Tuesday, October 18, 2005

The good news on property tax reform failure in Texas

The Marginal Revolution blog has an interesting post today on housing economics based on a NY Times article. Three scary facts come out of it:
  1. Europeans on average pay seven times their income for half as much housing as Americans, who spend 3.5 times their income. This could mean rising home prices longer term in the US if we start to match Europe, especially on the coasts.
  2. "Toll agrees with Glaeser et al. that the key force driving up prices is zoning and growth regulations. In New Jersey it now takes Toll Brothers up to two million dollars in legal fees and ten years in time to get the permits necessary to build. " Ouch.
  3. "Susan Wachter, a housing economist at the Wharton School at the University of Pennsylvania, has an interesting public choice insight about why zoning is worse in Europe.

    European towns also have less incentive to encourage development, Wachter says, because they generally do not, unlike their American equivalents, depend on their local tax base to pay for education and services, which tend to be federalized.

    This implies that towns in states that reduce their reliance on the property tax - often done, as in CA, in order to "equalize" school funding or other expenditure - will soon restrict development."
That last one is a major warning flag for Houston and Texas. Basically you have a free rider problem: when localities don't get much out of local property taxes, they will stop encouraging development and even stifle it, counting on getting the necessary revenue from elsewhere in the state (i.e. let some other guy pay my way). Had property tax reform passed in the legislature this year, we could have seen Texas heading down this path, as more school funding would have shifted from local property taxes to state-level assessed taxes. Now maybe there's some appropriate state-local balance here, but this downside never came up during the debate (at least not that I know of). I would hate to see us as financially dysfunctional as California.


At 7:49 AM, October 19, 2005, Blogger John Whiteside said...

I think you have to remember the underlying cause of the zoning and regulation (and associated costs) in New Jersey, which is that the state is approaching a point of total development. When land gets scarce, the cost of using that land is going to go up - that is the market at work. New Jersey's situation is very different from ours, and so controls on land use make more sense there.

Lots of intersting stuff in the NY Times article last Sunday where much of what's in your post comes from (by way of others).

At 10:11 AM, October 19, 2005, Anonymous Anonymous said...

On the topic of "European towns also have less incentive to encourage development," many countries in Europe have either steady-state or negative population growth. They simply do not need much new development.

At 1:50 PM, October 19, 2005, Blogger Tory Gattis said...

Even if they don't need much new development, you'd like for there to be an incentive for them to renew, redevelop, and restore what they have, enhancing its value and therefore the property tax base.

At 12:35 PM, October 20, 2005, Anonymous Anonymous said...


I'll give you the market in Jersey being much different than ours, but Im not sure why the difference makes controls on land use more neccessary. Lets see prices are high, which means there is high demand, which means government should step in and restrict the already limited supply. I cant make that last jump in logic. Please explain.

At 3:05 PM, October 20, 2005, Anonymous hh gwin iii said...

"Lets see prices are high, which means there is high demand, which means government should step in and restrict the already limited supply. I cant make that last jump in logic. Please explain. "

I think what he means is, the last few acres of land are pretty valuable...so perhaps the State wants to keep those undeveloped as parkland?

I'm not expressing an opinion, but am trying to clarify what my understanding was.


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