There are large areas of a city that don’t pay any property tax, though. These include public benefit, non-profit institutions such as schools and churches. It includes the public right of way reserved by cities for streets. And in the last half-century, it has also come to include large, limited access highways that have plowed through historic areas and now occupy large portions of valuable city land. These are considered public utilities in the same way that streets are, but there are some important differences that should make us reconsider the way we approach highways and the land they occupy.
1. Fair competition between modes
The tax-exempt status of interstates is
just one more subsidy in its favor that prevents fair competition between
modes. Railroads are significantly
safer, cheaper, more fuel efficient, and environmentally friendly per passenger
mile and ton-mile than highway travel.
But a slew of factors keep railroads from being able to successfully
compete for inter-city passenger travel and put them at a disadvantage when
competing with freight trucks. Railroads
pay all of their capital and operating costs, from right-of-way acquisition to
construction. Highways, meanwhile, pay
for only a fraction of their costs through the gasoline tax. Property taxes are one more piece of this
puzzle.
2. Highways expand to take up lots of valuable land
The primary purpose of property taxes may be to keep localities solvent, but they also perform another critical function that highways are notably exempt from. The portion charged to the land helps to pass onto property owners the city’s opportunity cost for that land. It discourages property owners from sitting on valuable undeveloped or underdeveloped properties in the middle of the city that could be adding value to the city rather than detracting from it. Empty or underutilized land detracts from the city by disrupting the economy of density that makes the city a generator of wealth and quality of life.
While interstates may help expand the network effect of a city in some ways, they also are extremely disruptive in others. They replace an organic and time-tested way of building cities – that has significant room for growth – with a sprawling form that collapses into congestion at relatively low densities and must eat up large amounts of land to grow. This auto-dependent form has a limited ability to provide the dense aggregation of interactions that the traditional city requires to be economically successful. Interstates should be subject to property taxes that will compensate the city and force transportation agencies to think carefully about whether highways should expand or stay where they are.
3. Highways are not true public spaces
Interstates' function as a true public right-of-way is debatable. Roads are traditionally public spaces that facilitate interactions between citizens in a city. Because of this, they are held and maintained by the public. On city streets, it’s possible to travel locally by a variety of modes. The right-of-way often includes sidewalks or bike lanes that allow all citizens to use the public space. They can also be places for public congregation, holding parades, block parties, etc. It makes no sense for the public as a whole to pay itself for the use of its own property.
But dedicated vehicle lanes, especially on limited access highways where alternative modes are not allowed, represent a huge proportion of publicly owned land in developed areas. And that space is not a usually unlimited public good available to all. Road space, in the era of the automobile, has become an incredibly scarce good used in varying degrees by a subset of the public. Highways are certainly not counterbalanced by an equally complete network that is being used only by pedestrian travelers or bikers. Aside from being useless to some travelers (if only they were just useless), these wide swathes of roadway are actually destructive to the ability of people who do not own cars to get anywhere. Highways and large arterials are brutally effective barriers for the safe and efficient travel of people and goods by other modes, calling into serious question their status as universally-enjoyed public goods. In Richmond, part of the downtown interstate system was routed straight through historic walkable neighborhoods for the purpose of keeping certain populations away from others during desegregation. These vast areas of restricted use represent a semi-private interest (a “club good”) and ought to compensate the public in some way for the exclusive use of the space they take up.
4. Highways cause significant externalities that ought to be discouraged
Finally, highways cause significant negative externalities, while primarily benefitting those who do not live in the city. In fact, highways can often serve as an enabler for suburbanites who want to take advantage of the benefits and wealth that cities create while living in sheltered areas that will not require them to fund those cities or engage with the larger community. The other negative impacts of highways have been widely discussed and need little exposition here. They are at least as significant as the impacts of railroads, and include noise, air pollution, and danger for pedestrians.[iv]
A Few Objections and
Responses
1. The first objection has been mentioned already – that highways add to the network effect and offset whatever negative impact they may have on the ability of cities to create dense webs of interaction between citizens.
a. My first response is that public benefit is not necessarily a reason for highways to not pay their social or opportunity costs. In a properly-functioning market, goods and services will continue to be provided if they are more valuable than the cost of producing and maintaining those goods. Additionally, land will be reclaimed and redeveloped if its current use is significantly less valuable than another use. If highways are truly the "highest and best" use of the space they take up, they will more than pay for themselves.
b.. My second response to this objection is that their positive impacts are limited to very low densities. Once a city reaches a certain size, it is difficult to sustain long-distance travel in personal automobiles as the primary mode for the majority of the city. This is for the simple reason that cars and the roads they drive on require lots of space. Cities with fairly low densities are also likely to have relatively low land values and thus collect less tax.
c. My third response to this objection is that the positive impacts are not as equitably distributed as those of other modes. The benefits of urban interstates go disproportionately to those wealthy enough to absorb the high capital costs of car ownership with relative ease. As stated before, they also incentivize these people to live in low-density suburbs outside the city limits, thus depriving the city of the human capital needed for a healthy community.
2. A second objection is that other tax-exempt public institutions are more restrictive than roads (i.e. universities).
a. My first response is that, while this is true and proves that the existing tax structure is not inherently contradictory, it does not address the substance of the arguments presented. Perhaps other public institutions should pay property tax also, but the question is beyond the scope of this post.
b. My second response is that highways are uniquely destructive to urban places, more so than other public uses of land. Cities suffer significantly from being bisected by large highways and ought to be able to receive some compensation from them. Universities, on the other, hand, tend to be helpful to cities, creating a range of jobs and services that can benefit all members of the community, usually on relatively compact campuses.
1. The first objection has been mentioned already – that highways add to the network effect and offset whatever negative impact they may have on the ability of cities to create dense webs of interaction between citizens.
a. My first response is that public benefit is not necessarily a reason for highways to not pay their social or opportunity costs. In a properly-functioning market, goods and services will continue to be provided if they are more valuable than the cost of producing and maintaining those goods. Additionally, land will be reclaimed and redeveloped if its current use is significantly less valuable than another use. If highways are truly the "highest and best" use of the space they take up, they will more than pay for themselves.
b.. My second response to this objection is that their positive impacts are limited to very low densities. Once a city reaches a certain size, it is difficult to sustain long-distance travel in personal automobiles as the primary mode for the majority of the city. This is for the simple reason that cars and the roads they drive on require lots of space. Cities with fairly low densities are also likely to have relatively low land values and thus collect less tax.
c. My third response to this objection is that the positive impacts are not as equitably distributed as those of other modes. The benefits of urban interstates go disproportionately to those wealthy enough to absorb the high capital costs of car ownership with relative ease. As stated before, they also incentivize these people to live in low-density suburbs outside the city limits, thus depriving the city of the human capital needed for a healthy community.
2. A second objection is that other tax-exempt public institutions are more restrictive than roads (i.e. universities).
a. My first response is that, while this is true and proves that the existing tax structure is not inherently contradictory, it does not address the substance of the arguments presented. Perhaps other public institutions should pay property tax also, but the question is beyond the scope of this post.
b. My second response is that highways are uniquely destructive to urban places, more so than other public uses of land. Cities suffer significantly from being bisected by large highways and ought to be able to receive some compensation from them. Universities, on the other, hand, tend to be helpful to cities, creating a range of jobs and services that can benefit all members of the community, usually on relatively compact campuses.
How Much Money Are We
Talking About?
To get an idea of the land value of urban interstates, I looked at the city of Richmond. In dark blue on the map are the limited access highways running through the city. Several of these highways run through densely populated, extremely valuable land. Their construction punched holes in several historic neighborhoods and helped fuel suburbanization in the area. A few were built by bulldozing the city's historic African-American neighborhoods - including many of the city's black-owned businesses, which were never reopened. The Federal government funded much of this through urban renewal and interstate highway funding. Others were built over parkland and green space that had been a public amenity.
To get an idea of the land value of urban interstates, I looked at the city of Richmond. In dark blue on the map are the limited access highways running through the city. Several of these highways run through densely populated, extremely valuable land. Their construction punched holes in several historic neighborhoods and helped fuel suburbanization in the area. A few were built by bulldozing the city's historic African-American neighborhoods - including many of the city's black-owned businesses, which were never reopened. The Federal government funded much of this through urban renewal and interstate highway funding. Others were built over parkland and green space that had been a public amenity.
The Virginia Geographic Information
Network’s state road centerline file shows 605,009 feet of limited access
highway in the city. The rights of way
for these highways range from as little as 140 feet to 300 feet or more. I assumed an average right of way of 100 feet
per centerline (highways are composed of two centerlines – one in each
direction. There is significant overlap
around exit ramps and interchanges, but Richmond’s predominately
cloverleaf-style interchanges occupy enough extra space to offset this overlap. Using these numbers, I made a rough estimate
for the area occupied by highways of 2.33 square miles or 1492 acres.
To estimate the potential value of this land, I took the total assessed value of the city of Richmond and divided it by the total area of the city to get an average land value. I then multiplied this by the land area of the highways. I then calculated the theoretical property tax revenue for interstates for the year 2011 (most recent available data). I also multiplied the land value by the city’s current average annual capitalization rate of 8% to estimate the opportunity cost of developing the land currently used by highways. The results are listed below:
To estimate the potential value of this land, I took the total assessed value of the city of Richmond and divided it by the total area of the city to get an average land value. I then multiplied this by the land area of the highways. I then calculated the theoretical property tax revenue for interstates for the year 2011 (most recent available data). I also multiplied the land value by the city’s current average annual capitalization rate of 8% to estimate the opportunity cost of developing the land currently used by highways. The results are listed below:
Total Taxable Assessed
Value, 2011[v]
|
$20,425,959,000.00
|
Total Area of Richmond
(sq. mi.)
|
62.5
|
Value Per Square Mile
|
$326,815,344.00
|
Total Area of Highway Right
of Way (sq. mi.)
|
2.33
|
Potential Value of Urban
Highway Land
|
$761,998,231.38
|
Richmond Property Tax[vi]
|
$1.20 per $100 value
|
Potential Yearly
Property Tax
|
$9,143,978.78
|
Average Capitalization
Rate
|
0.08
|
Potential Land
Market Value (annualized)
|
$60,959,858.51
|
What would it look
like?
How could a property tax on limited access highways work? It would obviously be most workable if all interstates were tolled to pay for maintenance and other costs – either by a private company or by a government authority (it would also create a better market for allocating scarce road space and thus solve congestion). In the absence of a toll-based system, which we may not see in our lifetimes, ownership of the highways could be held “in trust” by an interstate transportation authority that taxed all car owners to pay for them. The interstate real property tax could be embedded into the personal property tax already charged on cars. This could result in serious equity issues, though, as cars drive varying distances on highways depending on their owners’ location and habits.
In order to serve its true purpose, this tax must be effectively separated from taxes collected for maintenance and construction of roads. Property tax is a distinct tax covering a different set of costs to the city and must be separated from general transportation funds. Property tax revenues might help state departments of transportation make different decisions about siting interstates in high value areas and help cities make up for the damage those highways can do.
Finally, Federal regulation would probably have to establish guidelines for assessing properties, such as requiring them to use formulas like the one used here. Making highway land assessments dependent on other assessments in the city would keep city officials from taking advantage of the fixed nature of roads and the political constraints around their locations. Given the propensity of local governments to take advantage of private railroad companies, it is reasonable to assume they would be even more likely to hike up taxes that will be paid by a Federal or State entity.
How could a property tax on limited access highways work? It would obviously be most workable if all interstates were tolled to pay for maintenance and other costs – either by a private company or by a government authority (it would also create a better market for allocating scarce road space and thus solve congestion). In the absence of a toll-based system, which we may not see in our lifetimes, ownership of the highways could be held “in trust” by an interstate transportation authority that taxed all car owners to pay for them. The interstate real property tax could be embedded into the personal property tax already charged on cars. This could result in serious equity issues, though, as cars drive varying distances on highways depending on their owners’ location and habits.
In order to serve its true purpose, this tax must be effectively separated from taxes collected for maintenance and construction of roads. Property tax is a distinct tax covering a different set of costs to the city and must be separated from general transportation funds. Property tax revenues might help state departments of transportation make different decisions about siting interstates in high value areas and help cities make up for the damage those highways can do.
Finally, Federal regulation would probably have to establish guidelines for assessing properties, such as requiring them to use formulas like the one used here. Making highway land assessments dependent on other assessments in the city would keep city officials from taking advantage of the fixed nature of roads and the political constraints around their locations. Given the propensity of local governments to take advantage of private railroad companies, it is reasonable to assume they would be even more likely to hike up taxes that will be paid by a Federal or State entity.
[i]
"Milton Friedman
Interviewed." Times Herald [Norristown, PA] 01 Dec 1978, n. pag.
Web. 30 Oct. 2013.
<http://www.cooperativeindividualism.org/friedman-milton_interview-1978.html>.
[ii]
Grotewohl, Leland. "The
Railroads' Problem of Inequitable Property Taxes." Miami Law Quarterly.
206. (1957): n. page. Web. 31 Oct. 2013.
<http://heinonline.org/HOL/Page?handle=hein.journals/umialr11&div=28&g_sent=1&collection=journals
[iii]
Supreme Court of the United States. CSX
TRANSPORTATION, INC., PETITIONER v. GEORGIA STATE BOARD OF EQUALIZATION ET AL.
552 U.S. 9, 128 S. Ct. 467, 169 L. Ed. 2d 418 . 2007. Web.
<http://www2.bloomberglaw.com/public/desktop/document/CSX_Transportation_Inc_v_Georgia_State_Bd_of_Equalization_552_US_>.
[iv]
Guerra, Erick. "Valuing Rail
Transit." Berkeley Institute of Urban and Regional Development.
Working Paper. (2010)
<http://www.iurd.berkeley.edu/publications/wp/2010-04.pdf>.
[v] Virginia Local Tax Rates, 2011
http://www.coopercenter.org/sites/default/files/econ/TaxRates/taxrates2011/2011TR.pdf
