Is there an “Efficient” Way to Address Suburban Sprawl? -- Weekly Policy Commentary -- February 2, 2009

Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.

There are a number of reasons why urban sprawl might be excessive from society's perspective. However, the pros and cons of alternative policies for containing development at the urban fringe are not widely appreciated. This week, Antonio Bento discusses why development fees are potentially the best policy from the standpoint of economic efficiency but, for practical purposes, are also one of the more challenging policies to implement.

The predominant pattern of urban growth in the United States over the past half century has been one of low density and employment decentralization that has yielded excessive amounts of sprawl, certainly from an economist’s point of view. To begin with, developers do not take into account the societal losses from the irreversible paving over of large open spaces at the urban fringe. These include the aesthetic benefits existing residents might otherwise enjoy from unspoiled views of rolling farmland, and the possible loss of ecosystems and natural habitat. Also, developers do not consider the broader societal costs of decaying inner cities (such as crime and run-down communities) caused by the flight to the suburbs.   As cities spread out, commutes get longer, leading to more traffic congestion and pollution. This would not be a problem if drivers were fully charged for their contribution to congestion and pollution through, for example, road pricing schemes, but such comprehensive pricing policies are a long way off. Moreover, urban development is frequently subsidized—typically developers do not pay for the infrastructure costs (schools, roads, sewers, and other public services) needed to accommodate residential development. Other policies, such as zoning restrictions requiring minimum lot sizes at the urban fringe may further exacerbate the problem. Concern about urban sprawl has led to a variety of “Smart Growth” initiatives including, for example, urban growth boundaries and other regulations (such as conservation easements, transferable development rights, and designation of priority funding areas) designed to limit expansion of the urban fringe. An alternative approach emphasizes pricing instruments, such as taxes on residential development and property. So how should policymakers choose among these alternatives? Promoting Efficient Development

Antonio M. Bento is an associate professor in Cornell University’s Department of Applied Economics and Management. Most of his research lies at the boundaries of environmental, energy, urban, and public economics, and uses state-of-the-art econometric and computable general equilibrium methods, as well as geographical information (GIS) tools.

In terms of economic efficiency, an ideal policy instrument would trade off the benefits of land preservation at the urban fringe with the costs in terms of reducing the availability of housing, and producing denser, or more clustered, housing than residents would otherwise prefer. In principle, a tax per unit of land developed could achieve this efficient outcome, by reflecting the full costs of development into the prices of new, suburban housing lots. It would be feasible to approximately measure infrastructure costs and the costs of congestion and pollution from additional driving that should be included in the tax. Even the value of open space might be incorporated into the tax, based on studies that estimate how much extra people are willing to pay for houses in close proximity to open space amenities.

However, even if it were feasible to impose differentially higher property taxes for housing units at the urban fringe, this approach would still be inferior to development taxes. The key problem with property taxes is that they penalize capital, or housing value, in addition to land. This creates an incentive for lower density development, which partly undermines attempts to limit urban sprawl. Due to this perverse effect, in work with Sofia Franco and Daniel Kaffine, we found that the economically efficient amount of open space preserved under property taxes is only a minor fraction of the amount that would be saved under an efficient system of development fees. 

In principle, urban growth boundaries can be designed to mimic the effects of development taxes. However, this requires knowledge of how much land would be saved under the ideal tax, which is very difficult to gauge in advance.

Moreover, another difference is that development taxes generate revenues that can be recycled in ways to improve the efficiency of the local economy. For example, revenues can be used to fund city-center revitalization programs, which in turn helps to lessen pressure for land conversion at the fringe due to flight to the suburbs. Revenues might also be used to purchase conservation easements that could permanently save large open spaces at the fringe. Revenues can also be used to cut the rate of preexisting property taxes, thus promoting density over land expansion.

Practical Obstacles to Efficient Pricing

On paper, development fees seem like the most efficient solution, but there are definite obstacles to putting them into practice.   First, the distributional burden borne by developers is greater under the development tax than under the urban growth boundary. The development fee essentially penalizes all developers and subsidizes agricultural landowners. In contrast, an urban growth boundary only penalizes those developers at the fringe that would have converted the land in the absence of this policy. As a result, urban growth boundaries seem to get substantially more political support. Indeed, several communities throughout the United States have implemented urban boundaries, while very few have implemented development fees.

Second, successful implementation of development fees may require coordination among different governments. Currently, most Smart Growth programs are implemented by local governments, typically cities and counties. However, there is a concern that such programs could actually exacerbate suburban sprawl because communities can use urban growth boundaries almost as an exclusionary zoning restriction. As a consequence, housing prices tend to increase and push individuals to bedroom communities that are often located farther away from their place of work. In this case, Smart Growth can have a perverse effect by displacing and reallocating growth in ways that exacerbate sprawl and traffic congestion.

Coordination across local governments, to prevent spillover effects from displacing and reallocating growth across neighboring communities, is potentially important. However, this  metropolitan-wide approach to managing urban growth will require local governments to, in part, give up some of their power to regulate land use as well as some of the fiscal benefits that can come with some land use choices. Not surprisingly, this may be the greatest obstacle of all in controlling sprawl.

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Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.

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