Lee Friday – January 24, 2018
For many years, property owners with vacant buildings in London, Ontario have applied for a 30 percent rebate on their property taxes. However, City Council decided to cut the rebate in half for 2018, then eliminate it entirely at year’s end. Additionally, despite insufficient parking in downtown London, Council is seriously considering a reduction in the number of parking lot permits.
Ending the rebate and reducing the number of parking lots will stimulate development, according to the politicians. Unfortunately, these actions may produce the opposite result.
Regarding the tax rebate, the London Free Press (LFP) quotes Councillor Stephen Turner:
“The policy benefits land speculators, those who buy land to sit on it, and hurts development . . . We want to offer incentives to develop, not disincentives . . . If someone has been holding on to a vacant building since 1998, they are clearly speculators. That decreases development potential . . .”
Similarly, Councillor Tanya Park was quoted by the LFP:
“Any owner with vacant lots downtown are not doing themselves or the city any service. The earning potential is huge . . . It behooves one to get them (developed). . .”
Politicians constantly vilify “speculators.” We are all speculators! Each of us makes decisions on a regular basis, the outcomes of which are often unknown to us until some future time. This means we are speculating. My wife and I decide to dine at a restaurant that is new to us. We may love it. We may be disappointed. We are speculating.
When entrepreneurs initiate new projects, they do not know if they will be successful. There are many unknown factors awaiting them, not the least of which is the fickle, discriminating consumer. Entrepreneurs are speculating, and most new businesses fail within five years.
Our standard of living i.e. the goods and services we enjoy in modern society, are an outcome of successful entrepreneurial efforts. Thus, speculators should be praised, not condemned. As Ludwig von Mises wrote in Human Action:
. . . dealing with the uncertain conditions of the unknown future – that is, speculation – is inherent in every action, and . . . profit and loss are necessary features of acting which cannot be conjured away by any wishful thinking.
Councillor Turner says long-term owners of vacant land and buildings are “decreasing development potential”, and to address this supposed deficiency he wants to increase taxes. First, increasing taxes is not an incentive to development, but a disincentive.
Second, owners are not keeping properties idle because of tax rebates. They have simply not yet identified a development project which they believe will be sufficiently profitable to justify the cost – including taxes – of development which they must obviously absorb. The risk of loss is always present. Profits, or losses, determine the success, or failure, of any business. As Mises said, this reality “cannot be conjured away by any wishful thinking.”
Owners hold idle property because (a) they believe a profitable opportunity will materialize in the future, and/or (b) they have not received an offer for the property which is sufficiently attractive for them to forego the opportunity for future development themselves. The fact that they have not received such an offer indicates that other entrepreneurs do not have any better ideas. As Murray Rothbard wrote in Man, Economy, and State:
In many cases . . . a land site, once committed to a certain line of production, could not easily or without substantial cost be shifted to another line. Where the landowner anticipates that a better line of use will soon become available or is in doubt on the best commitment for the land, he will withhold the land site from use if his saving in “change-over cost” will be greater than his opportunity cost of waiting and of forgoing presently obtainable rents. The speculative site-owner is, then, performing a great service to consumers and to the market in not committing the land to a poorer productive use. By waiting to place the land in a superior productive use, he is allocating the land to the uses most desired by the consumers.
“Park said she likes an initiative by Montreal to tax land at its highest potential use, to encourage building on the lot.”
This is a ridiculous idea!
Let’s define “highest potential use” as a use which an entrepreneur believes will provide products or services which are more highly valued by consumers as compared to any alternative use of the land. No one can possibly know, in advance, what this use is, which means such political edicts would be completely arbitrary. Someone must first identify a particular use, develop the property accordingly, then wait to see if enough consumers approve of the enterprise to allow it to be profitable. As Rothbard told us, the only way to know the answer to this question is to wait, and allow market events to naturally unfold.
The LFP quoted a major developer:
“The most important reason London has 700,000 sq. ft. of vacant office space in the downtown is because we do not have enough convenient parking,” said Shmuel Farhi, a top core property owner. “Every spot lost means one less potential new downtown worker.”
This simple economic fact seems lost on Councillor Jesse Helmer, who said (emphasis added):
“I understand why people want parking downtown . . . I have been consistent with not voting for temporary parking . . .”
So, Helmer is saying he does not want to allow entrepreneurs to provide the parking which he knows people want. And Helmer is supposedly a representative of the people!
Do not concern yourself with Helmer’s choice of words, “temporary parking” versus permanent parking, because some councillors seem opposed to either form of parking. The LFP reported that in 2014, Sifton Properties applied for a rezoning to establish a parking lot for permanent use and council refused, instead approving a new temporary use for three years.
Government Ignorance about Land-use Planning
City Council says vacant space and parking lots are preventing more economically productive development. However, business expansion requires parking expansion. As Farhi pointed out, there is a lot of vacant office space because there is insufficient parking.
John Fleming, the bureaucrat in charge of planning, said:
It would be a lot easier if we knew that once parking lot permission is withdrawn, somebody would by default develop the land. We know that that’s going to take some time, and in that time, we’re going to potentially have a vacant piece of land that’s not being used.
Exactly. Fleming is confessing his ignorance about whether the City’s policy will actually achieve its goal. It is entirely possible that a former downtown parking lot will remain vacant for many years, when it could have served a useful economic purpose as a parking lot. And as parking facilities become more scarce and expensive, businesses and workers may flee to the suburbs. Thus, downtown London would experience economic contraction, which is the opposite of Council’s professed goal.
Politicians and bureaucrats are ignorant about land-use planning. The same goes for numerous entrepreneurs, as many of their ventures fail. The difference is that entrepreneurs (and their investors) are investing their own money. Thus, they are highly incentivized to plan well because they personally bear the burden of their own mistakes.
In contrast, the government has little incentive to plan well because taxpayers, consumers, and businesses are forced to bear the burden of the government’s mistakes. But why do politicians and bureaucrats continue to force their planning decisions on the rest of us when they readily admit to their own ignorance?
The simple answer is because they can. They are power hungry, and like to portray themselves as indispensable masterminds to the voters. And it matters not a whit to them when their grandiose schemes fail, as they invariably do. After all, they have no skin in the game, and they always blame someone else e.g. those evil speculators. As Shmuel Farhi said:
The market drives development, not hopes and wishes . . . all mayors want to see development. The problem is, if the development is unsuccessful they can just walk away, but the bankers and lenders will not.
As long as property owners are not harming anyone, it is wrong for the government to tell them what they can and cannot do with their own property. Entrepreneurs should not have to apply for parking lot permits from the government. They should be free to seek permission directly from consumers. If the government stops interfering in the marketplace, more parking lots will be provided, and parking fees will decline. If too many lots are built, owners of empty lots will face losses.
Losses are the method by which consumers deny permission to parking lot owners to continue their business. Thus, the land remains available for a future development which an entrepreneur believes will more effectively satisfy the preferences of consumers.
City Council says it wants the downtown to grow, yet it coercively imposes rules which prevent growth. Absent the ‘permit’ requirement and other government regulatory impediments (zoning etc.), the market would provide sufficient parking spaces to prompt businesses to start leasing those 700,000 square feet of vacant office space. And more people working downtown means more spin-off businesses will be created – restaurants, stores etc. These are basic economic principles which even politicians can understand, that is, if they were so inclined.
Interesting discussion but I’m not quite sure how it aligns with your ideology. It seems that you’re not in favour of government intervention yet a tax rebate for only one class of property owner is a pretty big form of government intervention. More importantly, the vacancy tax rebate became redundant when MPAC began considering occupancy when it assessed property. A vacant building has a lower assessment value and therefore is charged less tax. Maintaining the vacancy tax rebate provides two discounts instead of just one.
Thank you for your comment.
I did not say whether I was, or was not, in favour of the tax rebate, as this was not the point of the article. My objective was to show that council’s reason for eliminating the rebate (to stimulate economic development) is based on faulty economic logic.
With that said, I will comment on your claim that “a tax rebate for only one class of property owner is a pretty big form of government intervention.”
I disagree. The original tax constitutes the intervention. The rebate reduces the intervention.