Fix Zoning Via Self-Set Tax Package Buys

We have long known that self-set (i.e., Harberger) property taxes can not only lower the cost of making property trades, and discourage leaving properties idle, but can also serve as a substitute for eminent domain, wherein governments force sales at its-set prices in order to assemble large property packages. As with self-set taxes all properties have reasonable price offers, a buyer can suddenly buy a package at once.

Almost five years ago I described a way to use self-set taxes to allow decentralized zoning changes. I still like that proposal, but I gotta admit that it can look a bit complicated. (Though so are existing zoning systems.) So let me suggest a different complementary approach that might look simpler. (We could use both.)

First, we’ll need to assume that every zoning restriction on how a particular property can be used is an obligation to other particular properties within a limited spatial proximity of that first property. Thus zoning restrictions are different from general regulations or building codes that apply uniformly to all properties. 

For example, if one property can’t build a liquor store because another nearby property holds a grade school, that is an obligation of the first property owed to the second property. When zoning rulings don’t make clear which are those owed properties re any particular zoning restriction, we will need the legislature or courts to declare rules or formulas to let everyone identify those owed properties.

Second, you should be legally allowed to remove or change any zoning restriction if you can get the consent of all owners of those other properties to which that restriction is owed. This might seem crazy hard if there are hundreds of such properties, but in fact there is a case where it seems feasible: when someone uses self-set property taxes to assemble a large property package. 

With a large enough package, for many of the zoning restrictions of internal properties, all of the owed properties will also be in the same package. Thus the new package owner should be allowed to remove any such zoning restrictions. They should also be able to add new zoning obligation “encumbrances” between the properties within this package. The owner of a large package would thus have great freedom to change the zoning restrictions within their new large package.

So if some geographic area seems to be filled with inefficient zoning restrictions, an investor with access to enough capital might use self-set property taxes to buy up the entire area, change the zoning restrictions, and then sell it back, mostly to the original owners, but sometimes to new better owners. 

It seems to me that the main obstacle to this process is the transaction cost of selling the property back to original owners. While such owners will typically be quite eager to get their property back, many of them may expect this package buyer to be even more eager to sell, and thus become especially demanding in their negotiations.

Property owners who expect to gain from changes in local zoning restrictions should want to help this process along, and they could do so via posting binding offers to buy back their own property at particular prices given particular zoning changes. Such offers would cut the risk faced by investors, and also give investors guidance regarding which particular zoning changes to consider. We should make it easy to post and search through such offers.

But even with substantial transaction costs due to such strategically demanding owners, this approach could be a big win in the many geographic areas where it seems that zoning restrictions greatly reduce the value of properties.