It’s nearly impossible to imagine any path to a flourishing future for our species that does not run through our cities. And yet we’ve neglected the social systems and institutions necessary for that — public safety, good schools, affordable shelter, public spaces and easy physical proximity to others, government that is free of corruption and responsive to its people. Making today’s cities really work again for the people who live in them will not happen overnight.
But there is a project that cities could embark upon, more or less immediately, to improve their citizens’ collective quality of life. They could turn the land under their jurisdiction into a source and reserve of shared public wealth, rather than a divisive private speculative asset. In doing so, they could overcome the unending conflicts among developers, homeowners and renters that stand in the way of high-road development — development that is beneficial, fair, sustainable and publicly accountable. This could lower costs for ordinary people and small businesses, encourage new arrivals and make cities more equitable.
And cities could start doing this tomorrow, starting with the land that they already own, which can be substantial and is often focused in central or downtown areas. Further, land now in private hands can also gradually be acquired by the public — without turning city government itself into an abusive landlord or a hulking bureaucracy.
We make this argument in four distinct steps. First, we highlight the vastly underestimated land wealth that many American cities already enjoy, which we suggest be used better. Second, we argue that a version of Henry George’s land value tax is a way to unlock this value. Third, relying on more recent work, we suggest a way to improve on George’s thinking by even more clearly limiting speculative gain. Fourth, we suggest applying this idea in urban wealth funds that could be started immediately to potentially great public benefit.
Updating The Public’s Balance Sheet
To motivate this project we should first observe something that’s hidden in plain sight: In the United States, many municipalities own real property whose estimated value exceeds their city’s gross product. But the publics of most cities — and, in some cases, their elected leadership — don’t even know what they own.
A recent McKinsey Global Institute report, looking at the “balance sheet” — all assets minus all liabilities — of 10 of the world’s leading economies, found that global net worth and real assets had more than tripled in the past 20 years to better than $500 trillion, six times the 2020 gross world product (GWP) of just over $80 trillion. Real estate made up better than two thirds of those real assets, or about four times GWP.
We’re used to thinking of these assets as privately owned. But in a separate but convergent 2018 analysis covering 31 countries, the International Monetary Fund (IMF) estimated that the government-owned portion of that real estate — which includes a lot of undeveloped land, as well as physical infrastructure and government and commercial buildings — was worth double the GWP at the time. Some of the most valuable real estate, unsurprisingly, is at the most productive centers of all countries’ economies, in urban areas.
Local governments are an important part of this story; yet many U.S. cities have not fully inventoried their property assets. Even fewer have assigned them a current market value, which is sometimes tens of times higher than the book value in city ledgers.
When they do this exercise, which is not expensive or time-sucking, their balance sheets look radically different. In 2014, Boston’s balance sheet showed liabilities of $4.6 billion outweighing declared assets of $3.8 billion, of which $1.4 billion was real estate, for a negative net worth of $800 million. But examination showed that that the declared $1.4 billion in property holdings was actually worth $55 billion — nearly 40 times the initial estimated value — putting Boston very far into positive net worth territory. A similar story unfolded in Pittsburgh, when it did the analysis (taking only two weeks and $20,000) and found it had undervalued its property holding by nearly 70 times!
Global cities have done far more than American ones to put land in service of the public. Singapore, Copenhagen and Hong Kong all have public “urban wealth funds” managing real estate on behalf of the public. They are savvy and have information advantages over private speculators regarding the complexities of city government. Married to public purpose, that’s often a powerful motor for constructive change. It’s especially useful for capitalizing on the positive externalities of mindful development, which are often lost in private speculation. In Hong Kong, for example, a public-owned developer has focused on building apartments near transit stops. This causes transit investments to benefit the public twice: first through better transit and second by increasing the value of the public’s real estate portfolio.
Dag Detter, a former Swedish government economic development official now in private consulting who often works with the IMF, has argued for better public-serving management of this “hidden goldmine” for years — either for national or “sovereign” wealth funds, of the sort he helped design and run in Sweden, or for these city-centric wealth funds. He recommends that they should operate within strict guidelines but focus on maximizing returns to the fund for the owning public. For Detter, they should be largely insulated from political pressure, though it’s fine with him if some portion of their return is turned over to public authorities.
Given the divisiveness of our urban politics, the limited bandwidth of city finance managers and the deep power and predatory behavior of our private financial sector, doing what Detter suggests would require extra caution and preparation. But it’s still worth exploring. That exploration may get a boost if many cities create new financial entities to better manage the current influx of federal monies. One way or another, we expect the demand for better strategic management of municipal assets will only grow. But first, cities need to account for that wealth and update their own balance sheets, which only a few have done.
And that first step should prompt city residents and their leaders to ask themselves where their land wealth really comes from in the first place.
Recognizing The Ultimate Source Of Urban Wealth
Why does a half-acre of unbuilt land in the center of a large city cost so much more than in an unpopulated greenfield site? It’s not that the land itself is different — it’s because it has a bunch of people around it and public infrastructure for their commingling. People — their interactions and their ideas — are the real source of land value. Cities are simply a way of getting more of them in one place. The land beneath or near them rises in value merely by their proximity.
But as land values increase, owners find they can charge non-owners ever more in rent for the privilege of living and working near one another. Owners are thus enriched merely for owning the land — independent of anything they do to make the activity on or near it more productive of value. Henry George pointed out the injustice and economic irrationality of this way back in 1879, in the wildly popular “Progress and Poverty,” which helped inspire the Progressive movement of the early 20th century.
To address it, George prescribed a simple remedy: land value taxes. Unimproved land doesn’t magically shrink when taxes are put on it — in economist-speak, it’s quintessentially “inelastic.” That means taxes put on land are among the most efficient, and they can go as high as that unimproved land’s value. Unlike other kinds of tax, the cost cannot be passed on to renters without consequence. It is instead “fully capitalized,” or built into the price of the land, decreasing that price and lowering the hurdle to anyone who’d like to purchase land as a location for some profitable enterprise. The decreased land price lowers the rents owners can feasibly charge. Land value taxes are therefore good for those who want to unlock land for valuable uses — building shelter or new commercial projects — and bad for those who primarily want to hold it and watch its price climb over the years.
Many countries and cities around the world have versions of land value taxes — with predicted effects on land prices and tenancy costs. Land value taxes were successfully implemented in early 20th-century German cities such as Berlin, Cologne and Frankfurt, after proving their ability to tamp down harmful speculation in the leased territory of Kiautschou Bay. These successful policies were altered and lost in financial upheaval of the first World War. Land value taxes also worked well in numerous Pennsylvanian cities and lasted for the better part of the 20th century. Indeed, as a recent overview of theoretical literature on and reports of practical experience with land value taxes show, there is overwhelming substantiation of the concept. George believed, not completely unreasonably, that land value taxes could eventually replace all other taxes; he called it the “single tax.” There’d be enough money to fund any number of worthy social investments for the public good — and even, depending on our druthers, universal or targeted subsidies to those in need.
Land value taxes are today more prevalent elsewhere — in places like Estonia and Taiwan — than in the U.S., where the idea originated. There are many reasons for this, but one can hardly fail to see that there are a lot of rich and politically powerful people in the United States who prize the ability to speculate on land prices and pocket unearned rents. Especially after the federally subsidized explosion in home ownership after WWII, they’ve found political allies, tragicomically, in the many non-rich homeowners whose share in the real estate game is their best bet for economic security.
But this lamentable entanglement of upper-middle-class interests with regressive land politics is less acute in our urban centers. There, dwelling renters are far more common. There, too, live many from younger generations who may have not yet developed emotional commitments to traditional real estate ownership — a potential base of political support for new ways of thinking about land value.
Splitting The Property Atom
We can still improve upon land value taxes, devising new methods of administration that accurate reveal land values, insulate assessments from political pressure, and truly place markets in the service of the public.
Work since George suggests a promising avenue toward the ideal of efficient abundance. Sun Yat-Sen, inspired by the Georgist land administration in Kiautschou Bay, proposed a method for land assessment in the early 1900s: owners assessed the value of their own land, and the state could then purchase the land at that value. More recently, economists E. Glen Weyl and Anthony Lee Zhang have sketched an elegant update of this idea, which could form the basis of a kind of land use license.
Without using the eminent domain power, and even without raising existing property taxes, cities could thus gradually shift property markets away from the buying and selling of permanent property rights, and toward the buying and selling of a special sort of land-use license. This could change the way we think about and share the value of our urban spaces.
Here’s how the licenses work: They resemble conventional time-based leases, except that they are a form of equity for their holders. At the time of their expiry after, say, six or 12 months, they go on a public auction block. But the amount of the winning bid is paid to the former license-holder, rather than to the public. Importantly, their holders periodically pay a license fee to the public, which generates revenue in proportion to license’s price, like a tax. The rate at which this fee is set is a matter of government judgment — higher or lower depending on government’s interest in encouraging long-term investment. But the fact that its rate is known at purchase, and its absolute amount determined freely by the bidding parties, makes it a self-enforcing source of public revenue, while allowing market actors to determine the real value of the property-cum-license.
Among the communities of scholars and practitioners developing this system, it’s known alternately as plural property, partial common ownership, and self-assessed licenses sold at auction (SALSA). It’s possible to imagine SALSA replacing the role of common municipal property tax regimes. Instead of relying on a city assessment of, respectively, property value or unimproved land value and then paying whatever tax on that, the licensor pays the license fee rate the city has set, applied to the most recent price of their license.
The on-ramp to this promising system of land management is to apply it to property owned by an urban wealth fund, thus not unduly stirring the hornets’ nest of vested land interests, while creating a meaningful vehicle for the public to “buy back” the land in cities. The Government Finance Officers Association is exploring urban wealth funds; its innovative programs are an excellent place to begin this work.
This would truly split the property atom, unleashing tremendous democratic and economic energy. It would separate land values from productive use, ensuring the public a fair share of the former, as Georgists have long advocated, and as traditional land ownership has always failed to do. And there would be no financial losers in the establishing urban wealth funds to pursue this agenda: incumbent homeowners’ interests would be unaffected but for a likely rise in valuation due to the presence of a powerful new buyer in the city.
At the same time, the urban wealth fund would give all city-dwellers a stake in the rising real values of land that they are helping create. And it would do all this without overburdening city administrators with mastering the arcana of real estate development or land management. If the urban wealth fund grows as we think it could, it’s possible to imagine a future city in which little land is privately owned in the conventional sense, yet all is efficiently allocated through markets, and affordability and livability is available to all comers.
Powerful tools are at hand to efficiently transform real estate markets and eliminate speculative rents. It’s time to use them. Cities must recognize the sources of their general wealth (commingling people), the hidden public wealth they already have (still barely charted) and manage that wealth in ways that give all city residents a material stake in urban development. This would help restore the social fabric and democratic life of cities, which is currently being strangled by land politics.
How It Would Work
To establish a SALSA urban wealth fund, a city would first map its public-owned real assets (office buildings, outskirts land, any infrastructure whose administration does not necessarily need to be centralized), assigning market value where possible. Parks and any other land already being used in the public interest should be excluded.
The city would then identify its urban core real estate not being used by public actors, along with underused outskirts land, and transfer all the titles to the city’s wealth fund. That fund would be managed consistently with its public purpose, as stated in its charter.
To minimize any suspicion of government waste, we’d recommend limiting the urban wealth fund’s charter (respecting existing law) to administering SALSA licenses — that is, collecting fees and using them for some combination of (a) purchasing and developing new land in the city, (b) democratically-decided public goods investments and/or (c) cash dividends distributed to city residents on an equal per capita basis. The revenues should not be used as another general revenue source, but rather maintained as an apolitical people’s fund.
If it is as beneficial and popular with the public as we suspect, such an urban wealth fund might grow to acquire much private real estate. Paying out a dividend to citizens, even a small one, would affirm current residents’ contribution to the wealth of the city — and induce new ones to come. It would partially offsetting renters’ costs. It would make productive business owners happy. Last but not least, its purchasing activities would make real estate prices increase, pleasing incumbent homeowners. All this together would happily start to dissolve the dysfunctional caste system that now divides urban renters, developers and homeowners, impeding the high-road livable densification we urgently need.
As this urban wealth fund’s portfolio of properties grows, it would be able to have a bigger and bigger impact. If the fund came to own all of the land in the city, its popular dividend might cover most of a typical resident’s monthly housing costs. This would be an unprecedented experiment in alternatives to traditional property interests, and it would make smart development something everyone could root for. That’s the kind of thing that makes cities happier.
