Professor Gerald Korngold has written a useful, thorough, and persuasive argument for the expanded use of land value capture, or LVC. His report is published by the Lincoln Institute of Land Policy, an organization that has long supported the economic work of Henry George.
George argued that real estate investors should profit from the fruits of their own labors but not those of the community. This means that these investors may benefit from the increased value of their improvements and additions to the land but not from land appreciation brought about by external factors. Increases in land value caused by the community should be recaptured by the community.
In the opening section of the report, Professor Korngold defines his terms, noting that “LVC enables communities to recover and reinvest land value increases resulting from public investment and other government actions.” (P. 6.)
For example, if a municipality constructs a subway station that causes neighboring property values to rise, owners should share some of that unearned gain with the public, thereby allowing the community to make further infrastructure investments. More controversially, a community might take a similar approach to regulatory changes that enhance property values, such as upzonings that permit greater density.
Subsequent chapters of the report systematically examine a range of LVC tools. Those arising from infrastructure investments include exactions, impact fees, linkage fees, special assessments, and mandates for inclusionary housing. Landowners who benefit from a municipal project might be required to transfer some of the unearned gain back to the community that paid for these boosts in value.
When regulatory changes benefit an owner, by contrast, the municipality might demand contributions of infrastructure or cash in exchange. For example, an urban owner that receives permission to build above otherwise applicable height limits might be required to fund improvements to a nearby subway station that will be burdened by the increased traffic the enlarged building will attract or might be required to build those improvements itself.
In either case, the community provides a tangible benefit to the landowner that increases the value of the owner’s land, and the owner must reciprocate at least partially. Outcomes such as these are both efficient and fair, as they expand overall land value while internalizing economic externalities. They also provide another funding option for stressed municipalities that desperately need infrastructure enhancements.
There are, of course, impediments and counterarguments. LVC must be permitted by applicable enabling legislation, and some states flat-out prohibit one or more of these devices. LVC can cause cash-flow problems for owners whose increased land value leads to imposition of a tax or other mandatory payment, as they may not have the cash on hand to pay for the augmented value of their land. There are line-drawing problems: How close to the subway station must a lot be for it to be included within the class of beneficiaries? There are also valuation problems, such as how to appraise a required donation of open space for use by the public.
Some landowners view LVC as contrary to their property rights. Several LVC devices raise regulatory takings issues, not all of which have been addressed by the Supreme Court.
Moreover, once LVC contributions arrive, how should they be spent? These payments might be used to benefit the neighborhood immediately surrounding the project, the residents of which may be enduring in-kind costs such as increased density or traffic. Alternatively, the funds might be spent more broadly to enhance equity throughout the community.
Perhaps most important is the question of who should make these decisions. Many land use bodies are subject to capture by real estate interests. Historically under-represented groups may not have a seat at the table when these difficult choices are being debated.
Professor Korngold makes a compelling case for the expanded use of LVC. There are ever-increasing needs for infrastructure. The more the country urbanizes, the greater the demand and need for amenities. As incomes grow, residents expect higher levels of service from their communities. In addition, the expansion of regulations such as environmental laws leads to the need for upgrades.
He notes that ad valorem property taxes indirectly import some aspects of LVC. As a new public project increases land values nearby, assessed valuations increase in tandem, and the owner’s taxes rise as well. But property tax increases are capped in many jurisdictions, in some instances as a direct response to past tax increases that resulted from infrastructure upgrades. “Some would argue that LVC charges for benefited properties should be distinct from the property tax and instead become analogous to a fund for initial capital investments. The property tax could then be used for ongoing operational municipal expenses.” (P. 10.)
One question the work does not directly address is the extent to which it might be wise to mitigate LVC concepts in some circumstances to enhance housing affordability (though it does discuss the use of funds raised in this way to build lower-cost housing elsewhere). The internalization of externalities causes homebuyers to bear the full cost of their homes. This may seem fair – you should pay for what you use – but it elevates housing costs. When might a community forego this type of internalization to reduce home prices?
Whatever the benefits of LVC, perhaps it needs to be balanced against other considerations in cases like these. Professor Korngold makes a compelling case for the wider use of LVC; perhaps a longer work might also examine which settings are best suited to these wider uses.
While this scholarly work is billed as a “Policy Focus Report,” it reads like a law review article. It is thoroughly researched, informative, well-documented, persuasive, and enjoyable to read.
It does differ from a traditional journal article in one regard, though, namely the manner in which it is presented. This report is published in full color, with photographs, drawings, graphs, and tables deployed throughout to illustrate key points. It is laid out in two columns, is broken into small sections, and makes ample use of sidebar comments. All of these features make it far easier to read than the typical journal article and, in many ways, more useful. (Law review editors and online database services, take note!) It thus pairs the academic features of a journal article with the readability of lighter material.
Professor Korngold’s Policy Focus Report is a valuable and thought-provoking addition to the literature. It addresses an old and useful device that might be used more frequently to solve several related municipal problems. To the extent that local leaders are already using this device, Professor Korngold’s report encourages them to expand that use. To the extent that they are not, it inspires them to consider it and to urge state legislatures to allow them to use it more frequently.
