October 16, 2012
Jeff Jamawat, Policy & Planning Fellow, US EPA, for the Smart Growth Network
In the best-case scenario, transit infrastructure—be it train stations, streetcars, or light rail—can spur economic growth, strengthen local housing markets, and improve the land use and development patterns around station sites. As a result, property values often go up, reflecting higher market demand for walkable, compact developments that are well served by transit. Rising prices, however, can make the station area unaffordable to some current residents. As these residents are priced out of the market, they often relocate to areas outside the city, losing their access to transit once again.
Transit infrastructure, such as light rail, can increase property value in station area, but at what cost? Source: Transit Oriented Development and Proposition 207 in Metropolitan Phoenix (November 2009); photo courtesy of Metro Valley Rail (Phoenix)
"The infrastructure we create to help people often puts them at a disadvantage," writes Rick Rybeck of Just Economics, a DC-based consulting firm. Not only does the displacement of people help perpetuate sprawl, which eats away rural and agricultural lands, it also increases people's reliance on cars, which increases transportation costs and air pollution. Rybeck argues in his submission to the National Conversation that displacement also "cripples municipal budgets because expensive infrastructure underutilized in the urban core [is] being duplicated at the urban fringe," allowing less funds for other projects and services.
To address this problem, Rybeck proposes a two-prong approach that is currently being used by 17 local jurisdictions in Pennsylvania: lower the property tax on building values (click here for full article) and raise the property tax on land values. "A lower tax rate makes [buildings] cheaper to construct, improve, and maintain. This results in more affordable buildings and is a benefit to residents and businesses," he explains. To the extent that transit infrastructure makes land near station areas more valuable, a higher tax on land values can keep costs from spiraling out of control based on real estate speculation. Rybeck elaborates, "The tax on land values takes some of the profit out of land speculation" because landowners will pay the same amount in tax whether the land is left vacant or converted to a productive use, such as mixed-use housing with affordable units. "By reducing the speculative demand for land, land prices stay more affordable. Where land values are high, there will be economic pressure to develop these sites in order to generate income from which to pay the tax," he maintains. This tax-based strategy is essentially a way of rewarding the developer for creating positive externalities (e.g., increasing the supply of affordable housing in TOD) and encouraging landowners to put their lands to the highest and best use.
Can communities benefit from Rybeck’s approach? Give us your two cents on tax reform!