Paying the Planning Tax

Easy credit fanned the flames of the recent housing bubble, but the bubble was first inflated by anti-sprawl plans that created artificial housing shortages in many American markets. If planning laws hadn’t boosted median housing prices to several times median family incomes, few homebuyers would have had to resort to sub-prime mortgages.

As I write in a paper published today, the housing bubble really only affected a dozen states. In the remaining states, increases in housing prices were relatively modest. While housing prices grew by more than 130 percent in California and Florida from 2000 to 2006, prices in Texas grew by only 30 percent. With few exceptions, the states that saw the biggest bubbles were ones that had passed growth-management planning laws. And with one exception, every state that has passed such a law also saw a housing bubble.

The exceptions were New York and Nevada (where prices grew without a growth-management law) and Tennessee (where prices didn’t grow, in spite of a 1998 growth-management act). New York prices only grew in the New York City area, which is surrounded by states and suburbs that have growth-management laws and plans. Nevada prices grew because Las Vegas has literally run out of private land; it is surrounded by federal land and federal land sales have not kept up with growth. Tennessee’s prices haven’t grown because regional growth-management plans included lots of vacant land in their urban-growth boundaries, so there is, as yet, no shortage.

Americans want to live in single-family homes. Anti-sprawl restrictions increase the price of such housing. But people will go to great lengths to achieve the American dream of home ownership, including bidding up the price of scarce housing and taking out various sorts of sub-prime mortgages to pay for that housing.

Anti-sprawl plans effectively imposed a $250 billion tax on homebuyers in 2006. Nearly 93 percent of that tax affected only 11 states, all of which (except New York) have growth-management planning laws of one sort or another.

The lessons should be clear: If more states pass growth-management laws, the next bubble will have even more detrimental effects on our economy. Instead, states that have passed such laws should begin to repeal them. Cities that have written growth-management plans should expand or eliminate their urban-growth boundaries, eliminate impact fees, reduce the time and red tape required to get subdivision and building permits, and remove other planning obstacles that prevent home builders from meeting the demand for housing.

A key finding of the Cato report is that anti-sprawl planning is driven by municipal finance. If developers can subdivide and build on land in rural areas, cities have to offer low-cost, growth-friendly environments in order to attract development (and the resulting tax revenues) within their borders. But if cities can prevent development outside their borders, they have no incentive to maintain growth-friendly policies, and so they will hike impact fees and take other actions that make housing unaffordable.

Thus, housing prices increase when cities use growth-management planning or other tools to get control of the rural areas that surround them.

If more states pass growth-management laws, the next bubble will have even more detrimental effects on our economy.”

Some writers have speculated that regional governments can keep housing affordable, but because they are likely to be controlled by their largest cities, they practically insure that housing becomes unaffordable.

Of course, existing homeowners benefit when housing prices rise. But the costs to society as a whole are much greater than these benefits. First, many homes sold each year are new, and no one benefits from artificially high prices for them. Second, not all existing homeowners benefit: those who want to buy larger homes, for example, will face the same obstacles that confront first-time homebuyers. Third, existing homeowners tend to be wealthier than new homebuyers, so anti-sprawl planning effectively taxes the poor and gives the money to the rich.

The saddest thing is that many of the states and cities with growth-management plans consider themselves “progressive.” In truth, they are extremely regressive, as they favor wealthy homeowners and penalize low-income families and first-time homebuyers. As Joseph Perkins, head of the Northern California Home Builders Association, puts it: “smart growth is Jim Crow.”

An old Russian proverb says that Americans don’t have real problems, so they make them up. Urban sprawl is one of those made-up problems. In reality, the costs of sprawl are far lower than the costs of anti-sprawl planning. Cities should stop doing such planning and states should repeal laws that give cities control over the surrounding areas outside their borders.

Randal O’Toole is a senior fellow with the Cato Institute, and author of the new study, “The Case Against Regional Growth-Management Planning.”