What we haven’t quite grasped is the ways in which municipal financial instruments can affect the location and density of developments that pay for infrastructure and services. Municipal governments can affect urban form not only with planning tools like zoning laws, but also with municipal financial tools. Sometimes these financial tools work with planning tools to curb sprawl. But too often they have the opposite effect—cities subsidize sprawl by charging an artificially low cost for infrastructure and services to new development.
Fiscal incentives influence where people choose to live, where businesses choose to locate and where municipalities choose to invest in infrastructure. If a municipality levies the same charge on developers whether they locate next to existing services or far away, there’s no incentive to locate near existing services where the cost to the municipality is much less. Instead of encouraging density, property taxes apply to both land and improvements, discouraging owners from making improvements. If cities want to discourage sprawl, financial tools must be structured in ways that provide the right incentives for compact development.