Mobile Home Parks, Harberger Auctions, and The Hold-Up Problem

Harberger taxes are a proposed solution to the assessment problem and are frequently mentioned on online forums. These taxes may suffer the same problems currently facing mobile home parks.

Hello,

Lars and I are now on the fourth week of posts to Progress and Poverty, so I feel it's time for me, Greg, to stir the pot. In the past couple of weeks, Harberger taxes have been mentioned a few times in conversation, and the suggestion occasionally comes up in online forums. I’m not sure the idea is all that common, but it's salient enough online for me to want to write about it.

I hold that Harberger taxes are a bad idea, and I write this article to put the idea to bed, or else be proven wrong. I look forward to your comments as to which is the case.

The Mechanics of Self Assessment

If you are not in the online Georgist forums, you may not have heard about Harberger Taxes.

The idea was introduced by Arnold Harberger, a 20th century economist, and was made more famous by Eric Posner and Glen Weyl in their book Radical Markets, which, among other ideas, proposed using Harberger's system. The premise is to allow people to assess their own property according to what they believe it is worth, rather than the more conventional method of employing professional property assessors (government employed or otherwise).

Let's illustrate with a concrete historical example. In the 16th century, ships passing through the Danish sound of Øresund were obligated to pay a toll on their cargo, equal to a fixed % of the cargo's value.

Who decided the cargo's value? The ship's own captain, of course. However, there was a catch -- the Danish crown reserved the right to buy the ship's cargo for exactly that price.

This created a system that perfectly balanced the captain's incentive to arrive at a fair price for his cargo, because there were consequences for both under and over-valuing.

He had an obvious incentive to declare a low self valuation--if he assessed his cargo at just one Danish Krone he'd pay almost nothing in tax. However, that would invite the crown to purchase his cargo at a bargain basement price.

He also had an incentive to declare a high self valuation--if he valued his cargo at one billion Danish Krone, the crown would surely let him keep his goods (and on the off chance they did elect to purchase, he’d be thrilled). Unfortunately, he would then have to pay taxes on a billion Kroner valuation.

But let's say he valued his cargo somewhere in the middle, not too far off from what was hoping to sell the goods for at his final destination? Then the taxes would be reasonable, and if the crown called his bluff and purchased the cargo--well, he'd be happy to accept at the stated price, wouldn't he?

Harberger taxes work on this exact same principle, but applied to terrestrial goods rather than maritime. The owner is free to state any price whatsoever for their property. The tax rate is applied to this self-assessed price, with the catch that any member of the public is free to buy the property at the self-assessed price.

Alternative implementation methods are a bit less crude, with some adding provisions that allow the property owner to reject the offer, triggering a nuanced offsetting mechanism that raises the tax burden towards the offered value.

This is good market design for getting property owners to determine the true worth of the property to themselves:

Declare too high? You'll pay hefty taxes.

Declare too low? Someone might snatch your property,

In the next section, I show how the Harberger tax plays out in theory. Then, I detour to explain the situation of mobile home parks before returning to my criticism of Harberger taxes. Although the Harberger tax system is an elegant solution for domains such as maritime trade, the insecurity of tenure it introduces is a real problem when you're not just trading goods, you're living in them.

Mobility in Harberger’s World

Let's assume I own and live in a van that's genuinely mobile. Without any particular effort, I can drive my van away at any time. Nothing ties me down to any particular location. I also own a parcel of land which is vacant except for my van.

Living in a relatively undeveloped suburban area, I self-assess my land at $10,000 under the Harberger system. With the standard 7% Harberger tax rate, I pay $700 in taxes annually.

Setting my valuation

How did I arrive at my self-assessed $10,000 valuation? It's a strategic balancing act between minimizing tax burden and protecting against unwanted sales.

Consider that in a tax-free world, this land might be worth $20,000.

In the Harberger world, I could self-assess at $20,000, but then I would have to pay taxes on that full amount. If I was only willing to pay $20,000 in a world without taxes, then in a world with taxes, I’d pay less. Taxes decrease the selling price of the land.

Alternatively, I could value the land at zero dollars. Then, my tax would be zero dollars, but then anyone can take my land for free.

Harberger taxes do not drive the selling price of land to zero. The optimal self-assessment lands somewhere in between, and let’s assume for argument’s sake that in this example a full Harberger tax drives land values to half the value in a tax-free world. So, I set my land valuation at $10,000.

The offer

After setting my self assessment at $10,000, someone comes along and offers $15,000 for my land. Since this exceeds both my self-assessed value ($10,000) and what the land is actually worth to me, I accept their offer. I pocket the $15,000, start my van's engine, and drive ten minutes further from the urban core where I purchase another plot with a $10,000 self-assessed value.

Easy enough.

But, in the real world, property is not mobile. Let’s take that planned detour to mobile home parks.

Immobility in Mobile Home Parks

Mobile homes are not actually mobile. Despite their name, these prefabricated homes, typically costing $50,000-$100,000, become essentially immobile once placed. To move a mobile home would cost north of $10,000, and that's just the monetary expense, to say nothing of the physical and social cost of moving. Meanwhile, they're occupied predominantly by low-to-moderate income families seeking affordable housing options, and often represent these families' largest assets.

If you own a mobile home, you need somewhere to park it where you can connect to electricity, water, and sewage, such as a mobile home park. In many cases, the mobile home you may have purchased was already situated in such a park.

I grew up in a mobile home, and toward my later years in high school, it was not hard to realize that someone could simply buy our park and raise the ground rent substantially overnight, and we would have no recourse. We would either have to pay the increased ground rent, or abandon the mobile home to the park owner.

What struck me as an obvious, though unethical, idea soon came to be treated as a genius idea in the business world. In 2022, the private equity firms, including Blackstone, Carlyle, Stonebridge and more, were quickly acquiring parks and increasing rents.

The firms would even increase rents beyond any reasonable ground rent price. There are plenty of stories out there, including one last year of rent increases of 44% after a park was acquired. Theoretically, a firm could increase monthly rent to a million dollars. Then, everyone gets evicted and leaves their mobile homes behind, and the park turns around and rents those homes at market value the next day.

The New Yorker tells the stories of private equity firms buying up mobile home parks to the detriment of the residents.

This is classic rent-seeking behavior. When ground rents increase dramatically, the asset purchased by a low-to-medium income family loses substantial value overnight. Unable to afford the new rates, many residents face eviction and abandon their homes. Park owners then acquire these abandoned homes and rent them to new tenants.

Some of the people involved are genuinely terrible people. This John Oliver segment provides some insight.

John Oliver segment on mobile home parks.

This is known as the "hold-up problem". A robber puts a gun to someone's head, and either they hold up their hands and allow the robbery to take place, or they risk being shot. In mobile home parks, residents face an impossible choice: surrender your home or pay more rent.

Immobility in Harberger's World

Back to our example. I just moved my perfectly-mobile van and decided I am ready to live in a proper home.

Now, on my new plot, I build a permanent house. It's a modest structure that costs $80,000 to build. My land plot has a self-assessed value of $10,000.

What should I self-assess my property at? It depends on the precise structure of the Harberger tax.

You could tax the full property value – the land and the building together. But, we do not want to tax buildings. We want to tax land. A full tax on buildings would lead to less development.

Let’s presume we are leveraging Harberger taxes only on land value, not improvements. So, I self-assess my land value and pay taxes on that self-assessed land value. The land also holds my immobile $80,000 house. You probably see where this headed…

If I assess my land at $10,000 while my house is worth $80,000, Blackwood Private Equity could offer $20,000 for my land. Either I accept the $20,000 and let Blackwood walk away with my entire property, or I pay a tax that is double the value of my self-assessment. Essentially, now I am not just paying a real land value tax, but an extra tax has crept onto the value of my building just to secure my tenure, and I can’t afford double the taxes.

I have been held at gunpoint.

An ideal world where my home can be lifted by balloons and transferred anywhere.

This hold-up problem is the fundamental flaw with Harberger taxes. I would probably begrudgingly accept the offer, and Blackwood Private Equity would acquire my home with minimal capital.

This isn't a theoretical concern. It's precisely the same dynamic we see in mobile home parks, just operating through a different mechanism. The investor has successfully used the system to extract value from my immobile investment.

People online posit having an arbiter determine the building's value and ensure proper compensation. If we're going to use property assessors to determine building values, then that means we're also using a property assessor to implicitly determine the land value. And if we're going to do that, then we don't need the specter of a forced sale hanging over everyone's heads to implement a land value tax. A chief advantage of Harberger taxes is supposedly to eliminate the need for professional assessors, so this seems to defeat that purpose.

When Market Values Don’t Matter

The degree to which a buyer is willing to “hold up” a property owner does not need to be capped by the fair market value of the property. Large corporations could weaponize Harberger taxes to eliminate competition through strategic property acquisition. Unlike traditional markets where owners can refuse to sell, Harberger systems allow deep-pocketed firms to force sales of critical properties from smaller competitors.

Imagine a tech giant targeting a startup's headquarters or manufacturing facility. By offering just above the self-assessed value, they could seize essential infrastructure, effectively shutting down operations without needing to acquire the company itself. This creates a predatory environment where capital becomes a weapon against innovation and competition.

This bully mechanism also applies more generally to communities in our neighborhoods. I am not convinced a smart market design is one in which a well-capitalized asset giant can force whole communities of homeowners out to enact massive infrastructure projects overnight, likely to the detriment of the low-skill workers that our economy relies upon. Perhaps, even at the individual level, some wealthy billionaire gets mad at someone and decides to force them out of their home.

Money behemoths will find perverse incentives to pay above market value to squeeze specific projects or even entire areas.

The Hold-Up Need Not Apply

Now, some of you may be thinking, if a Harberger tax on land can threaten someone's ability to hold onto their property, doesn't vanilla land value tax have the exact same problem? No.

Conventional property taxes already exist, and the system already adequately balances property rights. Under this established assessment system, governments use market data from sales transactions to determine property values. If I own a house with $20,000 land value and $80,000 improvement value, I would pay tax only on the land value while maintaining secure ownership rights. No one can force me to sell my property as long as I pay the fair tax on my land, which, as far as our preliminary revenue-neutral modeling shows for working and middle class homeowners, would likely be similar or even less than they're already paying in property taxes.

There are problems in property tax assessments, but they are tractable. Data from assessments are often open-source, which enables people like us to test their validity. Meanwhile, if someone has received a valuation they disagree with, they can appeal the decision and provide their own data and reasoning. The Center for Land Economics is working to improve assessment systems by open-sourcing code for modern valuation processes. For more details on effective assessment methods, see Lars's essay "Mass Appraisal for the Masses."

Georgists should leverage this existing infrastructure rather than advocating for an entirely new system. The clearest political path to land value taxation is through modifying current property tax structures, rather than by implementing radical new valuation mechanisms. I imagine most people come to Harberger taxes because of the mindset that land is intractable to value. Modern property tax systems and new valuation models can make land values reliably determinable without resorting to self-assessment schemes.

Harberger taxes represent an elegant theoretical solution that fails in practice for immobile property. Just as mobile home residents face exploitation through sudden ground rent increases, property owners under a Harberger system would face similar hold-up problems. This creates an impossible dilemma: pay increasingly burdensome taxes or surrender investments at below-market values.

The Harberger tax is a good idea for valuing goods like intellectual property, spectrum allocation, or orbital real estate, but I am concerned they create vulnerabilities for homeowners and businesses when applied to real estate. If you think I am missing something or have solutions for this hold-up problem, I’d love to hear from you in the comments!