Exploring Taxation as a Substitute for Overregulation in the Development Process

We already impose a significant tax on development in the form of time, cost, and concessions made by developers during a discretionary approval process. The question to confront, then, is whether a tax on development causes more or less distortion than the current regime, not whether the tax causes more distortion than a regime with no tax at all. Consider how a system that combines rules with taxes might work. In some ways, the system would operate like traditional zoning. The local legislative body would enact a zoning code, albeit a more detailed code than under most current regimes, incorporating into its rules many of the features currently found in subdivision regulations. A developer who complies with the code would truly be entitled to build “as of right,” subject only to review by a building inspector to ensure that the project actually complies with the code. A zoning board of appeals or a similar body would still need to review the inspector’s conclusions, issue first-order interpretations, and grant the equivalent of variances, still constrained by standards articulated in the ordinance. At the same time, the municipality’s local legislative body would impose a general tax on development within the municipality. The tax might be based on square footage or some other easily measurable feature. Local officials might even channel development by imposing different taxes on different kinds of space. For instance, square footage devoted to affordable housing might be taxed at a rate of zero, while green buildings might be entitled to a partial exemption—all determined by preset standards that enable developers to factor the tax into their development planning. The municipality could then use the tax funds it raises to control externalities generated by development. If the code failed to adequately address road, water, or sewage needs, the municipality could use funds to augment inadequate systems. If open space proved inadequate, the municipality could use the funds to condemn land for parks. Municipalities might even allocate the tax revenues to any municipal purpose whatsoever, 56 Development incentives provided by a comprehensive tax scheme are no more objectionable than the current incentives offered by many municipalities. See, e.g., TOWN OF BABYLON, N.Y., CODE § 89-86 (2006), available at http://www.ecode360.com/6806042 (offering a building fee refund for projects that achieve LEED certified status); CHICAGO, ILL., MUN. CODE § 13-32-301(c) (2010) (waiving permit fees for projects that qualify for the Chicago Green Permit Program). 2013] TAXATION IN LIEU OF OVERREGULATION 433 leaving elected officials free to decide where addressing land use externalities lies on the list of municipal priorities. This combination of rules and taxes would preserve municipal autonomy. A municipality seeking to encourage development could keep development taxes low and impose less stringent standards on developers. Conversely, an antidevelopment municipality could keep taxes high and impose more stringent standards. The biggest challenge for a tax-based scheme involves the practice—which is prevalent in many municipalities—of imposing excessively restrictive zoning ordinances with the expectation that the ordinance will be amended when a developer proposes a sufficiently attractive project. If municipalities were to continue that practice, a tax-based scheme would accomplish little. All of the review would be centralized in the local legislative body, which might eliminate inconsistent review by multiple boards, but the scheme would do little to reduce rent seeking. A local legislative body—unlike a zoning board of appeals or a planning board—is not typically subject to time constraints. As a result, when a developer seeks an amendment, the local legislature is generally free to take as much time as it wants to review the proposal, taking input from every potential interest group, and ultimately redrafting the ordinance to impose requirements a developer could not anticipate. Limiting municipal power to amend the ordinance could solve this problem. Of course, evolving circumstances make it important for municipalities to retain some power to amend their ordinances, but state legislation could limit municipal power to enact amendments more often than once every three 57 Opening up the process would increase the opportunity for rent-seeking. See generally Sterk, supra note 45, at 1745-46 (noting that in a regime without constraints on who might seek to benefit from exactions, the potential for rent-seeking increases). The increased opportunity for rent-seeking would not directly affect the development process so long as rent-seekers are unable to increase the size of the pie by opposing (or threatening to oppose) a particular development project. Of course, rent-seekers might seek to impose a higher development tax, but that risks discouraging marginal development (and threatening the total revenue collected). See Vicki Been, “Exit” as a Constraint on Land Use Exactions: Rethinking the Unconstitutional Conditions Doctrine, 91 COLUM. L. REV. 473, 478, 509-45 (1991). 58 Charles Tiebout, A Pure Theory of Local Expenditures, 64 J. POL. ECON. 416, 418 (1956) (noting that consumer-voters can choose to move to local community that best serves their preferences). 59 Fenster, supra note 30, at 622-24. 60 See, e.g., N.Y. TOWN LAW § 267-a(8) (McKinney 2011) (requiring the board of appeals to render a decision within sixty-two days of the hearing); N.J. STAT. ANN. § 40:55D-73 (West 2011) (requiring the board to render decisions within 120 days). 434 BROOKLYN LAW REVIEW [Vol. 78:2 years. More frequent amendments would engender a presumption of invalidity, a presumption that could be overcome only by proof that the existing ordinance reflects a zoning “mistake”—a variation on the change or mistake rule currently in force in a number of states. If it were apparent to the local legislative body that it could not amend its ordinance at will, the body would have an incentive to avoid excessive restrictions, since those restrictions would prevent development and therefore eliminate tax collections.