A tweak to the tax code could break “honest graft” and fix the housing crisis

George Washington Plunkitt was notorious even by New York’s Tammany Hall standards. But we still owe the sage of the all-powerful Democratic political machine of the late 19th and early 20th centuries a debt of gratitude.

Plunkitt made no apologies for the wealth he amassed while nominally being a public servant, and he gave us all a comprehensive view of how cities “work.” There was a lot of graft in city hall, he admitted. But there was a difference between “dishonest graft” and “honest graft.”

“I see my opportunity and I take it,” Plunkitt once told an audience. “I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particular for before. Ain’t it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that is honest graft.”

Plunkitt’s words are as relevant today as they were when he uttered them more than a century and a half ago. The very idea that cities might serve the people who actually live in their neighborhoods ahead of speculators like Plunkett feels revolutionary.

“It’s always sort of puzzled me that communities create enormous amounts of land value through schools, streets, water and sewer, etc. They then give it away to people who are often the wealthiest people in the community, and then go to the general public and say, ‘We're broke. You gotta give us more taxes or fees,’” says Rick Rybeck, founder of Just Economics, a consulting firm that works with cities on infrastructure projects. “It just seems a little absurd.”

The reason Plunkitt and so many of his descendants in the “honest graft” racket have been able to survive and thrive for so long is that most American cities cling to an antiquated tax code that penalizes landowners who build on their properties. Today, in every major American city, speculators are rewarded by lower taxes on their vacant lots while they wait for local or federal infrastructure projects to increase the value of that empty land, then sell it off at a tidy profit to those who are willing to bear the tax burden of actually building something. It’s a regressive policy that penalizes builders and rewards speculators.

Rybeck is one of the nation’s foremost advocates for what some call a “split tax.” The idea is fairly simple: It introduces a “land value tax” on unimproved property, a higher rate that gives incentives for owners to build on their land, while maintaining a lower rate for improved property.

The results aren’t hypothetical. In the 1950s, the then-sleepy exurb of Rosslyn, Virginia, became a thriving commuter suburb—one of the wealthiest in the country—because city leaders found a way to incentivize builders rather than rent-seekers. “When landowners' assessments and taxes went up, they realized they needed to put that land to better use, and Rosslyn became [a] sort of booming town for consultants and lobbyists right across the river from D.C.,” Rybeck tells me.

Rybeck isn’t the only one advocating for a split tax. Detroit Mayor Mike Duggan is fighting for legislation, currently pending in the Michigan Legislature, that would allow the city to impose a land value tax on unimproved property. If adopted, proponents claim, it would cut the average property tax bill by 17% while giving landowners incentives to build. When I was mayor of Kansas City, Missouri, I floated the idea, too. We had something like 10,000 vacant lots in a city that could have used the housing and construction jobs. But I never had the votes.

The idea isn’t itself revolutionary—Pittsburgh had a split tax for nearly a century until it was repealed it in 2001. The repeal has complicated the city’s ongoing efforts to recover from the collapse of its steel economy in the 1970s, and the argument over its abandoned split tax still haunts planners’ discussions, Pittsburgh Deputy Mayor Jake Pawlak tells me.

“There have been advocates for returning to that system who've made similar arguments that would help us address, on the one hand, under-development in former industrial areas or in parts of neighborhoods that have seen disinvestment,” he says. “On the other hand, it would discourage speculation because no one would be buying and holding land without a plan to utilize it, so I can imagine that those may have been some thoughts that the earlier city leaders had. It did have a significant impact in blunting the blow of the collapse of the steel industry on us because as even as the value of the improvements declined dramatically, the value of the land remained relatively stable.”

Of course, speculators and wealthy landowners generally oppose such proposals. But part of the problem is political inertia itself, says Joe Minicozzi, a principal at Urban3, a consulting firm that advocates for split taxes. Too many local tax assessors, Minicozzi says, are wedded to the old property tax system, and they’re not entirely sure why they’re doing so or what it’s actually doing for or to their city’s prospects.

“We really need to interrogate this,” he tells me. “We really need to move past this system because of how arbitrary it is. And when I show the arbitrary and capricious nature of it to assessors, they can’t think outside the box. They’re just like, ‘This is what we all have.’ It’s like, well, no, you’re actually in control of those levers. And the fact that you can’t explain it to me is kind of crazy.”

The issue is not going away. In fact, it’s about to become more acute as one-off federal infrastructure funds make their way into American cities. To date, some $454 billion has been earmarked for projects in 4,500 communities, according to the White House. That money will, of course, increase property values for speculators, but its impact on actual infrastructure is going to be blunted as long as cities cling to their antiquated and regressive property tax systems.

Minicozzi, among others, hopes that the arguments coming to a town near you can at least be more open about what’s at stake.

“We’re going to be subsidizing something, but it should be something of choice, rather than something arbitrary [that is] just the way we’ve always done things,” he says. “A community may choose to subsidize suburbia, but at least you’re doing it consciously now.”

In other words, city policymakers have a choice. They can split the tax or they can continue to reward Plunkitt’s “honest graft.” But they can’t do both.