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Property Commodification as a Municipal Strategy, Property Tax Reform as an Imperative


Dr. Laura Wolf-Powers (@wolf_powers) is an Associate Professor in the Department of Urban Policy and Planning at Hunter College, City University of New York.

This post continues a symposium on decommodifying urban property. Read the entire series here.


An immediate practical problem confronting proponents of urban property decommodification in the United States is the centrality of the real estate tax as a local budgetary resource. In a contribution to this symposium, Sheila Foster proposes that an enabling state should facilitate the transfer of “underutilized land and structures in the public domain” to underserved or marginalized communities, asserting that municipal leaders can touch off progress and repair past harm by building the capacity of members of those communities to co-govern public land.

I full-throatedly support this idea and am actively involved in an effort to persuade the City of New York to deed an underutilized, publicly owned structure to a land trust organization. However, any group strategizing to take title to public property and remove it from the real estate market must bear in mind that from an existential perspective, a municipality’s incentives run in exactly the opposite direction.

De-commodified property, whether owned by the public sector or by non-profit organizations not subject to tax liability, is not on the tax rolls in a conventional sense. The property tax accounts for 30% of local government revenue (more in many localities) and would account for more if economists had their way. But while American municipalities have uncritically embraced value appreciation and hyper-commodification in the name of generating revenue, these actions serve primarily to elevate prices and deliver unearned economic benefit to the wealthiest property owners. Hyper-commodified property – imbued with value by public infrastructure, developed at its “highest and best use” from an income generation perspective, and then taxed – is in theory a boon for municipal governments. In reality, urban fiscal and land use policies become caught up, under regimes of commodification, in cycles of price appreciation and rent-seeking. To reverse this spiral, municipal leaders must both reform currently regressive property taxation regimes and implement tax policies that expressly curb rent-seeking and speculation. They can also experiment with ground-leasing public land on terms that serve broad social interests.

Economists consider the local property tax highly efficient, both because it sends a signal to voters as to the true price of public goods and because it distorts decisions less than other taxes. This second virtue (non-distortion) becomes increasingly salient when the property tax is a tax on land as opposed to improvements. The early 20th century saw a raft of experiments, most of them identified with the reformer Henry George, to implement land taxes as a strategy for capturing the socially-created value associated with desirable urban locations. There was a double logic underlying these efforts. First was the expectation that taxes on unearned land rent would deter speculation, thus lowering prices and putting property ownership within the reach of non-elites. The second logic was that it would raise revenue for public improvements; in New York City, the 1902 adoption of a policy to fully assess taxes on land in addition to buildings contributed to the city’s ability to finance the early subway system.

But these two logics worked at cross-purposes. To the extent that taxation succeeded in lowering real estate prices, it functioned poorly as a generator of revenue. To the extent that it produced revenue, it exerted an upward effect on property prices as existing owners passed tax costs along to purchasers and renters. Ultimately, despite the whiff of social reform that had accompanied Georgist experiments, municipalities came to see their fiscal interests as aligned with policies (zoning policies especially) that increased the taxable value – and the prices – of land and buildings. This in turn squeezed renters and made property more difficult for the non-wealthy to acquire. It also provided city governments with a steady stream of revenue.

Property tax revenues pay municipal employees, fund city services, and finance city capital projects. The more heavily commodified urban property is, one would expect, the more revenue is available for the critical activities that keep cities operating. But over time, commodification has worked against the interests of cities because it has contributed to extreme economic polarization and catalyzed housing market crises that not even ample revenue can remedy. This is especially true in “hot market” cities like New York. In these places, households and enterprises that do not own property struggle with rent that consumes greater and greater shares of their annual incomes.

Meanwhile, both because of the way that property taxation systems are structured and because cities are in the habit of abating real estate taxes for large residential and commercial property owners, the burden of paying for public goods falls more heavily than it should on the non-wealthy. In New York City, the property tax system—which collects about $30 billion annually on value amounting to $1.3 trillion—is widely acknowledged as deeply unfair to renters and low-income owners. In Philadelphia, with its high proportion of low-income homeowners, rising property prices in gentrifying neighborhoods are translating into crushing tax burdens.

City governments also implement so-called “value capture” fiscal policies in ways that contribute to asset bubbles, reward speculation, and divert general fund revenues to investors. Tax increment financing (TIF), which “front funds” infrastructure and sometimes private development costs with anticipated revenue derived from increased property values, is celebrated for its efficiency, but often has perverse effects.  Rachel Weber argues that in the early 2000s, the City of Chicago used TIF policy in ways that subsidized overdevelopment and overinvestment in the city’s downtown core while depriving the city’s general fund – and its school district – of needed revenue. (Overinvestment in Chicago was helped along as well by an abundance of lightly regulated loan capital, a factor also pointed out by British economist Josh Ryan-Collins in his work on housing financialization).  Dan Immergluck and Tharunya Balan use the case of the Atlanta Beltline to assert that cities, to avoid displacing existing low-income residents, must proactively buffer them from the rising land values associated with TIF-financed public improvements.

Tax increment financing can also turn risky if post-investment property values do not increase to the degree projected. The tendency for TIF and its cognates to promote the risky cabin-ing of future real estate tax revenue to create conditions for shorter-term lender and investor gain is seen in New York City’s Hudson Yards development and is a source of concern about New York State’s plan for the area around Penn Station in Manhattan. In the Hudson Yards case, government’s willingness to make property owners liable for discounted Payments In Lieu of Taxes (PILOTs) rather than conventional real estate taxes means an estimated $1 billion in foregone revenue over 25 years.

De-commodifying public property for social housing, urban agriculture, and other “low-rent” but socially valuable uses is clearly one way to re-embed land in capability-supporting social interactions. Advocates must also turn their attention to reforming property taxation. One way of doing this is simply to reduce the incidence of property taxes on low-income people. A report released recently by the NYC Advisory Commission on Property Tax Reform  proposes to simplify the city’s property tax system and make it more transparent and more fair, partly by redistributing some tax burden from less affluent to more affluent households. In New York State (for it is at the state level that the city’s tax policy is made), comprehensive reform to city property taxation would also remove the rationale for piecemeal abatements such as the deeply regressive 421a tax exemption for multi-family housing development. It remains to be seen whether or when New York State elected officials will follow the Advisory Commission’s recommendations, but the impulse to jettison one-off abatements and exemptions while distributing the overall tax burden more equitably is one that could guide property tax reform in many cities and states.  

Legislators across the country can also cool hypertrophic property markets with taxes that discourage speculation, such as vacancy taxes and transaction taxes that make “flipping” properties less lucrative. Finally, state officials could amend the legislation governing land value capture mechanisms in such a way as to ensure that they facilitate the redistribution of socially produced wealth rather than allowing that wealth to accrue to a few lucky property owners. For example, the public sector could set a baseline assessment value on property in a specific district in advance of making infrastructure investments or regulatory changes and then place a claim on socially created value uplift by heavily taxing post-investment transactions in the district. Or the public sector could simply acquire land through “preservation purchases” and ground lease it to developers on terms that it sets with attention to pressing social needs.

Because they would (if successful) decrease windfall profits, the taxation reforms suggested here would disturb a powerful political constituency that has long been accustomed to having its way in city council chambers and statehouses. For this same reason, it will require political courage. As Foster’s accounts of activists in Oakland and Philadelphia show, shrewd organizing on the part of social movement groups can coax such courage into being.