If you were to look at a cameo of a city, you’d see something like a circus tent with an oversized pole in the middle, the uplift there being the downtown skyscrapers. If you were to overlay on that cityscape a graph of the value of each parcel in the metro region, that shape would be even more exaggerated. The height of the buildings in the very center might be five times as tall as the buildings just a block away. But the “height” of the value of the most prime locations, calculates acclaimed assessor and appraiser Ted Gwartney could be ten times higher than the value of locations just a block away.

That’s the upward, vertical reach of site value. It also has an outward, horizontal reach. A city’s influence on land value extends far beyond the “tent” into the countryside, to where no buildings yet stand. Plot on a map the locations of the subscribers to the city’s major newspaper (at least when newspapers were vital). You’d find some subscribers hundreds of miles away from a major city. Even that far away, land values would be higher than in a similar rural area without any major city within newspaper-subscriber distance.

The final image of a profile of land value would be an upside down golf tee with a hugely wide and thin bottom.

“Location, location, location.” Familiar phrase. What’s unfamiliar are the sorts of nearby locations that lift the value of surrounding sites.

What are the aspects of an area that make one location desirable? There are the natural ones: good views, fertile soil, a deep harbor, a thick oil field. And there are the artificial ones. Most of these are products of the public, of everyone, not of the individual owner of the location.

Look at the ads that owners post in order to sell or lease their locations. They cite things like proximity to downtown. Of course, being close to downtown by itself is useless without streets, a public property. Also street cars, trolleys, and light rail. If it’s nearby, owners advertise “bus stop just one block away”.

After nature and easy access to downtown, what’s the next most powerful influence on site values? A good school, the Dallas Fed concluded. It’s usually a public school, since that’s where most parents send their kids. And private schools can be far away from their wealthy student body. In upper-income neighborhoods, it’s not proximity to a toney school that pumps up land values so much as it is the ambient income of the residents, of their ability to pay top dollar for their homes and the lots they sit on.

A little known fact about public improvements—transit, transportation arteries, schools—is that none of these projects are an expense. Meaning, yes, those improvements cost money, but they raised nearby location values by much more than their cost. Each one could be self-financing, not needing one penny of subsidy. Two highly lauded economists—Bill Vickrey and Joe Stiglitz—worked in this field. Stieglitz coined the phrase “the Henry George Theorem” after the 19th c. reformer. If the public wanted to, it could recover all the land values it created and use those profits to fund the project. But how often does the public act in its own best interest?

Some places do. Hong Kong, for example, has a world-class transit system and not one rail of it was funded by subsidy. Pittsburgh renewed its downtown without one penny of subsidy. Any place could do the same.

How? First, the local government determines there is demand for a project. Next it offers bonds to finance the project for sale. If investors agree that there is sufficient demand, they buy the bonds. The jurisdiction uses that income to fund the project. Then the new bridge or light rail or even an amphitheater elevates the surrounding land values. The government uses a tax on land value or a land use fee or land dues to direct those new site values into the public treasury. The last step is to use those monies to pay off the geo-bonds.

Not only do human-made projects raise enough money to pay for themselves, but the artificial amenities and the natural ones together generate so much location value that it’s an embarrassment of riches.

Not only do these human-made projects raise enough money to pay for themselves. But the artificial amenities and the natural ones together generate so much location value that it’s an embarrassment of riches. And that bounty really should embarrass those individual owners lucky enough to receive that revenue stream because actually, they don’t deserve it.

Presently, we pay the owner of the land. We make a gift of the “rent” that we create. While that’s generous of us and fortunate for the owner, it’s also wrong. It’s wrong both morally and practically. It’s wrong ethically because owners created neither the land nor its value; the presence of society does that (ghost towns have no site value; towns need to have people to have land value). It’s wrong pragmatically because when governments do not use land value to pay off infrastructure, they turn to taxes, and taxes act like sand in the gears of an economy.

What’s worse than the government not getting a slice of the action is that the populace does not get one either. The flow of “rents”—all the spending for all the land and resources we use (the biggest part of any economy’s GDP)—now ends up in very few pockets. It could end up making life comfortable for all residents, sort of like what Alaska does with some oil revenue, or what Singapore does with surplus land tax revenue; both places pay citizens a dividend. Every place could create an extra income for everyone, and they should.

A final note on semantics: It seems public works create or raise land value. They don’t. Saying so is merely convenient. What’s really going on is that the new project converts public demand into a money flow, technically called “rent”. It’s like how glass condenses vapor into water, trickling down the cool surface. And rather than puddle at the bottom of the pane, rents swirl upward into a swoop more dynamic and dramatic than the urban skyline.

Buildings and other improvement don't create land value. They attract it. They convert demand for the improvement into a revenue stream.

© Text Copyright Jeffery J. Smith rights reserved.
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