Fill those parking lots
with buildings

We often don't agree with the positions of the free-market Buckeye Institute, but here's a statement from their Web site that makes sense a call for shifting property taxes to vacant land (it's a version of Henry George's land tax idea that former Cleveland Mayor Tom Johnson favored). This would be good public policy to encourage landowners to develop their land instead of milking parking lots.

By William S. Peirce

A front-page story in the Cleveland Plain Dealer on January 11, 2004 gives an excellent description of a serious problem: the reluctance of owners of prime downtown land to convert parking lots into the high rise apartments that Cleveland needs if it is to develop a vibrant downtown. Unfortunately, the remedies suggested in the article are ineffectual, expensive, and dictatorial. Ironically, Mayor Tom L. Johnson, whose statue presides over Public Square, could have suggested the effective, market driven approach to solving the problem.

As the article points out, landowners operate parking lots because they can make more money doing that than they can building housing. Meanwhile, developers eager to build housing say they cannot afford the land. The remedies proposed include subsidies of various types and using eminent domain to take the land from one owner and give it to another more politically favored. Yet the profitability of parking and the unprofitability of housing are the result not just of market forces (What will you pay to park downtown? What will you pay to rent or buy an apartment downtown?), but also of tax policy. If vacant land (including parking lots) pays a heavy enough real estate tax, people will not want to hold land vacant.

The fact that parking lots in downtown Cleveland have sold for close to $4 million per acre indicates that owners are expecting substantial net income even after paying real estate taxes, as well as wages, insurance, and the other costs of operation. If the real estate tax on vacant land were to be raised, the land would generate a smaller net income and so the owner would be willing to sell the land for a lower price.

The Ohio Constitution specifies that the real estate tax must be levied at the same rate on land and buildings. Because of poor assessing, however, in practise the developer faces a low tax on vacant land and a higher tax if he builds a substantial building on that same land. When Tom Johnson was mayor, the city worked very hard to ensure that vacant and poorly developed land were assessed at full market value and, by shifting some of the burden to land, the burden on buildings could be reduced.

The state of Ohio a century ago did not permit the Johnson administration to shift the tax burden entirely to land and it would be at least as difficult politically today, but it is clear that intelligent and determined tax administrators can move toward that goal. It is a rare tax that provides revenue while promoting economic development. The portion of the real estate tax levied on land does that. It is truly disheartening that the county has reduced parking lot assessments far below market value. The Campbell administration should demand a full investigation of the circumstances leading the county to undercut Cleveland's efforts to restore downtown to its glory.

William S. Peirce is a Professor Emeritus of Economics, Weatherhead School of Management, Case Western Reserve University and member of The Buckeye Institute's Board of Research Advisors.


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