New York City is the poster city for rising rents. Given current trends, don’t expect that to change any time soon. New York’s municipal leaders, however, have not been idle in addressing this. The City and State are actively pursuing measures such as implementing city-wide rent freezes to slow rising rents. Yet, with so much money at stake in the rental and leasing sector, there are those who seek to create and exploit loopholes. New Yorkers are now fighting back against a bill that, due to such a loophole, not only failed to preserve and improve affordable housing but gave landlords and developers millions of dollars in tax breaks.
In 1995, the New York State legislature sought to revitalize Lower Manhattan, which was riddled with aging buildings and had few development projects on the horizon. A proposed bill gave developers tax incentives if they converted old office buildings into apartments. In exchange for these tax incentives, landlords would limit rent increases, therefore assuring reasonably affordable housing stock for the foreseeable future. It seemed like a win-win situation for developers and tenants alike.
Hours before the bill was set to pass, Republican lawmakers pulled it from the voting schedule, citing the need to consult Rudy Giuliani, New York City’s mayor. Giuliani wrote a letter to Republicans stating that an exemption should be granted to units that initially rent for greater than $2,000 per month. Republicans reinterpreted the rent-stabilization component of the bill by introducing a reading of Giuliani’s letter into the public record just before the final vote. The bill, 421-g, passed 53-1.
Between 1995 and 2006, before the law expired, 421-g helped create close to 10,000 new rental units in Lower Manhattan. However, nearly three-quarters of those units were not rent stabilized because they initially rented for more than $2,000 per month. So while 421-g accomplished its goal of sparking revitalization in Lower Manhattan, it did not protect tenants as intended. And even though the law expired in 2006, some buildings continue to benefit from tax breaks that totalled nearly $75 million in 2015.
Some legal experts believe that developers have misused the law at a large cost to the city and tenants. Lawyers claim that the intent of the state legislature was to encourage the creation of rent-stabilized housing units by offering tax incentives. Therefore, having 75% of units created under this program exempt from rent stabilization not only defies the spirit of the law but is costing the city tens of millions of dollars each year in lost tax revenue.
There is substantial debate regarding whether or not the law has been applied properly, and it is centered around one major issue–namely, the exemption. The bill was not officially amended before it was passed to stipulate exemptions to units that initially rent for greater than $2,000 per month. That policy was instated by the attachment of the letter from Rudy Giuliani recommending the exemption.
Multiple lawsuits have been filed against landlords by tenants alleging massive rent overcharging. Decisions from the bench have been varied. In one instance, a judge ordered Skyline Developers to re-instate rent stabilization status on a number of its rental units, citing the Giuliani interpretation of the law as invalid. Another judge came to the opposite ruling on a similar case with developer UDR.
A number of other lawsuits are working their way through the courts, and legal scholars are hopeful that clarity will finally be reached regarding proper interpretation of the law.
That said, there are better ways to promote the creation and preservation of affordable housing units. Common Ground NYC activist Scott Baker argues the following:
If the city wants to have affordable housing AND new building AND condos people can afford to buy AND a reliable and large revenue stream to replace many if not most taxes, there is only one proven way to do this: The Land Value Tax.
It works like this: over a period of time, phase out taxes on buildings and replace them with taxes on location. This discourages hoarding and inefficient use of location because there is an increasing tax on that, while it encourages building because there is no tax on that (eventually).
Every location is to be taxed at its full rental value. This means more apartments, which means lower rents and costs due to competition.
The idea for taxing land values originated with classical political economists like Adam Smith and were popularized globally in the 19th century by two-time New York City Mayoral candidate Henry George. Today, economists refer to Land Value Taxation (LVT) as the most efficient of taxes, meaning that it is difficult (if not impossible) to evade taxation or paying what is owed to society. That’s because land, unlike money, cannot be moved, hidden or tax-sheltered, a quality that would have made LVT succeed where 421-g failed.
In retrospect, 421-g was designed to legislate additional affordable housing into existence–contrary to the demands of the market and their underlying forces, and regardless of any shortages this may cause. Rent controls also have the pernicious effect of privileging older residents at the expense of younger residents.
By contrast, the function of land value taxation is to make the ownership of raw and underdeveloped land prohibitively expensive. This encourages landowners to make use of the space in order to accrue the rental income necessary to pay the land value tax. Consistent with Baker’s statements, this would effectively turn the housing market into renters’ market due to the increased supply of housing and working space, leading to increased competition to attract renters. Thus,we could expect lower housing costs while realizing the improvement of the conditions of affordable housing. Ultimately, LVT achieves organically what 421-g was designed to accomplish artificially.
Numerous articles and studies published over the past eight years on the effect of the 2008 financial crisis on the future of America’s “millennial” generation have reached the same conclusion: at its best, the future is uncertain; and its worst, the future is downright bleak. It’s not difficult to understand why. While the most highly educated generation of young adults in the nation’s history, Americans born between 1980 and 2002 also carry the highest loads of student debt and suffer one of the highest rates of underemployment. As a result of their strained economic situation, many millennials are delaying marriage, starting a family, and buying homes—once considered central components of the American Dream.
Despite all this, millennials report feeling “hopeful” about their own futures and that of the country. And many have channeled that hope into the 2016 presidential race, in which recent polls show that young voters aged 18 to 29 are participating in larger numbers in primaries and caucuses than in previous elections. The two candidates who have thus far attracted the most support from millennials include Bernie Sanders and Donald Trump, the so-called “anti-establishment” candidates who have promised to radically transform America’s rigged political and economic systems. Although they stand on the opposite sides of many issues, both Sanders and Trump employ a certain type of rhetoric called “economic populism,” that decries crony capitalism and especially resonates with millennials and others who have yet to benefit from America’s economic recovery.
Before millennials cast their vote for one or another of these candidates, however, they should consider the modern origins of economic populism and the particular lessons of one of America’s most famous “economic populists”—Henry George (1839-1897). Never heard of Henry George? Think again. If you’ve played the popular board game Monopoly, at the very least, you’re familiar with his ideas which inspired the game’s founder, Lizzie Magie.
In the wake of one of the worst economic disasters in the nation’s history—the Long Depression of the 1870s—George, a middling California journalist, set out to expose and explain why industrial and technological progress seemed perversely to deepen poverty, inequality, and economic instability. In 1879, George published his findings in the aptly titled economic treatise, Progress and Poverty. The work became an international success and likely outsold every other book published in the nineteenth century except The Bible.
More than 135 years later, Progress and Poverty still holds key insights into the polarizing character of American capitalism and helps explain why vast disparities of wealth continue to accompany economic growth. More importantly, George’s ideas—and the amazing story of their life—provide important lessons to those seeking to build a more just and sustainable economic system. George’s ideas not only provide the necessary context for understanding the origins of America’s broken economic system but also the steps for constructing a more just and viable one.
The failure to treat land and natural resources as the common property of all people—as opposed to the private property of individuals—perpetuates crony capitalism, accounts for the growing divide between the wealthy and poor, and causes the pernicious boom and bust cycle that has afflicted the American economy since the late-eighteenth century.
Living and working in California in the post-Gold Rush Era, George closely observed the new and perplexing realities of industrial capitalism. Over the past century, human civilization had experienced unprecedented levels of technological development and industrial production. New sources of power including steam and electricity as well as improved methods of transportation such as canals, turnpikes, and railroads enabled mankind to produce and distribute more goods than ever before.
Despite the fact that society could produce exponentially more food, families continued to starve. Despite the fact that the nation’s leading industrialists earned more profit than at any other time in history, workers struggled to support their families. Despite the fact that America’s economy had become larger and more diversified, the nation continued to face worsening financial panics and industrial depressions.
Unlike other social commentators of his generation who attributed these conditions to overproduction, under-consumption, or a unsound monetary policy—Congress had recently passed the Coinage Act of 1873, which drastically reduced the price of silver—George concluded that at the heart of this dilemma was land. As he explained:
The reason why, in spite of the increase of productive power, wages constantly tend to a minimum, which will give but a bare living, is that, with the increase in productive power, rent tends to even greater increase, thus producing a constant tendency to the forcing down of wages.
By “rent” George referred not only to the monthly fee a tenant paid to their landlord, but to “economic rent”—which economists define as the profit one earns simply by owning something of value, such as land.
Land being necessary to labor, and being reduced to private ownership, every increase in the productive power of labor but increases rent—the price that labor must pay for the opportunity to utilize its powers; and thus all the advantages gained by the march of progress go to the owners of land, and wages do not increase.
George defined land broadly to include not just the surface of the earth, but all the materials, forces, and opportunities freely supplied by nature. To George, buildings, houses, farms and other improvements to land represented wealth or capital, whose values could be separated from land. Unlike the value of capital, land value increased not as the result of any effort on behalf of the individual owner, but to the increase in the demand for land as a result of advancing population, the building of a railroad, the construction of a school, or a multitude of other public improvements. In other words, George argued that land values are social in origin, completely dependent on the development of the surrounding community.
The relationship between public improvements and an increase in land values was especially apparent in California and other western states. Following the announcement of a new railway route, for example, land values skyrocketed and investors raced to purchase large sections near the planned route. Speculators made a killing following the completion of the railway when they could sell the land for many more times what they had initially paid. Railroad officials often colluded with speculators to increase the price of land to help finance construction.
Unbridled speculation in land values, George correctly surmised in Progress and Poverty, had preceded every major North American economic panic since the late-eighteenth century.
To break the boom and bust cycle and prevent deepening wealth inequality, the federal government should replace all taxes that penalize the working and middle classes with one “single tax” on the full value of land rent.
Prior to the passage of the Sixteenth Amendment, which enshrined the modern federal income tax into the Constitution, Congress mainly relied on public land sales and tariffs—taxes on imported goods—to finance the activities of the federal government. State and local governments raised revenue almost entirely from the general property tax. Both tariffs and property taxes, George pointed out, unfairly privileged the wealthy at the expense of the poor and middle classes.
By design, tariffs protect manufacturers by restricting and raising the price of imported goods and materials. Defenders of high tariffs claimed such taxes protected American jobs by reducing foreign competition. Opponents like George, however, pointed out that high tariffs make most goods purchased by laborers more expensive and thus, reduce the true value of wages.
Property taxes also tended to benefit the rich by failing to differentiate between the economic value of land and the value added by capital improvements. In many places, only improved land—that is, land with houses, farms, buildings, etc.—reached tax rolls, while the owner of many acres of valuable albeit undeveloped land entirely escaped taxation. Additionally, the rich were rather adept at “hiding” certain types of property—valuable jewelry, stocks, paintings, etc.—while also convincing tax assessors to underreport the value of property they could not hide—land.
To reduce corruption and more fairly distribute the tax burden, George proposed to eliminate all taxes save one tax on the full value of land minus the value of improvements. As he explained,
Were all taxes placed upon land values, irrespective of improvements, the scheme of taxation would be so simple and clear, and public attention would be so directed to it, that the valuation of taxation could and would be made with the same certainty that a real estate agent can determine the price a seller can get for a lot…
A tax upon land values is, therefore, the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of the community.
George’s proposal became known as the single tax and those who supported it were called “single taxers.”
Through the single tax, George hoped not only to reform the system of taxation, but also abolish the system of private property in land, which allowed individuals to horde resources nature bestowed to all of mankind and profit from the efforts of the entire community. According to George:
The wide-spreading social evils which everywhere oppress men amid an advancing civilization spring from a great primary wrong—the appropriation, as the exclusive property of some men, of the land on which and from which all men must live…
It is the continuous increase of rent—the price that labor is compelled to pay for the use of land, which strips the many of the wealth they justly earn, to pile it up in the hands of the few, who do nothing to earn it.
Beyond righting a wrong, the single tax promised a host of other social benefits. Taxing only land values would generate all the revenue needed to operate government and doing so would produce ever greater levels of opportunity, as man’s right to the bounty of nature and his desire for a productive life was strengthened. Taxing only land values would ameliorate and one day eliminate the hardship caused by continually bursting bubbles of land speculation. Taxing only land values, George believed, was not just the application of sound public policy, but the acknowledgement of a spiritual duty.
The unprecedented popularity of the single tax and all that it stood for prompted the beneficiaries of crony capitalism—the defenders of the status quo—to accept half-measures such as the federal income tax, while at the same time burying George under a mound of lies and epithets.
The simplicity and inherent fairness in the single tax drew followers from different walks of life and from all over the world. In 1886, the United Labor Party selected George as its candidate for Mayor of New York City. In a hotly contested and nationally followed race, the Democratic candidate Abram Hewitt narrowly defeated George, who earned more votes than any other third party candidate in the City’s history. He also outperformed the Republican in the race, Theodore Roosevelt, who placed third.
George was a profound influence on the religious reform movement known as the Social Gospel, both in the United Kingdom and the United States. One of his best known followers was the popular New York City priest, Edward McGlynn, whose outspoken efforts to bring a Georgist solution to the deepening poverty and inequality led him to be ex-communicated—and then re-communicated, in his lifetime and under the reign of Pope Leo XIII.
George’s growing religious influence in Europe and the United States coupled with the McGlynn controversy prompted Pope Leo XIII to issue the famous 1891 Encyclical Rerum Novarum, in which he reaffirmed the Catholic Church’s support for private property rights in land and also reminded Catholics of their spiritual duty to charity and the less fortunate.
Because he campaigned against private ownership of land, George’s detractors labeled him a socialist. In supporting private ownership of capital, however, George was clearly not a socialist. Karl Marx vehemently opposed George and the single-tax movement for misleading workers into believing that landowners rather than capitalists were to blame for their suffering. “Theoretically the man is utterly backward!” Marx wrote of George in 1880.
Despite the economic nature of his subject, George wrote for the common reader. He rejected the idea that one must possess a good deal of formal schooling to grasp the laws of political economy. His lack of academic credentials and increasing popularity threatened a growing number of professional economists who dismissed George’s theories as “half-baked” and “dangerous.”
The widespread appeal of the single tax together with the growing demand to lower tariffs, led many in Congress in 1913 to support a federal income tax. Although a good deal more progressive than today’s version, the federal income tax was a poor substitute for a tax on economic rent. The main problem with an income tax, according to George, was that it failed to differentiate between incomes justly earned and those earned from the labor of others. As he explained:
Nature gives to labor; and to labor alone…
Now, here are two men of equal incomes—that of the one derived from the exertion of his labor, that of the other from the rent of land. Is it just that they should equally contribute the expenses of the state? …The income of the one represents wealth he creates and adds to the general wealth of the state; the income of the other represents merely wealth that he takes from the general stock, returning nothing.
Despite attempts to discredit George, his ideas inspired a generation of social activists on multiple continents who successfully built the single tax into a number of Progressive Era reforms and programs—particularly at the state and local levels—that continue to provide such basic human services as clean water, electricity, and public transportation to large populations all over the world.
Although the single tax was never fully implemented anywhere in the world, George’s ideas animated many of the most notable social reform movements of the era of high industrialism. In particular, local government leaders of the Progressive Era pulled heavily from the single tax to justify their efforts to raise taxes on public service corporations and transfer the provision of water, power, and transportation from private to public suppliers—a movement known as municipal ownership.
Similar to George’s single tax, which aimed at reclaiming and distributing socially created land values, advocates of municipal ownership targeted the socially generated wealth of public service corporations, which amassed huge profits by providing services required by all residents and using public property, such as streets, waterways, gas lines, and franchises, to do so. As Ohio State Senator and single tax advocate Frederic C. Howe explained in 1907,
The value which these corporations enjoy in the market is social in its origin. It is created by the community itself. No act of the owner gives them the earning power which they enjoy…Moreover, the franchises and privileges that these corporations enjoy are granted by the people themselves. They are created by law. No labor enters into their making. They are a free gift from all of the community to a few of its members.
In states with constitutional provisions against municipal ownership, urban reformers utilized the single tax in their efforts to increase taxation on the property of public service corporations, particularly that of railroads and streetcars.
The reach of the single tax into such seemingly disparate movements as labor politics, religious reform, and municipal ownership testifies to the importance of land and natural resources to the fundamental dilemma facing democratic society: how to encourage economic growth and provide an equal opportunity to all persons to engage in and benefit from the advancements of human civilization. To George the answer was simple: one tax based solely upon the wealth produced by land—the resource from the time of its creation that has always existed for the benefit of all men.
As the presidential election rolls nearer, young voters might fare well to remember George’s lesson that so long as the government continues to treat socially generated wealth as the private property of individuals, the benefits of industrial progress and economic recovery will not be shared equally; instead, those benefits will flow to those who control the greatest shares of economic rent.
People around the world struggle to find housing, yet there is a huge amount of wasted space in cities that could be put to immediate use to provide affordable housing in prime locations. In light of this need, how is it that so much of the most sought-after real estate in the world is wasted?
What is holding the supply of housing down the most is not entirely vacant lots but sites that are only partially used. New York City is a good case study for other cities. At first glance, it seems overbuilt. However, in Queens, 58.8% of sites are built to less than half of the building space allowed by zoning for various reasons, e.g. parking lots, short buildings among tall ones, etc. The figure for all of Manhattan is 38.6%.
In Manhattan’s Community District 5, Midtown–the city’s highest-built area–42.9% of sites have less than half the allowable building size (and nearly the same portion of buildings in that district, 41.8%, were built before 1940). Not only that–208 lots in Community District 5 are either vacant or occupied by buildings whose assessed value is less than 20% of their land value. The total area of those lots is over 36 acres.
Land value is important because it is a measure of how much people need the site itself; it’s independent of the quality of the improvements. If the need, and thus the land value, is high but the site isn’t being used intensively, this represents a missed opportunity to provide housing. It’s basic economics: a lower supply of housing units means higher housing prices. For example, there are many single story McDonald’s franchises in NYC sitting next to 20 story buildings. This is a missed opportunity to provide 19 stories worth of housing. Extrapolate this type of waste across the entire city. It results in drastically higher rent for everyone.
While New York City officials completely ignore the issue of fewer units on any given plot of land, they do at least acknowledge the more obvious problem with vacant lots. In a report published last week, NYC Comptroller Scott Stringer outlined his vision to utilize over 1,000 city-owned vacant lots, which he calls the city’s “Golden Assets.” Stringer delivered a damning assessment of Mayor Bill de Blasio’s celebrated affordable housing plan, Housing New York,claiming 53,116 affordable city-owned residences could be created immediately were the city’s vacant lots to be developed. That figure eclipses the 40,204 low- and middle-income homes financed to date by the mayor’s Housing New Yorkinitiative.
Stringer’s declaration follows the New York City Department of Housing Preservation and Development’s (HPD) audit on vacant lots owned by the city between June 2014 and September 2015. The audit found 1,459 vacant lots are ready to be developed through urban renewal programs but have been left neglected or abandoned, with some lots remaining unoccupied for over 50 years.
The HPD’s findings come at a time of increasing pressure on Mayor de Blasio and intense scrutiny of his effectiveness in making housing affordable for New Yorkers–more than half of city residents spend over a third of their income on rent.There are a couple of reasons to be skeptical about the de Blasio administration’s affordable housing program. He has sought to require the provision of more and better-targeted affordable units as a condition for building the market-rate units (mostly condos) that developers want to build. The first question to ask is how affordable are the “affordable” units that are being created? Can median-income NYC families actually afford them? There are indications that the administration is willing to compromise on this by lowering the bar for “affordable.” The other question is, what is the net rate of affordable housing creation, given that a great number of units are being lost to conversion?
On the other hand, de Blasio tried to push through a tax on the value of vacant land, relaxing zoning restrictions and fast-tracking the urban land use review process, measures that would create more affordable housing. But Stringer doesn’t believe enough is being done to ensure housing is accessible for locals. “It’s our job to ensure that every New Yorker has a fair and fighting chance in this city,” Stringer said. “That starts with providing them a fair and affordable place to live.”
In response to the city’s shortcomings in meeting demand for low-income housing, Stringer has called for the creation of a New York City Land Bank, arguing that a land bank is the most expedient way to “turn these vacant lots and other properties into sites for thousands of permanently affordable units.”
Land banks are non-profit entities responsible for converting (and later managing) neglected or vacant properties to affordable housing or other purposes that benefit the community. Under land banks, the ownership of vacant lots is retained, often through a community trust structure, allowing the non-profit organisation to prioritize the needs of the community through long-term affordability and access for low-income earners.
Comptroller Stringer believes land banks with the sole mission of transforming city-owned properties into affordable housing would fast-track Mayor de Blasio’s pursuit of ample affordable housing for New Yorkers. The report published by the Office of the Comptroller, “Building an Affordable Future: The Promise of a New York City Land Bank,” outlines recommendations including:
that the city pass legislation to authorize a New York City Land Bank
the drafting of laws that allow a community land trust model to oversee properties acquired and maintain long-term control of the properties
the launch of the land bank by transferring city-owned vacant lots
allowing the new land bank to manage foreclosure of properties that are either vacant or underutilized so as to create a pipeline for affordable housing
Jonathan Westin, director of New York Communities for Change, is an advocate for the use of land banks. “We need to be clear that this land does not go to the favored developers of City Hall,” Westin said, “that this land goes to developers, non-profit developers, like the comptroller is calling for, that keep it affordable forever.”
HPD Commissioner Vicki Been has responded unfavorably to the audit’s findings, disputing the number of vacant lots and stating that approximately 310 have development restrictions, such as being situated in a flood zone or not having the infrastructure in place to allow for development. Been believes the figure is closer to 670 vacant lots. Of those, approximately 400 have been identified for development in the next two years.
Been fiercely rejected the assertion that Mayor de Blasio’s Housing New York plan is not actively addressing the city’s affordable housing crisis, stating that “two years into the [10-year] plan, we are ahead of schedule, having funded 40,204 homes for low, moderate, and middle-income New York families.”
If you look at the numbers in the Executive Summary of Stringer’s report, you see that the land bank proposal–while perfectly nice in itself–is a drop in the bucket of NYC’s housing problem. They affirm the viability of the community land trust model, which is a fine thing. Yet the report focuses on a not-for-profit remedy, when it is the whole climate of for-profit real estate incentives that is the true reason for the lack of affordable housing. The issue has to be addressed in terms of who profits.
Section IV begins with this sentence: “Land banks have traditionally been employed by cities that are suffering from vacant lots and blighted property.” That makes sense. But what created the vacant lots and vacant property? It was not a lack of land banks.
In the absence of a solution for the underlying problem, establishing land banks and community land trusts is helpful; it’s good to bail water out of a sinking ship. However, we have to address the underlying cause of the problem. The current tax system penalizes new construction and rewards underuse and land-hoarding. This is because of taxes on buildings and the many inputs that go into construction.
Another problem is the huge tax benefits that go to condos and co-ops in New York City. If condos were taxed as regular single-family homes–and not as if they were rental apartments–things would be much fairer. We’d also be seeing fewer tax-sheltered luxury highrises. These condos, with their teeny-tiny tax burdens, are tailor-made for speculators, many of whom do not even live in the country.
One way of pushing landlords to use their land is to tax the value of the land itself and not tax the buildings. That is why Mayor de Blasio tried to tax vacant land, but he was blocked. Taxing the value of all land, not just vacant lots, would create far more affordable units than community land banking. This is because such taxation would push landlords to actively use their land in ways that meet people’s needs. If there is no profit to be made by holding onto a vacant lot or derelict buildings, it makes more sense for owners to either put the land to its highest and best use or to sell to someone who will.
There is far more wasted space than either Stringer or de Blasio admit. Looking at the New York City Assessment Rolls and the PLUTO Real Estate Database, we see that there are 18,144 vacant lots citywide and 655 in Manhattan. The number of privately-owned lots of more than 1500 sq. ft. totals 32,417 citywide and 1,789 in Manhattan. Appearances can be deceiving. All of those ground-level parking lots, unused building floors, etc., represent much more wasted housing potential than the completely vacant lots cited by the Stringer report. This space could immediately house an enormous number of people, at very low rent, if the supply were thereby increased. If landlords were taxed on the value of their land, they would have to make these spaces available for people’s needs. This would solve the housing crisis in NYC. The same approach would work in other cities around the world, as well.
Detroit, in the mid 20th century, was a vibrant center of American industrial manufacturing with a prospering middle class. It is now the poster city of blight and urban decay. As industry has collapsed across the region, job scarcity, white flight, and soaring crime rates have driven hundreds of thousands of people out of the city. Thousands of homes, retail spaces, and civic buildings sit empty and dilapidated. Today, due to the faulty set of incentives implemented to encourage investment, real estate investment–a force that was once thought to have the potential to save Detroit–is worsening blight and costing the city millions of dollars.
After decades of declining investment in Detroit, locals were excited when, beginning in 2013, investors began to purchase large swaths of residential properties. Jimmy Lai, a billionaire based in Hong Kong, purchased 32 homes at a tax foreclosure auction. At the same auction, local real estate agent Wendy Briggs walked away with a staggering 428 properties. Despite the hopes of local residents, it became obvious right away that Jimmy Lai, Wendy Briggs, and the myriad others snatching up Detroit real estate had no plans to invest in their properties. Instead, they anticipated that Detroit would experience a real estate boom in the next several years, allowing them to unload their properties at a large profit.
Thousands of homes owned by speculators have fallen into disrepair as their owners wait for a real estate boom that does not appear on the horizon. In the meantime, a house at 3383 15th Street, owned by Jimmy Lai, partially burned down in 2015. To date, he’s made no effort to clear the wreckage, which poses a safety hazard in the neighborhood. At one point, Detroit paid over $200,000 demolishing a single speculator’s properties after they fell into disrepair and then into foreclosure.
So what factors are driving this mess? A big cause is real estate taxation in Detroit. Facing debilitating revenue shortages during the 2008 financial crisis, Detroit over-valued residential properties with the hope that increased revenue from property taxes could help the city stay afloat. They did this without the understanding that increasing property taxes reduces incentives to build or rebuild. Without this understanding, Detroit’s taxing strategy proved disastrous. In 2016 alone, the city sent 38,000 foreclosure notices due to unpaid taxes. The majority of tax bills totaled less than $2,000. If overdue taxes couldn’t be paid, the homes went up at tax foreclosure auctions, where speculators would subsequently make the majority of their purchases. It simply was too easy for speculators to game the system–with minimal cost to them and minimal gain for the city.
Many speculators fail to consider taxes in the total cost of their investment, now owing Detroit millions of dollars in back taxes. Wendy Briggs alone, who purchased 428 properties for just $379,000, owes $4.7 million in back taxes. 95% of her properties will be auctioned in 2016. In fact, nearly 80% of all properties purchased at the 2013 tax foreclosure auction are back in foreclosure. So not only do speculators let their properties fall into decay, they fail to pay their taxes, which deprives the city of a critical revenue stream and puts homes back into the tax foreclosure auction. This cycle continues to repeat itself.
Detroit and Michigan are taking steps to reduce the number of foreclosures and ability of investors to hoard properties. The state has cut interest rates on tax repayment plans by two-thirds, reducing the number of homes foreclosed due to unpaid taxes. Wayne County has closed a loophole that allowed speculators owing back taxes to purchase additional properties at auction. In addition, property assessments are expected to drop. The next step would be to eliminate taxation on buildings and focus solely on taxing land values. Both measures, if implemented worldwide, are predicted by experts to induce landlords to either immediately develop their properties or to sell to those who will.
These measures have cooled investor interest in Detroit. In 2016, the top ten investors bought nearly half as many homes than they did in 2013. Although housing activists applaud this progress, they believe more can be done. Local residents propose making it easier for people in poverty to file property tax exemptions and further decreasing the number of real estate investors in the market. However, this could have the opposite effect, as low property taxes decrease property owners’ incentive to develop their properties.
Detroit residents, having learned that speculators tend not to care about their communities, are thrilled to see them go. “They think Detroit is just a bunch of criminals who don’t care and the city is meaningless to them. The idea of a neighborhood or community is a foreign concept to these people,” says Bill Cheek, a resident in the North Corktown neighborhood. The challenge, some believe, will be keeping them out. By implementing sufficient land value taxation and exempting buildings from taxation, they should be able to do just that.
It’s sounding again like the drought of 1976-77: “Shower with a friend.” “Put a brick in your toilet tank.” “Fix your leaky faucet.” “Replace your lawn with a cactus garden.” And then the pictures: denuded ski slopes, boat docks resting on the bottom of empty reservoirs, dry brown furrows stretching to the horizon.
Despite all the focus on urban water conservation, agriculture consumes some eighty percent of California water. California is basically a dry state, subject to periodic severe droughts. So, how come the largest water user is cow pasture, watered with giant sprinklers sending great sprays into the atmosphere? How come farmers irrigate those long brown furrows by flooding them, losing great quantities of water to evaporation, and bringing harmful salts to the surface? And how come some farmers even grow rice in flooded paddies, seeding them from airplanes? Why do we see so few elementary efforts to conserve water, such as drip irrigation or mulching fields to protect the soil? Why are irrigation canals not lined and covered to prevent water loss?
Why? Because California farmers get their water free, or close to free. Any of us who have taken elementary economics should be shouting from the rooftops or blasting through cyberspace: if you make something free, you will get waste and shortages!
California’s water crisis derives from history, ideology, and politics.
The California Constitution says that the water belongs to the people. However, farmers may take water provided they put it to “beneficial use,” first come, first served. This is the basis of California “water licenses”, which attach to pieces of land, dated to the time water was first “appropriated.” Absent any definition of “beneficial use”, this is already a recipe for waste: A “senior” water license downstream, used for low-value irrigated pasture, takes precedence over a “junior” water license upstream, used for high-value orange groves.
From 1935-55, federal agencies built many dams and canals, supplementing pre-existing farm water supply on the east side of the Central Valley. The part of that federal water that was administered by the Federal Bureau of Reclamation, however, was subject to the “160-acre limitation,” restricting the amount of land entitled to nearly free water to 160 acres per landowner, and limiting the term of this giveaway to 40 years. (160 acres is a quarter of a square mile.) California’s giant landowners—some left over from 1848 when the U.S. took California from Mexico, but validated the existing Spanish and Mexican land grants—chafed under these restrictions. In the 1960’s, they found a way around it: the California State Water Project (SWP). The SWP brings water from the Feather River in the Sacramento Valley south through the long-abused Sacramento delta, then pumps it up to a canal running south along the west side of the Central Valley, pumps it up again 2000 feet over the Tehachapi mountains into Los Angeles, and conducts it even further south to San Diego. The SWP was financed by California taxpayers, frightened by claims that southern farming and then LA would dry up and blow away without an assured water supply into the 22nd Century. Meanwhile, half that water has gone to irrigate the holdings of the west side land barons. These include the J. G. Boswell dynasty (200,000 acres) and their in-laws the Chandlers (145,000 acres), at that time owners of the LA Times.
The Environmental Defense Fund has proposed a “market” solution to the water problem: transform water licenses into secure and transferable property—and let the market work its wonders! This is equivalent to “cap and trade,” which gives secure “pollution rights” to polluters based on their pollution history. However “cap and trade” at least limits pollution. “Transferable water licenses” simply wouldn’t work. On the one hand, it would invite speculators to grab up water licenses and hold them by wasting water, creating an astronomical “spot market” for emergency water. On the other hand, most owners of water licenses wouldn’t sell, but would rather keep on operating the old inefficient way. “Transferable water licenses” would lock in a system under which every subsidy and giveaway engineered by pork-barrel politics becomes sacrosanct, perpetual property, and taxpayers forever incur ongoing costs of $60 per acre-foot* or more to deliver water for $3.50 per acre-foot to landowners who can resell it for $400 per acre-foot. This is the absurd, unjust sequitur of condoning private seizure of public domain.
Poor perpetually-broke California, trapped by Proposition 13 and other handcuffs on its taxing power! Yet there’s liquid gold underfoot. The state could charge for water, thus recognizing that we the people own the water. Prices would depend on the region: low near the sources, and high at the end of long canals. The state could put a meter on every ground-water pump, and charge accordingly. Overnight, California’s fiscal deficit would become a surplus. Yes, some water-hogging crops like rice and hay and alfalfa might move away, as they should. That would release water for the more valuable, intensive fruit and vegetable crops for which California is famous—and which provide far more employment. The farmers might threaten to “pass on” higher water prices to consumers. But that’s an idle threat, because shifting land and water into higher-valued and more intensive crops will raise the total supply of food marketed. And when the rains come again, the reservoirs will fill and stay filled, and all the little boats will put in again.
The NGO Carbon Market reported last week that European businesses make billions from free carbon quotas. For the average European Joe, this must sound absurd and incomprehensible. Wasn’t the European Union Emission Trading scheme intended to make the polluter pay? Perhaps the question is: who is being paid, then? Other–bigger–polluters, so it seems.
The idea is that by putting a “cap” on carbon emissions, goods and services that rely on emitting carbon should become more scarce–at least until technology makes it possible to produce them with less emissions–which means more expensive, too, as the same number of consumers compete for a smaller supply. With the human factors of production (labor and capital), this higher price provides an incentive to increase supply, which will eventually bring the price down again. This is the called the “price mechanism.”
However, with natural scarcities such as land and government created scarcities such as permits, this cannot happen. Instead, they generate a flow of income called “economic rent.” Such income is called “unearned” because it does not reflect any kind of human effort. This is the economic mechanism through which European corporations are making big money out of carbon permits–for absolutely doing nothing.
Pollution permits, though a government created mechanism, reflect natural scarcity–the capacity of the earth to process waste and regenerate resources. Producing more waste causes harm to humans and other life, both now and in the future. Ignoring this harm allows businesses and individuals to “externalise” costs, meaning that the damage is paid for by someone else. This means that the price for some goods is artificially low, and thus, again because of the price mechanism, there is an oversupply of these goods. One way to deal with this problem is through so-called “Pigouvian taxes” (which should rather be called Pigouvian fees), which charge the true cost of pollution directly to the polluters.This fee serves as an incentive both to consume less of the polluting products and to create technology that avoids pollution in the long term.
These Pigouvian taxes require that we assign a fixed monetary value to the damage caused by pollution, which should be the price of repairing the damage. However, they provide little actual control over the amount of pollution produced, since it is possible for people to continue to produce an equal amount of waste but consume less of something else to compensate for the cost of Pigouvian taxes (i.e. the case of inelastic demand).Therefore, they don’t make sense as a solution when we lack the means to repair the damage but do have information about the maximum capacity of waste nature can absorb.
Putting caps on pollution through permits could offer a valid alternative. However, it would be essential that the economic rent of these permits be captured by the government. After all, each individual has a right to an equal share of natural resources, including the capacity of the Earth to absorb waste. This distribution can be accomplished by renting out the permits periodically to the highest bidder. A benefit of this system would be that the environmental cost would be set by the market and would decrease with development of technology to prevent pollution (because of lower demand).
Such a system would capture all of the unearned income paid for by consumers. The money collected should then be distributed equally to all citizens according to the rightful share of each. Those citizens that generate more waste than their fair would thereby compensate those that generate less. This system is socially justifiable because poor people pollute less in absolute terms and will thus benefit financially. The additional income could also be used to reduce taxes on the lowest incomes.
The European Union chose not to capture this economic rent, which would have resulted in a much more efficient allocation without generating unearned income. Under the current system, economic rent is “capitalized” into the selling value of the permits. This is intentional: supposedly, the incentive to buy and sell these permits will cause them to be allocated to the best use. The problem is that in a market of capitalized economic rent assets, there may also be speculation and actual under use of the assets, because as long as you can exclude others, full use is not required. If this isn’t bad enough, European governments actually gave away the valuable permits to large polluting businesses, a huge free handout on top of their historically externalised cost.
In these times of high public debt and slow economic growth, European citizens are constantly told they must suffer austerity and/or high taxes for their own benefit. It is time that the European population learns about economic rent and holds its representatives responsible for their lack of economic judgement in environmental policies.