Land Value Tax Won’t Fix San Francisco

Nice view. Shame if someone spoiled it with some buildings.

Photo by Ezra Shaw/Getty Images

I love the idea of a land value tax. Instead of taxing human labor (and disincentivizing work) or taxing accumulated capital (and disincentivizing savings) you tax land. You get revenue (good!) in a progressive way (because landowners are rich!) without any bad incentives (amazing!) and everyone’s happy. Noah Smith thinks it could greatly ameliorate the class tensions currently gripping San Francisco.

Here I’m afraid that I’m skeptical. There are lots of places in the United States of America—most places, even—where a tax on land value would be a great thing for housing affordability. For example, if Harris County in Texas replaced its property tax with a land value tax it would alter the incentives facing property owners in the Houston area. You’d get more building, less idle land, more housing supply, and lower rents. But in a place like San Francisco (or Cambridge, Mass.; or Manhattan; or Santa Monica, Calif.; or D.C.), the constraint on the supply of new buildings isn’t really taxes it’s zoning. The median value of an owner-occupied house in San Francisco is $750,900—almost double the California average and more than quadruple the national average. Under the circumstances, the financial incentives to build new housing units are already extremely strong. The problem is that it’s hard to get regulatory permission to build.

Now there are two ways you can think about the intersection of restrictive zoning and tax policy.

One is to simply take the restrictive zoning as an unchangeable given. In that case, urban buildings are actually a lot like land. The supply of buildings is essentially unresponsive to a change in financial incentives. Under the circumstances even really high taxes on buildings won’t lead to less building, so you might as well jack them up. More conventionally, you can place a high implicit tax on rental property by imposing stringent rent control regulations. The downside of rent control is that it destroys incentives to increase the housing supply and leads to scarcity. But if your zoning code has already destroyed those incentives then why not?

The other is to reject the notion that restrictive zoning is unchangeable. If a city wanted to have robust population growth, affordable housing, and lots of construction sector job opportunities then it could easily change its zoning code to allow for more housing. Having upzoned for density, prosperity, and environmental sustainability, it would find itself in a situation where a land value tax is much smarter than a traditional property tax. But for the already-built-up, already-expensive, restrictively-zoned cities of America you need to fix your zoning first.