development and planning – The Menace of Privilege

Cook County contains 59,886 vacant taxable land parcels

A vacant lot (source: Cook County Assessor)

The current locally assessed value of these 59,886 parcels totals $490.23 million. By ordinance, these assessments are 10% of what the Assessor estimates to be the market value of these parcels, implying that they’re worth $4.902 billion. Of course there’s also a “multiplier” of 3.0163, meaning the taxable value is $490 million X 3.0163 =$1.478 billion. Tax rates vary around the County, but in Chicago currently (before expected increases) is 7.02%. Meaning that owners of vacant land need to pay $1.54 billion X 7.02% = $103 million.

The County Board decided that vacant land, like residential real estate, should be assessed at 10% of estimated value. Commercial and industrial land is assessed at 25% of value (with exceptions for special favors). The Board could, by ordinance, apply this 25% factor to vacant land also. Which would raise something like $490 million X 1.5 X 3.0163 X.0702 = $155 million/year. Without taxing any housing; without taxing any business. Without taxing anybody who can’t afford to own land. Now $155 million may not seem like a lot, given that the City of Chicago is running something approaching a $1 billion annual deficit, Chicago Public Schools hundreds of millions more, and of course many suburban Cook County taxing bodies are in deficit. But $155 million is just the start.

If you are owner of a vacant lot, and you receive notice that your taxes have more than doubled, what will you do? You could sell the lot, but who would buy it? Probably somebody who wants to build housing, or a commercial business, or something else that serves the community. Or you might decide to build something yourself. Either way, this contributes to better housing supply or increased job opportunities.

Also, that $155 million/year is just for actual vacant lots, coded by the Assessor as class 100. There are also 25,180 parcels labeled as “vacant land under common ownership with adjacent residence” (class 241), also assessed at 10%. These are assessed at $123 million. By the same calculation as we used for vacant lots, assessing these like other nonresidential property could yield an additional $39 million, and some of the parcels would be used for new housing (including accessory dwelling units) or other useful projects.

This amount of revenue is not going to solve all the financial problems of Cook County local governments, but it would be a start, would cost practically nothing to implement, and would have the side benefit of increasing jobs and housing.

Many vacant lots are not taxable, because they belong to the City of Chicago or other government agencies. The above calculations omit such lots. DePaul’s Institute for Housing Studies has examined vacant land in Chicago, including City-owned parcels, and provides some analysis here.

This is not a complete remedy for Chicago’s and Cook County’s financial (and other) difficulties. But it should be an element in any plan to achieve prosperity and justice.

[More to come.]

Georgist looks at “Escaping the Housing Trap.”

This new book by Strong Towns head Chuck Marohn (and Daniel Herriges) is worthwhile for anyone who wants to understand where America’s “housing crisis” came from. The history is important: How did we get here? He goes thru how housing was financed a hundred years ago, federal programs enacted in response to the 1929++ economic depression and subsequent disruptions, subsequent federal programs, and the dilemma we have today.

About 2/3 of American households are homeowners, they have (or hope to obtain) “equity” in their property, and they really don’t want to see the economic value of their holdings decline. Many of them are already stressed by the cost of paying their mortgages, taxes, maintenance expenses, and other costs of living. Not to mention the cost of owning and operating automobiles, as in most communities life without one is quite inconvenient.

The remaining third are renters (plus the unhoused). Many of them are also under economic pressure, as rents in recent decades have outpaced incomes. They might like to see housing prices decline, or more precisely to see the housing they want become easier for them to afford.

So there are big interests who want housing costs to decline, and who don’t want the price of housing to decline.

Part of the problem, as Marohn sees it, is that nowadays housing is built, financed, and often managed at a national scale. These folks are professionals who can deal with complex zoning and building code requirements. So part of the remedy is for local governments to make it easier for small-scale, local builders to make housing. This would include allowing an increase in density by right, such as backyard cottages, accessory apartments, or a two or three unit building in areas which have been restricted to single family.

This isn’t wrong, and I have enough personal experience dealing with building and zoning officials in a “progressive” community to know that improvements would be helpful. Even Brandon Johnson claims to be aware of the problem.

Working thru the book, I kept wondering what happened to the land value tax, which I know Marohn has supported. When I got to the example on “Financing Backyard Cottages” where he notes that one advantage would be additional property tax revenue, it sure looked like LVT has been tossed aside. Finally, toward the end of the penultimate chapter, he says “the land value tax… is perhaps the best mechanism to overcome neighborhood stagnation and decline.” Well it was nice he was able to fit this in.

I do recommend this book to anyone interested in realistic ways to get more housing built, or just in finding out how we got where we are. However, if you want to know how the whole problem could have been avoided by getting public revenue primarily from the value of land and other privileges, you’ll want to look elsewhere.

Everything changed for him when he read Progress & Poverty

Tech billionaire wants to solve economic inequality, among other problems, by building a new city funded by land value tax. As described here, alternate source here.

Of course there are all kinds of issues involved in building a new, freestanding city, but it’s encouraging that he wants to start on a sound economic basis. Thanks to Bob Jene and Edward Miller for the tip.

Distributing privilege differently

Some land in Woodlawn (15 years ago). Image credit: Eric Allix Rogers CC BY-NC-ND 2.0

A D Quig reports in Crains that the City of Chicago’s Housing Commissioner says “everyone who lives in Woodlawn now should be able to stay in Woodlawn.” This can be a challenge as housing costs in the area rise. According to Crains (not corroborated by any press release I can find on web sites of the Department of Housing or the Mayor’s Office), support for housing affordabiity in the area will involve six strategies:

Right of refusal for large apartment building tenants if a landlord seeks to sell his or her building
Helping apartment building owners refinance properties to keep renters in place with affordable rates
Giving grants to long-term homeowners to help with home repairs
Financing the rehab of vacant buildings
Setting guidelines for how city-owned, vacant, residentially zoned land can be developed into affordable or mixed-income housing
Requiring developers that receive city-owned land to meet enhanced local hiring requirements

Details, of course, are yet to be defined, and the whole thing requires action by the City Council. Still, assuming that the program is effectively structured and implemented, what we have is the designation of a privileged class– people who live in Woodlawn– receiving benefits that might otherwise accrue to another privileged class — people who own land in Woodlawn, with a new layer of bureaucracy established (or repurposed) to administer it, including investigating and monitoring the reported income and behavior of the people who are granted permission to live in the area.

Whereas, under a land value tax, the area would now have little vacant land, presumably a lot more housing, probably quite “affordable.”

Of course if you’re the Mayor, you do what you figure is politically feasible and within your power, not what is morally right and economically efficient, but would require persuading a lot of uninformed voters and obtaining cooperation from quite a few other governmental actors.

Who Owns Silicon Valley?

View of Silicon Valley in 2012, showing major employers — Vintage 2012 view of Silicon Valley showing major employers. “Silicon Valley IT Company Topography” by Wayan Vota is licensed under CC BY-NC-SA 2.0

Or more precisely, who owns Santa Clara County? With the cooperation of local officials including the County Assessor, a consortium including the Mercury News has determined who owns the greatest value of real estate in the County. Tech giants Alphabet and Apple are second and third, but the number one owner turns out to be Stanford University.

Some other important information:

Proposition 13 is mentioned, but the incentive which keeps old people in their homes which become unaffordable to most families is not explored.

Local opposition to development, preventing housing construction which might otherwise occur, is discussed.

Stanford’s existing holdings include commercial property, but their current acquisitions seem mainly to provide housing for some of their elite employees. These people are able to buy houses at favorable prices (relative to the area), however Stanford retains the land and retains the right to buy the house back eventually. Local non-Stanford people complain, of course, but do not offer to sell their properties at a discount.

Apparently California practice is to assess all real estate, even that which is exempt. This enables meaningful estimates of ownership even tho $13.3 billion of Stanford’s $19.7 billion in real estate is exempt.

Several local officials were interviewed. They don’t discuss how it feels to know that your opposition, Apple and/or Google, has control of much of your communications and might be monitoring them.

Well worth a read for those interested.

Some effects of high and misconfigured real estate taxes

Delinquent taxes soaring in Cook County

Reportedly, taxes of 163,036 parcels in Cook County were not paid on time. This comprises 2018 taxes which should have been paid in 2019. and amounts to 8.7% of all parcels in the County. For a dozen south Cook County municipalities, this amounts to 20% or more of total parcels. Counts by municipality are posted separately for south, west, and north Cook. All sources show the percentage of parcels with unpaid taxes within the City of Chicago as 9.9%.

Separately, the reports show that only 7.8% of the delinquent taxes offered for auction in 2018 were bought by investors, which might imply that the remaining parcels are considered worth less than the taxes owed.

Unfortunately the source doesn’t tell us how many of the parcels are vacant, residential, commercial, or other uses, and gives no historical context, so we don’t really know how any of these figures compare to prior years. But regardless, the current numbers are alarming.

Suppose that the real estate tax system was changed, so that improvements would be tax-free while the value of land as vacant would be heavily taxed to make up the difference. For vacant parcels, construction of houses or other structures would not increase the tax. For parcels which contain improvements, taxes likely would be lower than now, and improvements would again be tax free. Just a thought.

Maybe expanding tax-exempt institutions raise land prices?

Crains tells us that a strikingly-designed two flat, less than 30 years old, is worthless. Well, they didn’t say it quite that way, but it was sold for $1.9 million to a buyer who will demolish it. So the $1.9 million was for the land. I don’t know whether any developer of housing or anything else taxable would have paid nearly that much for the site, but the buyer was tax-exempt Illinois Masonic Medical Center. Their exempt status of course made the land more valuable to them. Which raises the interesting question of whether buying land in the path of such an institution’s expansion might be a profitable strategy. Of course, a fair-minded community might decide to tax land used for hospitals at the same rate as land used for housing and other useful things. But we’re not there yet.

“Taxes – De Standaard” by Stijn Felix is licensed under CC BY-NC-ND 4.0

Tribune clarifies how TIF’s work

Great story by Hal Dardick in today’s Tribune explaining the real reason the Lincoln Yards TIF had to be Rahm’d thru the City Council before the new Mayor took office. The area just barely qualified as a TIF, and pending new assessments were going to rise enough that it would no longer be eligible. According to the story, it’s uncertain whether the new Mayor could have stopped the project, but she settled for what appear to be minor concessions.

Of course, the whole idea behind TIF’s is that money can be pulled from general revenue into giant slush funds, which the Mayor (and others) can manipulate with little oversight. Meanwhile, there’s little left for routine maintenance, replacement of infrastructure and funding of government schools and other services. Which increases the “need” for TIF’s.

Dardick’s article goes into considerable detail, includes a link to a recent report by Lincoln Institute (no relation to Lincoln Yards, afaik). He does say “land” when I think he means “land + improvements.”

One counterfactual that Dardick doesn’t bother with: What would have happened if Joe Berrios was still Assessor? Would he have nudged down some values to keep the area eligible? Or, to look at it the other way, suppose the current Assessor, who appears to be more conscientious, had been in office since 2013. Perhaps the earlier figures would have been higher, so the increase would be less?

We’ll never know, and it shouldn’t matter. In a well-run city, TIF’s wouldn’t be needed, and a well-informed electorate wouldn’t tolerate them.

LVT and rising sea levels

https://commons.wikimedia.org/wiki/File:Boneyard_Beach_on_Bulls_Island_(4880451924).jpg

Christopher Flavelle’s recent Business Week article looks at how rising sea levels can affect ownership of newly-submerged land. Part of the problem, of course, is that owners of these parcels want the government (Corps of Engineers, local authorities, somebody!) to use expensive artificial means to preserve or recover their properties, but of course don’t particularly want to pay for the service. Complicating the situation is the public trust doctrine, as applied in the various coastal states, which prohibits private ownership of submerged land. So if the land is recovered, who owns it?

A land value tax won’t prevent land from being submerged, and won’t clarify ownership, but it will importantly change the incentives. The article cites one case where the landowner continues to pay real estate tax [presumably a modest amount, but the article does not say] on the submerged parcel. ‘“It’s Gulf-front property,” says Levenson, who now lives in Tennessee. “Someday it will be valuable.”’

Suppose, instead, that the rental value of land was the sole source of public revenue. The land might someday be very useful, and might have a large rental value, but could never be sold for a high price. End of controversy. The water rises, the owner avoids the taxes by relinquishing the land. Unless the rest of us are obligated to pay to enrich a few coastal owners, this is the just and efficient way to proceed.

Yes you can pay for big infrastructure projects from local real estate tax

August 2017 view south from Jackson Blvd bridge. It turns out this structure is the remnant of an underground bypass to handle river flow. Click image to enlarge. (photo by Menace of Privilege)

Building The Canal to Save Chicago by Richard Lanyon is a great book about a critical infrastructure project. It’s the story of what we now call the Chicago Sanitary and Ship Canal, built at the close of the 19th century to protect Chicago’s water supply. Of course there’s more to it than that, including effects on flooding, navigation, and downstate.

The book is full of photographs of the work, and one cannot ignore how dirty, strenuous, dangerous (and noisy) it must have been. Power shovels, dredges, locomotives, various devices for moving soil out of the channel– all powered by coal, burned without emission controls of course. Over 5,000 people were employed, and there were deaths — unfortunately no count is provided.

We get some useful details about the costs and funding. Substantially all of the construction (which began in 1892 and was substantially complete in 1900) was done by contractors under competitive bidding. The work day was set at 8 hours, with extra pay for work beyond that time. Minimum wage was to be 15¢/hour.

Adjusted to today’s (2015) GDP/capita, that 15¢ equates to about $37.50, but other approaches would yield vastly different numbers. Of course, due to the primitive equipment available, the workers could not have been nearly as productive as equivalent workers would be today.

Total cost of the project was reported as $33,530,000 (page 355 — excluding work east of Damen). This could equate to $8.38 billion today. It was paid entirely (page 338) from property taxes imposed on the approximate area benefited (including bonded debt paid from these taxes), without federal or state financial assistance. Initially the tax rate was 0.5% of assessed valuation, later raised for a five-year period to 1.5%. If based on actual property value, this would be a very hefty tax, but traditionally property in Cook County has been assessed at a modest fraction of market value.

I say “property tax” rather than “real estate tax” because, up until the 1970s, Illinois taxed personal property as well as real estate. The tax was poorly-enforced and hard to administer, and was replaced by a corporate income tax surcharge. I suspect that personal property never amounted to more than a small fraction of the tax base.

Sound concept, everything else wrong

Argyle station, one of the platforms to be widened. Graham Garfield photo from Wikimedia, Creative Commons Attribution Share-alike 2.0 generic license

[The following was written in September 2016, but for some reason was not published until January 2017.]

If good transit increases land values – which it does – then shouldn’t the increase in real estate values should be used to fund transit infrastructure? Yes, if you do it right.

Case in point is CTA’s “Red Purple Modernization Project” and, in particular, the “Lawrence to Bryn Mawr Modernization.” The structure is nearly 100 years old, been maintained somewhat, it seems reasonable that it might need rebuilding. Maybe it’s even reasonable to widen the platforms (which must account for a lot of the >$1 billion cost), even tho we know from Granville and Loyola that elevator access can be achieved on existing narrow platforms. It would be interesting to know of any evidence that narrow platforms actually are associated with more accidents or injuries than wider platforms.

We’re already stuck with a federal funding system thru which skilled local politicians have milked federal taxpayers for over $1 billion just for this 1.3 mi segment. But a local match is needed. It’s not clear from the posted documents how much this match would be, but under new laws the State permits “Transit TIF’s” which can be used to raise much of it.

According to the CTA documents, “Transit TIF funds are created by growth in property value, known as increment, that occurs because of the investment in transit.” That’s almost certainly a lie, as a TIF absorbs the entire increase in assessed value that occurs during its life. Increase due to better schools goes to the transit TIF. Ditto for increase due to more effective policing, sanitation improvements, libraries, flood control, fire protection, or anything else the government does and pays for. Ditto for increases due to private activity that makes the area more desirable (for instance, good private schools have been shown to raise land values). Ditto for inflation, which has already returned to real estate values and will doubtless continue, on the average tho not every year, for decades.

So where will governments get the money to pay for schools, sanitation, libraries, and everything else including pension costs resulting from past services? The land value increase is already taken, as is the increase in improvements and from inflation. So it’ll have to come from other taxes. We’re already seeing higher taxes for nearly every kind of productive activity, and we’ll just see more. It’s been pretty well demonstrated that people will put up with this. Not a lot all at once, but a bit more every year.

We’re stuck with this, it is going to happen, the current crew will be re-elected repeatedly or similar ones put in their place. But, just for fun, we might consider what should have been done instead.

Well, first, a proper evaluation should have been done of restoring the third track on the parallel Metra line a mile or so west. Restore a couple of the stations which existed there sixty years ago, integrate the fare structure, and we might find that two tracks would have been sufficient. But that would have required more coordination than legislators seem to feel is necessary.

Second, CTA needs to fix operational problems that constrain its capacity. At Clark Junction, for instance, it takes about 18 seconds to reset the switches and signals after the route clears. Similarly, at Howard trains approaching from north and south are often held out because nobody can get empty trains out of the station, or perhaps sometimes because nobody got around to changing the signals. How could this be fixed? How many more trains handled?