|financial and regulatory incentives|
following material is excerpted with written permission from How Smart
Growth Can Stop Sprawl, a briefing guide for funders by David Bollier.
The views expressed are those of the author. (Washington, D.C.: Essential
One of the least understood but most influential forces propelling sprawl is the tax system, especially property taxes. At all levels of government, usually in obscure ways, the tax system actually encourages the deterioration of cities, flight to the suburbs, and construction of low-density, cheap buildings. This dynamic is driven by local governments' reliance on property taxes as the chief source of revenue, and by the fragmentation of governance and land-use planning in a metro region. Neighboring metro communities compete for property wealth through a tactic known as "fiscal zoning." As Myron Orfield explains:
Apart from such intra-regional competition, the property tax system perversely rewards land speculation by requiring higher taxes on buildings than the land upon which they sit. James Howard Kunstler -- a celebrated critic of sprawl through his two irreverent, incisive books The Geography of Nowhere (1993) and Home from Nowhere (1996) -- explains the deficiencies of this tax scheme: "Under this system, a rational person has every reason to put up crappy buildings that will not be highly assessed, or he has every reason to let his property run down, or build nothing at all." Land owners are encouraged to hold property off the market and not build -- driving up land prices in the meantime -- in the hope that they can make a killing at some point in the future. Kunstler writes:
Property taxes are not the only culprit for current patterns of development, to be sure. Historically, Federal Housing Administration rules have fostered flight from the city to the suburbs by favoring lending for single-family homes (suburbs) but not multifamily units (cities). FHA rules have also made it cheaper to buy a new home (suburbs) than to renovate an older one (city).
Suburban migration has also been fostered for decades by federal tax deductions for home mortgage interest, which essentially subsidizes homeowners (suburbs) over renters (city). "This tax policy has tended to encourage the construction of detached single-family houses, most often in the suburbs," writes urban planner Douglas Kelbaugh in Common Place. "This single tax provision costs the federal treasury an estimated $50 to $90 billion a year, making it in effect the broadest and most expensive welfare program in the U.S.A." 3 The home mortgage deduction significantly boosts demand for land in suburban-lot-sized parcels.
Until recently, federal capital gains tax had been another tax incentive encouraging land consumption and out-migration from the city. Tax law required the reinvestment of equity from the sale of a house in a residence of equal or greater value. Since there are relatively few opportunities for middle-class homeowners to "trade up" to larger, nicer houses within city limits -- but plentiful opportunities in the suburbs -- federal tax law for decades encouraged homeowners to leave the city. The repeal of this tax provision is a prime example of how tax policy can be used to encourage more livable cities. Another way of encouraging homebuyers to live in the city is to offer a tax credit to first time homebuyers. That is what Washington, D.C. is promoting through its $5,000 Homebuyer Credit Act.
Inheritance taxes pose a special problem for farmers, as sprawl dramatically increases the market value of their large holdings of land. When farmers die, their heirs often have little choice but to subdivide the property for new development in order to pay estate taxes. This is a special problem in many parts of the Southeast and West, where property values have soared as development migrates from the city. As older landowners die in coming years, there will be a huge number of property transfers that could stimulate powerful new rounds of sprawl. As discussed in Farmland and Open Space Preservation and Tax Incentives, land trusts and other farm preservation strategies can help mitigate this problem.
Orfield, Metropolitics: A Regional Agenda for Community and Stability
(Washington, D.C.: Brookings Institution Press, 1997), p. 62.