Parking lots as tax arbitrage during the Great Depression

I’ve learned a lot from Fogelson’s Downtown, but one thing that I had absolutely no idea about before I read this book was how Depression-era tax policies encouraged downtown landlords to tear down their buildings and replace them with parking lots (emphasis mine):

By the mid 1930s the owners of Detroit’s Temple Theater, a nine-story office building that had once been the home of the city’s most successful vaudeville house, had had enough. In a city reeling from the Great Depression, the vacancy rate for office buildigns was running between 35 and 40 percent. With tenants hard to find – and rents, which had been falling steadily, hard to collect – the Temple Theater no long paid. In an attempt to lower property taxes and operating expenses, its owners did what other downtown property owners in Detroit and other cities had done. They demolished the building and turned the site into a parking lot. [These] were commonly referred to as “taxpayers.” The “taxpayers” were as much a legacy of the depression as the “Hoovervilles,” bread lines, soup kitches, and dance marathons. They symbolized downtown in the 1930s as much as skyscrapers, department stores, and high-rise hotels had in the 1920s. […]

Things were much the same in downtown Los Angeles, where so many buildings were torn down and replaced by parking lots or “taxpayers” in the 1930s that by the early 1940s roughly 25 percent of the buildable land was used to store autos. In a business district of less than one square mile there were no more than nine hundred parking lots and garages, with space for more than sixty-five thousand cars. […]

By tearing down the buildings, the owners could lower their tax bills and reduce their operating expenses. By replacing them with parking lots or one- and two-story garages, they could capitalize on the growing demand for parking space and generate enough income to hold on to their property until the vacancy rate dropped to a point where new construction was warranted. By the time it did, however, the country was in the middle of World War II, and the government had imposed tight restrictions on all nonessential construction. […]

According to downtown business interests, local officials also took other measures that gave the outlying business districts a competitive edge. They imposed more stringent fire, sanitary, and building regulations in the central business district, a step that drove up the costs of doing business downtown. Even worse, they assessed central business property at a much higher rate, a practice that drove costs up even more. As a result, wrote Oles in 1935, a downtown Seattle lot that rented for five dollars per square foot a month was paying ten times as much in property taxes as a suburban Seattle lot that produced the same income. Local officials, downtown business interests complained, were assessing property not on a basis of its “revenue producing power,” but on the basis of “a theoretical ad valorem figure” – a figure that was based on its potential, though highly unlikely, use as the site for a tall office building.

Fogelson also writes more about why downtown property was assessed at such high rates:

To understand why, it is necessary to bear in mind that down through World War II cities derived the bulk of their revenue from property taxes, of which the central business districts paid a share out of all proportion to their size. They paid a very large share because their assessed values, on which their property taxes were based, were very high – 20 percent of the city’s assessed value in Chicago, 27 percent in Milwaukee, and nearly 30 percent in Seattle in the late 1920s, by which time the incipient decentralization of commerce was well under way. Their assessed values were high partly because their property was the most valuable in the city and partly because, in the view of two experts from Milwaukee, it was “greatly over assessed.” The ratio of assessed value to actual value was much higher in the central business district than in other parts of the city, sometimes twice or even three times as high. The disparity was especially striking on the edge of downtown. As William H. Ballard explained, property there was normally assessed not on the basis of its actual value – the capitalized value of its current earnings – but on the basis of its speculative value – the value if someone wanted to develop it as a site for an office building, department store, or luxury hotel. This property was so assessed (and thus so “excessively and unequally taxed”), observed Cuthbert E. Reeves, a Los Angeles real estate economist, even if there was “not a chance in the world to finance or find tenants for such [a] development.”

Downtown was hit so hard in the 1930s and 1940s, first by the Great Depression and then by decentralization, that some property owners demolished their buildings and either replaced them with “taxpayers” or left the site vacant. Others persuaded the local officials to lower the assessed value, no easy task. Still others refused to pay their taxes, a practice that drove the number of delinquent properties up to record levels. Despite these maneuvers, the central business district still paid a large share of the property taxes in most cities in the 1930s and 1940s, if not as large a share as it had in the 1920s. According to several studies, moreover, downtown produced much more in property taxes than it consumed in public services – two and a half times as much in St. Louis and even more in Boston, where the central business district generated enough revenue not only to meet its own expenses, but also to make up most of the deficit attributed to the blighted areas. Small wonder that Graham Aldis of Chicago, where about one-third of 1 percent of the city paid over 17 percent of its taxes, called the central business district “a milch-cow for the tax collector.” And that Albert D. Hutzler, owner of Hutzler Brothers, Baltimore’s largest department store, referred to downtown’s tax base as “the lifeblood of the city.”

A thriving downtown, one with high (and steadily rising) property values that generated more than its fair share of municipal revenue, was vital to more than the city’s ability to meet its day-to-day expenses. It was vital to its ability to undertake long-term capital projects as well. […] According to a 1941 study, New York was able to stay under its debt limit only by assessing Manhattan real estate on the basis of “fictitious” (that is, highly inflated) values. If the city had assessed property on the basis of earnings, a policy that had recently been adopted in Seattle, its bonded debt would have exceeded its debt limit, and New York would have been “legally bankrupt.”

I should add that much of this property tax revenue was used to fund road construction – something I covered in my personal blog two and a half years ago (!!), which I believe spurred Adam to invite me to post on Market Urbanism.

Also of note: The property tax gap between density and sprawl is, unfortunately, still with us. Even today, multifamily rental property has effective local property tax rates that’re 18% higher than taxes on single-family, owner-occupied units. And that’s just on the local level – when you factor in the mortgage interest tax deduction, the disparity is even higher.