“Futarchy” is my proposed system of governance which approves a policy change when conditional prediction markets give a higher expected outcome, conditional on that change. In a city setting, one might be tempted to use a futarchy where the outcome is the total property value of all land in and near that city. After all, if people don’t like being in this city, and are free to move elsewhere, city land won’t be worth much; the more attractive a city is as a place to be, the more its property will be worth.
Yes, we have problems measuring property values. Property is only traded infrequently, sale prices show a marginal not a total value, much land is never offered for sale, sales prices are often obscured by non-cash contributions, and regulations and taxes change sales and use. (E.g., rent control.) In addition, we expect at least some trading noise in the prices of any financial market. As a result, simple futarchy isn’t much help for decisions whose expected consequences for property values are smaller than its price noise level. And yes, there are other things one might care about beside property values. But given how badly city governance often actually goes, we could do a lot worse than to just consistently choose policies that maximize a reasonable estimate of city property value. The more precise such property estimates can be, the more effective such a futarchy could be.
Zoning is an area of city policy that seems especially well suited to a futarchy based on total property value. After all, the main reason people say that we need zoning is because using some land in some ways decreases how much people are willing to pay to use other land. For example, people might not want their home next to a bar, liquor store, or sex toy store, are so are willing to pay less to buy (or rent) next to such a place. So choosing zoning rules to maximize total property value seems especially promising. (Similar mechanisms could also be used for other policies that limit or change property use.)
I’ve also written before favorably on Harberger taxes (which I once called “stability rents”). In this system, owners of land (and property tied to that land) must set and may continuously adjust a declared property “value”; they are taxed per unit time as a percentage of momentary value, and must always agree to sell their property at their currently declared value. This system has great advantages in inducing property to be held by those who can gain the most value from it, including via greatly lowering the transaction costs of putting together big property packages. With this system, there’s no more need for eminent domain.
I’ve just noticed a big synergy between futarchy for zoning and Harberger taxes. The reason is that such taxes allow the creation of prices which support a much finer grain accounting of the net value of specific zoning changes. Let me explain.
First, Harberger taxes create a continuous declared value on each property all the time, not just a few infrequent sales prices. This creates a lot more useful data. Second, these declared values better approximate the value that people place on property; the higher an actual value, the higher an owner will declare his or her taxable value to be, to avoid the risk of someone taking it away. Thus the sum total of all declared property values is a decent estimate of total city property value. Third, it is possible to generalize the Harberger tax system to create zoning-conditional property ownership and prices.
That is, relative to current zoning rules, one can define a particular alternative zoning scenario. Such as changing the zoning of a particular area from residential to commercial. For such a scenario, one might declare a particular period during which a decision will be made on it. Given a defined scenario, one can create conditional ownership; I own this property if (and when) this zoning change is made, but not otherwise. The usual ownership then becomes conditional on no zoning changes soon.
With conditional ownership, conditional owners can declare conditional values; you can buy my property under this condition if you pay this declared amount of conditional cash. For example, I might offer to make a conditional sale of my property for $100,000, and you might agree to that sale, but this sale only happens if a particular zoning change is approved. Taxes paid are based on the actual zoning scenario that obtains.
The whole Harberger tax system can be generalized to support such conditional trading and prices. In the simple system, each property has a declared value set by its owner, and anyone can pay that amount at any time to become the new owner. In the generalized system, each property also has a declared value for each approved alternative zoning scenario. By default, alternative declared values are equal to the ordinary no-zoning-change declared value, but property owners can set them differently if they want, either higher or lower. Anyone can make a scenario-conditional purchase of a property from its current (conditional) owner at its scenario-conditional declared value. Physical control of a property only transfers if and when that zoning scenario is actually approved. There’s probably a delay between announcing a new approved scenario and allowing conditional trades in it, to give time to set declared values.
Having declared values for all properties under all scenarios gives us even more data with which to estimate total city property value, and in particular helps with estimating the difference in total city property value due to a zoning change. To a first approximation, we can just add up all the conditional declared values, and compare that sum to one from the no-change declared values. If the former sum is consistently and clearly higher than the latter sum during the declared decision period for this proposal, that seems a strong argument for adopting this zoning proposal. At least if the news that this zoning proposal seems likely be approved at current declared values has been spread widely enough to give owners sufficient time to express their actual conditional declared values.
Actually, to calculate the net property value difference that a zoning change makes, we need only sum over the properties that actually have a conditional declared value different from its no-change declared value. For small local zoning changes, this might only be a small number of properties within a short distance of the main changes. As a result, this system seems capable of giving useful advice on very small and local zoning changes, in dramatic contrast to a futarchy based on prices estimating total city property values. For example, it might even be able to say if a particular liquor store should be allowed at a particular location. As promised, this new system offers much finer grain accounting of the net value of specific zoning changes.
Note that in this simple system, losers are not compensated by winners for zoning rule changes, even though we can actually identify winners and losers. There are probably variations on this system where losers do actually compensate winners via transfers, though I haven’t yet figured out how to arrange that. Simply doing a transfer based on declared values won’t work, as then declared values will be changed to include expected transfer amounts.
We are close to a workable system, but not quite there yet. This is because we face the problem of owners temporarily inflating their declared values conditional on a zoning change that they seek to promote. This might tip the balance to get a change approved, and then after approval they could cut their declared values back down to something reasonable, and only pay a small extra tax for that small decision period. The Harberger tax system has a strong discipline against declaring overly low values, but less so for overly high values.
A solution to this problem is to correct using prices for the purely financial assets that represent claims on all future tax revenue from the Harberger tax on a particular property. That is, each property will pay a tax over time, we could divert that revenue into a particular account, and an asset holder could own the right to spend a fraction of the funds from that account. Such assets could be bought and sold in financial markets, and could also be made conditional on particular zoning scenarios. As such assets are easy to create and duplicate, the usual speculation pressures should make it hard to distort these prices much in any direction.
A plan to temporarily inflate the declared value of a property shouldn’t do much to the market price for a claim to part of all future tax revenue from that property. So when conditional and no-change prices for such tax revenue assets are available regarding a property, it is probably better to use these (scaled by the right factor) instead of the declared property values on that property when calculating the net effect of a zoning change on city property values.
So that’s the plan for using futarchy and Harberger taxes to pick zoning changes. Instead of just one declared value per property, we allow owners to specify declared values conditional on each approved zoning change scenario, and allow conditional purchases as well. By default, conditional values equal no-change values. During a scenario’s decision period, we add ups its conditional values, and if those clearly and consistently exceed the no-change values, even after correcting suspicious inflations with tax revenue asset prices, then the zoning proposal should be adopted.
Thanks to Alex Tabarrok & Keller Scholl for their feedback.
Added 25Jan: One complaint people have about a Harberger tax is that owners would feel stressed to know that their property could be taken at any time. Here’s a simple fix. When someone takes your property at your declared value you can pay 1% of that value to get it back, if you do so quickly. But then you’d better raise your declared value or someone else could do the same thing the next day or week. You pay 1% for a fair warning that “your value is too low!”