City Planning and Taxes

Abraham J. Falick

[Reprinted from California Homeowner, June, 1968]

The impact of taxation and fiscal policies in general upon urban growth structure is sometimes overlooked in the generation of city plans. Failure to account for these taxation effects can result in development of urban patterns in unintended and disadvantageous ways.

In our private enterprise economy we depend upon a market price system to stimulate production of goods and services by its direct reflection of consumer demand via prices that the buyers pay. The "goods and services" provided by the various levels of government seldom have the benefit of such direct interest in its product since its "marketplace demand" relies mainly upon the political process and the judgments of departmental administrators - including tax appraisers and city planners.

Legislators and administrators influence industrial activity and housing sites, the market for both public and private products (such as land or buildings) with control levers of taxation and expenditures. Policies viewed as economic abstractions and cash flows are translated into the geographical facts of location and distribution of commercial/industrial activity and housing sites. The city planning problem with respect to taxes gets entangled with these politico-economic issues:

(1) the search for easily-collected taxes by legislators and administrators,

(2) the short-run viewpoint of some taxpayers,

(3) municipal jurisdictional boundaries.

ASSESSORS TEND TO IGNORE HIGHEST AND BEST USE OF LAND

An easily-collected tax is not always the "fairest" in terms of ability-to-pay. With respect to property taxes this has usually meant the appraisers, for example, will prefer to set taxes "objectively" on the value of land and improvements as they now stand. They look upon "subjective" taxation on the basis of earning power or potential highest-and-best-use as a basket of snakes. This method requires some Solomon-like distinctions with respect to commercial and residential use as well as with current and future zoning practices.

While the complexity of the latter approach, with main emphasis on the intrinsic land values, can be appreciated it is still believed by many economists (including the writer) to be a more effective way of using market processes to gradually eliminate central city slums. Such a tax approach would also permit a more rational functioning of economic activity in the core area. Land-value taxation is more likely to reflect the potential earning power of a property which is attributable to its location; it removes the tax penalty on improvements. Pittsburgh presently taxes land at full value while improvements are taxed at half value to encourage new construction.

The present "easy" and "objective" (abnormally low) tax has a perverse effect upon urban planning by keeping slum property or vacant land prices artificially high perpetuating the downhill slide of the central city, and shifting its legitimate share of taxation to other parts of the city. A higher tax on these well-located lands would permit their prices to decline to normal levels and encourage highest-and-best-use as determined in the market place. As a recent article in Harper's Magazine, May 1968, on the effect of the present tax approach points:

"Land speculators deliberately keep land idle because of the low taxes. The homeowner, along with apartment and commercial property owners, pays higher taxes on his improved land, in effect subsidizing the land speculators who simply wait for the entire community to push up the price of their land."

A PUBLIC EXPENDITURE SHOULD BECOME AN ASSET NOT AN EXPENSE

The short-run viewpoint of some taxpayers stems in part from the failure to treat public expenditures on the same basis as business expenditures. When a corporation invests in "machinery or buildings one assumes, correctly, that the purpose is to make its operations more productive, more profitable. The investment is listed as an asset on the balance sheet and becomes a part of the stockholders equity. Unfortunately, when city growth and improvement call for similar public investment in schools, fire/police protection, rapid transit, and urban renewal the short-runners view these as "expenses" rather than as basic assets in the community infrastructure.

Bond issue defeats and failure to provide tax revenues are a result of this point of view and makes rational planning for future needs difficult or impossible. The effect of such neglect is that the community declines in its functional and economic efficiency, in time it becomes a less desirable place in which to live. Part of the attractiveness of California is the fact that it has kept up most of its public investments - particularly in educational and highway planning - unlike many eastern cities. A time of testing for attitudes toward transportation planning and public expenditure will come in November when voters decide the proposed rapid transit system which will provide a vital balance to the transport needs of the Los Angeles area. Stanford Research Institute, viewing the 89 mile network as strictly an investment, calculated a $1.87 return to the community for each dollar put up.

SPRAWL CONTRIBUTES TO HIGHER COSTS FOR SERVICES

The City of Los Angeles with its 463 sq. mi. area is one of the largest town plots in the nation but its tax base and planning efforts suffer from irregular boundaries and framented jurisdictions. Its territory completely or partially surrounds six of its suburbs with overlapping and crossing service areas; the planning problems can be imagined. Perhaps more serious in its effect on the tax base and city planning are the so-called Phantom Cities or "dropout-towns" of Los Angeles County which are industrial, strip-commercial, or high-income residential enclaves which exist mainly to escape ordinary municipal taxes.

These industrial/commercial "cities" have no health/welfare problems, and require minimal fire and police protection. Los Angeles and other towns provide these services for their workers. The high-income residential enclaves also insulate themselves from urban problems - but depend mainly upon the City of Los Angeles for their livelihood and major cultural amenities.

The presence of cut-rate tax haven "cities" handicaps urban planning by draining the industrial base and the high-income citizens from the city proper. The larger city and its residents have less funds for operations, planning, and community investment while the "phantoms" enjoy a tax windfall.

A JUST PROPERTY TAX CAN BE AN AID TO PLANNING

In short, taxes and planning are intimately related; Los Angeles and many other cities are trying to develop tax programs which will permit more logical planning and better implementation of these plans for the future. Councilman Edmund Edelman, chairman of the Revenue and Taxation Committee of the Los Angeles City Council has enlisted the aid of a team of UCLS fiscal economists to prepare new tax approaches for the city. To resolve at least some of the geo-economic and planning problems cited above the UCLA group and the committee will examine tax incentives for desirable intensities of use, penalties for undesirable ones, user-benefit charges and other proposals.

Tax effects on planning take place whether intended or not, with increasing awareness of the fiscal impact on planning -- and the planning effects on taxation - one can make more rational choices about the structure of the community in which we live. We may not like taxes but no civilization exists without them; let us use taxes as part of the apparatus to plan a better future.