OECD Economics Department Working Papers N. 1375: LOCAL TAXATION, LAND USE REGULATION, AND LAND USE. A SURVEY OF THE EVIDENCE. This paper surveys the theoretical and empirical research on the relationship between local taxation, land use regulation and land use patterns. The findings can be summarized as follows: 1) In more fiscally decentralized settings, sub-national land use regulation and fiscal policies encourage urban sprawl. In contrast, in more centralized settings, restrictive urban containment policies and a lack of local fiscal incentives for land development tend to generate housing shortages. 2) Certain fiscal instruments affect the type and composition of land development, e.g. the share of residential versus commercial development. Removing local fiscal incentives for certain property types reduces the amount of land allocated for that type and increases its price. 3) In more decentralized settings, local land use policies aimed at containing or modifying urban growth are ineffective since mobile individuals can circumvent local restrictions by sorting into nearby jurisdictions that offer the preferred combination of land consumption and public services. 4) Expanding transportation networks enables households and firms to move to suburban areas, prompting the central city population to shrink and encouraging sprawl, particularly near major highways. 5) In fiscally decentralized settings, sub-urbanization is associated with a growing political power of homeowners. Homeowners tend to get fiscal zoning policies enacted – mainly via minimum lot size restrictions – that selectively attract well-off local taxpayers. Fiscal zoning thus imposes barriers to local development and raises property values, while at the same time facilitating sprawl. Overall, fiscal policy and land use regulation strongly interact, and governments must align those policies carefully to achieve land-use objectives effectively. 1. Introduction 1. Urban land use development – and in particular urban sprawl – is a major concern in many countries. The scale of conversion of open land for residential and commercial purposes and the emergence of scattered and low- density settlement patterns raises questions about the efficiency and sustainability of land use. Land use policies ought to address the negative effects of sprawl and help reduce the externalities arising from certain forms of land use. Moreover, land use policies can enhance welfare by mixing land uses, thereby generating positive externalities, and they may help preserve open land, public parks and natural amenities. More generally, land use policy can be seen as a “planners triangle”, which is about to find a balance between economic competitiveness, environmental stability and social inclusion (OECD, 2017). 2. However, fiscal and land use policies are not determined by a welfare maximizing central government with perfect information. Instead, the policies are the outcome of a political process that is influenced by particular interests across government levels. Moreover, policies often have unintended consequences not foreseen by policy makers. This paper reviews and summarizes the related theoretical and empirical literature and underlying empirical challenges to document how fiscal and land use policies determine land use patterns. It aims to provide a comprehensive framework that helps policy makers at various government levels and practitioners in the planning sector to understand the direct and indirect consequences of specific fiscal policies and planning regulations for land use. 3. This paper stresses the role of intergovernmental frameworks for land use and the interaction between fiscal and land use policy. As will be shown, decentralized systems tend to provide more incentives for low density development and sprawl. More centralized systems tend to facilitate urban containment policies, but they often lack sufficient fiscal incentives for local governments to build and develop, thereby making housing supply price inelastic and, ultimately, causing housing shortages. The report also emphasizes the role of sorting of individuals across political borders, as sorting can undermine urban containment policies. Finally, land use patterns must be seen in the context of the improvements in transportation technologies. The widespread use of the automobile has allowed households to live further away from city centers, and it allowed firms to settle farther away from railways and ports. In conjunction with rising incomes – which has also considerably increased the demand for suburban land (Margo, 1992; Deng et al., 2008) – it has caused sprawl at the edge of major agglomerations. 4. The paper is organized as follows: The second section illustrates how land use and fiscal policies rely on a country’s inter-governmental frameworks and how, in turn, this may affect land use patterns. The third section discusses various fiscal and regulatory instruments such as minimum lot size restrictions, growth controls, height restrictions, and property and income taxation, and their impact on households and firms. The fourth section deals with sorting and how it may shape local government’s strategic fiscal and land use policies. In particular, local governments may combine land use and fiscal policies to foster specific development patterns. The section is complemented with a comparison of development patterns in the United Kingdom – a highly centralized country with a restrictive planning system and few local fiscal incentives – with those in Switzerland, which is one of the most decentralized countries worldwide with a flexible planning system and strong local income-tax induced incentives for local development. The fifth section explores how government spending in transportation networks affects land use patterns. The sixth and final section concludes. By Hansjörg Blöchliger, Christian Hilber, Olivier Schöni and Maximilian von Ehrlich.
Blöchliger, H., et al. (2017), “Local taxation, land use regulation, and land use: A survey of the evidence”, OECD Economics Department Working Papers, No. 1375, OECD Publishing, Paris,https://doi.org/10.1787/52da7c6a-en.