Columbia Professor William Vickrey presented testimony on site value taxation at hearings organized by Elizabeth Holtzman, Comptroller of the City of New York, in December 1992. He had discussed these ideas informally at the luncheon meetings of the City Club of New York. His appearance was organized by a fellow member of the City Club who was the Comptroller's newly appointed Chief Economist, the second appointee under the City Charter approved in 1990. Nearly three years later, Vickrey's testimony was extended and was presented at a conference of the Committee on Taxation, Resources and Economic Development (TRED), September 29-30, 1995, and at the Levy Institute, November 2-4, 1995.
Vickrey was later awarded the Nobel Prize for economics but died before he could accept it. Columbia Prof. Lowell Harriss accepted the prize on Vickrey's behalf.
The following text is edited for typographical errors from the version of this paper posted on the School of Cooperative Individualism web site.
1. The Efficient Competitive State. Site value taxation means collecting the rents attributable to the availability in a city of goods and services produced under conditions of economies of scale, priced at marginal cost for efficient allocation. This would under competitive conditions be just sufficient to provide the necessary subsidies. (See "The City as a Firm.")
2. Urban versus Rural Site Value. To separate the site value due to urban attractions from that not clue to the presence of the city, it would be appropriate to use as the base for a site value tax for municipal or metropolitan purposes the appraised market value of the site in excess of a flat amount per square foot representing the value of surrounding land for agricultural or other purposes. This would also ease the difficulties of differential rates across jurisdictional boundaries. Value up to this flat amount could be the base for a land tax for state purposes .
3. Landlords as Beneficiaries. In starting from an inefficient situation, if labor and capital are fully mobile in the long run so that returns to labor and to capital are determined by nationwide or region-wide conditions, any gains from an improvement in efficiency would redound to the owners of the fixed factor, land. Example: If the landlords of New York knew what was good for them, they would vote enthusiastically for an added tax on site values to be devoted to lowering subway fares, especially for off-peak and for shorter trips, and improving the frequency and quality of the service. Assuming that the subsidy would be used efficiently and not frittered away on administrative overheads, aborted or grandiose construction projects (63rd. St ) or overgenerous fringe benefits (cf, the Lindsay settlement allowing for retirement after twenty years service on a pension equal to half of the final year's total wages, Inclusive of overtime and holiday premiums, resulting, after a year during which those with seniority rushed to pick the Juiciest schedules, in a spate of retirements of skilled workers and a serious deterioration in system performance), this would increase the value New Yorkers get for their outlays on subway service, increasing the attractiveness of the city and in the long run raising site rents by more than the tax.
4. Short and Long Run Impacts of Tax Changing. The differential impact of a shift from property tax to site value tax on properties on similar sites but differing degrees of current development may be the reverse in the long run of what it may appear to be in the short run. Although the owner of a vacant lot may find his taxes increased while a neighboring owner of a developed property may find his taxes decreased, in the longer run with the removal of the tax on improvements the vacant lot owner may find it profitable to put up a structure appropriate to the new conditions, recovering much or even all of his tax increase in the process, even in the face of a reduction in the space rental rates prevailing in the market, while this reduction in space rents may reduce the rents of the already developed property by much or all of the tax decrease.
5. Sprawl. Site value taxation in the long run tends to diminish urban sprawl, increasing densities and gross of tax site values and site rentals at the center. What happens at the periphery will depend on the elasticity of demand for space. Where the change to site value taxation is looked at as a universal trend, or in the case of sui generis cities, with low elasticity, peripheral densities and site values may fall; where one is looking at an individual city facing competition from other similar cities, elasticity may be high and peripheral density and site value may rise. Such tendencies will be opposed by zoning practices, and be affected by established transportation facilities.
6. Ricardian Equivalence. For a community relying exclusively on site value taxation, Ricardian equivalence is in full.sway and Keynesian fiscal policy is impotent. For a situation where various site values increase proportionally at the same rate over time, any debt is in effect a joint mortgage on the site value, and any deficit financing will reduce the market value of sites by the same amount as the reduction in current taxes, leaving the taxpayer in effectively the same position.
Where site values increase at different rates, there may be some shifting of net worth among property owners, but the overall macroeconomic effect is likely to be much the same. In any case there may still be some advantage to deficit financing, if the interest rate on the public bonds is lower than the rate on private mortgages or the risk-adjusted return on private investment. This may be due to scale economies or lower transactions costs for the larger transaction, better credit rating of the public agency than of private parties, or, in the U.S., to the exemption of interest on state and local public bonds from the Federal income tax. There is also a facilitating of the market in real estate as less private funding is needed for transactions where the property has In effect a built-in assumable mortgage.
Where the only tax involved in debt service is one on all real estate inclusive of improvements, the presence of a debt can have serious consequences. An investor putting up a building is thereby assuming, for the time being at least, an increased share in the burden of servicing the debt, subject to being partially relieved later by subsequent builders. This is already a substantial burden over and above the tax levied to finance current outlays, but if a point is reached where doubt is cast on the likelihood of such relief, the doubt may become self-realizing and construction come to a complete halt. Attempts to use deficit financing to take advantage of interest rate differentials become unwise.
To the extent that a jurisdiction relies on sales, income or other consumption taxes, debt does not affect property values in this way, Ricardian equivalence does not hold, and Keynesian fiscal policy remains effective.
7. Rents for Roadway Use. An important type of site for the use of which payments should be made to the public fisc consists of congested streets and highways. Ideally, charges for space use should correspond to the marginal social cost of each such use, regardless of what notional capital value might be assigned to the land involved. Street space has a scarcity value bearing little relation to the value of nearby lots in private ownership, given the very high cost of street widening or otherwise varying the capacity of facilities. Adjacent street space may have a drastically different scarcity value depending on patterns of traffic flow.
7a. Parking. In the case of on-street parking, charges should be adjusted by time and place so that there are nearly always empty spaces available within a convenient distance of any given destination, where parking is permitted at all, but charges are reduced to zero when empty spaces are plentiful. The usual form of parking meter is incapable of accomplishing this. Alternative methods of collecting charges are available, one requiring very little capital investment being the use of simple parking cards purchased in advance in convenient denominations, to be punched or mutilated to indicate the time of use to be covered, according to posted fee schedules, and displayed on the vehicle. Other methods involving more investment in curbside equipment may enable the charge to be determined at the time the parker leaves, making it unnecessary to guess at the charge in advance, and permitting the charge to be determined in terms of actual vacancy rates, tracking marginal social cost more closely than is possible with a preset calendar. Commercial and official vehicles should not be exempt. For trucks in the New York garment district, for example, adequate parking charges would encourage more rapid loading and unloading and discourage the use of parked trucks as warehouses, vastly improving the efficiency of the operation as a whole. Delivery trucks making a habit of double parking, should be required to carry a meter to be set to accumulate a charge at an appropriate rate while double-parked, evidenced by a flag or other visible display. Hopefully this would end the ridiculous practice of delivery trucks double-parking just ahead of a bus stop, thereby causing more interference with bus service, to say nothing of traffic generally, than if they had parked in the stop.
7b. Queueing. For bridges, tunnels and other bottlenecks where queuing regularly occurs, tolls should be varied by time of day, adjusted until the toll at any moment corresponds to the product of the expected time span to the next gap in the flow times an average value of delay per vehicle hour. For a typical morning rush-hour congestion period the results can be that each regular user could leave home later by as many minutes as he now expects to waste in the queue and arrive at the destination at the same time as now, paying a toll in excess of the off-peak rate, if any, by a differential equal to the value of the time saved as evaluated for those with a somewhat lower than average value of time.
Where a flat toll is already in effect, the differential peak toll can be used to lower all tolls by a flat amount, leaving nearly everyone substantially better off. If nevertheless there are those who regard their time as of so little worth and who must nevertheless travel so close to the peak period that they would be less well off on balance, they can be allowed to wait in a space out of the main flow of traffic for an amount of time equal to the expected queuing delay under the former conditions, and then obtain a voucher allowing them to use the facility at the former toll rate, if any. Everyone would thus have available an alternative substantially equivalent to present conditions or slightly better, if it ts preferable, thus guaranteeing that no one will lose by the change. (The evening rush-hour situation, being predominantly origin-timed rather than destination-timed, is not symmetrical and somewhat less clear-cut . ).
It is essential that the charge vary gradually rather than simply on a one-step peak period versus off-peak period basis. This is not only to avoid inducing aggressive driving or lagging around times of substantial toll change, but even more importantly to provide incentives to all rush-hour users to adjust their timing even by a snail amount. Otherwise very few users at the middle of the rush hour will shift and little improvement in conditions at the height of the peak be realized.
For regular users the mechanics can be handled by electronic or bar-code identifier units. For casual users one can collect a flat maximum rate and give in return a rebate voucher with scratch-off spots, redeemable as lottery tickets or otherwise. This should enable the toll collection to be handled without increase in toll-plaza facilities. Where tolls are collected in one direction only, tolls can be charged in the tolled direction on the assumption of a peak return trip, a rebate being credited on the return trip, automatically. In the case of regular users having vehicle identifier units, or on the stamping of receipts in registers that need not be at the toll plaza, those facing tolls on the return trip can he allowed to pick up timed and dated vouchers along the non-tolled direction and get them stamped for a potential refund at the tolls on the return trip.
7c. Network Congestion. For congestion on a network of city streets or highways, charges can be assessed by requiring cars entering the congested area to be equipped, permanently or temporarily, with identifier units (electronic, bar code, or radar scanned) which can be scanned by wayside equipment suitably scattered around the area so that each vehicle can be checked into and out of suitably arranged zones. The resulting records can be assembled, appropriate charges calculated by computer and billed to registered owners or charged to credit or debit card accounts at suitable intervals.
Generally the effect would be to increase traffic speeds and reduce pollution and carbon dioxide emissions, in addition to providing badly needed revenues. In seriously congested conditions amounting to incipient gridlock, such as are prevalent in midtown Manhattan over most of the day from 11am to 7pm, the results are likely to be an increase, rather than a decrease, in the total volume of movement accomplished over the day as a whole, by reducing the density of traffic during peak hours so that the fewer cars move sufficiently faster that the flow in vehicle-miles per hour is increased. More movement, faster movement, more revenue, less pollution!
Casual users can be dealt with in a number of ways. The tightest would be to require all those not equipped with identifier units to pick one up at a "port of entry" for a deposit related to the period of validity, subject to a refund on surrendering the unit at departure. Or licenses for a brief period can be sold for a flat fee, or free subject to a restriction on repetition. Some routes for through traffic can be designated as free routes.
7d. Taxicabs, etc.. For taxicabs, to permit the charge to be passed on to the customer, and for those wishing to preserve their anonymity, on-vehicle apparatus can be provided which on entering a zone will begin charging at a rate per mile indicated by a suitably modulated signal emitted from the scanning equipment, the charge being debited against a stored amount periodically augmented by inserting a suitable card or token purchased anonymously.
8. Fire Protection. Superficially it might seem that the cost of fire protection is to be charged to the combustible structures that benefit directly from the protection. From the standpoint of marginal social cost, however, nearly all of the cost of fire protection is properly charged against site value. The cost of providing a given grade of protection to a given area is only slightly affected by the number of structures in the area. There is the wear and tear on equipment used and the risk of injury to personnel during the actual fighting of fires, plus the possibility that response time to a second fire may be longer if the local unit is out fighting a first fire and a unit must be brought from further away. Although dense development is associated with traffic congestion that may lengthen response times of fire companies, this cost is to be charged directly to the traffic, and not to the property improvements.
These elements are small compared to the wages of the crew on standby and the capital cost of the firehouse and equipment, amounting probably to less than 20 percent of the total. This minor part of fire protection cost can appropriately be assessed on the Improvements, including tangible personalty, possibly according to what an insurance premium would be for a standard degree of coverage. The owner of tennis courts next door to a fire house who does not directly use the service can nevertheless afford to devote the land to this use only if the convenience of the location for his customers enables him to charge fees yielding a return to the land comparable to what it could get in other uses. He thus benefits indirectly from the presence of the fire house, without which his customers would be scarcer.
9. Other Utilities. Similarly, for other utilities such as water, sewage, gas, electricity, telephone, cable, mail delivery, and the like that are available at that location, the fact that the occupant does not make direct use of one or more of these facilities should not excuse the owner from contributing to the cost of carrying these services past his property, any more than one can expect to get a reduction in a car rental charge because one will not be using the headlights, the windshield wipers or the back seat. As matters now stand, electric and gas bills include the cost of carrying the services past the tennis courts and disproportionate shares of .the cost of carrying the services past row houses and two-acre lots. The results are thus not only inefficient but regressive. In addition, land rents and land prices are higher by reason of the availability of these services, but not by as much as if they were available at marginal cost.
9a. Postal Service. In the case of postal service, an appropriate arrangement would be for the local pick-up and delivery service, where most of the cost varies relatively little with the volume of mail, and possibly also some window services, especially in smaller communities, to be subsidized out of local urban site value taxes, with the character of the service in terms of frequency of pick-up and delivery, mailbox locations and the like, determined by local governments in terns of local conditions and desires. rather than in accordance with bureaucratic rules and budgets devised in Washington. Bulk sorting and transportation of mail would still be a national responsibility, much as TVA generates and distributes power on a wholesale basis, leaving distribution in local hands.
10. Competition Among Cities. As long as efficient marginal cost pricing financed by site value taxes is rare, and labor and capital are mobile, landlords can gain by the adoption of the more efficient modality and thereby secure net rents reflecting the degree to which their efficiency is greater than that of their competitors, As the practice becomes widespread, however, for those cities that are in competition with other cities of a similar character, net after tax urban site value will be competed away through lower relative prices for their products, to the benefit of the population generally. Net non-urban rents, such as those reflecting agricultural productivity, may remain, as well as urban rents in cities having some degree of uniqueness, such as a harbor, an attractive environment, or a salient position in some special activity such as entertainment, fashion, or finance.