Fiscal zoning is the practice of using local land-use regulations to preserve and possibly enhance the local property tax base. Economists agree that if localities can conduct “perfect zoning,” which effectively makes all real estate development decisions subject to our view that balances its benefits and costs to the community, then the local property tax can be converted into a benefit tax and lacks the deadweight loss of taxation. This essay argues that American zoning is closer to this ideal than many other economists think. The practice is often difficult to detect because zoning serves several objectives besides fiscal prudence. Zoning and related land-use regulations began in the United States early in the twentieth century and spread rapidly(Raphael Fischler 1998). Almost all American urban municipalities and counties now have zoning regulations. The question for this essay is how much traction does zoning actually have? A counterexample may put this in perspective. In a famous article, Ronald Coase (1960)used cattle trespass as a hypothetical example of the effect of legal rules. In rural areas where both cattle ranching and crop farming are viable, cattle must be kept from invading cornfields and other areas that might attract them. Two rules to control the animals are available. Ranchers can put up fences to keep roaming cattle out of fields (or actively herd them to accomplish the same goal), or farmers can put up fences around their crops to keep out cattle. Coase’s objective in his article was to show that it did not matter for economic efficiency whether the farmer was legally obliged to fence out cattle or the rancher was legally obliged to fence them in.

I have in other work applied Coase’s argument to apply to bargaining between developers and municipal officials who control zoning(Fischel 1985), but right now I will point to a different issue that Robert Ellickson raised. Maybe the legal rules—fence in or fence out—do not actually govern cattle trespass. Ellickson did field research in Shasta County, California, where legal rules had recently been changed so that owners of free-roaming cattle had to be fenced in. He found to his surprise that the legal rules did not matter much at all. Traditional ranchers and their neighbors adhered to self-generated rules of behavior that required, in a nutshell, that ranchers always take care of their animals, regardless of the law, and that victims. Ellickson expanded his inquiries into the relevance of property law in other dimensions and produced a now-classic book, Order without Law(1991).

Property taxes and deadweight loss so does zoning actually control private land-use decisions, or is it, like cattle trespass law in Shasta County, just an appendage that only crops up occasionally? The particular issue examined in this essay is whether zoning allows communities to control the composition of its property tax base. Here is a brief explanation of the relevance of that question. Economists in the tradition of Henry George (1879)have argued that a tax on land is a better tax than general property taxes. Higher tax rates on land do not cause owners to remove it from the jurisdiction or modify their decisions about how to use it. Of course a higher tax rate on land will make owners of land poorer (assuming they had not anticipated the higher rate before they bought the land), and their poverty might cause them to do less of what they had been doing before. Unhappy land owners might decide to sell their land in that case, and the buyers would pay a lower price for it as a result of the higher annual tax burden. But the buyer’s decision about what to do with the land will not be affected by the tax.