Last week, Jim Bacon’s column (“Taxula Rasa”, May 19, 2003) opened an important line of inquiry concerning property taxes and consumption taxes. In this edition of The Shape of the Future, we expand on Bacon’s observations concerning property tax outside the Clear Edge.

 

First, what is a “Clear Edge?” Our use of the term comes from Ed McMahon of The Conservation Fund. Ed cites the need for a Clear Edge around urban areas as a fundamental principle for creating “better development patterns in Virginia.” The concept of the Clear Edge is, however, as old as human civilization and is immediately evident to anyone who has visited historic as well as contemporary urban and nonurban areas of Western Europe. In contemporary application, the Clear Edge might be called, alternatively, the “urban service district border,” the “urban growth boundary” or the “inside edge of the greenbelt.” Whatever it is called, the Clear Edge demarcates the boundary between Urbanside and Countryside.

 

Surprisingly, despite dysfunctional scatteration of urban land uses across the U.S. landscape over 50 years, a rational place to draw a Clear Edge is not hard to find around most of the Cores of New Urban Regions. Likewise, a Clear Edge can be located around urban enclaves in the Countryside.

 

Bacon’s column nailed down the rationale for taxing land but not improvements inside the Clear Edge. Owners of vacant land wind up paying a larger share of the cost of providing urban services, making the land more expensive to hold for speculative purposes and encouraging conversion of the land to its most profitable use. By relying upon market mechanisms to alter economic behavior, the tax is far more efficient than complex land-use codes at creating compact, sustainable settlement patterns. 

 

Outside the Clear Edge, there are two options for the property tax:

 

1. Abandon the property tax altogether and rely on user fees and consumption taxes to pay for public services

 

2. Tax the improvements rather than the land – the inverse of tax policy inside the Clear Edge. 

Abandoning the Property Tax

Outside the Clear Edge

 

From a tax strategy perspective, a shift to user fees for urban services outside the Clear Edge makes a great deal of sense. Most functions of contemporary state and sub-state governments, even in so-called “rural” areas, are to provide urban services such as roads, water, sewer, fire, rescue, police and education. The cost of providing these services is significantly higher in scattered locations. 

 

Charging a user fee for services outside the Clear Edge, based on the cost of providing those services, would discourage the scatteration of urban land uses. (See the ubiquitous Cost of Services Curve documented in my book, The Shape of the Future.) Bacon’s use of fees to allocate the true cost of transport -- congestion fees and weight-distance charges -- would serve as a model for urban services in the Countryside.

 

Inverse Henry George

 

The concept of taxing only improvements is anathema to champions of Henry George, the influential 19th century theoretician who advocated a tax on land, not improvements, upon whose concept the idea of taxing land inside the Clear Edge are based.

 

However, “Inverse Henry George” applied outside the Clear Edge may provide a transition to a pure fee-for-service system. It would be easy to administer, and it would change economic incentives – making landowners think twice before scattering urban land uses over the Countryside -- though perhaps not as dramatically as the fee-for-service system would.

 

I am not convinced that an “Inverse Henry George” tax system is a good idea, but I advance it here to put the issue in sharp focus.

 

If one were to apply “Inverse Henry George” outside the Clear Edge, the first step would be to find an equitable way to treat land improvements that support economic activity such as farming and forestry, as opposed to scatering urban uses such as subdivisions and retail clusters. I would suggest treating barns, silos, fences, wells, irrigation ditches and other improvements as capital investments, just as tractors, log skidders and forest management software are now. The “property tax” on a farmer’s land would be on dwellings and recreational improvements not required for productive use of the land. Planners already make this distinction for land-use control purposes on a regular basis.

 

The Objective of Property Taxes

Outside the Clear Edge

 

The primary goal of any tax on property outside the Clear Edge should be two-fold:

• Provide revenue to cover the cost of public services.

• Encourage the preservation of extensive land uses, not only to preserve farming and forestry as an economic underpinning of the community but to protect distinctive rural landscapes that provide a "green" context for urban enclaves where most citizens in the New Urban Regions actually live.

Many local governments have altered their tax policies in an attempt to achieve the latter objective. Some low-density jurisdictions have designated 70 percent or more of their land area to land-use categories -- agriculture, forest and open space – that qualify for special tax treatment. Unless these tax zones are coupled with preservation easements, however, most observers see these zones as encouraging long-term land speculation. Even conservation easements provide for some future land subdivision. Relying on land-use tax valuation to preserve Countryside resources simply is not prudent.