There is a crisis here in America. All across the country, from the Delaware to the Columbia: no one can build high-rise apartments. This is worse than it may at first appear. In previous times of high immigration and shifts in production, workers moved to the most productive cities, helping both themselves and the long-term economy. This doesn’t happen anymore. The fastest growing cities in the United States are not generally her most bustling, cities like Boston and Seattle. They’re instead the vast Sunbelt sprawls: the Tuscons. Any graduating Wesleyan senior will be able to tell you why. The rent in Williamsburg is eye-gouging.
Some have argued that the difference is geographic. Coastal and island cities are constrained by water. There is only so much terrain within commuting distance of Mountainview.
But this argument is spurious. Seventy-five percent of San Jose, some of the most valuable land in the world, is zoned for single-family housing. Much of the land within an hour’s commute of San Fransisco is farmland. In Washington D.C., no building may be more than 110 feet tall. Most of America’s most important and productive cities are zoned such that it is practically illegal to build. Counterfactually, Charleston is cheap.
Now, why is such building illegal? Well, many are of the confused belief that dense development inevitably means neighborliness and joy die, substituted by harsh scowls and uncaring. In fact, New Yorkers are just like that. Staten Island, though lacking any other value, at least shows us that New York’s peculiar charmlessness is no result of density. In contrast, Chicagoans are lovely.
However, there is a real cost to dense development. The most obvious is light. Midtown is a dark place by 3 p.m. Second, density simply isn’t as charming. Thus, we expect a free market would produce greater development in nice neighborhoods than is socially optimal.
There is a standard ECON101 response to any externality, or negative effect: tax it at the negative value causes. That way, building will rise exactly to where the value to the developer is the cost to that company added to the cost to the community. Unfortunately, this encounters two difficulties. The first is that finding the negative costs imposed is difficult. Thus, governments often elect to set mandatory regulations (such as carbon emissions targets) instead of taxing externalities (like taxing carbon). This is analogous to setting building limits instead of taxing high-rise construction.
The second is more political. See, there is some cost to the community from developing apartments in chic zip codes, but there is also some benefit (I get to live there!). The people who can best estimate these costs are locals. Thus, and for other reasons, zoning and build use regulations are highly decentralized. However, if you already live in a chic neighborhood, why should you care who gets to move in? To you, development only imposes costs. We have an incentives problem. The people best able to determine how much development should occur are just the people most motivated to prevent it.
If state governments want to resolve this (and it really must be states, as the federal government has little constitutional authority over such matters) then the trick is to line up the interests of municipal dwellers with those of society as a whole.
Thus, states want to find out what the value of the land in any town would be if development there were liberalized. The difference between the real value of the land and the value that land would have were there no taxes on development is what is lost by society to municipal regulation. If each landowning person in the city were taxed a portion of that loss proportional to how much of the current land in the city they own, then denizens would have exactly the incentive to vote to tax development as would benefit society over all. This tax will fall on renting voters as well through the increased rents their landlords will demand (in the short term! In the long term, rents go down. That’s the whole point).
But how could we get this counterfactual information?
The purest solution is experimental. One could establish a block at some edge of all zoning districts, on which there are minimal limits on building. Comparing with the next block over would allow estimating possible local land values. This will actually be an underestimate, because density begets density, but let us have mercy on the poor Californians and Bostonians we plan to so heavily tax.
However, this solution has some downsides. Every neighborhood in America would have one strange block of large buildings, which would upset me. Alternatively, states could set up boards to estimate lost value based on more complex math.
There is an easier solution, which would provide most of the same benefit (under some assumptions). States can mandate most restrictions on development be replaced with a linear tax on square feet of enclosed space per lot (or per square foot of ground), while allowing municipalities to decide the magnitude. Second, there should be a fixed amount subtracted from the tax for each person who resides on the property. This should be a reasonably good measure of development-imposed harm on the community. I, for one, would rather live next to a small block of apartments or a three-decker than a similarly sized McMansion, though in many municipalities, only the last would be legal. If you feel differently, you have little taste. On the other hand, this would offer strong incentives to fit in as many people as possible, which allows more people access to the city. Voters will want to keep taxes on development low, as they themselves are being taxed for their homes. It may not be quite enough incentive. Eh. It’s all a pipe dream anyway.
Tom Hanes is a member of the class of 2020. He can be reached at email@example.com.