Land Value Taxation
Tax Increment Financing
[Reprinted from a Land-Theory online
discussion, 18 August 2000]
Right now, there is tremendous opposition to a tax increment
financing plan being pushed by Pittsburgh's mayor. The plan
contemplates giving hundreds of millions of dollars to a developer,
and additional subsidies to prominent upscale retailers, such as
Nordstrom's and Tiffany's.
I am hoping to not only end this travesty, but to parlay pressure
against the mayor's scheme into support for a shift to land value tax.
A shift is necessary, as there has been a major reassessment,
requiring a reduction in tax rates to offset the increase. It is
rumored that the mayor wants to mostly untax land, which got most of
the increase. We want council to put the entire reduction on the
Real estate values are assessed separately for land and improvements.
The tax rate is gradually lowered on improvements and increased on
land, until, ideally, the entire real estate tax burden is on land
Developers petition local taxing jurisdictions to allocate
improvement taxes on the additional value they create to the financing
of the improvements themselves, or to ancillary improvements that
would otherwise have been made by the developer. In effect, the
developer is paying taxes to himself.
Government Spending (LVT)
There is no increase in government spending.
Government Spending (TIF)
Government spending is increased, not only to subsidize selected
improvements, but to fund the bureaucracy that decides who will get
the TIF deals and under what circumstances.
Adds a single sentence to the municipal code. Most counties are
already required to assess land and building values separately, and it
is good assessment practice to assess land and buildings separately,
anyhow. A city, borough, or home-rule municipality may shift to land
value tax as part of its annual budget process. The only public
hearing required is the annual tax hearing.
A vast array of criteria and procedures are instituted, and
constantly amended, to regulate who may qualify for TIFs and under
what circumstances. Each TIF deal must be considered separately,
involving negotiations with developers; presentations to the governing
bodies of the three taxing jurisdictions; concurrence by the three
taxing bodies; public hearings by each taxing body, and the assumption
of debts by public authorities.
Corruption, Fraud and Cronyism (LVT)
The only opportunity for corruption is in the assessment of real
estate values. Because land lies out of doors, and the factors that
create land value are not concealable, it is more difficult to hide
corrupt assessment practices with regard to land.
Corruption, Fraud and Cronyism (TIF)
Giving government officials the power to selectively grant millions
of dollars to favored enterprises is a prescription for corruption,
fraud and cronyism. For example, the big five contributors to the
stadium tax campaign each got multi-million-dollar subsidies.
Citizen Tax Burden (LVT)
Most citizens pay substantially less under land value tax than under
any other broad-based tax generating the same revenue.
Citizen Tax Burden (TIF)
Ordinary taxpayers must pay more in order to subsidize TIF
Effect on blighted property owners (LVT)
LVT reduces the tax burden on making improvements to blighted
properties is while increasing the burden on these properties in their
current condition. This makes owners inclined to either improve the
properties or sell them to someone else who will improve them.
Effect on blighted property owners (TIF)
Blighted property owners are encouraged to hold out for subsidized
development projects, which generally pay far more for land than the
ordinary market value. Thus, while TIFs might help remove specific
cases of blight, they encourage the persistence of blight generally.
Eminent Domain (LVT)
LVT reduces the need to resort to eminent domain for private
development by making holders of blighted properties are more eager to
sell and potential improvers more eager to buy.
Eminent Domain (TIF)
Because holders of blighted properties can unilaterally derail a
subsidized project, and because holding out has little penalty, the
need to resort to eminent domain is increased.
Public Debt (LVT)
Switching to land value tax creates no public debt. It stimulates the
economy, it increases revenue from other taxes and thereby helps
Public Debt (TIF)
Tax increment financing uses municipal bonds, for which public
authorities, and, ultimately, the taxing jurisdictions are responsible
if the TIF project fails to pay off the bond obligations.
All development risks and all increased returns are borne by the
developer. The taxpayer is not at risk.
The taxpayer is on the hook for TIF debts, and there is also greater
risk that enterprises in TIF districts will leave once the TIF subsidy
has expired. For example, Union Switch and Signal has a 20-year lease
in a building that enjoys a 20-year TIF. When that lease ends, they
can easily leave, or threaten to leave, if not granted another
Track Record (LVT)
Fifteen Pennsylvania cities and one school district have shifted to
land value tax. In every case, a surge of construction followed. Other
Pennsylvania cities, which have not shifted to land value tax, have
continued to decline. Subsidized economic development projects have
had a spotty success record at best.
Underlying Principles (LVT)
LVT is consistent with the principles on which this country was
founded. It has been supported by many of our forefathers, including
William Penn, Ben Franklin, Thomas Jefferson, Tom Paine, Abraham
Lincoln, and Woodrow Wilson. Today, it is embraced by such economists
as Paul Samuelson, James Buchanan, Milton Freidman, and Pittsburgh's
own Nobel Laureate, Herbert Simon.
Underlying Principles (TIF)
Taxing businesses while subsidizing competing businesses has been
roundly condemned throughout history. While some economists see tax
increment financing as having merit in some cases, where the
production of export products brings money into the city, the use of
TIF money to subsidize some retailers at the expense of others is