The news that a posh San Francisco street was sold for delinquent taxes exposes the deeper issue with America’s local revenue system.
The news circulated last week that a couple had purchased one of the most exclusive streets in San Francisco through a delinquent property tax sale. Capitalizing on a routine if little understood aspect of municipal governance—city government’s sales of property to recoup their unpaid taxes—the couple nabbed the street right from under its tony residents’ Tesla tires. Readers chuckled that Presidio Terrace’s residents might soon be forced to either buy the street at a considerable mark-up or pay an exorbitant rent to park their cars in their regular spots.
For urban scholars and analysts, the episode shed unexpected light on the use of property taxation—the lifeblood of city governments. Now is the right moment to re-evaluate the practice, especially as progressives begin to look to local governments to check the Trump administration’s action on immigration, welfare, Medicaid, and other issues.
The readiest source of funds available to most cities is the property tax. But, over the last century, that source of revenue—beyond the often discriminatory process of tax sales—has created a series of perverse incentives for municipal government that have often been the cause of so many social problems progressives want to prevent Trump from exacerbating.
Spatial and economic inequality, gentrification, unequal housing, and yawning gaps in educational opportunities are certainly the product of overtly racist policies. But even for administrations with ostensibly good intentions, cities’ historical dependence upon property values to fund municipal services has been a structural constant in ensuring iniquitous outcomes: Because municipal governments depend on property values for their chief source of local revenue, it has always been in their interest to abet systems of racial capitalism rather than stand as bulwarks against them. Until progressives understand this history, they will be doomed to repeat it.
Cities were not always as strapped for cash as they are today. For much of American history, local governments enjoyed the greatest revenue raising capacity of any level of government. In 1932, cities harvested 52 percent of all taxes collected, the remainder trickling up to state and national governments. Blessed with the independence these resources ensured, local governments led the way in progressive policy experiments—pioneering everything from municipal energy production, distribution and mass transit, to increased spending on schools, health facilities, and charitable services.
But the fiscal ground began to shift with the ratification of the 16th amendment, when the federal government began a steady march toward monopolizing the most progressive and durable form of public revenue, the income tax. Cities continued to rely on property taxes, which were not terribly regressive since the majority of Americans didn’t own much taxable property.
The New Deal and World War II changed this equation in critical ways, clinching the federal government’s dominance on income taxation and creating policies that democratized property ownership. By the end of the war, the federal government taxed income at staggeringly high (but progressive) rates that remained until the 1980s. At the same time, New Dealers pursued an aggressive program of subsidized home building and mortgages that favored suburbanization and white Americans. These efforts democratized home ownership (for some). But they meant that property taxes would be shouldered more democratically, too.
Meanwhile, cities experienced the Depression as a crisis of urban land values. Shuttered or derelict factories no longer delivered abundant property tax revenues, and more and more middle class white Americans were decamping for the suburbs. As a result, nearly 1,200 municipal governments went into default during the Depression.
Rather than enable cities to tax income at greater rates (by incentivizing state governments to lift constitutional bans or caps), New Dealers opted to help cities stimulate urban land values through a massive program of urban redevelopment.
The program was Urban Renewal, which delivered vast federal subsidies paired with eminent domain powers to enable cities to clear “blight” and “slums” and deliver the land to private interests for redevelopment—and restored property tax revenues. As Guy Greer, one of the program’s designers put it, “The people and business concerns of the urban communities have been paying almost all the taxes collected by the federal government with strictly limited tax resources left for the local governments’ own expenditures.” It “seems only fair that the federal government should aid the local governments” by helping to stimulate urban land values.
With renewal funds, cities targeted neighborhoods with the least political clout—home to minority and poor white residents. Mayors happily forecast restored land values and tax yields as they seized homes, cleared land, and conveyed parcels to private developers. By the middle of the 1960s, as the Civil Rights movement reached high tide, minority residents viewed urban renewal as a particularly egregious form of racial violence—“Negro Removal” in James Baldwin’s famous popularization. According to one estimate, by 1966, some 66,000 families were being displaced annually, with minority groups losing their homes and communities at disproportionately high rates. The explosions of rebellion and unrest that rocked American cities in the late 1960s were often directly tied to the racist displacement of urban renewal.
In the intervening decades, cities turned to a range of other methods to bolster local property values, very often at the expense of racial minorities: Floating municipal debt, pursuing new redevelopment programs, offering tax abatements, developing racist property tax assessments, and even annexing white suburbs, which had the added effect of diluting minority residents’ electoral clout.
And then, having reached the limits of the property tax by the early 1980s, cities learned to cultivate the most regressive forms of revenue—tickets, court fines and fees—a practice laid bare in Ferguson, Missouri, after the death of 18-year-old Michael Brown.
As the Obama Administration’s Department of Justice found, Ferguson, like many other cities, had become so strapped for revenue that its policies and practices were primarily shaped by revenue needs. Ferguson, it turns out, actually underperforms
As of 2014, local governments still depended on revenue from higher levels of government for their largest share of resources—36.3 percent. The property tax was a close second at 29.8 percent. And punitive fees, fines, and charges for services were cities’ third most important source of revenue, subsidizing 22.6 percent of municipal budgets. Meanwhile, local income taxes accounted for just 2 percent of revenue.
Local governments’ dependence on robust property markets has always created perverse and iniquitous incentives. Indeed, the pursuit of rising property values was a structural condition long before it became a defining feature of urban neoliberalism.
A final example only makes the point more clearly. In the 1970s, a pioneering generation of big city African American mayors was elected on idealistic pledges to democratize urban administrations. But almost to a mayor they were forced to compromise with the interests of property. In Cleveland, Carl Stokes pursued an enormous but failed redevelopment plan. In Detroit, the union organizer turned mayor Coleman Young succeeded in building Detroit’s massive Renaissance Center but struggled mightily otherwise. In Newark, New Jersey, Kenneth Gibson was ultimately charged with being a sell-out—as Amiri Baraka, a one-time supporter of Gibson’s put it, the mayor quickly became a “neo-colonialist” more concerned with the profits of “huge corporations” than with his African American electoral base.
In reality, each mayor confronted the fiscal and structural limitations—to say nothing of racial—imposed by cities' disparate revenue sources. By then these resources had been hemmed in by an American political center increasingly averse to taxation—no matter the level of government. Those discontents are even more entrenched today.
Liberals are right to look to alternative sites of public power to check Trump’s punitive racial nationalism. Some cities have committed themselves to the Paris climate agreement, and many others are declaring themselves sanctuary cities. But, at the end of the day, many of the most pressing problems of American cities require revenue. Recently, there has been some interest in developing alternative sources of local revenue. Henry George’s land tax even seems to be coming back into vogue. A tax on land, however, would likely recapitulate the racial iniquities bound up in the property tax.
Ironically enough, progressives might look to two Republican presidents for inspiration. Richard Nixon passed General Revenue Sharing, a program in which the federal government sent billions of string-free income tax revenue to practically every local government in the country. While this is little more than a fantasy at our present political moment, in the future a modified and more carefully regulated version of revenue sharing could offer cities desperately needed funds and flexibility.
Ronald Reagan offers the other model: Encouraging local governments to tax income themselves. Reagan’s plan was baldly cynical at the time. In the middle of the tax revolts he called for devolving a range of essential social services to local governments and invited them to raise revenue and fund them themselves. Congress saw through this effort to slash the social safety net. But the notion of enabling local governments to tax income at higher rates is worth considering - and not only because the income tax is the least regressive source of public revenue. What would an urban development plan designed to boost employment rather than land values look like?
Regardless of the sources of revenue cities develop in the coming decades, progressives must carefully interrogate the kinds of incentives they will create. Without this kind of consideration, we might further entrench our most glaring and longest-lived inequalities.