Coordinating Opposite Approaches to Managing Urban Growth and Curbing Sprawl A Synthesis

American Journal of Economics and Sociology, The,  Jan, 2001  by Thomas L. Daniels

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In the past 20 years, the economic returns to farmland within 50 miles of major metropolitan areas have generally exceeded the returns to farm labor and capital. That is, public investments in roads, schools, and other infrastructure have been capitalized into private land values. Indeed, farmers commonly view their land as a pension account that will be cashed in at retirement. This practice often means selling the farm for development rather than agriculture to maximize net returns.

From a public perspective, agricultural land produces open space amenities as well as food and fiber. Recent studies on cost of community services have found that agricultural land tends to generate more income in property taxes than it uses in public services. Conversely, residential development typically costs more in public services than it pays in property taxes. Thus, farmland produces net revenue gains compared to residential development. [10]

Various farmland protection techniques have been employed to discourage or minimize development, especially in rural-urban fringe areas. Yet most of these techniques provide the farmer with scant compensation for the development restrictions placed on the farm. Property tax breaks are usually small in comparison to the sums offered by developers. And often property tax breaks merely subsidize farmers' holding costs until they decide to sell for development. Agricultural zoning frequently encourages the breakup of farms into large residential lots with little capacity for agricultural production. But even where agricultural zoning significantly restricts land use, this restriction is not permanent. Rather, zoning in general is notoriously changeable as decisions on re-zonings are made by politically vulnerable local officials.

Farmers are thus left with two choices: either tough it out in farming and hope to sell the farm to the children or another farmer, or else sell out for development. An alternative to these choices is the sale of development rights to a state or local government. [11] In a purchase of development rights program, a landowner receives payment for the unearned increment in the land: the difference between the development value and the land value restricted to agricultural use. The payment is for one time only, and does not reflect the potential appreciation in the unearned increment over time. In return, the government is able to lock up land in agriculture or open space use in perpetuity (or for a time period specified in the easement document).

Critics charge that a purchase of development rights program is merely paying the landowner for the increase in property value that was caused by public investment in nearby roads, schools, and sewer and water lines. But the strong limitations on future development of the property make for a compelling quid pro quo arrangement. The value of the land for agricultural use may rise, which may indeed reflect the greater scarcity of land for farm use. But this increase in value is likely to occur much more slowly than the increase in recreation, residential, commercial, or industrial real estate values. Moreover, the purchase of development rights is less expensive than purchasing the land in fee simple.