The other day I read a story that could be a textbook example of conflict between local and global environmentalism. The Nevada desert near Burning Man turns out to be an ideal place to put a geothermal power plant: there’s hot rock close to the surface, and by drilling down to it, you can easily generate a whole bunch of zero-carbon, totally reliable baseload electricity— just the sort of thing we need much more of to accelerate the green energy transition. So a power company applied to drill and build on federal land there, and got lots of approvals and accolades.
Until the residents of the tiny town of Gerlach, right next to the planned power plant, objected. They said the traffic, the noise, and the sheer bigness of the generation buildings and equipment would ruin their rural quality of life and imperil local wildlife too. They want their town to be a place for culture and art and tourism and outdoor recreation, not the bedroom community for a giant industry. And the local authorities, so far, are siding with them and refusing to grant permission to build.
If you’re a traditional environmentalist, this is an inspiring tale of ordinary people standing up to a megacorporation bent on despoiling their land and their community for profit. If you’re a YIMBY or “it’s time to build” type, it’s a depressing tale of vetocracy blocking desperately needed green infrastructure and keeping American life poorer and dirtier than it should be. But if you’re an institutions nerd, you might ask: is this a job for Harberger taxation?
Free for the takings
The real estate website Zillow used to have a feature called “Make Me Move.” The idea was that even if you weren’t actively interested in selling your house, you could put up a listing price anyway, just to see if someone would give you a more attractive offer than you expected. You didn’t have to take the offer, but it was still a useful signal to know whether someone was willing to pay that much. And hey, maybe you’d discover a mutually beneficial opportunity to get a bunch of cash and give someone else a way to buy a house they couldn’t have otherwise.
Harberger taxation is like a mandatory version of Make Me Move. Under a Harberger system, all property owners would be required to declare a public, binding price for their properties. Property tax assessments would be based on that price rather than on a state-generated assessed value— thus pressuring you not to inflate the price too much. And anyone who wanted could force you to sell them your property simply by paying you your declared “make me move” price— thus pressuring you not to underprice it to save on your tax bill.
The intuitive appeal here is not just about cleverly aligning incentives for accurate valuation, but about replacing messy political questions with theoretically simple economic ones. Right now, only the government can force sales through eminent domain, and the Constitution’s Takings Clause says they can only do so “for public use” and with “just compensation”. But what counts as a public use, and what level of compensation is just? The Harberger tax artfully dodges those issues. Anyone who thinks they have a higher-value use for your property can in effect seize it through private eminent domain, and you decide how much they have to pay to make you whole.
So if the power company really stood to gain so much from drilling geothermal wells in Gerlach, they could just buy out the locals and save years of wasteful litigation and costly uncertainty. Big thorny overlapping-jurisdiction conflicts over transmission lines, wind farms, etc might be a lot easier to resolve, too. Nowadays, when so much technically feasible and socially crucial progress is held up by knotty permitting fights, this sort of mechanism looks temptingly like Alexander's sword. Certainly its boosters, who include extremely smart eccentric economists like Glen Weyl and Robin Hanson, seem to see it that way.
Home is where the irrationality is
Yet there is almost no popular constituency for “pure” Harberger taxation beyond eccentric economists, and I confidently predict there would be none even if it were far more widely understood. I predict this because I am about as YIMBY as they come, and when I contemplate what it would mean for me as a homeowner, I am viscerally freaked out. In general, as Freddie deBoer and others rightfully say, progress advocates don’t do nearly enough to cultivate empathy for those who stand in the way. Instead we dismiss them as narrowly selfish, shortsighted, and/or bigoted, which makes us feel morally superior but doesn’t actually help achieve YIMBYish goals.
So since introspection is easier than empathy, I aim here to unpack my intuitive dread of Harberger taxation, in hopes it can point toward keyhole solutions that might achieve much of the allocative-efficiency benefit with much greater political palatability. If it’s so urgent to realize that benefit, it should likewise be urgent to brainstorm incremental steps toward it that the normies could get behind.
I notice I have two related classes of fears:
Non-pecuniary value of home. There are a bunch of reasons why I value my current house much more than other houses I could buy for the same amount of money, even nearby ones. I have a very comfortable hyperlocal knowledge of the neighborhood; my wife and I have friends here; our son does too, and he would hate to have to change schools; and exchanging the quirks of this house for the quirks of some other one would be a long-lasting source of stress. That’s all very hard to put a price on. You can blame me for succumbing to the endowment effect— but good luck trying to make policy on the basis of that blame.
Fear of malicious exploits. What if some billionaire decides to make me move as revenge for my insulting them in a blogpost, or just for the lulz? Or what if some super-smart real estate investment company comes up with a scheme to manipulate me out of my house on the cheap? I don’t feel like I know enough about the relevant people and markets to be able to gauge the likelihood of such things. Today I’m protected by my right to refuse even a very generous offer, and the Harberger system would take that protection away. I could try to shore it up by raising my “make me move” price and accepting the increased tax bill, but it feels intuitively wrong to have to buy security in my own home that way. And again, if even I am this fearful, probably less sophisticated and/or less economically-inclined homeowners are much more so.
What might we do to address these fears and still reap some of the gains? I can think of four things off the top of my head.
Split the roll
Californian real estate is notoriously poorly allocated because of Proposition 13, which protects incumbent property owners from increased taxes even when their properties rapidly appreciate in value. Most people recognize what a disaster this has been, but few CA homeowners would willingly give up its protections. One recent proposal designed to route around this would have created a split roll in which residential properties were still protected but commercial ones were not. It failed narrowly, but it likely came a lot closer than any plan affecting residential tax rates could have done.
What if we introduced Harberger taxes on a split-roll basis? Commercial property owners ought to be far less burdened by the fears above. Their property valuation is much more pecuniary and “making them move” less of an emotional prospect; being bought out of one’s business feels very different than losing one’s beloved home. And letting decentralized eminent domain override holdout business owners, while it wouldn’t help with situations like Gerlach, would likely resolve plenty of costly permit fights elsewhere.
Furthermore, trying it out with this limited scope could produce real-world experience that, if positive, would increase the policy’s popularity over time and build support for incremental expansions— perhaps, say, bringing residential properties other than primary residences into the system. Eccentric economists tend to be confident that their models accurately describe how policies would work in the real world; normies prefer to kick the tires.
Take the whole thing, please
We might also address some fears about targeted misuse by requiring properties to be bought in adjacent chunks— say, at least an entire city block in size, or a certain minimum total acreage— rather than one lot at a time. The classic use case for traditional eminent domain is enabling the clearance of a large tract of land for common infrastructure without being blocked by a few recalcitrant holdouts. If private “make me move”-ers had to buy a bunch of adjacent properties at once, they’d be more inclined to do so only when such a large project (like a geothermal plant!) required it.
The larger upfront cost of an aggregated purchase would serve as a deterrent to malicious targeting of individual homeowners or other such gamesmanship. Moreover, I think it would make it feel better for those forced to move if they knew their neighbors would have to do the same: an irrational feeling, perhaps, but sharing sacrifice often makes it go down easier. I admit I haven’t worked out the incentive implications of an aggregation requirement on individual owners’ price declaration strategies; maybe it defeats the purpose entirely, maybe it just requires some tweaks to fix, but again this is where a limited-scope pilot could give a lot of information.
Next year out of Jerusalem
Another thing that would soften the blow of being forced to move is having a very long advance notice period: say, a year or even two where the forced-buyer’s payment is in escrow but the forced-seller still has the use of the property. With that much notice, one can do a lot of both logistical and psychological adjustment. And for socially important projects that would create value for decades, having to wait a year to begin would be a relatively small upfront cost. Indeed, it would be less of a cost than the typical multi-year permit-and-litigate process now imposes on such projects, and a far more pleasant and predictable cost too.
Ease into it
Finally, we ought to game out more how to apply Harberger principles to situations where the optimal allocation solution involves the owners of a property accepting an easement: that is, losing some of the use value of their property but not having to vacate it altogether. Is there a “make me accept a slightly less nice quality of life” price that is appropriate in a situation like Gerlach, rather than jumping all the way to the “make me move” price? Can we extend the price declaration mechanism, or replace or supplement it with a negotiation mechanism, in a way that gives the same sort of incentives to get to the “right” price for an easement deal? I haven’t seen a simple answer to that— maybe there isn’t one— but again, it’s a path worth probing toward incremental benefit.
As always, other ideas are more than welcome, as are debunkings of the above ideas. When two strong intuitions are in tension— in this case, “people ought to be secure in their property ownership” and “at some reasonable price you ought to be able to buy anyone out, if you have a sufficiently valuable thing to do with their property”— it’s worth putting thinking caps on.
Another thing that might help make a Harberger tax more acceptable is to have some kind of escape clause if you come to realize you priced your property incorrectly. For example, you could legally back out of a sale if you pay, e.g., 2x the tax bill arising from the difference in your original price and the offered price.
This could give rise to a secondary industry of insurers who would protect you against having to move if you price the property at their recommended value. I’m not sure if that would be a good thing for the goals of the system, but it could at least put a price on some of the optionality that people would object to losing and take away a bit of the pressure to price your property exactly right.
Anyway, I got here via the ACX open thread and really enjoyed this piece!