Faculty Profile

William Fischel is professor of economics and the Patricia F. and William B. Hale ’44 Professor in Arts and Sciences at Dartmouth College in Hanover, New Hampshire. He was a member of the Hanover zoning board for 10 years, and has long served on the teaching and research faculty of the Lincoln Institute. He has written more than 50 articles and three books about the related topics of local government, land use controls, school finance and property taxation. Fischel’s most recent book pulls those themes together under the title The Homevoter Hypothesis (Harvard University Press 2001), and he will discuss them at a course at the Lincoln Institute on April 25.

Land Lines: The term homevoter doesn’t seem to be in any dictionary. What does it mean?

William Fischel: I coined the word to convey the theme of my book. My original title was Municipal Corporations and the Capitalization Principle, but when I tried it out on people their eyes glazed over. I had to think of something catchier, and homevoter popped into my head. In local government elections, residents tend to “vote their homes.” For example, if the school board proposes a tax increase to reduce class size, most homeowners will consider the impact of the taxes and the better school quality on the value of their homes as well as on their personal situations.

LL: What’s the difference between people voting their personal situations and voting their homes?

WF: If people voted only according to their immediate situation, almost every school referendum would be voted down. Since the last of the baby boomers graduated from high school in the late 1970s, only about a third of all American households have any children in public school. If people only cared about whether school expenditures benefited them directly, the two-thirds of voters without kids in school would vote down school referenda and save themselves some taxes. The reason they usually don’t is that they know that scuttling the local schools will drive their home values down. They may not like paying taxes, but most voters will not actively oppose a reasonable school budget.

LL: Why would home values override immediate concerns about taxes, since most homeowners plan to keep their houses for a long time?

WF: For the great majority of homeowners, the equity in their home is much larger than their holdings of stocks and bonds and savings accounts. An owner-occupied home is a huge asset, and it is nearly impossible to diversify the financial risk of holding on to it. People who own a lot of stocks can diversify their holdings by buying mutual funds. But you cannot diversify your homeownership portfolio by buying a tenth of a house in Cambridge, a tenth in Springfield, a tenth in Pittsburgh, and so forth. You are stuck with all your homeownership eggs in one local basket. If the schools are declining, so is much of your investment. You don’t have to plan to sell a home soon to be concerned about its value, just as you don’t have to be ready to retire to be concerned about your retirement investments.

LL: So even people who will never have kids are interested in the quality of public schools?

WF: They sure are, especially when they are buying a house. Many economic studies of housing values have found that the major determinant of house price differences among communities is the quality of public schools. Further, the difference in home values is not reflected in the cost of the structure but in the land value. If your home burned down and you decided to sell your lot instead of rebuilding, the price of the lot would reflect the value of the community’s public assets such as its schools. The structure itself would just reflect the cost of building it.

LL: What other community assets do homevoters pay attention to?

WF: Lots of things, including neighborhood traffic, local parks, good (or bad) views, local air quality, open space, crime rates and public libraries. Like school quality, all of these community characteristics are capitalized in home values if they are better or worse than average.

LL: Capitalized? As in the stock market?

WF: Yes, just as in the stock market. If Merck Pharmaceuticals develops an effective drug to treat cancer, the value of Merck stock will go up. That good news is quickly capitalized in (or reflected in) the price of the stock. If a particular city found a good way to control traffic noise and congestion, the value of homes there would rise. In both cases, the stockholders would be pleased.

LL: How is a city like Merck?

WF: They are both corporations. One is a municipality and the other is a business, but each has a corporate identity that is independent of its owners or residents. The main difference is that a city’s major stockholders, its homeowners, cannot diversify their assets. So unlike most business stockholders, residents pay close attention to what their corporation’s managers are doing. They make managers do their business in the open most of the time, and they make their board of directors—the city council—stand for election more frequently than business corporation boards.

LL: What about the role of other stakeholders, such as local business owners?

WF: Business people are usually behind development plans, and city councils pay attention to them. But in the municipalities where most people live—cities and towns of less than 120,000 population—homeowners have to be persuaded that the proposed development will do them some good. Just creating jobs and lowering taxes is not enough in most places. A job-creating, tax-paying factory whose traffic, noise and pollution devalue the homes of nearby residents will have a hard time getting permission to locate there. Homevoters may not be as active as developers, but they are usually more numerous and vocal, and few city councils can afford to ignore their concerns.

LL: And how do renters benefit from the system?

WF: Renters get the benefit of municipal services that are more consumer-oriented as a result of homevoters’ activism. But renters have a shorter time horizon because when they move they neither gain nor lose from the local improvements they leave behind. This may explain why renters tend to participate in local government less than homeowners. They don’t have the long-term financial stake that even the short-term homeowner has.

LL: What’s the downside of homevoters’ influence?

WF: The downside is exclusionary zoning. Zoning is a necessary tool for local governments to rationalize development. The problem is that homevoters can overuse this tool. Because homes are not a diversifiable asset, homeowners often become risk averse to any development that might reduce their home’s value. The NIMBY (Not In My Back Yard) syndrome is most often seen in homeowners, and my theory says they are rational to behave this way. But what is rational for the homeowners in a single community might not be rational for the larger region. Siting low-income housing, power plants, half-way houses and the other necessary but sometimes unlovely developments is impeded by having people too worried about their home values.

LL: Is there a way to control the bad side of homevoting and still keep the good side?

WF: Understanding where the problem comes from is a start. People who oppose low-income housing projects are not necessarily opposing low-income people. They may be mainly worried about their home values. One way to deal with that would be to offer home-value insurance for neighborhoods that feel threatened by proposed land use changes. An innovative program in Chicago offered home-value insurance to help forestall “panic selling” and thus stabilize neighborhoods with respect to both home values and socioeconomic composition. It might be worth extending home equity insurance to other situations in which neighborhood change raises the anxieties of homeowners.

LL: But people have lots of reasons to oppose neighborhood changes besides loss of property value.

WF: It is rare for people to mention property values in public discussions. It sounds too selfish to talk about in a public forum. But economists know that most of the things that people do talk about, such as traffic, noise, open space and service costs, clearly affect people’s home values. Whether owners are consciously relating these characteristics to home values or simply intuitively aware of this connection is hard to say. If developers could take home values off the table in such debates, it might go a long way to overcoming the NIMBY problem.

LL: You mentioned earlier that the quality of community life was reflected in land values. Would this argue for a tax on land rather than improvements in order to finance local services?

WF: I think it does, and in fact that’s what most property taxes really do tax. Local development is a highly regulated activity because of zoning laws, planning reviews and environmental impact statements. I believe that local land use regulation is tight enough to make buildings essentially indistinguishable from land as a tax base. Take the example of the home that burns down. The buyer of the lot typically has to put up another home of the same type, and the tax payment on land and structure will be the same as before. For the most part, owners of homes and businesses in zoned communities have only one allowable use for their land, so that increasing or decreasing local taxes is not going to affect that use. That’s exactly the same virtue as a tax on land. Beyond that, taxing property value gives voters cooperative incentives on the zoning front. Homevoters won’t want to trash another side of town with an unfriendly land use, because devaluing other people’s property would cause property taxes to be shifted to the remaining homeowners.

LL: A land tax is what Henry George advocated more than 100 years ago. Are you saying that the local property tax already is a land tax?

WF: Yes, within certain contexts. It is quite a bit like a land tax in largely residential communities and for most new development. Zoning limits a developer’s alternatives, so the tax rate will not alter his behavior. A general property tax would not be like a land tax, however, if it were administered by a large jurisdiction such as a state or national government, unless those governments also had local zoning controls in place. It is the combination of local zoning plus the property tax that approximates a land tax. Henry George’s ideas came in through the back door of suburban zoning and property taxation rather than through the front door of state and national taxation.