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A TDR Parable: It’s simple. You just go to the farmer whose land you’re trying to preserve and tell him that he can’t develop his land because it is a “sending area” for your new Transfer of Developments Rights (TDR) program. At first, he’s a bit upset. But as town planner you assure him that everything is OK because you’ve found a developer who will pay him for the development potential of his property in order to build a block of new houses on small lots in the quaint village center nearby. Everybody wins! It’s easy, isn’t it?
Well, not really. The farmer has been offered a lot more money by another developer who wants to build the kind of low-density gated community that professional refugees from the city really want. The farmer decides to sue you and the town, claiming that by depriving him of the right to develop his land there has been a “taking.” Also, the villagers have decided that their community is dense enough and they would like you to find a different “receiving area.”
Meanwhile, the original developer has figured out that he can use his development rights to build a new strip mall on a greenfield site outside of town. This was a site you had hoped he would not use, although you had to include it as a receiving area in order to be sure the farmer’s development rights had somewhere to go.
This parable is clearly an oversimplification, but it illustrates many of the challenges that TDR programs face. The allure of the TDR model is its seemingly simple ability to accomplish in one transaction two complementary goals: open space preservation and compact, centered development. However, the promise of TDR has been stalled by a variety of political, economic and administrative obstacles.
The Lincoln Institute and Regional Plan Association (RPA) cosponsored a two-day conference in October 1997 to explore the potential and the limitations of using TDR programs. While the conference addressed a number of legal and planning issues, one of the central questions asked by the group was, “How can TDR programs be used to influence settlement patterns, not only to protect open space, but also to promote compact development?”
A presentation of research by the American Farmland Trust revealed that the use of TDR has expanded tremendously, and many programs are considered successful even though the overall picture is ambiguous. The list of success stories is still dominated by such well-known programs as Montgomery County, Maryland (1980) and the New Jersey Pinelands (1981). A number of more recent programs showing early potential are the Long Island Central Pine Barrens, New York (1995), Bucks County, Pennsylvania (1994) and Dade County, Florida, where TDRs are helping to preserve more than 100,000 acres of everglades ecosystems outside of the Everglades National Park.
Obstacles and Opportunities
Regardless of how many programs may be considered successful, the conference revealed that there are still many obstacles to establishing a working TDR program. Among them are:
Impacts on Receiving Areas
The first half of the TDR equation (agreement on the resource to be protected) is generally not difficult. However, the second half (agreement on where the transferred development is to go and how it should be configured) has been extremely problematic.
Conference participants acknowledged that while the goal of transferring density away from preservation areas and into growth areas was being accomplished by a number of TDR programs, the programs have not been effective in influencing the design and character of development in the receiving areas. Local municipalities are, or at least should be, obligated to identify sites for increased density, but the use of that density may not be constrained beyond the existing town zoning bylaws. The unfortunate result is that the increased density is as likely to be used for a suburban strip development as for compact, centered development, thus creating localized sprawl within the receiving area.
In the case of the Long Island Pine Barrens, some towns intentionally spread out their receiving areas to avoid the political fallout of higher-density development. When the TDR program was being developed, the Pine Barrens Commission was working on design guidelines meant to promote compact town planning. However, this layer of complexity and restriction was too burdensome to be incorporated into each of the local town plans.
While there is broad agreement that controlling the character of development in receiving areas is a desirable idea, it also raises a number of questions. First, the administrating agency may not be able to deal with the additional complexity that design controls would bring. Second, the market for new development in the receiving areas may not be strong enough to support the additional burden of cluster design. The need to guarantee a market for the transfer rights also works against the creation of controls that would concentrate development. An advantageous ratio of receiving areas to sending areas (as high as 2.5:1) tends to create large receiving areas.
Conference participants from around the country also confirmed what they perceive as a knee-jerk reaction against higher density. Despite the influences of New Urbanism and neo-traditional planning, the general public and the marketplace do not value centered development. Residents of fast-growing communities might be more receptive to clustered residential designs if they could understand what different types of development would look like by reviewing three-dimensional representations in drawings and models.
Land use attorney Charles Siemon suggested that many town planners seem to want compact, centered development, but are not willing to acknowledge that it can be more expensive to private developers. Perhaps another approach, one that is outside of the TDR marketplace, is needed, such as a fund that buys the development rights and agrees to sell them to developers at a discount if they build in town centers. Lexington, Kentucky, is experimenting with this kind of arrangement.
Evaluating TDR
How do you measure the success of a TDR program? By the amount of open space preserved? The number of acres kept in farming? The number of transactions? The quality of development in the receiving areas? And, over what time period? Charles Siemon suggested that a TDR program might be considered a success even if no transactions take place. How? Because, in the context of a larger land use plan, the TDR program can make a preservation program more palatable by providing the landowner with additional options.
It became clear during the conference that the perceived success or failure of TDR programs was colored by excessive expectations. The notion that a TDR program would, by itself, protect open space, preserve activities such as farming, help create appealing village centers, and do all of this simply by offering a mechanism for moving development around is simply not realistic. Some participants asked, “Why should a TDR program be expected to accomplish more than any other single land use tool, such as zoning?”
This question reflected the most fundamental conclusion of the conference: TDR programs work only when they are part of a larger, long-term land use plan that has the commitment and political will of the community behind it. This commitment to the larger goals of the plan and to the particular resource being protected is the real answer to legal and other challenges. A comprehensive plan is more likely to accommodate multiple avenues of relief for landowners who feel unfairly treated. TDR programs that are created within the context of a comprehensive plan are much more likely to be tailored to the specific political, economic and geographic circumstances of their location. Finally, in terms of creating balanced and centered development, it is within a land use plan that the design guidelines and other controls that result in the best town planning principles may reside.
Robert Lane is director of the Regional Design Program at the Regional Plan Association in New York.
Notes:
1. James Tripp and Daniel J. Dudek, “Institutional Guidelines for Designing Successful Transferable Rights Programs,” Yale Journal on Regulation (Summer 1989).
2. In the summer of 1997, the U.S. Supreme Court heard Suitum v Tahoe, a challenge to a TDR program. Although some of the justices took the opportunity to talk about various legal dimensions of TDR, the case did not address the fundamental legality of TDR. Instead, it focused on the “ripeness issue.” Did Mrs. Suitum have to try to sell her rights through the program before challenging its legitimacy? The Court ruled that she did not. The conference participants felt that in the short term the case may create pressure for TDR programs to assign real dollar values to the rights or credits that are being transferred. This is consistent with the finding that a TDR bank, capable of assigning such values, can play an important role in the success of a TDR program.
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A critical aspect of the property tax, but one that is rarely addressed in public debate, is its “economic incidence,” or who actually bears the burden of the tax, as opposed to its statutory incidence, or who literally pays the tax. For example, a landlord might pay a property tax bill, but if some of the tax is offset with a rent increase, then the tenant bears that part of the tax burden. Not surprisingly, estimates of the economic incidence of taxes depend on the relative responsiveness of supply and demand to tax-induced price changes—factors that explain the extent to which consumers and businesses can change their behavior to avoid the tax.
The economic incidence of a tax is also affected by the phenomenon of “capitalization”—changes in asset prices that reflect the discounted present values of the economic effects of future tax and/or public expenditure changes. For example, an increase in property taxes, holding expenditures constant, might be capitalized into land or house values. The prices of these assets might fall by the present value of the projected increase in future taxes, whereas increases in expenditures, holding property taxes constant, might have offsetting effects.
These capitalization effects should include the effects of other tax-induced price changes, such as changes in future housing or land rents. In principle, the economic incidence of all of these capitalization effects is on the owners of land and housing at the time of the imposition of the tax, when the effects are “capitalized” as one-time changes in the prices of these assets. These price changes also significantly affect the ultimate economic burden of the tax on subsequent purchasers.
Benefit Tax versus Capital Tax Views
The complexity of measuring all of these effects implies that determining the economic incidence of taxes is one of the most difficult problems in public finance, and the property tax is no exception. Indeed, the debate over the incidence of the residential property tax has raged for at least the last thirty years, and is still far from resolved. Professional opinion on the incidence of the tax is generally divided between the “benefit tax” view and the “new” or “capital tax” view (Zodrow 2001).
Under the benefit tax view, the property tax is considered a user charge for public services received. It thus serves the function of a local head tax or benefit tax as envisioned by Tiebout (1956) in his celebrated analysis of how interjurisdictional competition coupled with consumer mobility can lead to the efficient provision of local public services. The implications for taxpayers are threefold. First, as a benefit tax the property tax is simply a payment for public services received, analogous to purchases of goods and services for private markets. Second, because the property tax functions as a market price, its use implies that local public services are provided efficiently. Third, the property tax, like all benefit taxes, results in no redistribution of income across households and thus has no impact on the distribution of income.
By comparison, under the capital tax view derived by Mieszkowski (1972) and elaborated by Zodrow and Mieszkowski (1986b), the property tax is a tax on the use of capital and thus inefficiently distorts resource allocation by driving capital investment out of high tax jurisdictions and into low tax jurisdictions. The capital tax view divides the incidence of the property tax into two components. The national average tax burden is in effect a “profits tax” borne by all capital owners, including homeowners, businesses, and investors. The local or “excise tax” components of property tax rates that fall above or below the national average are borne locally through changes in land rents, wages, or housing prices.
The incidence effects of local taxes that are higher and lower than the national average tend to cancel one another in the aggregate. Therefore, the profits tax effect is the main factor determining the incidence and distributional effects of the property tax. From the perspective of any single taxing jurisdiction, however, the burden of local expenditures financed by the property tax tends to be borne primarily by local residents.
The capital tax view has different implications for taxpayers in all three of the areas noted above for the benefit tax view. First, the tax has some significant benefit aspects in that local tax increases tend to be borne by local residents. Second, the tax inefficiently distorts housing consumption decisions; moreover, use of the local property tax can also lead to inefficient underprovision of local public services if government officials, concerned about tax-induced loss of investment, then reduce the level of public services (Zodrow and Mieszkowski 1986a). Third, because the primary effect of nationwide use of the property tax is a reduction in after-tax returns to capital owners, it is a highly progressive tax. Nevertheless, from the perspective of a single taxing jurisdiction, the local tax is not borne by capital owners as a whole but rather by local residents and is a roughly proportional tax. (See Table 1 for a summary of these two views.)
Capitalization and the Incidence of the Property Tax
My recent research sponsored by the Lincoln Institute has focused on a single but critical aspect of this long-standing debate. Dating back to the seminal work of Oates (1969), empirical evidence of the interjurisdictional capitalization of the discounted values of local property taxes and public services into house prices has been interpreted as offering support for the idea that property taxes can be viewed as payments for local public services received, consistent with the benefit tax view.
This notion was extended to the case of intrajurisdictional capitalization in the pathbreaking work of Hamilton (1976). In this model, which is characterized by perfectly mobile households with heterogeneous demands for housing and fixed housing supplies, intrajurisdictional fiscal capitalization converts the local property tax into a pure benefit tax, even though all houses are not identical. Specifically, high-value homes sell at a discount that reflects the capitalized present value of their “fiscal differential”—the present value of the excess of future taxes paid relative to public services received.
Similarly, low-value homes should sell at a premium that reflects the capitalized present value of the extent to which future taxes paid are less than the value of public services received. As a result, all households “pay for what they get” in public services, and the property tax is an efficient benefit tax. Capitalization thus implies that it is futile to follow the conventional strategy of buying a low-value home in a high-value community in order to receive local services at relatively low cost.
In supporting the idea that the combination of strict zoning regulations and fiscal capitalization converts the property tax into a benefit tax, Fischel (2001) interprets the extensive literature on the capitalization of property taxes and public services as demonstrating that fiscal “capitalization is everywhere.” He concludes that empirical support of fiscal capitalization provides compelling evidence that the benefit tax view accurately describes the effects of the property tax. Fischel makes this argument in the context of a model in which local governments are analogous to municipal corporations that maximize the house values of “homeowner-voter shareholders” who strive to protect their housing investments.
The central result of my research is that even if empirical evidence of the phenomenon of fiscal capitalization implies that it is indeed “everywhere,” such evidence does not establish the validity of the benefit tax view. Rather, my model shows that if one adopts all of the admittedly stringent assumptions of the benefit tax view, complete intrajurisdictional land value fiscal capitalization is also entirely consistent with, and indeed predicted by, the capital tax view of the property tax.
When combined with earlier results that demonstrate that interjurisdictional capitalization is also consistent with the capital tax view, my research results imply that the widely observed phenomenon of property tax capitalization provides little if any grounds for distinguishing between the capital tax and benefit tax views. That is, capitalization does not tell us whether the property tax should be viewed primarily as a progressive tax on all capital that inefficiently distorts decisions regarding housing consumption (the capital tax view), or an efficient user charge that has no effects on the distribution of income (the benefit tax view).
A Reconstruction of the Benefit Tax View
My research begins by reconstructing the Tiebout-Hamilton benefit tax view within the context of a partial equilibrium version of the standard differential tax incidence model, which focuses on the effects of use of the property tax in a single taxing jurisdiction. This approach is necessary because the derivations of the benefit tax and capital tax views of the property tax are based on somewhat different theoretical approaches.
Hamilton’s benefit tax view model characterizes the properties of an economy in equilibrium, with local public services financed by residential property taxes rather than the head taxes assumed by Tiebout. In contrast, the derivations of the capital tax view, such as those in Mieszkowski (1972) and Zodrow and Mieszkowski (1986b), are based on the differential tax incidence analysis pioneered by Harberger (1962). Under this approach, the effects of the property tax are analyzed by first constructing an initial equilibrium with either no taxes or only nondistortionary lump-sum taxes, and then introducing property taxes and analyzing their effects.
To facilitate a comparison of the two views, my analysis begins by deriving all of the benefit tax view results obtained in Hamilton’s model of intrajurisdictional fiscal capitalization within the context of a differential tax incidence model, one that is typical of the capital tax view but nevertheless makes the essential—and admittedly rather stringent—assumptions characteristic of derivations of the benefit tax view. In particular, households are perfectly mobile across competing local jurisdictions with an exogenous source of income, and there are a sufficient number of jurisdictions to satisfy all tastes for local public services.
Following Hamilton, the model has two different types of households, one of which demands relatively larger houses. Initially, the local economy is assumed to be in a Tiebout equilibrium, with local public services as well as housing and the composite good provided at efficient levels, and with local public services being financed by uniform head taxes per household. The fixed supply of land within a jurisdiction is used either for large houses for “high demanders” or small houses for “low demanders.”
Property taxes on all land and capital within the jurisdiction are then introduced into the model, with the revenues used to reduce the level of head taxation while holding the level of public services per capita fixed. Zoning is also introduced, by assuming that the amounts of land used for large and small houses are fixed. This is a weak version of the approach followed by Hamilton, who assumes fully developed communities and thus precludes any change in land or capital allocated to the two types of housing. Indeed, some form of land use zoning is required for any capitalization to occur since, in the absence of zoning, all land within the jurisdiction would in the long run sell for the same price and there would be no capitalization (Ross and Yinger 1999). In this derivation of the benefit view, housing capital is also assumed to be fixed, as in Hamilton’s analysis.
The effects of introducing property taxes on both housing capital and land in this initial equilibrium are identical to those predicted by Hamilton. First, for large homes, which experience a disproportionately larger increase in property taxes, the resulting negative fiscal differential is fully capitalized into lower housing prices. Similarly, small houses sell at a premium that exactly reflects the negative fiscal differential between total property taxes paid and the associated benefits of the tax change as measured by the reduction in head taxes.
Second, the net change in land values due to capitalization in a heterogeneous jurisdiction is zero; that is, the aggregate amount of the discount in land prices for larger homes equals the aggregate amount of the premium in land prices for smaller homes. Third, the price of each type of housing rises by just enough to offset the cost of the public services that must be financed with property taxes.
To sum up, all of the benefit tax view results obtained by Hamilton are obtained within the context of a partial equilibrium differential tax incidence model of a single taxing jurisdiction that is comprised of households that are homogeneous with respect to demands for public services, but heterogeneous with respect to demands for housing. Once again, capitalization implies that the property tax is a benefit tax. Accordingly, the combination of property tax payments and capitalization effects implies that (1) taxpayers pay for all their local public services; (2) both housing and local public services are consumed at efficient levels; and (3) the property tax results in no redistribution of income.
Capitalization Under the Capital Tax View
Converting this model to accommodate a version of the capital tax view is straightforward. Recall, however, that this approach considers the effects of the property tax from the perspective of a single taxing jurisdiction, which is modeled as a small open economy that faces a perfectly elastic supply of capital. Since the net rate of return to capital is fixed by assumption, the effect of nationwide use of the property tax on the return to capital cannot be analyzed. Nevertheless, within the single taxing jurisdiction framework the effects of the property tax on the allocation of housing capital, as well as the effects of this tax-induced reallocation on all other variables, including the changes in land prices that are the focus of the analysis, can still be derived.
The key distinction between the benefit tax and capital tax views of the property tax is that under the latter approach the stocks of housing capital are not assumed to be fixed (although the zoning assumption of fixed land supplies for the two types of housing is maintained). That is, under the capital tax view, which clearly reflects a relatively long-run view of incidence, households can reduce their housing consumption in response to an increase in the property tax.
Given these assumptions, the implications of the capital tax version of the model are as follows. First, capital flows out of the production of large houses where property taxes are high relative to benefits received, and into the production of smaller homes where the property tax bill is low relative to benefits received. This reallocation of housing capital is an important factor in determining incidence—who ultimately pays the property tax. The analysis shows that land rents unambiguously increase for land used for small houses and decrease for land used for large houses, and it is these changes in land rents that are capitalized into land prices. The key result is that these land value capitalization effects under the capital tax view are precisely the same as those calculated previously under the benefit tax view. Thus, the existence of capitalization does not help resolve the critical issue of whether the benefit view or the capital tax view more accurately describes the incidence and economic effects of the property tax.
The other results derived in Hamilton’s model obtain in this capital tax model as well. The net effect of property tax capitalization on aggregate land value within the taxing jurisdiction is zero. Similarly, the effects of the property tax on housing prices—which rise by an amount just sufficient to offset the value of public services received—are also identical under the two models, implying that housing prices for smaller homes increase proportionately more than prices for larger homes.
Despite this distortion of the allocation of housing capital under the capital tax view, the local effects of use of the property tax still have some very important features that are characteristic of a benefit tax. For example, residents pay for net local public services received (those not financed with head taxes) in the form of higher housing prices. Simultaneously, fiscal differentials are capitalized into land values, so that the net effect of the property tax burden and land value capitalization is that future purchasers of both types of houses effectively pay for what they get in public services.
Thus, the essential difference between the two views of the property tax is that, under the capital tax view, land value capitalization occurs due to capital reallocations across housing types, implying inefficiency in the housing market. Under the benefit tax view, capitalization occurs with respect to fixed housing capital stocks, and there is no distortion of the allocation of housing capital. For example, if a local government finances an increase in public expenditures with additional property taxes, the resulting capitalization effects are the same under both views (and cause the same gains and losses at the time of implementation). However, the capital tax view implies that in the long run housing demands will decline, while housing consumption remains unchanged under the benefit tax view.
My model also shows that under the capital tax view per capita housing consumption declines unambiguously for both types of households, which is the standard result that the property tax causes an inefficient reduction in housing consumption. In addition, the number of households that purchase small houses unambiguously increases, while the net effect on the number of households that purchase large houses is theoretically ambiguous, and the total population in the jurisdiction increases.
Conclusion
This analysis shows that, within the context of a partial equilibrium analytical framework characterized by assumptions typical of the benefit view of the property tax, intrajurisdictional capitalization into land values of fiscal differentials is entirely consistent with, and indeed predicted by, the capital tax view of the property tax. Earlier results demonstrate that interjurisdictional capitalization is also consistent with the capital tax view (Kotlikoff and Summers 1987). Together, these results suggest, counter to the claims of benefit tax proponents, that empirical evidence supporting full capitalization of property taxes in land values—either within or across jurisdictions—provides little if any evidence that allows researchers to distinguish between the capital tax and benefit tax views.
Instead, the key issue is whether the zoning restrictions or other mechanisms stressed by proponents of the benefit tax view are sufficiently binding to preclude the long-run adjustments in housing capital predicted by the capital tax view. This issue promises to be a fertile topic for future research, which may help clarify the answer to the long-standing and critical question of who pays the residential property tax.
George R. Zodrow is professor of economics and Rice Scholar in the Tax and Expenditure Policy Program of the Baker Institute for Public Policy at Rice University in Houston, Texas.
References
Fischel, William A. 2001. Municipal corporations, homeowners and the benefit view of the property tax. In Property taxation and local government finance, Wallace E. Oates, ed., 33–77. Cambridge MA: Lincoln Institute of Land Policy.
Hamilton, Bruce W. 1976. Capitalization of intrajurisdictional differences in local tax prices. American Economic Review, 66 (5): 743–753.
Harberger, Arnold C. 1962. The incidence of the corporate income tax. Journal of Political Economy, 70 (3): 215–240.
Kotlikoff, Laurence J., and Lawrence H. Summers. 1987. Tax incidence. In Handbook of Public Economics, Volume I, Alan J. Auerbach and Martin S. Feldstein, eds., 1043–1092. Amsterdam: North Holland.
Mieszkowski, Peter. 1972. The property tax: An excise tax or a profits tax? Journal of Public Economics 1 (1): 73–96.
Oates, Wallace E. 1969. The effects of property taxes and local public spending on property values: An empirical study of tax capitalization and the Tiebout hypothesis. Journal of Political Economy, 77 (6): 957–961.
Ross, Stephen, and John Yinger. 1999. Sorting and voting: A review of the literature on urban public finance. In Handbook of Regional and Urban Economics, Volume 3, Paul Cheshire and Edwin S. Mills, eds., 2001–2060. Amsterdam: North Holland.
Tiebout, Charles M. 1956. A pure theory of local expenditures. Journal of Political Economy, 64 (5): 416–424.
Zodrow, George R. 2001. Reflections on the new view and the benefit view of the property tax. In Property taxation and local government finance, Wallace E. Oates, ed., 79–111. Cambridge MA: Lincoln Institute of Land Policy.
Zodrow, George R. and Peter Mieszkowski. 1986a. Pigou, Tiebout, property taxation and the under-provision of local public goods. Journal of Urban Economics, 19 (3): 356–370.
———. 1986b. The new view of the property tax: A reformulation. Regional Science and Urban Economics, 16 (3): 309–327
Editor’s note: The Lincoln Institute published a new report on tax increment financing in September, 2018.
Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF. An important finding is that TIF has different impacts when land use is considered. For example, commercial TIF districts tend to decrease commercial development in the non-TIF portion of the municipality.
Designating a TIF District
The rules for tax increment financing, and even its name, vary across the 48 states in which the practice is authorized. The designation usually requires a finding that an area is “blighted” or “underdeveloped” and that development would not take place “but for” the public expenditure or subsidy. It is only a bit of an overstatement to characterize the “blight” and “but for” findings as merely pro forma exercises, since specialized consultants can produce the needed evidence in almost all cases. In most states, the requirement for these findings does little to restrict the location of TIF districts.
TIF expenditures are often debt financed in anticipation of future tax revenues. The practice dates to California in 1952, where it started as an innovative way of raising local matching funds for federal grants. TIF became increasingly popular in the 1980s and 1990s, when there were declines in subsidies for local economic development from federal grants, state grants, and federal tax subsidies (especially industrial development bonds). In many cases TIF is “the only game in town” for financing local economic development.
The basic rules of the game are illustrated in Figure 1. The top panel shows a land area view of a hypothetical municipality. The area on the western border is designated a TIF district and its assessed value is measured. The lower panel of Figure 1 shows the base-year property values in the TIF (B) and the non-TIF (N) areas. At a later point in time, assessed property values have grown to include the increment (I) in the TIF district and growth (G) in the non-TIF area of the municipality.
Tax increment financing carves out the increment (I) and reserves it for the exclusive use of the economic development authority, while the base-year assessed value (B) stays in the local government tax base. Thus,
Impacts on Overlapping Governments and Non-TIF Areas
The value increment (I) is the tax base of the TIF district. In most states (like Illinois, but unlike Massachusetts) there are multiple overlapping local governments, e.g., the municipality, school district, community college district, county, township, park district, library district, and other special districts. Figure 2 illustrates this situation with the school district representing all the nonmunicipal governments. To understand the economics and politics of TIF, it is crucial to note that while the municipality makes the TIF adoption decision, the TIF area value is part of the tax base of the school district and other local governments as well. Moreover, the TIF district gets revenues from the increment times the combined tax rate for all local governments together. The following hypothetical tax rates for a group of local governments overlapping a TIF district are close to the average proportions in Illinois.
Municipal tax rate = 0.15 %
School district tax rate = 0.60 %
Other governments’ tax rate = 0.25 %
Combined tax rate = 1.00 %
For each 15 cents of its own would-be tax revenues the municipality puts on the line, the school district and other local governments contribute another 85 cents. Thus, there may be an incentive for municipalities to “capture” revenue from growth that would have occurred in the absence of TIF (to collect taxes that would have gone to school districts). Or, municipal decision makers may favor inefficient economic development strategies that do not result in public benefits worth the full cost, since their own cost is only 15 cents on the dollar. TIF proponents would counter that nothing is captured, because the increment to the tax base would not exist “but for” the TIF authority expenditure. That argument, of course, turns on what would have happened to property values in the absence of TIF.
If, as municipalities are often required to assert when they adopt TIF, all of the increment is attributable to the activities of the TIF development authority, then TIF is fair, in that the school district is not giving up any would-be revenues. If, as critics of TIF sometimes assert or assume, none of the increment is attributable to the TIF and all of the new property value growth would have occurred anyway, then the result is just a reallocation of tax revenues by which municipalities win and school districts lose.
The impact of TIF on growth in property values requires a careful reading of the evidence. It is wrong, as those who look only at growth within the TIF district in effect do, to assume to know the answer. Part of the solution is to use appropriate tools to statistically control for other determinants of growth.
It is also necessary to take into account the potential for reverse causality. We want to know the extent to which TIF adoption causes growth. But the causation could go the other way; anticipated growth in property values could lead to TIF adoption if municipalities attempt to capture revenues from overlapping governments. Or there could be reverse causation bias if TIF is adopted in desperation by municipal decision makers in areas where low growth is anticipated. Either way we should ask: Are the municipalities that adopt TIF systematically different from those that do not? If the municipalities are systematically different, we must statistically disentangle the effect of that difference from the effect of the TIF using a technique that corrects for what economists call “sample selection bias.”
Impacts on Growth and Property Values
There are two sides to any government budget: revenues and expenditures. As a revenue-side mechanism, TIF is a way of earmarking tax revenues for a particular purpose, in this case local economic development. The effectiveness of economic development expenditures depends on opportunities, incentives, and planning skills that are specific to each local area and each project. By combining data from a large number of TIF and non-TIF municipalities, we can ask: On average and overall, is TIF adoption associated with increased growth in municipal property values? We have addressed this question in two research studies, both of which use statistical controls for the other determinants of growth and for reverse causation due to sample selection bias.
The first study (Dye and Merriman 2000) uses data from 235 Chicago area municipalities and covers preadoption, TIF adoption (or not), and postadoption time periods. We control for the selection bias (reverse causation) problem by first predicting which municipalities adopt TIF and then using that information (a statistic called the inverse Mills ratio) when estimating the effect of TIF adoption on property values in a second stage. Use of selection bias correction was first applied to the study of TIF by John Anderson (1990) and is now standard practice.
Our estimates of the impact of TIF have a number of additional variables controlling for home-rule status, the combined tax rate, population, income per capita, poverty rate, nonresidential share of equalized assessed value (EAV), EAV per square mile, distance to the Chicago loop, and county of location. We found that property values in TIF-adopting municipalities grew at the same rate as or even less rapidly than in nonadopting municipalities. The study design did not get at this directly, but the offset seemed to come from smaller growth in non-TIF area of the municipality (lower G).
Our findings were a surprise to those, especially nonacademics, who naively had inferred TIF caused growth by observing growth within a TIF district (I) without any statistical controls for the other determinants of growth (in I or G). Our findings were quite threatening to those with an interest in TIF, such as local economic development officers who spend the earmarked funds or TIF consultants who are paid for documenting findings of “blight” or “but for.” Our findings were also at odds with an Indiana study that found a positive effect of TIF adoption on housing values (Man and Rosentraub 1998).
Because our findings were controversial, because the effect of TIF was unsettled in the academic literature, and particularly because we wanted to pursue the possibility of a negative cross relationship between growth in the TIF district (I) and growth outside the TIF district (G), we undertook a second study (Dye and Merriman 2003). In addition we wanted to look at whether there are different TIF effects when more municipalities are included and different types of land uses are considered. We used three different data sets: property value data for 246 municipalities in the six-county Chicago area; less complete property value data for 1,242 municipalities in all 102 Illinois counties; and property value data for 247 TIF districts in the six-county Chicago area.
For the six-county sample (similar to our earlier study, but with more years and more municipalities), Table 1 presents the pre- and postadoption growth rates for the TIF-adopting and nonadopting municipalities. These calculations are from raw data, before any statistical controls for other growth determinants or corrections for selection bias. The first row compares EAV growth rates of the TIF-adopting and nonadopting municipalities in the period before any of them adopted TIF. EAV grew slightly faster for municipalities that would later adopt TIF.
The second row shows that in the period after TIF adoptions took place, gross-of-TIF EAV grew less rapidly for TIF adopters. The last row shows that the net-of-TIF EAV growth rate for TIF adopters was even lower, suggesting that growth (I) in the TIF district may come at the expense of property values outside the development area (G). In summary, if we make no statistical adjustment for the effects of other determinants, TIF adopters grew more slowly than nonadopters.
When we use the more recent six-county data in a multivariate regression model with statistical controls for local characteristics and sample selection, we no longer get the earlier provocative result of a significantly negative impact of TIF adoption on growth, but we still find no positive impact of TIF adoption on the growth in citywide property values. Any growth in the TIF district is offset by declines elsewhere.
The second study was designed with particular attention to land use. The property value data is broken into three land use types: residential, commercial, and industrial. Each TIF district also is identified by one of five development purpose types: central business district (CBD), commercial, industrial, housing, and other or mixed purpose. Thus, we can look separately at growth in municipal EAV by type of land use and type of TIF. Unfortunately, the data do not record EAV by land use within TIF districts, so we must settle for the growth in the tax base that is available to local governments. Most of the estimates of effects by land use type are not significantly different than zero. However, commercial and industrial TIF districts both show a significantly negative impact on growth in commercial assessed values outside the district.
The second study also extends the analysis to all 102 Illinois counties, which results in a much larger sample of municipalities (see Table 2). The TIF-base EAV (B) is unavailable, so we look at growth in available EAV. The simple means from the larger sample again suggest a negative effect of TIF on growth in property values. When we use this all-county sample to estimate the impact of TIF in a multivariate regression with statistical controls for other growth determinants and for TIF selection, there is a significantly negative impact of TIF adoption on growth in overall available (non-TIF) property values. This revives the earlier hypothesis that TIF adoption actually reduces property values in the larger community.
When we run separate regressions for available EAV growth by type of land use for the all-county sample, we see more evidence of a zero or negative impact of TIF on property value growth. Again, there is a significant “cannibalization” of commercial EAV outside the TIF district from commercial development within the TIF district.
The TIF district sample of the second study includes 247 TIF districts in 100 different municipalities in the six-county Chicago area. We match TIF base (B) and TIF increment (I) in each year to information for the host municipality. The key results are:
Conclusion
Tax increment financing is an alluring tool. TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable. The issues we have studied are (1) whether the targeting causes the growth or merely signals that growth is coming; and (2) whether the growth in the targeted area comes at the expense of other parts of the same municipality. We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.
Policy makers should use TIF with caution. It is, after all, merely a way of financing economic development and does not change the opportunities for development or the skills of those doing the development planning. Moreover, policy makers should pay careful attention to land use when TIF is being considered. Our evidence shows that commercial TIF districts reduce commercial property value growth in the non-TIF part of the same municipality. This is not terribly surprising, given that much of commercial property is retailing and most retail trade needs to be located close to its customer base. That is, if you subsidize a store in one location there will be less demand to have a store in a nearby location. Industrial land use, in theory, is different. Industrial goods are mostly exported and sold outside the local area, so a local offset would not be expected. Our evidence is generally consistent with this prediction of no offset in industrial property growth in non-TIF areas of the same municipality.
Richard F. Dye is a visiting fellow at the Lincoln Institute of Land Policy in 2005–2006. He is also the Ernest A. Johnson Professor of Economics at Lake Forest College, Lake Forest, Illinois, and adjunct professor at the Institute of Government and Public Affairs, University of Illinois.
David F. Merriman is professor of economics at Loyola University of Chicago and adjunct professor at the Institute of Government and Public Affairs, University of Illinois.
References
Anderson, John E. 1990. Tax increment financing: Municipal adoption and growth. National Tax Journal 43: 155–163.
Dye, Richard F., and David F. Merriman. 2000. The effects of tax increment financing on economic development. Journal of Urban Economics 47: 306–328.
———. 2003. The effect of tax increment financing on land use, in Dick Netzer (ed.), The property tax, land use, and land-use regulation. Cheltenham, UK: Edward Elgar, 37–61.
Dye, Richard F., and Jeffrey O. Sundberg. 1998. A model of tax increment financing adoption incentives. Growth and Change 29: 90–110.
Johnson, Craig L., and Joyce Y. Man (eds.). 2001. Tax increment financing and economic development: Uses, structures and impact. Albany: State University of New York Press.
Man, Joyce Y., and Mark S. Rosentraub. 1998. Tax increment financing: Municipal adoption and effects on property value growth. Public Finance Review 26: 523–547.
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In the United States we are used to thinking about the university within the context of its host city. The University of Wisconsin in Madison, the University of North Carolina in Chapel Hill and the University of Illinois in Urbana play major roles in driving the economies of those traditional college towns. Stanford University and Massachusetts Institute of Technology are examples of research universities that have served as incubators for new industries that have had significant economic and industrial impacts in Silicon Valley, California, and metropolitan Boston. The Julliard School in New York City, the Chicago Art Institute, and the film departments at the University of California (UCLA) and University of Southern California (USC) in Los Angeles also have had a significant effect on their local cultural landscapes.
After more than five years of focusing on the real estate development activities of U.S. colleges and universities, Lincoln Institute researchers are now investigating the roles that universities play in their host cities around the world. Will the National Autonomous University of Mexico (UNAM), a 733-hectare campus in the middle of one of the world’s largest cities, be able to maintain autonomy from the federal government through its land policies? Can a university that serves Northern Ireland’s Catholics and Protestants succeed in building a new campus in an area known for poverty and intractable political violence? What lessons can we learn from the redevelopment of a German military barracks by the University of Lueneburg that might be applicable to other universities’ development efforts?
Universities are major players in many activities not traditionally associated with the ivory tower. They are employers, purchasers, engines of economic growth, innovators, cultural meccas, branders of place and, increasingly, major real estate developers. This last role creates a web of opportunities and challenges that are not only important to the future of universities but also extend throughout the politics and economics of cities.
Formal examinations of the university’s role in acquiring, managing, selling and developing real estate have not been a topic of academic and professional inquiry in the U.S. until recently, but these issues are even less frequently discussed in international circles. There are few comprehensive case studies and literally no multi-continent examinations of how urban universities operate in real estate and land development, even though there is widespread agreement over its growing importance. The contributions of universities to their cities, the nature of state higher education policy and the increasing role of private market actors in university expansion are all important features of urban land development today, although they are realized differently in various places.
To facilitate further exploration and comparison of these issues, a dozen international scholars from Europe, South America, Asia and Africa gathered at the Lincoln Institute in March 2004 to present papers and engage in a critique of their work. They quickly moved the discussion beyond the case studies into a broader conversation about the role of the university in the history and the future of national policy toward cities and how such policy is affecting and is affected by the global economy.
The Role of the State
Outside the U.S., the university is almost always a public institution; therefore university land development is closely intertwined with and often an integral part of local and/or national planning and development policies. The levels of autonomy in real estate development decision making experienced by international universities are also dramatically different from those of U.S. universities, because of their relative attachment to the state as both an agency and public institution.
Anne Haila of the University of Helsinki pointed out the strong history of planning in Finland, for example, where plans are laws that carry great weight and supply clear direction to university land use planning. All university real estate in Finland is owned and managed by the national real estate company, which strives for efficiency in all of its real estate strategies. Conflicts between universities and the property manager became especially prevalent after 1999, when university departments were ordered to pay the full price of rent for their premises; if departments increased their space they had to pay more, but if they decreased it they were compensated. The reasoning behind the policy was to abolish the idea of “free space” and to make university departments aware that bringing in new research and other revenue-generating projects would help them pay for additional space.
Carlos Morales-Schechinger presented another example of the relationship between university land policies and the state in his review of UNAM in Mexico City. UNAM has been autonomous from the federal government for more than 50 years and has “abandoned any intention of becoming a developer.” Instead, UNAM considers the land’s use value as a sanctuary, an area secure from government intervention, and a place for study, natural spaces and public art. Approximately 29 percent (212 ha) of the land has been declared an ecological zone due to its unique flora and fauna.
Morales-Schechinger suggests that UNAM’s reluctance to engage in current real estate development is related to its past history, when some of its land was acquired from the territory granted to the peasants after the 1910 Revolution. The university serves nearly 260,000 students from all socioeconomic groups and thus views itself as an independent and often vocal critic of the federal government.
Shifting City Growth Patterns
Changes in the nature and structure of the nation-state brought on by economic restructuring, new political alliances, changing demographics, and the decentralization of governmental responsibilities and mandates can bring about radical changes in the real estate development policies of universities. Three participants focusing on universities in Portugal, Germany and Finland described the conditions of student demand and changes in the technology of work that were forcing both expansions and relocations of universities (or parts of them) in an increasingly decentralized urban environment.
Isabel Breda-Vazquez, speaking about the University of Porto (UP), noted the demographic shift in the city center, where UP was originally located, when it decided to expand and relocate its engineering and science facilities outside of the city, due to increasing demand for those courses of study and changing employment patterns. Problems associated with the subsequent decline of the city center included physical degradation, social vulnerability problems, functional obsolescence of buildings and spaces, reduced economic activity and consumption, and relocated student housing.
Changes in political alliances and the fall of the Iron Curtain reduced Germany’s need for military barracks, according to Katrin Anacker, and this has resulted in the large-scale conversion of one such facility to university property in Lueneberg. Increased student enrollment, a shortage of classrooms and the fact that university buildings were scattered throughout the city were important factors in the University of Lueneburg’s decision to take advantage of the military’s abandonment of a nearby barracks. Although dealing specifically with the conversion of military property into university buildings, Anacker’s paper may be read for its insights into the reuse of other types of obsolete or abandoned industrial buildings.
The growth demands on public universities and the decentralization of governance are occurring in the face of competing issues of demographic shift out of the city and revitalization efforts focusing on older parts of cities. Many workshop attendees identified the theme of abandonment during these discussions, in the contexts of either the state or local government or the university abandoning the city. Universities almost everywhere are placed in critical positions as they actively develop land themselves, and thus can be seen as agents of urban change—to both the benefit and the detriment of the city.
David Perry argued that to discuss the university as an engine of growth may be only part of the picture. The modern university may be an engine of the city’s development by dint of attrition, becoming even more important to central city renewal by filling the vacuum created by the withdrawal of once dominant agents in both the public and private sectors.
University Development Zones
Several papers addressed universities that are their own “zones of development” or “cities unto themselves.” Abner Colmenares presented the case of the Central University of Venezuela, a public institution in Caracas, and its Rental Zone (Zona Rental) Plaza Venezuela project dating from the 1940s. The notion of the Zona Rental dates back to 1827, when Venezuelan President Simon Bolivar granted real estate properties and farms to the university, to support its faculty and provide for its upkeep.
Adopting as its model Columbia University’s approach to the development of Rockefeller Center in New York City, Central University created and transferred the land to an independent foundation (Andrés Bello Fund Foundation for Scientific Development of the Central University of Venezuela–FFABUCV), which was mandated to promote scientific research by generating financial resources through the development of rental zone properties. By late 2004, more than 40 million square feet of construction had been completed, creating public spaces for the city, a subway center and numerous rental income sites, including a mall.
Wilmar Salim presented a similarly expansive project, the relocation of four universities in Indonesia to rural land formerly occupied by a rubber plantation. The government’s decision to relocate the universities from the capital city of Bandung to the Jatinangor area 23 kilometers distant resulted in the development of a new town to service the large campus. While the planning for the university was carefully conceived, such was not the case for the town that grew up alongside it. Salim notes several serious problems resulting from this relocation: environmental deterioration of the rural area due to the increased population and construction; lack of adequate planning in terms of infrastructure; and negative effects on community institutions caused by the influx of a population much larger than and culturally different from the indigenous residents.
Contested Space
The topic of the university as a contested space was addressed by Haim Yacobi of Israel and Frank Gaffikin of Northern Ireland, both of whom spoke of the challenges for urban universities located in places of conflict. In the Northern Ireland case, an attempt was made to set up a branch of the University of Ulster in an embattled area of Protestant-Catholic conflict and economic deprivation in Belfast. Although U.S. President Bill Clinton and British Prime Minister Tony Blair were present at the groundbreaking, the project faltered due to the lengthy development time and turnover of leadership, coupled with the existing problems associated with a historically contested space. The result was a distinct loss of credibility for the university in the community. Gaffikin stressed that when universities enter into these kinds of situations, they have to see the projects through with strong civic leadership.
Yacobi discussed the siting of Hebrew University on Mount Scopus in Jerusalem, a decision made by the government rather than the university, as was the case in Belfast. According to Yacobi, relocating the university after the 1967 war had a fundamental role in judaizing Jerusalem.
Fabio Todeschini of South Africa also examined the roles and responsibilities of the university in shaping urban space in a place that was already contested. He noted that the University of Cape Town has undergone enormous change since the apartheid era; currently more than one-half of the student population is black, although the majority of professors are white. The development and real estate practices of these and other universities have both created and been affected by significant symbolic, economic and cultural changes in their countries.
The workshop participants agreed about the seeming contradiction between the importance of universities to their cities and political economies and the lack of formal study of this phenomenon. The meeting confirmed that, both locally and globally, universities have enduring, indeed even increasing, levels of importance in their cities and regions. It is also clear that land development policies are equally important to the universities, to the development futures of cities and to the policy relationship with the private market.
Barbara Sherry is a doctoral candidate at the University of Illinois at Chicago in the Department of Urban Planning, a research assistant at its Great Cities Institute (GCI), and an attorney.
The City and the University Project
The Lincoln Institute of Land Policy launched The City and the University Project five years ago, to study the changing relationships between universities and their immediate neighborhoods, cities and the society at large. The Lincoln Institute shares this interest in the role that universities play in their cities with many other organizations. However, our attempt to understand this role is motivated by questions regarding urban assets and the use of those assets.
According to the currently dominant paradigm of enlightened self-interest, universities engage the city with the realization that the economic well-being of the abutting community is directly correlated to its own health. Through this project we are attempting to articulate a philosophy that universities should serve society as a whole, not just their abutters. Our goal is to extend the thinking, conversation and actions of university-community-city relations beyond this paradigm.
Under the leadership of Rosalind Greenstein of the Lincoln Institute, David Perry of the Great Cities Institute (GCI) of the University of Illinois at Chicago, and Wim Wiewel of the University of Baltimore, key actors from every conceivable side of university real estate development practices (including university administrators and faculty, developers, city planners and managers, journalists, nonprofit groups, and members of federal and state agencies) have been invited to participate in workshops sponsored by the Lincoln Institute. Perry and Wiewel have edited a book of U.S. and Canadian case studies contributed by some of these participants. Titled The University as Urban Developer: Case Studies and Analysis, this book is being published this spring by M.E. Sharpe, Inc., in association with the Lincoln Institute.
As a natural outgrowth of their work in North America, Perry, Wiewel and Greenstein expanded their research collaboration with an international seminar built on case studies from several continents. The workshop in March 2004 generated papers that will become part of a new edited volume, tentatively titled The University, the City and the State: Comparative Studies of University Real Estate Development.
In 2005 the Institute will convene a roundtable of practitioners and scholars to examine the university-city relationship in a variety of dimensions, including political, historical and philosophical. Another course is intended for neighborhood groups located near universities that face impressive challenges because of the particular role universities play in their district and their city. The course offers such groups the opportunity to learn how to best use their resources, relative to their university neighbors, to improve their urban environment.
The Institute will also offer a professional training opportunity for private-sector developers who work with and for universities that are extending their boundaries as demand increases for new laboratories, residential spaces, athletic facilities and other amenities. In addition, we are developing a special Web site for the urban university project that will facilitate communication among and between practitioners, policy makers and scholars.
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This article is adapted from a keynote address delivered by President Gregory S. Prince Jr. of Hampshire College in Amherst, Massachusetts, at a Lincoln Institute–sponsored conference in May 2003 at Lincoln House. Focusing on the topic “Universities as Developers,” the conference brought together some 40 college and university presidents and administrators who deal with real estate and development issues for their institutions.
“How do you build a relationship between an institution and the community in which it lives, in all of its forms?” This is a topic that I have struggled with for more than the 14 years I’ve been at Hampshire; building these relationships is an incredibly interesting process. I’m going to describe some of the salient points that have influenced the way I work on Hampshire’s community relations. It is not coherent. It does not start with a grand design. Rather, it’s inductive, based on my experiences and my observations. In addition, this interaction, this back and forth between thoughts and actions, between the college and the community, has been an important part of my own ongoing education about this critical topic.
This process for me began when I worked at Dartmouth College for 19 years. One of the things I found extraordinary at Dartmouth, which is so different from Hampshire, is that Dartmouth is taxed like any other institution, for profit or not, in the state. Because New Hampshire does not have the income tax or the sales tax, the town of Hanover is permitted to impose a property tax on all nonacademic facilities at the college. This tax policy has been in effect for decades, so it is an accepted part of life. People struggle over all the same issues that any academic community faces, but the conversation in town meetings is quite different when the college is paying just like anybody else. Granted, in Hanover tax dollars go to the schools where the faculty send their own children, so they have a vested interest. But, I saw a relationship between the college and the community that I found very healthy.
When I came to Hampshire College in 1989, everyone was talking about PILOTS (payments in lieu of taxes). I hadn’t thought much about PILOTS until I found out that the University of Massachusetts was making these payments to the town, and the town manager wanted Hampshire and Amherst College to start paying as well. So I learned to talk about PILOTS, but I felt there was something intrinsically shortsighted about the arrangement because it was based on a very narrow conversation about money and not about needs. Both Hampshire and Amherst colleges have made contributions to the town of Amherst for certain items, but we have not called them PILOTS, and we have not made them on a regular basis. Now, I am not saying that when a college or university does make a payment in lieu of taxes to a city it is necessarily a sign of an unhealthy relationship. All too often, however, the negotiations about what universities and colleges ought to pay to their host communities focus on the cost of police protection or snow removal, for example, rather than what it means to be part of a community with the rights and obligations that accompany citizenship, what are some of the critical needs of the community, and which ones could the institution most effectively address.
As I tried to figure out how to change the conversation, I wanted all of us to understand that we were having a dialogue. That is, when I’m having a conversation at Hampshire about the town, or with the town about Hampshire, I need to acknowledge that UMass and Amherst College are also part of the conversation. Wherever possible, we try to make sure that all three of us are communicating with the town; admittedly, this four-way conversation is complicated. I found in the process that the real discussion was about how to build sustainable communities. At Amherst College or UMass, sustainability is viewed differently than at Hampshire, a 33-year-old institution with little endowment. We need to figure out how to sustain our college over the long term within these different, complicated relationships. The PILOT conversation never seemed to quite get at that issue, so we’ve tried to expand it.
Broadening the Conversation
Two very different sets of experiences influenced my thinking about how to broaden and enrich the conversation with the community.
Urban Conferences
When I first arrived at Hampshire, I received a phone call from the chief counsel for the Transit Police in New York City, whom I had taught years before. He asked if Hampshire College would host a conference in association with the International Association of Chiefs of Police, bringing together representatives from several large urban communities. My first question was, “Great, but why Hampshire?” The response was that at that time, in 1989, people like Lee Brown (former police commissioner in New York City and now mayor of Houston) and Bill Bratton (former police chief of Boston and New York City, and now police chief of Los Angeles) felt that America had lost its cities but didn’t know it, and they were trying to figure out how to talk about it. They wanted to meet at Hampshire because it was the last place in the United States one would think would work directly with the police. The partnership that emerged between Hampshire and the International Association of Chiefs of Police did send a signal, and people noticed.
The conference brought together not just law enforcement officials but also the heads of all the major departments of ten major U.S. cities. Los Angeles dropped out at the last minute because of the Rodney King incident, but Atlanta, Boston, Chicago, New Haven, New York City, Phoenix, Seattle, Springfield and Tulsa were involved in the first group; other cities attended subsequent meetings. The police chiefs did not want mayors to come, because they wanted free and open discussion across professions and across cities. Because Hampshire paid for the conference, we were able to bring students into the process.
Among the most important outcomes of these conferences over several years was the creation of a forum for people involved in community schools, community policing, community health and other areas who never had a chance to converse, and that included the Hampshire students who contributed to an intergenerational discourse. In the first conference, we divided all the participants into groups, mixing professions and cities, and we gave them a four-block area of a fictitious city. Each group had three hours to write a proposal to a foundation on how they would use those city blocks to restore or revive the most problematic part of the city. They had access to unlimited funds, but out of the process came two critical principles that actually had very little to do with money and had everything to do with how people talk to one another and collaborate: (1) the need to have conversations across professions and across community boundaries; and (2) the need for every older adult committee or commission to have a younger counterpart organization. Guess who thought that one up? The students wanted to find a way to generate networks and initiate conversations in which common plans could be developed; they understood that no plan was going to succeed without that kind of cross-generational ownership. They came away with the realization that there is no single answer to what gets done; what is most important is how it gets done. Having conversations across boundaries, be they professional, historic, generational or institutional, may be the core value and core practice of community building.
We had three of these conferences over three years, and I think they had a profound effect on the strategic ways that people like Bratton and Brown and other law enforcement officers and community leaders changed their communities. These same principles of open conversation should be built back into relationships between colleges and universities and their communities. It’s not just about PILOTS or taxes. It’s about how you generate a conversation so that everybody is part of the process, respects the outcome and is committed to the sustainability of the community.
Cultural Village
The second set of experiences also began in my first year at Hampshire, a lovely campus of 1,200 students surrounded by 800 acres of farmland in Amherst, a small New England town in the western part of the state. Amherst also hosts the University of Massachusetts, a major state land-grant university with over 20,000 students, and Amherst College, with 1,600 students. A bus system links the colleges with the town, but many students complained that they were “in a little teenage encampment.” They wanted older adults and more activity around them so they could feel more connected to the community.
As I talked with people in the town and attended meetings on economic development issues, I learned that Amherst was fairly hostile to development. Lack of development intensified the feeling among town leaders that PILOTS were the possible recourse. As I began to understand that perceptions, strategies and concerns about development underlay the conversation about PILOTS, I began to look at land. Could land possibly help the community, since Hampshire had an abundance of land relative to available cash? Our land actually held the seeds for new possibilities in the form of creating a “cultural village.”
After many years of planning and negotiating, the grounds of Hampshire College are now being transformed into a center for nonprofit cultural and educational institutions that create more activity for the students and more economic activity for the town. The National Yiddish Book Center became the first new development when, in the early 1990s, it was looking for a new home. The center’s director, Aaron Lansky, is a Hampshire alumnus and he wanted to stay in Amherst where he had started the center. It took six years to persuade the boards of the college and the center to agree, but the center now has an absolutely gorgeous building with 40,000 volumes in the library. It runs tremendous events, bringing people together from all over the world. Hampshire College didn’t pay for it; the Book Center paid for it. But its building, its facilities, its activities and its staff are on our campus, enriching our life, putting people into our dining room, creating a more interesting intellectual environment for our students, creating economic activity for the town, and not using land that could otherwise be taxed.
The second member of the cultural village, the Eric Carle Museum of Picture Book Art, opened in the fall of 2002. One may well ask, “What does it do for Hampshire College to be the site of the first picture-book art museum in the U.S.?” The 40,000-square-foot building sits on land that Hampshire donated, but Eric Carle, the author of The Very Hungry Caterpillar, endowed the museum. It employs 18 people, including some of our students. So we’re enriching the faculty and cultural resources for our students, and the town of Amherst gets a large museum to sustain its economic base while limiting environmental impact on its land resources. Only 25,000 museum-goers were expected in the first year, but more than 40,000 attended in the first four months, bringing vitality to both the town and the college.
Intergenerational Viewpoints
These two experiences—developing the cultural village and learning from the urban conferences years before—make me feel that even though Hampshire is in a rural area, the principles that have guided community outreach are replicable even for large universities in urban environments. The key is to generate a conversation that crosses boundaries and in so doing weakens those boundaries. The process is ongoing and has led to many interesting new conversations.
Recently the town of Amherst approached me about developing open space on the edge of the campus for a commercial village center. The area now houses a well-known farm stand, but the town wanted to expand the amount of commercial activity. Through open conversation with the community, college trustees, students and residents, the land was purchased and given to Hampshire with the proviso that it be used to generate income to support the college. At the first public hearing on what to do with the land, we invited the entire community. All ages were present. A group of Hampshire students came to the meeting intending to argue against development; they wanted the area kept as open space. However, the first citizens to speak were in their 70s and 80s; they tore us apart about how terrible it would be to develop this area and how they had bought their apartments nearby because of this open beautiful land. In truth, their retirement community had been built while I was the president of the college, so I knew it, too, had been built on open land. Their attitude was, “we’re here and now we don’t want any more development.” The students understood these arguments, but found themselves thinking about how they wanted to behave when they were 75 years old. They didn’t want to imagine themselves as being opposed to growth and change, so this intergenerational conversation made a difference in their attitudes. Talks have continued and the plan is still in development, with a target date of spring 2004 to present it at town meeting.
Principles of Sustainability
Developing the cultural village and new developments in academic curricula converged to make sustainability an increasingly important issue. Suddenly, the cultural village was also becoming a laboratory. When the faculty, in response to issues in the cultural village, proposed seeking funds to do a sustainable campus plan focusing on the natural environment, I suggested that the most important principle in the plan be sustaining Hampshire College. My statement generated a very constructive conversation about what sustainability should mean for Hampshire. Let me summarize the principles that we developed.
1. The core goal in planning for the college must be the school’s long-term sustainability as an educational institution committed to providing students with the most constructively transforming liberal arts education possible.
2. In pursuing the first goal, the college must strive for human sustainability—for maintaining and enriching our capacity to live well together, for providing for the economic well-being of those who work at the college, and for nurturing their creative spirit and sense of fulfillment that comes from working at the college.
3. In pursuing the educational and social goals, we must recognize the fundamental relationship between the goals and the physical environment, and strive to achieve the sustainability of that physical environment to the greatest extent possible.
4. In pursuing the core goals of sustaining the college as an educational institution, we must strive to ensure that as an institution, independent of what its graduates accomplish, what we do makes a difference locally, nationally and internationally. Success in achieving the first three goals will ensure that we take a significant step in achieving the fourth goal. In effect, our primary aim is to provide the best education we can. We must model the behavior we expect of our graduates.
5. In pursuing educational and social sustainability, we must encourage entrepreneurial activity, invention and innovation, even if it entails the risk of failure.
6. In sustaining the human spirit of the college community, economic needs must be met, but with the recognition that we must also offer a meaningful mission, a stimulating and creative intellectual environment, and a supportive and enriching physical environment.
7. In seeking to create a sustainable, healthy and enriching social environment, the practical must be balanced with the artistic, the physical and rational with the contemplative, the values of individualism with those of community, and the needs of the college with those of the larger community.
8. In seeking to create a sustainable physical environment, efficient use of energy should be the highest priority, followed by other resource uses and resource disposal. Appropriate land use must be made another high priority. In maintaining the physical plant, we should consider the ease and efficiency of maintenance in terms of those who perform the work, as well as the level of resources needed to carry it out.
9. Wherever possible, physical infrastructure changes should include visible demonstration or interactive educational displays designed to educate about sustainability.
10. The cost of innovations in programs or in the physical environment should include the endowment required to ensure that those who follow us will not be burdened with their maintenance. The projects should be designed so they can be converted to other uses, removed or terminated.
The Board of Trustees reviewed the ten principles of sustainability, then challenged us on how we will interpret and implement them. In the process of working on these tasks, additional guidelines began to emerge:
1. Process is important: conversation and explorations can uncover interests as opposed to positions.
2. Geography matters. It may not be destiny, but it has a great deal to do with it and how you have to build and grow.
3. Focus on the culture, the economy and the environment comprehensively, not as separate subjects in conversations and plans, and involve them early.
4. Involve the community.
5. Involve young people, especially high school students, in any community planning.
6. Promote interdependence.
While these guidelines answer some questions, I struggle with other questions. One of particular importance to me currently is the issue of contiguity. Do our endeavors need to be within our current campus or town or can we successfully move into other communities? The five colleges in the region (Amherst, Hampshire, Mt. Holyoke, Smith and UMass) already work together on many joint programs and all of us have done a great deal of work in Holyoke, a small city about 15 miles south of Amherst that exemplifies all the problems of urban America.
We spent a lot of time trying to encourage UMass to move its art department to an old warehouse in Holyoke. We felt it would be a major boost to the community, but it looks as though it will not happen for equally legitimate reasons. Moving an academic department geographically from the rest of the academic community will increase intellectual isolation and fragmentation. Other ideas include building a five-college dormitory in Holyoke, and that possibility raises equally complex questions related to contiguity and community citizenship.
In both projects the issue is contiguity. Must you always maintain your place as a central, unbroken whole, or can you move outside of your special place? That’s the challenge. I think Hampshire has to somehow build a presence in Holyoke. We have made a huge investment there already, and I believe the city has incredible potential. I think we have to face the issue of opening ourselves up physically, not just maintaining the boundaries of our space but carrying ourselves outside of the institution as well. But others resist. What is exciting is the conversation and the process of engaging all of the related communities in that dialogue.
Gregory S. Prince Jr. is president of Hampshire College in Amherst, Massachusetts.
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Over the past 25 years, there has been a dramatic increase in the acquisition of conservation easements by nonprofit organizations. Privately held conservation easements, i.e., those held by nonprofits rather than governmental entities, have thus emerged as an important and growing tool for the preservation of natural and scenic features of the United States landscape.
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Many scholars and analysts have suggested that public leasehold systems could allow governments to benefit from a share of future increased land value. Some have even argued that other policy objectives, including stabilizing land prices, controlling land uses and facilitating land redevelopment, could also be achieved through public land leasing. Although these proposals are persuasive at the theoretical level, there is only limited evidence to prove that governments could achieve these policy goals in practice. My research on Canberra and Hong Kong, which have two of the world’s most well developed leasehold systems, examines some of the benefits and problems of public land leasing.
Land Value Capture
Legal scholars have treated property in land as a bundle of rights. According to this perspective, the government can retain the right to own land and assign to a private party the right to use, develop, transfer, inherit and benefit from land. The private party can enjoy the land rights only for a specified time and as stipulated in the land contract. Theoretically, because the government is the landowner, it could retain a portion of the land value increments by asking a lessee to pay:
The Hong Kong leasehold system seems capable of helping the government recoup a large portion of development windfalls from landholders. For the period 1970-1991, I found that the government recaptured, on average, 39 percent of the increased land value from selected land sites through land leasing. This captured value financed an average of 55 percent of the annual infrastructure investment during the same period. (1)
More important, the money collected from leasing is not a substitute for property taxes in Hong Kong. Owners of residential properties must pay annual rates to the government that are 5 percent of the estimated rental value of their flats. Owners of commercial real estate pay a 15 percent property tax on income earned from their rental premises. Combining all land-related revenues, the Hong Kong government could recover, on average, 79 percent of the annual costs of public infrastructure investment.
In Canberra, by contrast, the percentage of infrastructure investment funded by lease revenues was only 5 percent. (See Figure 1.) There are at least two reasons for the difference: the abolition of land rent for residential leases and competition from other cities that weakens government’s ability to collect higher rents on public land.
In the first instance, then-Prime Minister John Gorton abolished all land rent for residential leases in 1970, an action that his opponents charged was designed to rally public support for his reelection. It was estimated that the government transferred 100 million Australian dollars in equity to lessees at that time, resulting in the loss of an important source of revenue. This incident raised the broader issue of politics in public land management, although leasehold systems do not necessarily induce “rent-seeking” behaviors for private or political gain.
Hong Kong’s government seems able to minimize this problem by establishing a tight internal control over the operations of leasing land. It also provides public officials with generous remuneration and fringe benefits to reduce the temptation of corruption. This demonstrates that, in designing a public leasehold system, a government must consider the need for a system of checks and balances to prevent opportunism or political maneuvering. No single person or department within a government should have the unchecked power to decide on the method and timing of allocating land resources.
The second reason for Canberra’s low lease revenues is its keen competition from other Australian cities in attracting capital. If the city government charged high land premiums and rents, businesses and industry would go to other cities. Thus, competition weakens the government’s bargaining position in negotiating with developers on the amount of land premiums or rent for leasing public land. Although Hong Kong also faces competition from other Asian cities, such as Shanghai, Singapore and Taipei, differences in taxation, government structure, business ethics and culture make capital flight less likely in Hong Kong.
This issue of competition is particularly important for developing economies where local governments are eager to attract investment. They may be willing to compromise by collecting a smaller amount of land premiums and rent from both domestic and foreign land investors. The use of land as a source of public funds may require some level of inter- or intra-regional cooperation to prevent developers from playing one government against another.
Land Speculation
In Hong Kong the government’s reliance on land revenues as a source of public funds presents another problem: its financial interest in land conflicts with its public role in stabilizing land prices. The government has relied heavily on initial land premiums because demanding premiums from lessees during lease renewals has proven to be politically difficult. In addition, the assembly of land rights for land redevelopment involves high negotiation costs because most land leases in Hong Kong have multiple leaseholders. These high costs deter private developers from undertaking land redevelopment by acquiring lease rights and modifying contract conditions. As a result, the government is unable to utilize this method fully to recoup land value. As for the land rent, before 1997 the amount of annual rent paid by lessees was fixed and bore no relationship with increases in land value. Hence, the amount of land rent collected has been minimal. (2) (See Figure 2.)
These difficulties have encouraged the government to retain land value at the beginning of the lease. Yet, this method can work only if officials lease land slowly to private developers. A rapid disposition of land when its value is low would impede the government’s ability to recoup land value in the future. Restrictions on land supply, however, have encouraged private land banking and property speculation, leading to high land and property prices and making Hong Kong one of the world’s most expensive cities. (3)
Officials of other countries could avoid this problem by relying more on lease renewals, contract modifications and the annual land rent than on the initial assignment of leases to capture land value. The plausibility of doing so, however, remains an empirical question. The experiences of Hong Kong suggest that such an attempt could encounter strong public resistance and high negotiation costs.
Managing Land Uses
In principle, public leasehold systems allow the government to manage urban growth by incorporating land use regulations into land leases. If lessees do not develop their land according to the lease provisions, the government has the right to take back the land, a contractual right not available to the government when land is privately owned.
To take full advantage of this special land right, the government must be capable of enforcing the contractual agreements. Despite having the ability to repossess land, there is no evidence to show that enforcement costs under public leasehold systems are lower than those found under freehold systems. This is partly because drafting a complete land contract is impossible. Neither public officials nor the contracting party has perfect information, so they cannot account for all contingencies when they negotiate. Contract language is imperfect and subject to interpretation, creating enforcement problems.
In 1995, a special committee was established in Canberra to review its leasehold system.(4) Analysts found that enforcing the lease purpose clause was a major problem in a town called Fyswick because the lease conditions were too complex and ambiguous. Local officials could not evict lessees who breached their contracts. Rather, they gave lessees an amnesty period to regularize their land uses by applying for lease modifications. In the end, lessees paid their modification premiums, but analysts who conducted the study argued that their payments were far less than the fair market value of the land rights obtained by lessees.
In Hong Kong, using lease conditions to control land uses has created a different problem. Although land contracting could give the government the flexibility to control land development in detail on a case-by-case basis, it is extremely inflexible in adjusting to changes in the overall zoning plan over time. As mentioned earlier, the government incorporates land use regulations into land contracts as conditions at the beginning of the lease. Unless lessees initiate a lease modification, these conditions will remain until the lease expires, which could be as long as 50 years in Hong Kong (and 99 years in Canberra).
When the government needs to update the master plan or revise land regulations to accommodate new urban development, the revised rules may be inconsistent with lease conditions established years ago. This problem has created confusion about which planning standards developers in Hong Kong should follow. To make matters worse, any regulatory changes that infringe on the lessees’ contracted land rights may trigger lawsuits against the government. The legal liability has impeded the government’s ability to modernize its land use plan for districts where outdated lease purpose clauses are still in effect.
Urban Redevelopment
Under public leasehold systems, the government can deny a lessee’s application for lease renewal if it needs the land to rebuild the neighborhood or for other public purposes. It can then take back the land and compensate the lessee only for the building. Thus, in theory, leasing should reduce the public costs of land acquisition for urban renewal or other public uses.
The government, however, must wait for leases to expire before it can assemble land for urban renewal. The long duration of land leases could again create a problem. Nor is there evidence that compensation negotiations for buildings are simpler than for both land and buildings. In Hong Kong, issues of holding out and disputes over compensation are as common as in countries where land is privately owned.
Conclusion
The difficulties that Canberra and Hong Kong face in leasing public land show that leasehold systems in and of themselves do not resolve land management problems. This does not mean, however, that leasing is not a viable means to manage land. In Hong Kong, the government retains a large portion of increased land value for public infrastructure investment. Canberra’s public leasehold system enables the government to obtain low-cost land for building the Australian capital.
The important lesson is that policymakers should not set unrealistic expectations on what public leasehold systems can achieve. Failure to deliver their promises could frustrate a well-intended reform and bring the effort to a halt. Because no land tenure system is perfect, the debate should not focus on the choice between leasehold and freehold systems. They are not mutually exclusive. Instead, future research should concentrate on designing specific institutions according to different political, economic and social contexts to minimize problems associated with both systems.
Yu-Hung Hong is a visiting fellow of the Lincoln Institute this year. He previously taught at Hong Kong University of Science and Technology in the Division of Social Science, after earning his Ph.D. in urban planning from Massachusetts Institute of Technology.
Notes
1. See Yu-Hung Hong. 1996. “Can Leasing Public Land be an Alternative Source of Local Public Finance?” Working Paper, Lincoln Institute of Land Policy.
2. See Yu-Hung Hong. 1998. “Transaction Costs of Allocating Increased Land Value: Hong Kong.” Urban Studies 35, 9: 1577-1595.
3. See Yu-Hung Hong and Alven H.S. Lam. 1998. “Opportunities and Risks of Capturing Land Values under Hong Kong’s Leasehold System.” Working Paper, Lincoln Institute of Land Policy.
4. Members of the committee included Justice Paul Stein, Patrick Troy and Robert Yeomans. Findings of the review can be found in the Report into the Administration of the ACT Leasehold, published by the government of the Australian Capital Territory in 1995.
