s w a r r a n t f u r t h e r a t t e n t i o n . A s s e s s m e n t a t u s e v a l u e w i t h g r a d u a l i n c r e a s e upon n o t i c e t o t e r m i n a t e and no p e n a l t y on c o n v e r s i o n c a n be e x p e c t e d t o h a v e a m a r g i n a l e f f e c t i n d e l a y i n g d e v e l o p m e n t . B o t h p a y m e n t s i n c o m p e n s a t i o n f o r p r o p e r t y t a x e s and i n c o m e t a x c r e d i t s a r e f o r m s o f g o v e r n -m e n t a l l o a n s w h i c h h a v e no e f f e c t on o p t i m a l d e v e l o p m e n t t i m e . A p e n a l t y n o t d e p e n d e n t on d e v e l o p m e n t v a l u e , e . g . , on t h e a s s e s s e d l a n d v a l u e a t t h e t i m e t h e c o n t r a c t was i n i t i a l l y e n t e r e d i n t o , w i l l d e l a y d e v e l o p m e n t t i m i n g . T h i s i s a f o r m o f f i x e d t a x upon c h a n g e o f l a n d u s e , w h i c h h a s b e e n e x a m i n e d i n t h e a n a l y t i c a l s e c t i o n ( e q u a t i o n 7 ) . The m o s t e f f e c t i v e c o m b i n a t i o n o f p r e f e r e n t i a l t a x e s f o r d e l a y i n g d e v e l o p m e n t i s a p p a r e n t l y a s s e s s m e n t a t u s e v a l u e c o m b i n e d w i t h a f i x e d o r f l a t r a t e p e n a l t y a t t h e t i m e o f c o n v e r s i o n . W h e t h e r o r n o t a c o n t r a c t i s i n p l a c e i s i r r e l e v a n t t o t h e d e c i s i o n t o r e t a i n u s e o r d e v e l o p . T h i s t y p e o f t a x w o u l d be e a s i e r t o a d m i n i s t e r , o n c e t h e p e n a l t y i s d e t e r m i n e d , t h a n t h e more cumbersome c o n t r a c t s c o n s i d e r e d h e r e . U n f o r t u n a t e l y i t i s n o t an o p t i o n o f f e r e d by any known l e g i s l a t i o n . -105-CONCLUSIONS A summary of the e f f e c t s of taxes reviewed i n t h i s chapter i s p r o v i d e d i n Table I. A number of the taxes have some p o t e n t i a l t o c o n t r o l land use development on the urban p e r i p h e r y , but t h i s p o t e n t i a l has not been f u l l y e x p l o i t e d . Although these taxes are p r i m a r i l y j u s t i f i a b l e on the b a s i s of other o b j e c t i v e s , there are advantages to be gained i n l i n k i n g them to development plans i n order to p r o v i d e more coherent e x p r e s s i o n s of p u b l i c p o l i c y . Betterment l e v i e s of the forms c o n s i d e r e d here are b e s t a p p l i e d to f r i n g e areas c o n s i d e r e d s u i t a b l e f o r new development and to produce i n f i l l between l e a p f r o g developments. P r e f e r e n t i a l taxes f o r a g r i c u l t u r a l or open space land are more e f f e c t i v e i f the land i s i n a g r i c u l t u r a l or e c o l o g i -c a l r e s e r v e s , where a tax s u b s i d i y i s o f f e r e d to compensate f o r suspension of development r i g h t s . Although s t r i c t c o n t r o l over land p l a c e d i n r e s e r v e s i s warranted, the e x i s t e n c e of a tax p e n a l t y on c o n v e r s i o n may be an a d d i t i o n a l d i s i n c e n t i v e a g a i n s t attempts to remove land from r e s e r v e s , e s p e c i a l l y i n areas c l o s e to urban development. A number of s t u d i e s (Gloudemans, 1974, p. 38-41; Hady and S i b o l d , 1974, p. 10-11; C o n k l i n , 1975, p. 9-11) have made i t c l e a r t h a t a p p l i c a t i o n f o r p r e f e r e n t i a l assessment on a v o l u n t a r y b a s i s w i l l reduce farm"land c o n v e r s i o n g e n e r a l l y only i n s e m i - r u r a l areas. I t i s a l s o necessary to c o o r d i n a t e tax p o l i c y w i t h development - 1 0 6 -p l a n s , i n order to prevent the p o s s i b i l i t y of l e a p f r o g p a t t e r n s of sprawl with l i t t l e r egard f o r a g r i c u l t u r a l or open space p o t e n t i a l which may r e s u l t from a random a p p l i c a -t i o n of p r e f e r e n t i a l taxes. - 1 0 7 -T7ABLE I SUMMARY Type of Tax and Examples E f f e c t on Optimal Development Time L a t e r L a t e r L a t e r L a t e r L a t e r L a t e r P o s s i b l e minor d e l a y i n g e f f e c t due t o l i q u i d i t y Tax Reduction Use Value Assessment C l a s s i f i e d P r e f e r e n t i a l Tax D e f e r r e d Tax ( l e s s than f u l l recovery) D e f e r r e d Tax (based on market value a t time of sale) C o n t r a c t s and R e s t r i c t i v e Agreements (no p e n a l t y on conversion) C o n t r a c t s and R e s t r i c t i v e Agreements (penalty on conversion) Tax D e f e r r a l s Deferred Tax ( f u l l recovery) C o n t r a c t s and R e s t r i c t i v e Agreements (payments i n compensation f o r pr o p e r t y tax or income tax c r e d i t s ) F i x e d / F l a t Rate Tax on Development C o n t r a c t s and R e s t r i c t i v e Agreements (penalty on c o n v e r s i o n not dependent on development value) Development Value Tax (penalty on c o n v e r s i o n not dependent on development value) Tax P r o p o r t i o n a l to Development Value Development Value Tax Tax More than P r o p o r t i o n a l to Development  Value Land Value Increment Tax (market value t o development value) Land Value Increment Tax (use v a l u e t o development value) P r o g r e s s i v e Development Value Tax L a t e r L a t e r No e f f e c t E a r l i e r E a r l i e r E a r l i e r -108-CHAPTER VI CONCLUSIONS DISCUSSION OF OBJECTIVES AND RESULTS The f o r e g o i n g a n a l y s i s of l o c a l tax a l t e r n a t i v e s was undertaken to address the three r e s e a r c h o b j e c t i v e s i d e n t i -f i e d i n Chapter I. A review of the r e s u l t s of t h i s a n a l y s i s and the i m p l i c a t i o n s f o r urban s p a t i a l development suggests a framework f o r a tax system s e n s i t i v e to both f i s c a l and p l a n n i n g p o l i c i e s . The f i r s t o b j e c t i v e was to determine the consequences f o r s p a t i a l development of the most p r e v a l e n t form of l o c a l tax -the p r o p e r t y tax assessed on the value of land and improve-ments. Two economically nonneutral e f f e c t s which d i s t o r t the market a l l o c a t i o n of land i n a manner c o u n t e r p r o d u c t i v e to urban development r e s u l t from the e x i s t i n g p r o p e r t y tax. F i r s t , the d e p r e s s i o n of investment i n improvements leads to a r e d u c t i o n i n the i n t e n s i t y of urban land use. Second, because the p r o p e r t y tax i s not p r o p o r t i o n a l to the b e n e f i t s i n d i v i d u a l p r o p e r t y owners r e c e i v e i n the form of p u b l i c s e r v i c e s and f a c i l i t i e s , these goods are i n e f f i c i e n t l y a l l o c a t e d . The s p a t i a l e f f e c t s of the l a t t e r d i s t o r t i o n are most evident i n the f a i l u r e to a s s i g n a p p r o p r i a t e s o c i a l c o s t s of development on the urban p e r i p h e r y , a f a c t o r which - 1 0 9 -c o n t r i b u t e s to p a t t e r n s of sprawl. The standard of economic n e u t r a l i t y p r o v i d e s the b a s i s f o r two forms of l o c a l taxes. In response to the second o b j e c t i v e , the nature of changes i n s p a t i a l development expected from a s h i f t to these taxes has been examined. The la n d v a l u e tax, by removing d i s i n c e n t i v e s f o r investment i n improvements, i n c r e a s e s the i n t e n s i t y of land use and counter-a c t s urban sprawl by d e l a y i n g p e r i p h e r a l development through the encouragement of more e f f i c i e n t e x p l o i t a t i o n of under-developed core areas. Marginal c o s t p r i c i n g and betterment f i n a n c i n g f o r p u b l i c p r o j e c t s are most f e a s i b l e i n adminis-t r a t i v e terms fo charge b e n e f i c i a r i e s f o r the e x t e n s i o n of i n f r a s t r u c t u r e to new development on the urban p e r i p h e r y . T h i s more economically e f f i c i e n t a l l o c a t i o n of p u b l i c c o s t s works toward re d u c i n g premature development. The t h i r d o b j e c t i v e of t h i s a n a l y s i s was to examine the s p a t i a l e f f e c t s of other taxes a p p l i c a b l e to m e t r o p o l i t a n areas which produce economically nonneutral e f f e c t s , i n order to determine t h e i r p o t e n t i a l t o a c t as p o s i t i v e guides f o r development. Betterment l e v i e s i n the form of l a n d value increment and p r o g r e s s i v e development v a l u e taxes reduce the s p e c u l a t i v e time h o r i z o n and promote e a r l i e r development. Of the p r e f e r e n t i a l types of taxes, use value assessments and d e f e r r e d taxes, p a r t i c u l a r l y when attached to f l a t r a t e tax p e n a l t i e s upon change i n use, are the most e f f e c t i v e i n d e l a y i n g o p t i m a l development times. These taxes support - 1 1 0 -p o l i c i e s d i r e c t e d toward the p r e s e r v a t i o n of a g r i c u l t u r a l and open space land uses. Although none of the tax a l t e r n a t i v e s c o n s i d e r e d here can be expected, i n i s o l a t i o n , to have a major impact on urban development, a tax system combining them i s l i k e l y to c o n t r i b u t e s i g n i f i c a n t l y to more optimal p a t t e r n s of urban growth. Such a system of taxes, i n c o r p o r a t i n g a number of approaches to the problem, would provide an important a r r a y of f i s c a l measures capable of a c t i n g as a c o n s t r a i n t to sprawl. The o b j e c t i v e of o p t i m a l growth would be supported by the c o o r d i n a t i o n of t h i s tax system w i t h development plans which have determined the most economically e f f i c i e n t s p a t i a l stages of urban expansion, c o n s i s t e n t with planned f u t u r e investment i n p u b l i c f a c i l i t i e s , and have i d e n t i f i e d the areas to be preserved f o r open space and a g r i c u l t u r e . INTERNAL CONSISTENCY OF FISCAL OBJECTIVES IN A SYSTEM OF  TAXES P o s s i b l e components of a g e n e r a l system of taxes i n t e g r a t i n g economic e f f i c i e n c y w i t h p l a n n i n g o b j e c t i v e s have been e v a l u a t e d i n d i v i d u a l l y . An overview from the metro-p o l i t a n p e r s p e c t i v e suggests how these components might be p r a c t i c a l l y combined i n accordance w i t h development p l a n s . I t a l s o p r o v i d e s a means of a s s e s s i n g c o n s i s t e n c y of a p p l i c a t i o n among cases of s i m i l a r m e r i t and of p r e v e n t i n g d u p l i c a t i o n - 1 1 1 -of f i s c a l o b j e c t i v e s . The f i r s t s t e p toward a b a s i c reform o f the l o c a l tax system i n v o l v e s a r e t u r n to the standard of economic n e u t r a l i t y . T h i s standard allows f o r the recovery of p u b l i c l y c o n f e r r e d b e n e f i t s without d i s t o r t i n g p r i v a t e i n c e n t i v e s . The f i s c a l o b j e c t i v e of the land value tax i s to r e c a p t u r e economic r e n t s from l o c a t i o n v a l u e s c r e a t e d by the growth of urban p o p u l a t i o n s and n a t u r a l f e a t u r e s i n h e r e n t i n l a n d . The f i s c a l o b j e c t i v e of marginal c o s t p r i c i n g i s to ensure t h a t the a l l o c a t i o n of p u b l i c expenditures on s e r v i c e s i s conducted i n a more e f f i c i e n t manner. In order f o r the taxes to be economically n e u t r a l , both the land value tax and marginal c o s t p r i c i n g would have to be i n e f f e c t over the e n t i r e m e t r o p o l i t a n area. However, the problems i n h e r e n t i n c a l c u l a t i n g marginal c o s t s f o r developed urban areas tend to l i m i t the extent of t h e i r p r a c t i c a l a p p l i c a b i l i t y . W i t h i n developed urban areas, marginal c o s t p r i c i n g should be used, wherever p o s s i b l e , to recover c o s t s r e l a t e d to connection of new b u i l d i n g s to the p h y s i c a l i n f r a s t r u c t u r e and to the volume of s e r v i c e s consumed. As d e f i n e d i n Chapter I I I , these s e r v i c e s are an example of the improvements to land not covered by the land value tax. Where margi n a l c o s t p r i c i n g i s not a d m i n i s t r a t i v e l y f e a s i b l e , average c o s t s must be assigned. In newly de v e l o p i n g areas on the urban p e r i p h e r y , marginal c o s t p r i c i n g has a g r e a t e r scope. M u l t i - p a r t t a r i f f s and s p e c i f i c p r o j e c t betterment - 1 1 2 -f i n a n c i n g , which recover both the f i x e d and v a r i a b l e c o s t s , can o f t e n be implemented. In c o n t r a s t to developed urban areas, there are few b e n e f i t s of e x i s t i n g urban i n f r a s t r u c t u r e r e f l e c t e d i n l o c a t i o n v a l u e s on the p e r i p h e r y . I f other taxes are imposed to d i r e c t l y r e c o v e r the c o s t s of new i n f r a s t r u c t u r e , the e x i s t e n c e of the i n f r a s t r u c t u r e w i l l have no e f f e c t on l o c a t i o n v a l u e s . T h e r e f o r e the land value tax and marginal c o s t p r i c i n g do not l e a d t o double t a x a t i o n as the f i s c a l o b j e c t i v e s of both taxes are complementary r a t h e r than c o m p e t i t i v e . The land value increment and development value tax v a r i a n t s of the betterment t a x a t i o n form were d i s c u s s e d i n Chapter V i n terms of t h e i r e f f e c t s on new p e r i p h e r a l develop-ment. Because grants of p l a n n i n g p e r m i s s i o n convey b e n e f i t s not only on the p e r i p h e r y but a l s o i n developed urban areas, a case c o u l d be made f o r the uniform a p p l i c a t i o n of these l e v i e s . However, the grant of p l a n n i n g p e r m i s s i o n on the p e r i p h e r y , u s u a l l y i n the form of changes i n zoning from nonurban to urban uses, c o n f e r s p a r t i c u l a r l y s i g n i f i c a n t p r i v a t e b e n e f i t s because of hig h e r s p e c u l a t i v e r i s k s . In c o n t r a s t , the development c l i m a t e of urbani z e d areas i s r e l a t i v e l y more c e r t a i n . A l s o , expansion on the p e r i p h e r y i s more d i r e c t l y connected t o sprawled development. For these reasons, betterment l e v i e s may be s e l e c t i v e l y a p p l i e d i n accordance w i t h development plans f o r p e r i p h e r a l expansion -113-where f u t u r e s o c i a l c o s t s o f s p r a w l can, t o some e x t e n t , s t i l l be p r e v e n t e d and p r e s e n t c o s t s r e c o v e r e d . I n d e v e l o p e d urban a r e a s , i t i s l i k e l y t o be more d e s i r a b l e t o a l l o w t h e market to d e t e r m i n e t h e t i m i n g and a l l o c a t i o n o f l a n d , p a r t i c u l a r l y i f t he l a n d v a l u e t a x i s implemented. The o b j e c t i v e o f t h e s e forms of b e t t e r m e n t l e v i e s c o n f l i c t s n e i t h e r w i t h the l a n d v a l u e t a x nor w i t h p r i c i n g f o r s e r v i c e s . A b e t t e r m e n t l e v y reduces the p r e s e n t o r market v a l u e o f t h e l a n d and t h e r e f o r e t h e amount o f the l a n d v a l u e ta x i s a l s o d e c r e a s e d . The recovery, o f the c o s t s o f s e r v i c i n g , b o t h f i x e d and v a r i a b l e , i s s e p a r a t e from a t a x on g r a n t s o f p l a n n i n g p e r m i s s i o n . A l t h o u g h the g e n e r a l o b j e c t i v e o f l a n d v a l u e i n c r e m e n t and development v a l u e t a x e s i s the same, i t i s p o s s i b l e t h a t they may b o t h be used w i t h i n a t a x system w i t h o u t c o n f l i c t . Land v a l u e increment t a x e s may be a p p l i e d where development p e r m i s s i o n has a l r e a d y been g i v e n , but where no development i s o c c u r r i n g . These t a x e s , where t h e i n c r e m e n t i s a s s e s s e d p e r i o d i c a l l y , w i l l promote e a r l i e r development where i n f i l l i s d e s i r e d i n l e a p f r o g forms o f s p r a w l . P r o g r e s s i v e development v a l u e t a x e s can be t i e d t o t h e g r a n t o f p l a n n i n g p e r m i s s i o n t o promote e a r l i e r development a c c o r d i n g t o development p l a n s . Development v a l u e t a x e s might a c t u a l l y be a cause of l e a p f r o g development u n l e s s they a r e a p p l i e d t o a l l l a n d on t h e urban p e r i p h e r y , w i t h the e x c e p t i o n o f a r e a s s u b j e c t t o -114-p r e f e r e n t i a l taxation. A graduated system of levies according to planned sequences of development would be e f f e c t i v e i n c o n t r o l l i n g growth. In areas nearer the core i n which early development i s more desirable, the levy could be set i n i t i a l l y at a small proportion of development value but over time could increase more than proportionately to reduce the optimal time of development. In more remote areas where i t i s desirable that development be postponed, the levy could be set at a higher proportion of current development value, but would decline proportionately over time. A graduated levy i s consistent with the t h e o r e t i c a l p r i n c i p l e s explored i n Chapter V. The f i s c a l objective of p r e f e r e n t i a l taxation for a g r i c u l t u r a l and open space land i s to equalize the difference between the market's short term estimation of the value of development for urban use and the longer run s o c i a l estimation of the value of the land i n i t s e x i s t i n g use. Although these taxes have been discussed primarily i n terms of peripheral development, consistency demands that they be applied to a l l a g r i c u l t u r a l and open space areas that merit preservation throughout the entire metropolitan region. E s p e c i a l l y within the developed areas and on the immediate periphery, preferen-t i a l taxes counteract the effects of the land value tax. Rather than a c o n f l i c t of f i s c a l objectives, this represents a deliberate attempt to o f f s e t the market's f a i l u r e to r e f l e c t the s o c i a l costs of urban absorption of these areas. -115-T h i s suggested system of taxes i s p o t e n t i a l l y the most e f f e c t i v e combination, i n terms of redu c i n g sprawl, of the taxes which have been analyzed here. Tax reform need not i n c l u d e a l l o f the a l t e r n a t i v e s o u t l i n e d above i n order to achieve the i n t e g r a t i o n o f f i s c a l and p l a n n i n g o b j e c t i v e s . The most a p p r o p r i a t e combination o f taxes f o r s p e c i f i c m e t r o p o l i t a n areas i s dependent on a range of p r a c t i c a l c o n s i d e r a t i o n s , i n c l u d i n g p o l i t i c a l a c c e p t a b i l i t y , l e g a l c o n s t r a i n t s , a d m i n i s t r a t i v e c a p a c i t y , s o p h i s t i c a t i o n of development p l a n n i n g and the degree to which sprawl i s p e r c e i v e d to be a problem. These f a c t o r s cannot be examined i n d e t a i l here. In the f o l l o w i n g s e c t i o n , an important t h e o r e t i c a l c o n s t r a i n t to tax reform i s co n s i d e r e d . CONSISTENCY WITH FISCAL STANDARDS There are only two p r i n c i p l e s of g e n e r a l v a l i d i t y t h a t e x p l i c i t l y r e s t r i c t the r o l e of l o c a l taxes w i t h i n the proper j u r i s d i c t i o n a l a u t h o r i t y - a l l revenues should be used f o r a p u b l i c purpose and the taxes should not d i s c r i m i n a t e a g a i n s t p a r t i c u l a r persons or p r o p e r t y (Engelbert, 1969, p. 105) . None of the taxes c o n s i d e r e d here need be e l i m i n a t e d on the b a s i s of these p r i n c i p l e s . However, th e r e are a number of other standards a g a i n s t which a proposed tax i s l i k e l y to be judged. F a i l u r e of a tax t o meet one of these standards should not e l i m i n a t e i t from c o n s i d e r a t i o n but i t -116-must be s e r i o u s l y questioned i f the c o n f l i c t s are numerous or i n d i v i d u a l l y of p a r t i c u l a r importance. A review of these f i s c a l standards i n d i c a t e s the r e l a t i v e f e a s i b i l i t y of the taxes under d i s c u s s i o n i n comparison with the e x i s t i n g p r o p e r t y tax. 1. Adequacy as a revenue base The l a n d value tax, i f the t o t a l revenue i s f i x e d i n accordance w i t h expenditures, and i n d i v i d u a l taxes d i s t r i b u t e d p r o p o r t i o n a t e l y with assessed market values i s p o t e n t i a l l y as adequate a source of revenues as the c u r r e n t p r o p e r t y tax on land and improvements. The only necessary change i s an i n c r e a s e i n the r a t e of assessment on land. I f these new r a t e s prove to be high enough to remove the f u l l economic r e n t of land, other taxes i n the system c o u l d be used to supplement revenues and the c o n t r i b u t i o n of the l a n d value tax can be reduced. M a r g i n a l cost p r i c i n g f o r p e r i p h e r a l areas and average c o s t p r i c i n g f o r the developed core are u n l i k e l y to produce adequate revenues by themselves because some p u b l i c l y s u p p l i e d s e r v i c e s cannot f e a s i b l y be p r i c e d on t h i s b a s i s . I f the use of marginal c o s t p r i c i n g i s f u l l y e x p l o i t e d , more revenues can be c o l l e c t e d than are now captured by e x i s t i n g d e v i c e s such as development c o s t charges. Betterment l e v i e s a p p l i e d a c c o r d i n g to plans f o r development on the p e r i p h e r y are a l s o supplemental t a x e s . P r e f e r e n t i a l taxes, t o the degree t h a t they a c t as s u b s i d i e s , reduce the tax base. Forms of d e f e r r e d taxes r e c o v e r i n g foregone -117-revenues a t the time of development t o a h i g h e r use are p r e f e r a b l e . 2. B e n e f i t s r e c e i v e d The land value tax i s a form of payment f o r l o c a t i o n values c r e a t e d by p u b l i c and c o l l e c t i v e p r i v a t e e f f o r t s . M a r g i n a l c o s t p r i c i n g i s based on the b e n e f i t p r i n c i p l e . Together, these taxes are more c o n s i s t e n t with payments f o r b e n e f i t s r e c e i v e d than i s the p r o p e r t y tax. Although i t has been argued t h a t the l e v e l of investment i n improve-ments has some correspondence w i t h expenditures on s e r v i c e s ( C l a r k , 1961, p. 82), the p r o p e r t y tax i s g r e a t l y i n f e r i o r to these two combined a l t e r n a t i v e s . Betterment l e v i e s , a l s o based on the b e n f i t p r i n c i p l e , are c o n s i s t e n t w i t h t h i s standard. P r e f e r e n t i a l taxes are j u s t i f i e d on the b a s i s of s o c i a l r a t h e r than p r i v a t e b e n e f i t s . 3. A b i l i t y to p a y / l i q u i d i t y Because the l e v e l of investment i n improvements has some c o r r e l a t i o n w i t h a b i l i t y to pay, i t has been suggested t h a t the p r o p e r t y tax i s s u p e r i o r t o the land value tax (Clark, 1961, p. 82). However, land i s an a s s e t and the land value tax i s l e v i e d i n p r o p o r t i o n to i t s value as an a s s e t . The r e a l problem i s not one of a b i l i t y to pay, but of l i q u i d i t y . The g o a l of i n c r e a s i n g the i n t e n s i t y of land use n e c e s s i t a t e s p u t t i n g land i n v a l u a b l e l o c a t i o n s i n t o p r o d u c t i v e use. The l i q u i d i t y problem i s an unavoidable aspect o f t h i s t r a d e - o f f between p u b l i c and p r i v a t e i n t e r e s t s . Because marginal c o s t -118-p r i c i n g permits a l o c a t i o n a l c h o i c e , a b i l i t y to pay i s not a s i g n i f i c a n t i s s u e . The forms of betterment l e v i e s which come i n t o e f f e c t upon development t o a high e r use are b e t t e r equated w i t h a b i l i t y to pay than land value increment taxes which again may c r e a t e problems of l i q u i d i t y . P r e f e r e n t i a l taxes have been designed s p e c i f i c a l l y t o meet the problems of a b i l i t y to pay and l i q u i d i t y . 4. Leg i t i m a c y of e x p e c t a t i o n s A major f a c t o r l i m i t i n g the extent of tax reforms i s a r e l u c t a n c e t o a l t e r the r u l e s a f f e c t i n g the o p e r a t i o n of the pro p e r t y market, under which e x p e c t a t i o n s have been l e g i t i m a t e l y developed ( V i c k e r y , 1970, p. 25). The land value tax and forms of betterment l e v i e s are l i k e l y to have the most severe impact on these e x p e c t a t i o n s because they i n v o l v e more r a d i c a l forms of changes. The impact can be m i t i g a t e d c o n s i d e r a b l y by a gradual s h i f t t o land value t a x a t i o n (Cord, 19 70). Advance n o t i c e by way of development plans f o r the areas to which betterment l e v i e s w i l l be a p p l i e d would a l s o ease the impact of these changes, although i t would p r o v i d e l i t t l e a s s i s t a n c e i n areas where development has al r e a d y begun. However, the l e g i t i m a c y o f some e x p e c t a t i o n s developed under the e x i s t i n g p r o p e r t y tax should be examined c l o s e l y . I t c o u l d be questioned whether i t i s a l e g i t i m a t e expecta-t i o n t h a t s p e c u l a t i v e r i s k s should be rewarded by w i n d f a l l gains from changes i n zoning, that s e r v i c e s should be s u p p l i e d -119-r e g a r d l e s s of c o s t s to p a r t i c u l a r l o c a t i o n s , or t h a t p r i v a t e improvements which upgrade neighborhoods should be p e n a l i z e d by t a x e s . The reforms suggested i n t h i s d i s c u s s i o n p r o v i d e a more j u s t i f i a b l e b a s i s f o r l o c a l taxes than does the c u r r e n t p r o p e r t y tax. 5. A d m i n i s t r a t i v e f e a s i b i l i t y and c o s t s The p r e c e d i n g chapters have d e s c r i b e d the a d m i n i s t r a t i v e problems of each of the taxes and, i n g e n e r a l , the s u c c e s s f u l implementation of these taxes suggests t h a t they are f e a s i b l e a l t e r n a t i v e s . However, a d m i n i s t r a t i v e c o s t s w i l l be i n c r e a s e d and the b e n e f i t s of reform should be analyzed, e m p i r i c a l l y where p o s s i b l e , f o r p a r t i c u l a r urban areas. 6. Equal treatment of equals A c c o r d i n g to t h i s standard, taxpayers i n s i m i l a r circum-stances should be l i a b l e f o r the same taxes and assessments (McMath Commission, 1976, p. 86). I t i s d i f f i c u l t t o d e f i n e the circumstances which are r e l e v a n t , however. Those who view the p r o p e r t y tax as a v e s t i g i a l tax on wealth w i l l d e f i n e s i m i l a r circumstances to i n c l u d e l o c a t i o n value and the l e v e l of investment i n improvements. From the p e r s p e c t i v e of land use p l a n n i n g , the r e l e v a n t circumstance i s s o l e l y l o c a t i o n v a l u e . Because many assessment appeals are based on the argument t h a t taxes are h i g h e r than those g e n e r a l l y p r e v a i l i n g i n the neighborhood, i t i s l i k e l y t h a t taxpayers a l s o c o n s i d e r l o c a t i o n t o be more r e l e v a n t . Taxes based on m a r g i n a l c o s t p r i c i n g have a l s o been j u s t i f i e d on the b a s i s of -120-l o c a t i o n as the r e l e v a n t c o n d i t i o n . Although betterment l e v i e s are not e n t i r e l y o b j e c t i o n a b l e t o t h i s standard i f l o c a t i o n i s the determining c o n d i t i o n , grants o f p l a n n i n g p e r m i s s i o n i n developed areas i n which betterment l e v i e s are not a p p l i e d may be seen as cases of unequal treatment. P r e f e r e n t i a l taxes, even i f assessed on a l o c a t i o n a l b a s i s , are p r i m a r i l y a concession to groups having lower income or wealth, but are c o n s i s t e n t with the standard because they apply to a l l land i n a p a r t i c u l a r use. 7. U n i f o r m i t y of a p p l i c a t i o n and e q u i t y There has been c o n s i d e r a b l e debate on the importance of t h i s standard, based on the premise that u n i f o r m i t y produces l e s s d i s t o r t i o n i n i n c i d e n c e (Netzer, 1976, p. 2 2 4 ) . The prope r t y tax and the land value tax are the only a l t e r n a t i v e s which t h e o r e t i c a l l y s a t i s f y t h i s c r i t e r i o n . In p r a c t i c e , c l a s s i f i c a t i o n a c c o r d i n g to use, assessment d i f f e r e n t i a l s and a l l forms of tax r e l i e f circumvent u n i f o r m i t y g e n e r a l l y i n order t o a l l e v i a t e e q u i t y problems d i r e c t l y . The tax system reforms c o n s i d e r e d i n t h i s d i s c u s s i o n i n t r o d u c e a r e l a t i v e l y g r e a t e r degree of nonuniformity not g e n e r a l l y j u s t i f i e d on the b a s i s o f e q u i t y , but wit h the purpose of i n c r e a s i n g l o c a l c o n t r o l over l a n d use. THE EFFECT OF TAX REFORM ON URBAN SPRAWL The g r e a t e s t impact of tax reform w i l l be on p r e v e n t i n g - 1 2 1 -f u r t h e r sprawl by a f f e c t i n g l o c a t i o n a l c h o i c e s . In the i n t r o d u c t o r y chapter, the three main p h y s i c a l forms of sprawl were d e s c r i b e d . In t h i s s e c t i o n , the r o l e of i n t e g r a t e d f i s c a l and p l a n n i n g p o l i c y i n r e d u c i n g the e f f e c t s of e x i s t i n g types of sprawl w i l l be examined. Of the v a r i o u s causes of low d e n s i t y continuous develop-ment, g e n e r a l l y the most important i s consumer p r e f e r e n c e f o r s i n g l e f a m i l y r e s i d e n c e s . W i t h i n the scope of l o c a l t a x a t i o n , the best a l t e r n a t i v e s f o r r e d u c i n g sprawl are marginal cost p r i c i n g , to a l l o c a t e expenditures on s e r v i c e s , and a s h i f t to the land value tax, to promote i n f i l l where t h i s i s s t i l l p o s s i b l e . Although i n c r e a s e d d e n s i t y tends to reduce the incremental c o s t s of s u p p l y i n g some s e r v i c e s to a d d i t i o n a l r e s i d e n t i a l u n i t s , more compact forms of low d e n s i t y development are a l s o more c o s t - e f f e c t i v e than sprawled continuous development (Real E s t a t e Research C o r p o r a t i o n , 1974). Planned development of urban f a c i l i t i e s and e x t e n s i o n of s e r v i c e s and u t i l i t i e s combined with g r e a t e r use of marginal c o s t p r i c i n g are necessary to reduce the f u t u r e extent of t h i s form of sprawl. Leapfrog development r e s u l t s from d i f f e r e n c e s i n s p e c u l a t i v e e v a l u a t i o n s of r i s k and from v a r y i n g motives f o r owning l a n d . Although betterment l e v i e s and the land value tax, to the e x t e n t t h a t these skipped over areas have hi g h l o c a t i o n v a l u e s , can a f f e c t s p e c u l a t i v e d e c i s i o n s on h o l d i n g l a n d from development, i n c r e a s e d c e r t a i n t y of development -122-p o t e n t i a l may be more e f f e c t i v e . The e x i s t e n c e and e n f o r c e -ment of development plans combined with a p p r o p r i a t e l o c a l taxes w i l l a c t to reduce these s p e c u l a t i v e h o l d i n g s (Clawson, 1962) . A r t e r i a l sprawl i s p o s s i b l y the most d i f f i c u l t form to attempt to remedy through l o c a l t a x e s . In t h i s case, the I o r i g i n a l c o n c e n t r i c p a t t e r n of land values has been d i s t o r t e d along t r a n s p o r t a t i o n a r t e r i e s and l o c a t i o n values p r e v i o u s l y determined by p h y s i c a l p r o x i m i t y to the urban core are now determined by temporal p r o x i m i t y . The o b j e c t i v e of p l a n n i n g i s f r e q u e n t l y d i r e c t e d toward c o n c e n t r a t i n g development i n nodes along the a r t e r i e s or i n suburban r e g i o n a l centers at the t e r m i n i of the main a r t e r i e s . Where new c e n t e r s are e s t a b l i s h e d , land value t a x a t i o n can promote compact develop-ment, betterment l e v i e s can reduce the time l a n d i s w i t h h e l d and p r e f e r e n t i a l taxes can help preserve the areas most v a l u a b l e i n t h e i r present use. Again, extensions of s e r v i c e s can be f i n a n c e d by m a r g i n a l c o s t p r i c i n g . JURISDICTION FOR REFORM AND THE METROPOLITAN REGION The d i s c u s s i o n has t r e a t e d the m e t r o p o l i t a n area as a s i n g l e j u r i s d i c t i o n i n which a comprehensive tax p o l i c y c o u l d be formulated. In Canada, the a c t u a l j u r i s d i c t i o n f o r reform l i e s not w i t h l o c a l governments, but w i t h the p r o v i n c e s , which have been assig n e d powers over m u n i c i p a l i n s t i t u t i o n s -123-and " g e n e r a l l y a l l matters of a merely l o c a l o r p r i v a t e nature" under the C o n s t i t u t i o n A c t , 1982 (S e c t i o n 92, (16)). The p r o v i n c i a l government would have to c o n s i d e r the s u i t a b i l -i t y of these taxes f o r s e m i - r u r a l and r u r a l areas to ensure reasonable terms of ge n e r a l a p p l i c a b i l i t y , i n a d d i t i o n to the m e t r o p o l i t a n r e g i o n s which have been the s o l e concern of t h i s a n a l y s i s . A more s i g n i f i c a n t problem i s t h a t m e t r o p o l i t a n r e g i o n s are not u n i f i e d j u r i s d i c t i o n s , but are o f t e n composed of a number of p o l i t i c a l e n t i t i e s . Agreement on r e g i o n a l p l a n n i n g o b j e c t i v e s and f i s c a l p o l i c y are important t o the e f f e c t i v e o p e r a t i o n of t h i s system of taxes. D i f f e r e n c e s i n the types of taxes a p p l i c a b l e and i n tax r a t e s among l o c a l governments c o u l d c r e a t e negative impacts on r e g i o n a l land use p a t t e r n s . In order to ensure u n i f o r m i t y of tax o b j e c t i v e s and to mediate where c o n f l i c t s o f l o c a l i n t e r e s t a r i s e , i t may be necessary to a s s i g n these r e s p o n s i b i l i t i e s to a r e g i o n a l l e v e l of government. However, d i s p u t e s among m u n i c i p a l i t i e s over matters a f f e c t i n g l o c a l i n t e r e s t have impaired the a b i l i t i e s of r e g i o n a l d i s t r i c t s , m e t r o p o l i t a n c o u n c i l s , c o u n t i e s and the l i k e to c o n t r i b u t e to coherent l a n d use development. Although t h i s s u b j e c t cannot be d e a l t w i t h here i n the d e t a i l i t r e q u i r e s , i t i s p o s s i b l e t h a t g r e a t e r r e g i o n a l government access to some p o r t i o n o f m u n i c i p a l revenues f o r these purposes, supplemented by i n c r e a s e d p r o v i n c i a l a i d , would - 1 2 4 -strengthen the r e g i o n a l p l a n n i n g f u n c t i o n . T h i s more a c t i v e r o l e f o r r e g i o n a l governments (or g r e a t e r p r o v i n c i a l i n v o l v e -ment i n i n t e r m u n i c i p a l a f f a i r s ) might i n c l u d e compensatory f i s c a l t r a n s f e r s i n order to maintain adequate revenue bases i n those m u n i c i p a l i t i e s f o r which immediate economic expansion i s not d e s i r a b l e i n the long term i n t e r e s t s of the r e g i o n . RECOMMENDATIONS FOR FURTHER STUDY AND CONCLUDING COMMENTS This t h e s i s has reviewed a number of op t i o n s f o r l o c a l t a x a t i o n which are f r e q u e n t l y recommended as i n c e n t i v e s f o r more s o c i a l l y o p t i m a l forms of urban development, but which have not been analyzed s y s t e m a t i c a l l y w i t h i n the context of economic e f f i c i e n c y and aggregate e f f e c t on s p a t i a l p a t t e r n s Of growth. More e f f e c t i v e v a r i a t i o n s on these a l t e r n a t i v e s have been suggested, but there may be other forms of taxes more c l o s e l y combining p l a n n i n g and f i s c a l o b j e c t i v e s which deserve f u r t h e r e x p l o r a t i o n . The focus of t h i s a n a l y s i s has been on urban sprawl and m e t r o p o l i t a n development, but p l a n n i n g problems of s m a l l communities and r u r a l areas may a l s o b e n e f i t from a c l o s e r a l l i a n c e with f i s c a l p o l i c y , not n e c e s s a r i l y u s i n g the tax forms c o n s i d e r e d here. Before implementation of reforms i s undertaken, e m p i r i c a l r e s e a r c h should be a p p l i e d to s p e c i f i c m e t r o p o l i t a n areas to estimate the magnitude of the impact on landowner behavior and i n c e n t i v e s to a l t e r investment d e c i s i o n s . The l e n g t h of time - 1 2 5 -necessary to achieve changes i n development p a t t e r n s through a s e r i e s of induced a l t e r a t i o n s i n p a t t e r n s of land value would a l s o a i d i n the e v a l u a t i o n of the e f f e c t i v e n e s s of tax reform. From the p e r s p e c t i v e of e q u i t y , i t would a l s o be d e s i r a b l e t o estimate the extent of burdens imposed on d i f f e r e n t c l a s s e s of landowners. F i n a l l y , the i n c r e a s e i n a d m i n i s t r a t i v e c o s t s of implementation would need to be known to determine the f e a s i b i l i t y of reform. T h i s a n a l y s i s concludes t h a t there e x i s t s c o n s i d e r a b l e scope f o r l o c a l tax reform with the o b j e c t i v e of promoting more optimal p a t t e r n s of urban development. A c e n t r a l c o n t e n t i o n of t h i s t h e s i s i s t h a t economic i n e f f i c i e n c y i n the a l l o c a t i o n of resources c o n t r i b u t e s to urban sprawl. However, tax reforms are only one approach to the complex problem of urban sprawl. Other measures w i l l be necessary to c o n t r o l p a t t e r n s of development. Important among these measures are t r a d i t i o n a l forms of p l a n n i n g c o n t r o l s which, when combined with tax reforms, w i l l be more e f f e c t i v e i n r e d u c i n g the e x t e n t of sprawl and w i l l c o n t r i b u t e to g r e a t e r e f f i c i e n c y . Although t h e r e has been a g e n e r a l r e l u c t a n c e to i n i t i a t e s u b s t a n t i v e reforms of l o c a l taxes, d e s p i t e w e l l documented c r i t i c i s m s of the p r o p e r t y tax, the growing concern of l o c a l governments over que s t i o n s of urban development and f i n a n c i n g of p u b l i c p r o j e c t s should prompt r e e v a l u a t i o n s of f i s c a l p o l i c i e s . U n t i l attempts are made to i n t e g r a t e f i s c a l and p l a n n i n g o b j e c t i v e s , l o c a l f i s c a l p o l i c i e s w i l l be - 1 2 6 -i n c o n s i s t e n t and c o u n t e r p r o d u c t i v e to the development of m e t r o p o l i t a n areas. BIBLIOGRAPHY Agapos, A.M. and P.R. Dunlap. " E l i m i n a t i o n of Urban B l i g h t Through Inverse P r o p o r t i o n a l Ad Valorem Property T a x a t i o n , " Amer. J . Econ. Soc., 32(2), A p r i l 1973, 143-152. Archer, R.W. Urban P l a n n i n g and the Property Market. Canberra, A u s t r a l i a : M e t r o p o l i t a n Research T r u s t , 1971. . "Land S p e c u l a t i o n and S c a t t e r e d Development: F a i l u r e s i n the Urban-Fringe Land Market," Urban S t u d i e s , 10, 1973, 367-372. A r n o t t , R.J. and J.G. Mackinnon. "The E f f e c t s of the Property Tax: A General E q u i l i b r i u m S i m u l a t i o n , " Urban Econ., 4, 1977, 389-407. A t k i n s o n , Glen W. "The E f f e c t i v e n e s s of D i f f e r e n t i a l Assessment of A g r i c u l t u r a l and Open Space Land," Amer. J . Econ. Soc., A p r i l 1977, 197-204. Bahl, R.W. "A Land S p e c u l a t i o n Model: The Role of the Property Tax as a c o n s t r a i n t to Urban Sprawl," J . Reg. S c i . , 8(2), 199-207. e t a l . "Land Value Increments as a Measure of the Net B e n e f i t s of Urban Water Supply P r o j e c t s i n Develop-i n C o u n t r i e s , " i n ed. C. L o w e l l H a r r i s s , Government  Spending and Land Values, Madison: U n i v e r s i t y of Wisconsin Pr e s s , 1971. and J.M. McGuire. "Urban Sprawl: P o l i c i e s f o r Containment and Cost Recoupment," i n ed. Paul B. Downing, L o c a l S e r v i c e P r i c i n g P o l i c i e s and T h e i r E f f e c t on Urban  S p a t i a l S t r u c t u r e . Vancouver: U n i v e r s i t y of B r i t i s h Columbia P r e s s , 1977. B a i l s , D. "An A l t e r n a t i v e : The Land Value Tax," Amer. J . Econ. Soc., 32(3), J u l y 1973, 283-294. B a r l e v , B. " L o c a t i o n E f f e c t s of I n t r a - A r e a Tax D i f f e r e n t i a l s , " Land Econ., Feb. 1973, 86-89. . "The E f f e c t s of Property Taxes on the C o n s t r u c t i o n and D e m o l i t i o n of Houses i n Urban Areas," Econ. Geogr., 42(4) , Oct. 1976, 304-310 . Barlowe, R., J.G. A h l and G. Bachman, "Use Value Assessment L e g i s l a t i o n i n the U.S.," Land Econ., May 1973, 206-212. -128-Beck, M. P r o p e r t y T a x a t i o n and Urban Land Use i n North-e a s t e r n New J e r s e y . Washington, D.C: Urban Land I n s t i t u t e , no date. Becker, A.P. " P r i n c i p l e s of Taxing Land and B u i l d i n g s f o r Economic Development," i n ed. A.P. Becker, Land and  B u i l d i n g Taxes. Madison: U n i v e r s i t y of Wisconsin P r e s s , 1969. Beeman, W.J. The Property Tax and the S p a t i a l P a t t e r n of Growth w i t h i n Urban Areas. Washington, D.C.: Urban Land I n s t i t u t e , 1969. B i r d , R i c h a r d M. Charging f o r P u b l i c S e r v i c e s : A New Look a t an Old Idea. Toronto: Canadian Tax Foundation, 1976. Black, D.E. "The Incidence of D i f f e r e n t i a l P r o p erty Taxes on Urban Housing: Some F u r t h e r Evidence," Nat. Tax J . , 27(1), June 1974, 367-369. Blum, Andre. " S e r v i c e Charges," M u n i c i p a l Finance, 41, Nov. 1968, 100-107. Break, George F. "Property T a x a t i o n : A R e a p p r a i s a l of Burden, Incidence, and E q u i t y , and T h e i r P o l i c y I m p l i c a t i o n s , " i n ed. A r t h u r D. Lynn, J r . , Property T a x a t i o n , Land Use and P u b l i c P o l i c y . Madison: U n i v e r s i t y of Wisconson Press, 1976 . , ed. M e t r o p o l i t a n F i n a n c i n g and Growth Management P o l i c i e s . Madison: U n i v e r s i t y of Wisconsin Press, 1978. Brodsky, H. " R e s i d e n t i a l Land and Improvement Values i n a C e n t r a l C i t y , " Land Econ., Aug. 1970, 229-247. . " R e s i d e n t i a l Land and Improvement Values i n a C e n t r a l C i t y : A R e j o i n d e r , " Land Econ., May 1972, 198. Browning, C E . "Land Value T a x a t i o n : Promises and Problems," JAIP, Nov. 1963, 300-310. Canadian Tax Foundation. S i t e V a l u a t i o n as a Base f o r L o c a l  T a x a t i o n . F i f t e e n t h Tax Conference, 1961. Carman, H.F. and J.G. P o i s o n . "Tax S h i f t s O c c u r r i n g as a R e s u l t of D i f f e r e n t i a l Assessment of Farmland, 1968-69," Nat. Tax J . , Dec. 1971, 449-57. -129-C h i n i t z , B. and T.G. Cowing. "The Impact of L o c a l P u b l i c S e r v i c e C o n s o l i d a t i o n on Urban S p a t i a l S t r u c t u r e , " i n P.B. Downing, L o c a l S e r v i c e P r i c i n g P o l i c i e s and T h e i r  E f f e c t on Urban S p a t i a l Structure. Vancouver: U n i v e r s i t y of B r i t i s h Columbia P r e s s , 1977. C h i n l o y , P. " E f f e c t i v e P r o p e r t y Taxes and Tax C a p i t a l i z a t i o n , " Can. J . Econ., 11(4), Nov. 1978, 740-750. Church, A.M. " C a p i t a l i z a t i o n of the E f f e c t i v e P r o perty Tax Rate on S i n g l e Family Residences," Nat. Tax J . , 27(1), March 1974, 113-122. C i t y of Vancouver. Real Property Assessment and T a x a t i o n i n Vancouver. Submission to McMath Commission of I n q u i r y on Property Assessment and T a x a t i o n , Appendix B, 1976. C l a r k e , E.H. " M u l t i p a r t P r i c i n g of P u b l i c Goods: An Example," i n ed. Selma J . Mushkin, P u b l i c P r i c e s f o r P u b l i c  P roducts. Washington: The Urban I n s t i t u t e , 1972. Clawson, M. "Urban Sprawl and S p e c u l a t i o n i n Suburban Land," Land Econ., May 1962, 95-111. C l a y t o n , F.A. "Real Property Tax Assessment P r a c t i c e s i n Canada: An Overview," Can. Pub. Policy,. 2 , 347-362. Coen, R.M. and B.J. Powell. "Theory and Measurement of D i f f e r e n t i a l P r o p erty Taxes on Rental Housing," Nat. Tax J . , 25(2), June 1972, 211-216. C o n k l i n , H.E. "Property Tax I n c e n t i v e s to Preserve Farming i n Areas of Urban Pr e s s u r e , " i n I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , Proceedings of the 1975 Property Tax Forum, Property Tax Incentives f o r P r e s e r v a t i o n . 1 Washington, D.C: Property Tax Forum, 1975. Cord, S. "The Role of the Graded Tax i n Urban Redevelopment," Amer. J . Econ. Soc., 29(3), J u l y 1970, 321-28. . "Tax Reform and Urban Renewal," Amer. J . Econ. Soc., T 0 ( 4 ) , Oct. 1971, 395-396. . "How Land Value T a x a t i o n Would A f f e c t Homeowners," Amer. J . Econ. Soc., 32(2), A p r i l 1973, 153-154. DeSalvo, J.S. " E f f e c t s of the P r o p e r t y Tax on Operating and Investment D e c i s i o n s of Re n t a l Property Owners," Nat. Tax J . , 24(1), March 1971, 45-50. -130-DeSalvo, J.S. " E f f e c t s of the P r o p e r t y Tax on Operating and Investment D e c i s i o n of Rental Property Owners: Reply," Nat. Tax J . , 26(1), March 1973, 129-131. Downing, Paul B. "User Charges and the Development of Urban Land," Nat. Tax J . , 26(4), Dec. 1973, 631-637. . " P o l i c y P e r s p e c t i v e s on User Charges and Urban S p a t i a l Development," i n ed. Paul B. Downing, L o c a l S e r v i c e P r i c i n g P o l i c i e s and T h e i r E f f e c t on Urban  S p a t i a l S t r u c t u r e . Vancouver: U n i v e r s i t y of B r i t i s h Columbia P r e s s , 1977. E n g e l b e r t , E.A. "The P o l i t i c a l Aspects of Real P r o p e r t y T a x a t i o n i n R e l a t i o n to M e t r o p o l i t a n P l a n n i n g and Growth," i n ed. A.P. Becker, Land and B u i l d i n g Taxes. Madison: U n i v e r s i t y of Wisconsin P r e s s , 1969. E r v i n , D.C. and J.B. Fitch.. " E v a l u a t i n g A l t e r n a t i v e Compen-s a t i o n and Recapture Techniques f o r Expanded C o n t r o l of Land Use," N a t u r a l Resources J . , 19, Jan. 1979, 20-41. Feldman, L.D. "The Changing Role of the Real Property Tax i n Canada," Can. Tax Foundation, 1975 Conference Report, 1976, 713-722. F i n n i s , F.H. Property Assessment i n Canada. Toronto: Cana-d i a n Tax Foundation, 19 79. F o s t e r , D.C. and S. G l a i s t e r . "The Anatomy of the Development Value Tax," Urban S t u d i e s , 12(2), 1975, 213-218. Gaffney, Mason. "Land P l a n n i n g and the P r o p e r t y Tax," AIP J o u r n a l , May 1969, 178-183. . "Land Rent, T a x a t i o n and P u b l i c P o l i c y , " Amer. J . Econ. Soc., 31(3), J u l y 1972, 241-258. George, Henry. Progress and Poverty. New York: Modern L i b r a r y , 1879. G e r t l e r , Len. Human Settlement Issues - H a b i t a t and the Land, V o l . 1. Vancouver: U n i v e r s i t y of B r i t i s h Columbia P r e s s , 1978. Gloudemans, Robert J . Use-Value Farmland Assessments: Theory, P r a c t i c e and Impact. Chicago: I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , 1974. -131-Goetz, C.J. "The Revenue P o t e n t i a l o f User-Related Charges i n St a t e and L o c a l Governments," i n ed. R.A. Musgrave, Broad-Based Taxes. B a l t i m o r e : John Hopkins U n i v e r s i t y P ress, 1973. Grey, A.L. "Urban Renewal and Land Value T a x a t i o n , " i n ed. A.P. Becker, Land and B u i l d i n g Taxes. Madison: U n i v e r s i t y of Wisconsin P r e s s , 1969. Gr i e s o n , R.E. " E f f e c t s o f the Property Tax on Operating and Investment D e c i s i o n s of Rental P r o p e r t y Owners: A Note," Nat. Tax J . , 26(1), March 1973, 127-128. . "The Economics of Property Taxes and Land Va l u e s : The E l a s t i c i t y o f Supply o f S t r u c t u r e s , " J . Urban  Econ., 1, 1974, 367-381. Grimes, O.F. J r . "Urban Land Taxes and Land P l a n n i n g , " Finance and Development, 12(1), March 1975, 16-20. . "Urban Land and P u b l i c P o l i c y : S o c i a l A p p r o p r i a t i o n of Betterment," i n ed. Paul B. Downing, L o c a l S e r v i c e P r i c i n g P o l i c i e s and T h e i r E f f e c t on Urban  S p a t i a l S t r u c t u r e . Vancouver: U n i v e r s i t y of B r i t i s h Columbia P r e s s , 1977. Gust l e y , R.D. "L o c a l Taxes, Expenditures and Urban Housing: A Reassessment of the Evidence," Southern Econ. J . , 42(4), 1976, 659-666. Hady, Thomas F. " D i f f e r e n t i a l Assessment and the P r e s e r v a t i o n of Farmland, Open Space and H i s t o r i c S i t e s , " i n I n t e r -n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , P r o p erty Tax  I n c e n t i v e s f o r P r e s e r v a t i o n , Washington, D.C: Pro p e r t y Tax Forum, 19 75. Hamilton, B.W. "Property Taxes and the Tiebout Hypothesis: Some E m p i r i c a l Evidence," i n eds. E.S. M i l l s and W.E. Oates, F i s c a l Zoning and Land Use C o n t r o l s . Toronto: Lexington Books, 1975. Hansen, D.E. and S.I. Schwartz. "Landowner Behavior at the Rural-Urban F r i n g e i n Response to P r e f e r e n t i a l P r o perty T a x a t i o n , " Land Econ., 51(4), Nov. 1975, 341-354. H a r r i s s , C. L o w e l l . " T r a n s i t i o n to Land Value T a x a t i o n : Some Major Problems," i n ed. D. H o l l a n d , The Assessment of  Land Value. Madison: U n i v e r s i t y o f Wisconsin P r e s s , 1970. . "Land Value Increment T a x a t i o n : Demise of the B r i t i s h Betterment Levy," Nat. Tax J . , 25(4), 1972, 567-572. -132-H a r r i s s , C. L o w e l l . "Property Tax Redesign Options: P r o d u c t i v e or Counterproductive?" i n ed. A.D. Lynn, J r . , P r o p erty T a x a t i o n , Land Use and P u b l i c P o l i c y , Madison: U n i v e r s i t y of Wisconsin Press, 1976. Harvey, R.E. and W.A.V. C l a r k . "The Nature and Economics of Urban Sprawl," Land Econ., 61(1), Feb. 1965, 1-9. Haworth, C.T. and D.W. Rasmussen. " R e s i d e n t i a l Land and Improvement Values i n a C e n t r a l C i t y : A Comment," Land  Econ., 48(2), May 1972, 196-197. H e i l b r u n , J . "Reforming the Real E s t a t e Tax to Encourage Housing Maintenance and R e h a b i l i t a t i o n , " i n ed. A.D. Lynn, J r . , P r o p erty T a x a t i o n, Land Use and P u b l i c P o l i c y , Madison: U n i v e r s i t y of Wisconsin Press, 1976. . Real E s t a t e Taxes and Urban Housing. New York: Columbia U n i v e r s i t y P r e s s , 1966. Heinberg, J.D. and W.E. Oates. "The Incidence of D i f f e r e n t i a l P r o p e rty Taxes on Urban Housing: A Comment and Some Fu r t h e r E v i c e n c e , " Nat. Tax J . , 23(1), March 1970, 92-98. . "The Incidence of D i f f e r e n t i a l P roperty Taxes on Urban Housing: An Addendum," Nat. Tax J . , 25(2), June 1972, 221-222. H i r s c h , W. "The E f f i c i e n c y of R e s t r i c t i v e Land Use I n s t r u -ments," Land Econ., 53(2), May 1977, 145-156. Ho l l a n d , D a n i e l M., ed. The Assessment of Land Value. Madison: U n i v e r s i t y of Wisconsin P r e s s , 1970. Hushak, L . J . "Urban-Rural F r i n g e Land," Land Econ., 51(2), May 1975, 112-132. Hyman, D.N. and E.C. Pasour J r . "Real Property Taxes, L o c a l P u b l i c S e r v i c e s and R e s i d e n t i a l P r o p e r t y Values," Southern  Econ. J . , 39, 1973, 601-611. . " F i s c a l S t r u c t u r e and M e t r o p o l i t a n D i s t r i b u t i o n of P o p u l a t i o n , " i n ed. Paul B. Downing, L o c a l S e r v i c e  P r i c i n g P o l i c i e s and T h e i r E f f e c t on Urban S p a t i a l  S t r u c t u r e . Vancouver: U n i v e r s i t y of B r i t i s h Columbia Pr e s s , 1977. -133-Intergovernmental Committee on Urban and Regional Research. A Canadian Approach to M i n i m i z i n g Real P r o p e r t y Tax  Exemptions. Prepared f o r the Conference of M i n i s t e r s of M u n i c i p a l A f f a i r s , 1974. I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s . P r o p erty  Tax I n c e n t i v e s f o r P r e s e r v a t i o n : Use-Value Assessment  and the P r e s e r v a t i o n of Farmland, Open Space and H i s t o r i c  S i t e s . Proceedings of the 1975 Property Tax Forum, Washington, D.C: P r o p e r t y Tax Forum, 1975. Johnson, J.A. " M u n i c i p a l Tax Reform - A l t e r n a t i v e s to the Real Property Tax," Canadian P u b l i c P o l i c y , 2, 335-346. K a f o g l i s , M.A. " L o c a l S e r v i c e Charges - Theory and P r a c t i c e , " i n ed. H.L. Johnson, S t a t e and L o c a l Tax Problems. K n o x v i l l e : U n i v e r s i t y of Tennessee Press, 1969.. Keene, J . C , ed. P o l i c y I m p l i c a t i o n s f o r the Real Property  Tax. P h i l a d e l p h i a : U n i v e r s i t y of P ennsylvania, 1972. . "The Impact of D i f f e r e n t i a l Assessment Programs on the Tax Base", i n I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , Property Tax I n c e n t i v e s f o r Pres-e r v a t i o n . Washington, D.C: Property Tax Forum, 1975. Kinsey, David N. "The French Z.U.P. Technique of Urban Development," AIPJ, Nov. 1969, 369-376. Ladd, Helen F. Tax P o l i c y C o n s i d e r a t i o n s U n d e r l y i n g P r e f e r -e n t i a l Tax Treatment of Open Space and A g r i c u l t u r a l  Land. Cambridge, Mass.: Harvard U n i v e r s i t y P r e s s , 1978. L a i , R.T. " E f f e c t of Property T a x a t i o n on R e s i d e n t i a l R e h a b i l i t a t i o n i n the Older Center C i t y , " i n ed. J.C. Keene, P o l i c y I m p l i c a t i o n s of the Real P r o p e r t y Tax. P h i l a d e l p h i a : U n i v e r s i t y of Pennsylvania, 1972. L e s s i n g e r , J . "The Case f o r S c a t t e r a t i o n , " JAIP, 28(3), Aug. 1962, 159-169. Lynn, A r t h u r D. "Reform of Property Tax Systems: Substance or Semantics," i n ed.H.L. Johnson, S t a t e and L o c a l Tax Problems. K n o x v i l l e : U n i v e r s i t y of Tennessee P r e s s , 1969. MacKenzie, R.M. "Land Use Development C o n t r o l i n B r i t i s h Columbia," The Advocate, 36(6), Oct.-Nov. 1978. McKee, D.L. and G.H. Smith. "Environmental Diseconomies and Suburban Expansion," Amer. J . Econ. Soc., 31(2), A p r i l 1972, 181-188. -134-McMath Commission of I n q u i r y on P r o p e r t y Assessment and T a x a t i o n . P r e l i m i n a r y r e p o r t . Vancouver: P r o v i n c e of B r i t i s h Columbia, 1976. Macon, Jorge and J.M. Manon. F i n a n c i n g Urban and R u r a l  Development Through Betterment L e v i e s - The L a t i n  American E x p e r i e n c e. New York: Praeger P u b l i s h e r s , 1977. M a r g o l i s , J . "A Comment on the Pure Theory of P u b l i c E x p e n d i t u r e , " Rev. Econ. and S t a t s . , 37, November 1955, 347-349 . M i l l i m a n , J.W. " B e n e f i c i a r y Charges - Towards a U n i f i e d Theory," i n ed. S.J. Mushkin, P u b l i c P r i c e s f o r P u b l i c  P roducts. Washington, D.C: The Urban I n s t i t u t e , 1972. M i l l s , E.S. and W.A. Oates. "The Theory 'of L o c a l P u b l i c S e r v i c e s and Finance: I t s Relevance to Urban F i s c a l and Zoning Behavior," i n eds. E.S. M i l l s and W.A. Oates, F i s c a l Zoning and Land Use C o n t r o l s . Toronto: Lexington Books, 1975. Miner, D.D. "Emerging Trends i n A g r i c u l t u r a l R e t e n t i o n and Open Space P r e s e r v a t i o n , " i n I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , Property Tax I n c e n t i v e s f o r  P r e s e r v a t i o n . Washington, D.C: Property Tax Forum, 1975. Moss, W.G. "Large L o t Zoning, Property Taxes and M e t r o p o l i t a n Areas," J . Urban Econ., 4(4), Oct. 1977, 408-427. Musgrave, R.A. The Theory of P u b l i c Finance. Toronto: McGraw-Hill, 1959. and A.T. Peacock. C l a s s i c s i n the Theory of P u b l i c Finance. New York: S t . M a r t i n ' s P r e s s , 1964. Mushkin, Selma J . , ed. P u b l i c P r i c e s f o r P u b l i c Products. Washington, D.C: The Urban I n s t i t u t e , 1972. . "An Agenda f o r Research," i n ed. S.J. Mushkin, P u b l i c P r i c e s f o r P u b l i c Products. Washington, D.C: The Urban I n s t i t u t e , 1972 . Netzer, Dick. "The P r o p e r t y Tax and A l t e r n a t i v e s i n Urban Development," Papers and Proceedings of the Reg. S c i . Assoc., 9, 1962, 191-200. • . Economics of the P r o p e r t y Tax. Washington, D.C: The Brookings I n s t i t u t i o n , 1966. -135-Netzer, Dick. Economics and Urban Problems. New York: B a s i c Books Inc., 1970. . "The Incidence of the Pr o p e r t y Tax R e v i s i t e d , " Nat. Tax J . , 26(4), Dec. 1973, 515-535. . "Property Tax Reform and P u b l i c P o l i c y R e a l i t y , " i n ed. A.D. Lynn, J r . , Property T a x a t i o n , Land Use and P u b l i c P o l i c y . Madison: U n i v e r s i t y o f Wisconsin P r e s s , 1969. Neutze, G.M. "Property T a x a t i o n and M u l t i p l e - F a m i l y Housing," i n ed. A.P. Becker, Land and B u i l d i n g Taxes. Madison: U n i v e r s i t y of Wisconsin Press, 1969. . The P r i c e of Land and Land Use P l a n n i n g . P a r i s : OECD, 1973. . "The Development Value Tax: A Comment," Urban S t u d i e s , 11(2), 1974, 91-92. Nowlan, D.M. "Value and Use of Land: The P u b l i c Connection," Urban Forum, 2 , 1976 , 13-.22. Oates, W. "The E f f e c t s o f Pr o p e r t y Taxes and L o c a l P u b l i c Spending on Property Values: An E m p i r i c a l Study of Tax C a p i t a l i z a t i o n and the T i e b o u t Hypothesis," J . P o l i t . Econ., 77, 1969, 957-971. Ohls, J.O. and D. P i n e s . "Discontinuous Urban Development and Economic E f f i c i e n c y , " Land Econ., 51(3), Aug. 1975, 224-234. Orr, L.L. "The Incidence of D i f f e r e n t i a l P r o p erty Taxes on Urban Housing," Nat. Tax J . , 23(1), March 1970, 99-101. . "The Incidence of D i f f e r e n t i a l P r o p e r t y Taxes: A Response," Nat. Tax J . , 25(2), June 1972, 217-220. . "The Incidence of D i f f e r e n t i a l Property Taxes on Urban Housing: Reply," Nat. Tax J . , 25(2), June 1972, 217-220. P a u l , E.S. " P r i c i n g Rules and E f f i c i e n c y , " i n ed.S.J. Mushkin, P u b l i c P r i c e s f o r P u b l i c Products. Washington, D.C: The Urban I n s t i t u t e , 1972. Peterson, G.E., A.P. Solomon e t a l . Property Taxes, Housing and the C i t i e s . Toronto: Lexington Books, 19 73. -136-Peterson, G.E. " F e d e r a l Tax P o l i c y and Land Conversion a t the Urban F r i n g e , " i n ed. G.F. Break, M e t r o p o l i t a n  F i n a n c i n g and Growth Management P o l i c i e s . Madison: U n i v e r s i t y of Wisconsin P r e s s , 1978. P i c k a r d , J.P. Changing Urban Land Uses as A f f e c t e d by T a x a t i o n . Washington, D.C: Urban Land I n s t i t u t e , 1962 . . T a x a t i o n and Land Use i n M e t r o p o l i t a n and Urban America. Washington, D.C: Urban Land I n s t i t u t e , 1966 . P l u n k e t t , T.J. "The Property Tax and the M u n i c i p a l Case f o r F i s c a l Reform," Canadian P u b l i c P o l i c y , 2, 1976, 313-322. P o l i n s k y , A.M. and D.L. R u b i n f e l d . "The Long-Run E f f e c t s of a R e s i d e n t i a l Property Tax and L o c a l P u b l i c S e r v i c e s , " J . Urban Econ., 5(2), A p r i l 1978, 241-262. P o l l o c k , R.L. and D.C. Shoup. "The E f f e c t of S h i f t i n g the Property Tax Base from Improvement Value to Land Value: An E m p i r i c a l E s t i m a t e , " Land Econ., 53(1), Feb. 1977, 67-77 . P r e n t i c e , P.I. "The Case f o r Taxing L o c a t i o n Values," Amer. J . Econ. Soc., 28(2), A p r i l 1969, 147. Rawson, Mary. Property T a x a t i o n and Urban Development. Washington, D.C: Urban Land I n s t i t u t e , 1961. Real E s t a t e Research C o r p o r a t i o n . The Costs of Sprawl, v o l . 1 and 2. Washington, D.C: Department of Housing and Urban Development, 1974. Roberts, P. "The E f f e c t of P r i c i n g L o c a l S e r v i c e s on Urban S p a t i a l S t r u c t u r e , " i n ed. P a u l B. Downing, L o c a l  S e r v i c e P r i c i n g Problems and T h e i r E f f e c t on Urban  S p a t i a l S t r u c t u r e . Vancouver: U n i v e r s i t y of B r i t i s h Columbia P r e s s , 1977. Rose, L o u i s A. "The Development Value Tax," Urban S t u d i e s , 10(3), June, 1973, 271-285. . "The Development Value Tax: Reply," Urban S t u d i e s , 13(1), Feb. 1976, 71-73. Rybeck, Walter, ed. P r o p e r t y T a x a t i o n , Housing and Urban Growth. Washington, D.C: The Urban I n s t i t u t e , 1970. . "Can The Property Tax be Made to Work For Rather than A g a i n s t Urban Development?" Amer. J . Econ. and Soc., 33(3), J u l y 1974, 259-271. -137-Samuelson, Paul A. "The Pure Theory of P u b l i c Expenditure," Rev. Econ. and S t a t s . , 36, Nov. 1954, 387-389. Schwartz, S.I., D.E. Hansen and T.C. F o i n . " P r e f e r e n t i a l T a x a t i o n and the C o n t r o l of Urban Sprawl: An A n a l y s i s of the C a l i f o r n i a Land Conservation A c t , " J . E n v i r o n . Econ. and Management, 2, 1975, 120-134. Seligman, E.R.A. The S h i f t i n g and Incidence of T a x a t i o n . New York: Augustus M. K e l l e y , 1927. Shoup, D.C. "The Optimal Timing of Urban Land Development," Reg. S c i . Assoc. Papers, 25, 1970, 33-44. Simon, H.A. "The Incidence of a Tax on Real P r o p e r t y , " i n eds. R.A. Musgrave and C.S. Shoup, Readings i n the  Economics of T a x a t i o n . Homewood, I l l i n o i s : R i c hard D. Irwin Inc., 1959. Skouras, A. "On the A n a l y s i s of Property Tax E f f e c t s on Operating and Investment D e c i s i o n s of Rental Property Owners," Nat. Tax J . , 26(1), March 1973, 123-125. Smith, R. S t a f f o r d . "Property Tax C a p i t a l i z a t i o n i n San F r a n c i s c o " Nat. Tax J . , 23(2), June 1970, 177-193. Smith, T.R. "Land Value Versus Real Property T a x a t i o n : A Case Study Comparison," Land Econ., 26(3), Aug. 1970, 305-313. Stewart, D.A., Land Value T a x a t i o n : Some E f f e c t s on Land  S p e c u l a t i o n and the Burden of M u n i c i p a l T a x a t i o n . Unpublished t h e s i s , SCARP, U n i v e r s i t y of B r i t i s h Columbia, 1974. Stocker, F r e d e r i c k D. " E f f e c t s of T a x a t i o n on Urban Land Use," A p p r a i s a l J o u r n a l , 1971, 57-69. . "The Impact of Ad Valorem Assessment on the P r e s e r v a t i o n of Open Space and the P a t t e r n of Urban Growth," i n I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , P r o p e r t y Tax I n c e n t i v e s f o r P r e s e r v a t i o n . Washington, D.C: Property Tax Forum, 1975. . "Property T a x a t i o n , Land Use and R a t i o n a l i t y i n Urban Growth P o l i c y , " i n ed. A.D. Lynn, Property T a x a t i o n , Land Use and P u b l i c P o l i c y . Madison: U n i v e r s i t y of Wisconsin P r e s s , 1976. -138-Stone, G.W., J r . "Revenue Adequacy of Land Value T a x a t i o n , " Southern Economic J . , 41(3), Jan. 1975, 442-449. Tideman, T.N. "The E f f i c i e n t P r o v i s i o n of P u b l i c Goods," i n ed. S.J. Mushkin, P u b l i c P r i c e s f o r P u b l i c P r o d u c t s. Washington, D.C: The Urban I n s t i t u t e , 1972. Tie b o u t , C h a r l e s M. "A Pure Theory o f L o c a l E x p e n d i t u r e s , " J . P o l i t . Econ., 64, 1956, 416-424. Turvey, R. "Development Charges and the Compensation-Betterment Problem," Econ. J . 63, June 1953, 299-317. . The Economics of Real P r o p e r t y . London: George A l l e n and Unwin L t d . , 1957. T u s t i a n , R i c h a r d E. "A Planner's P e r c e p t i o n s of the E f f e c t s of Farmland and Vacant F r i n g e Land Assessment P r a c t i c e on Urban Development," i n I n t e r n a t i o n a l A s s o c i a t i o n of A s s e s s i n g O f f i c e r s , P r o p erty Tax I n c e n t i v e s f o r  P r e s e r v a t i o n . Washington, D.C: Property Tax Forum, 1975. V i c k e r y , W.W. "General and S p e c i f i c F i n a n c i n g of Urban S e r v i c e s , " i n ed. H.G. S c h a l l e r , P u b l i c Expenditure  D e c i s i o n s i n the Urban Economy. Washington, D.C: Resources f o r the Future, 1963. V i c k r e y , W.S. "Economic E f f i c i e n c y and P r i c i n g , " i n ed. S.J. Mushkin, P u b l i c P r i c e s f o r P u b l i c Products. Washington, D.C: The Urban I n s t i t u t e , 1972 . Wales, W.J. and E.G. Wiens. " C a p i t a l i z a t i o n of R e s i d e n t i a l P r o p erty Taxes: An E m p i r i c a l Study," Rev. Econ. and S t a t s . , 56, 1974, 329-333. White, M.J. " F i s c a l Zoning i n M e t r o p o l i t a n Areas," i n eds. E.S. M i l l s and W.A. Oates, F i s c a l Zoning and Land Use  C o n t r o l s . Toronto: Lexington Books, 1975. 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0095542/manifest

Comment

Related Items