Tulip on the Zoning Tax

Peter Tulip, Chief Economist for Australia’s Centre for Independent Studies, sent me the following comments on my recent response to Cameron Murray’s critique of the “zoning tax” literature. Reprinted with Tulip’s kind permission.

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Dear Professor Caplan,

May I comment on your wonderful blog post The Zoning Tax: A Mere Illusion?

I have been battling with Cameron Murray for many years.  Your post more clearly explains points I have been trying to make without success.  So, big thanks and admiration!

Some thoughts – consistent with but additional to yours:

Indivisibilities are an argument against marginal analysis in general. A common response is that yes, if every good is lumpy and slightly larger than the optimum, then marginal  cost will not equal marginal benefit.  However, Cameron’s example in which every block is slightly too big is contrived.  More generally, there will be a variety, relative to tastes.  While there are some properties that have a tiny bit of extra land that is of negligible value, there will be others that only require a tiny piece to achieve the lumpy threshold for subdivision – that marginal land will be of enormous value.  I think, with a uniform distribution, these exactly offset.  In a large market, with a distribution of lot sizes and shapes, trade will result in the larger lots going to those who value them.  So average and marginal values should be similar.

His example of colonial Brisbane is bogus.  It includes large agricultural holdings, far from the town centre, where land per acre is cheap and small residential blocks near the centre on which land is expensive.  Yes, the hedonic value of land falls with property size -- but there is no incentive for subdivision.  In contrast to the many papers that follow Glaeser and Gyourko, Cameron makes no attempt to compare like with like.  This has been pointed out to Cameron many times and he does not address the objection.

I haven’t bothered to check but I assume he makes the same simple mistake with Mesopotamia.

You note “Gyourko and Krimmel’s … approach fails to capture the additional zoning taxes on multifamily housing, skyscrapers, and so on.”  Yes, but that is already well-addressed by Glaeser,  Gyourko and Saks (2005), ‘Why is Manhattan so Expensive? Regulation and the Rise in Housing Prices’, The Journal of Law & Economics, 48(2), pp 331–369.  Importantly, Cameron Murray’s criticisms do not apply to higher-density, which, in Australia at least, is the focus of policy debates.

Two further references that may be of interest:

A critique of Glaeser and Gyourko’s approach by two respected urban planning academics:

Phibbs, Peter and Nicole Gurran (2021) ‘The role and significance of planning in the determination of house prices in Australia: Recent policy debates’ EPA: Economy and Space 2021 53(3) 457-479.

My response to some of these criticisms (with a focus on Australian policy debates) is here: Misunderstandings about Planning Restrictions  But I did not give Cameron Murray’s arguments much space, because I have not been aware that anyone took them seriously.

If the above published objections to Glaeser and Gyourko are wrong, what are the good objections?

In my view, the most serious limitation of Glaeser and Gyourko’s approach, which I have not seen written anywhere, is that the conceptual experiment is not a feasible policy.  For most urban and suburban land, subdivision is practically difficult, given the placement of existing structures. Conceptually, GG value the structure and implicitly the land at replacement cost.  If all the structures were swept away by a tidal wave, how much would it cost to replace them?  If the hedonic value of marginal land had been lower than the average value, as they find, we would see subdivision. 

There is nothing wrong with that question, but it’s applicability seems limited to very large lots.  The counterfactual is not a feasible policy.  This is one reason I prefer Glaeser-Gyourko-Saks estimates of the zoning tax on apartments, where the counterfactual coincides with a policy decision: building one storey higher.

The other legitimate objection is that the approach is indirect.  It does not require observations of zoning restrictions.  It is only proof by elimination.

My response to this is that when properties are upzoned, the land increases in value by roughly the amount of the zoning tax (about $350,000 per apartment in Sydney).

I hope that may be of some use.  I look forward to Build, Baby, Build with excitement.  Please let me know if I can be of assistance.

Peter