Best Practices:
How Well has Land-Value Taxation been Tested
as a Fundamentally
Important Public Policy?
Edward J. Dodson
[An Examination of the Results Experienced in Four
Pennsylvania Municipalities Following Moderate Increases in the
Effective Rate of Taxation Applied to Land Values / Written on behalf
of Earthrights Institute; July 2007]
INTRODUCTION
Progressive Momentum
Late in the nineteenth century, an organized citizens movement arose
in the United States determined to change the way revenue was raised
to pay for public goods and services. With arguments taken from the
writings of political economist Henry George, activists sought to
introduce legislation that would exempt from taxation what were
defined as productive economic assets and activities. These included
all goods produced by labor, including the capital goods on which
modern industrialized economies were already dependent. Public revenue
would thereafter come from the value of land (i.e., of locations in
cities and towns, of agricultural and mineral-laden lands, and from
those assets freely provided by nature for human exploitation and use.
Public support for the wholesale movement toward land values as the
sole or primary source for public revenue never materialized. The
proposal aroused vocal and well-financed opposition in a nation where
landed interests were politically powerful. Yet, decades following
Henry George's death in 1897 were characterized by determined efforts
to mitigate the social ills associated with
the American System, as it had evolved over the first century
of the nation's existence.
In the Commonwealth of Pennsylvania a small number of elected
officials and civic leaders continued to make the case for the reforms
championed by Henry George. Working within the confines of state
constitutional law, they focused their energy on the system of
property taxation and the granting of authority over public finance to
local government. What developed was a sustained strategy to promote
adoption of a system of property taxation that applied a higher rate
of taxation of assessed land values than to the value of property
improvements.
Constitutional Authority
Supporters of the two-rate property tax managed to build sufficient
support to have the Pennsylvania state constitution amended:
"The sponsors of the measure were able to enlist
the support of Mayor William A. Magee for a bill embodying the
recommendations of the committee, which was introduced in the State
Legislature as a mandatory measure … applying to the two
second-class cities, Pittsburgh and Scranton …" [1]
The bill was signed by then Governor John K. Tener on May 15, 1913,
and officials in Scranton and Pittsburgh instructed the assessors of
their respective cities to complete the first separate assessment of
land and buildings as required by the act.
Promise Unfulfilled
One of Henry George's most important observations was that land
values are societally- rather than individually-created. Locations in
cities and towns have exchange value because of the aggregate
investment in public and private amenities and improvements. Every
parcel of land has some potential rental value, depending on the
desirability of the location for commerce or residential use. Market
forces cause this potential rental value to be capitalized into land
prices.
By the time local governments began to impose even modest taxes on
land values, land prices had a long history of rising (and sometimes
falling) in response to changing market conditions. As the role of
local government expanded to include funding of public schools and the
development of regional infrastructure, authority to raise needed
revenue by the taxation of property was extended to county government
and to school districts. Unfortunately, the bill adopted by the
Pennsylvania legislature applied to municipal governments only
(excepting those organized as boroughs rather than cities, counties
and school districts). The result was to greatly negate the potential
of the taxation of land values to stimulate economic growth and to
push owners of land to develop their land to its
highest, best use.
THE EARLY EXPERIENCE
Pittsburgh
Pittsburgh's city council enacted local legislation in 1914 to
implement the two-rate property tax structure. Two years earlier, the
Housing Committee had published a pamphlet entitled
An Act to Promote Pittsburgh's Progress, which recommended
that all buildings in the city be taxed at a rate of 50 per cent less
than land values, the change to be accomplished by gradual steps.
Combined with a reassessment of all real property in the city, the
effects of what was a very modest shift in tax rates were
considerable. In particular, construction of new buildings increased
almost immediately. At the same time, owners of large, unimproved or
underimproved parcels of land organized to have the law repealed. A
new (Republican) mayor sided with the landed interests. Although the
repealing bill passed the state legislature, supporters of the
two-rate property tax also mobilized, and the Governor (Martin G.
Brumbaugh) vetoed the bill. What came to be called The Graded Tax Plan
reached its full initial stage of implementation in 1925, at which
time the tax rate on buildings fell to half that imposed on assessed
land values.
Two years later, the local newspaper in Pittsburgh, the Post,
commented on the changes already brought on by The Graded Tax Plan:
"Formerly land held vacant here was touched lightly
by taxation, even as it was being greatly enhanced in value by
building around it, the builders being forced to pay the chief toll,
almost as if being fined for adding to the wealth of the community.
Now the builders in Pittsburgh are encouraged; improvements are
taxed just one-half the rate levied upon vacant land. Building has
increased accordingly." [2] Pittsburgh had a long
way to go to become a livable city. Turning natural resources into
steel and other industrial metals was the reason Pittsburgh's economy
grew and its population increased. Its location, at the confluence of
two rivers - the Allegheny and Monongahela - to form the Ohio River,
provided access to the U.S. interior and markets up and down the
Mississippi River. The absence of laws restricting the dumping of
chemical wastes into the water or air turned Pittsburgh into a heavily
polluted region.
Scranton
The area around the City of Scranton was settled during the
mid-nineteenth century to exploit the vast supply of coal and iron ore
for the manufacture of steel. The population had grown to over 35,000
when the City of Scranton was incorporated in 1866. By the turn of the
century, the population increased to over 102,000, but the region
would soon lose its largest employer, the Lackawanna Steel Company, as
the iron ore supplies disappeared.
Scranton's economy became increasingly dependent upon the anthracite
coal industry. By the mid-1930s, the city population grew to
approximately 150,000 due to the extensive growth of the mining and
silk textile industries. The momentum continued throughout the Second
World War, as the need for energy stimulated strip mining operations
in the region.
Scranton's full utilization of the two-rate property tax began in
1925, when the rate of taxation on buildings was reduced to half the
rate applied to assessed land values. As with Pittsburgh, the effects
during the first decades were largely overwhelmed by broader social
and economic forces.
AFTERMATH OF THE SECOND WORLD WAR
Pittsburgh
The assessed value of all real estate in the City of Pittsburgh for
1953 was set at $1.065 billion, out of which $414.3 million was on
land value and $650.8 million on buildings. The rate of taxation
applied to assessed land values was twice that placed on buildings
($32 per $1,000 of value versus $16 per $1,000 of value).
Pittsburgh experienced the same stresses on its economy that plagued
most of the older "rust belt" cities of the northern United
States. Development shifted to outlying areas of Allegheny County,
made accessible by new highway construction. Pittsburgh was not able
to increase its land area by annexation, as the city is surrounded by
incorporated boroughs and towns. However, the Graded Tax Plan proved
to be an effective tool for revitalization of Pittsburgh's downtown
area after the Second World War.
Pittsburgh's reputation as an old industrial city, its air and water
fouled by pollution, began to slowly change. The area where the three
rivers converged was targeted for clearance of old warehouses and
railway yards, to be transformed into a new "Golden Triangle."
Over $50 million was eventually invested in the development of office
towers adjacent to a park established on the site of the historic Fort
Pitt. A steady stream of new office buildings, retail stores, and
apartment buildings followed throughout the 1960s and 1970s. The
character of the city experienced a dramatic change, evolving into
communities where residents could live, work and play, and where
finance, health care, education, high tech industries slowed what had
been a constant out-migration.
The connection between Pittsburgh's rebirth and its use of the
two-rate property tax approach was largely dismissed by two analysts
commissioned by the Western Division of the Pennsylvania Economy
League. Their 1986 report was, in part, based on interviews with
individuals in the development community. From these interviews, they
reported:
"The tax was not seen as imposing a sufficient
penalty to encourage property owners to sell or to develop
underdeveloped property. A review of the burden imposed by higher
land tax-rate bears this out." [3]
Other factors were identified as far more significant, including
below-market financing and the conveyance of publicly-owned land to
private developers at below-market cost. New construction also
benefited by a three-year abatement of taxes on building value. The
key observation regarding the use of the two-rate property is that the
effective rate of taxation on land values remained too low to act as a
powerful incentive for most land owners to act. Developers and
businesses were benefiting by lower tax rates on all buildings, and
the aggregate benefit may have been greater than was realized.
However, there is no clear way to isolate for individual changes in
public policy.
A subsequent study by two economic professors and published in 1992
by the Lincoln Institute for Land Policy was more sympathetic to the
incentive aspect of Pittsburgh's two-rate property tax:
"Following the change in regimes at the end of the
1970s, Pittsburgh experienced a striking building boom, far in
excess of anything that took place in other major cities in the
region. The building boom was basically a center city phenomenon; it
did not extend to the rest of the metropolitan area. It was
moreover, a boom in commercial building activity. The residential
sector experienced only a modest increase in new construction. …
"The fiscal reform that accompanied Renaissance II had two
important components: the huge increase in tax rates on land and
large tax abatements on new structures. It is difficult in any
rigorous econometric sense to separate the effects of these two
measures. …Our sense is … that these abatements were
probably the more important of the two tax incentives that we have
considered…
This is not, however, to downplay the role of land taxation. What
the Pittsburgh experience suggests to us is that the movement to a
graded tax system can, in the right setting, provide some stimulus
to local building activity. The primary role of the land tax in all
this is to provide the additional source of revenues that allows a
reduction in the rate of improvements." [4]
Scranton
In the years following the Second World War, utilities and
manufacturing concerns began shifting from coal to oil and natural
gas. For the same reasons as other northern regions were experiencing
decline, the Scranton area began to lose strength and population.
Even less so than Pittsburgh, Scranton's civic leaders had never made
a serious attempt to put the potential of The Graded Tax System to
full use. Poor assessments and the inability of the county and school
district to participate in the two-rate property tax guaranteed the
city would not be able to overcome the forces of social and economic
change on the horizon. For the year 1953, for example, the assessed
value of all real estate in the city was $98.1 million, of which $39.2
million represented land value and $58.9 million the value of
buildings. When one factors in the county and school district taxes on
property, the burden on property improvements remained considerable,
that on land values comparatively light.
A devastating flood occurred in 1955, destroying portions of the
city. Two years later, freight rail service to the area was abandoned.
Then, in 1959, a serious mining disaster shut down the mining
industry, leaving thousands of workers without employment. Supports in
the abandoned underground mines started to fail, causing cave-ins
destroying large numbers of homes and other buildings in the city.
Silk and other textile industries also left the region for lower cost
regions of the U.S. or overseas. By the mid-1970s, many of the
downtown businesses had closed. The city was in a desperate economic
situation.
Cities of the Third-Class
A bill granting to the third-class cities the optional privilege of
taxing land values at a higher rate than improvements was passed by
the state legislature in 1951. Since that time, some twenty of these
cities followed Pittsburgh and Scranton adopting The Graded Tax
System. Among these are the state Capital, Harrisburg, and Allentown.
The experience of these two additional cities described below.
MORE RECENT DEVELOPMENTS
Pennsylvania is a state struggling to retain and attract new
businesses. With a population of 12.4 million, the state is still
among the most populous in the nation; however, seniors now comprise a
higher percentage of the total population than in any state except
Florida. Although the state's economy is ranked among the top ten
states, economic output per-capita is just 26th.
The demands on state government to play an increasing role in raising
and distributing revenue to financially-troubled communities are
considerable. Seniors, in particular, have become very frustrated by
constant increases in property taxes, and elected officials concerned
about re-election to office have responded with a broad range of
proposals to address these concerns. Pennsylvania established a state
lottery in 1972, and thru 2003 the lottery raised $13.8 billion for
state programs. Casino gambling has now been introduced into the state
as well, with one-third of the state revenue reserved for property tax
relief.
Virtually ignored by the current Governor, Edward Rendell, and his
team of advisers is the real potential to stimulate Pennsylvania's
economy by encouraging its taxing jurisdictions, particularly the
school districts, to look at the two-rate property tax as an important
component of the solution to the state's problems.
There is an optimum amount of revenue to be raised by the taxation of
land values. Collecting less than this amount leaves in private hands
net imputed location rental values to be capitalized into the price of
land. Collecting more than this amount by taxing improvements
discourages investment in job-creating economic activity. The
importance of the public collection of this fund is wholly independent
from the issue of how public schools ought to be funded and by what
level of government. The very fact that a growing list of communities
around the state have introduced some degree of the two-rate property
tax is evidence that the measure deserves strong support from state
government.
Pittsburgh
Pittsburgh was granted a home rule charter in the mid-1970s,
permitting city officials to raise revenue by whatever means they
decided upon. A new mayor, Richard Caliguiri, took office in 1977,
promising to oppose further tax increases. For 1979 and again in 1980
he proposed raising the city's tax on wages to raise needed revenue.
City Council instead voted to increase the tax on land values.
In 1979, the rate of taxation on land values was increased from 4.95%
to 9.85% of assessed value. New construction jumped 22% over the
previous year as measured by the dollar value of building permits
issued, despite a fall-off in construction and renovation in the
surrounding four-county area and in the nation at large. Data on real
estate transactions also showed that vacant lot sales increased 16.5%
in the first seven months after the land tax increase, indicating that
the tax was putting pressure on inefficient landowners to develop
their sites.
In 1980 officials increased the tax rate on land values to 12.55%,
while reducing the rate on buildings to 2.475% -- creating a ratio of
5.07 to 1. Even with the county and school district taxes considered,
the effective ratio was still 2.99 to 1.
After the change in tax rates, construction in 1980 leaped 212% above
the 1977-78 average, setting the stage for the city's second
renaissance and the final stages of its movement away from heavy
industry. As discussed, the adoption in 1980 of three-year tax
exemption on all new buildings -- but not the land - further
stimulated construction. In 1981 construction peaked at nearly six
times the 1977-78 level. Then, for 1983 the tax rates were increased
on both land and buildings - to 13.3% and 3.2%, respectively.
The value of building permits issued annually from 1980 to 1989 was,
on average, 70% higher than it was between 1960 and 1979. Meanwhile,
the cities of Buffalo, Cleveland, Detroit, Rochester and many others
were experiencing declines. Pittsburgh's new construction activity
during the 1980-1992 period was actually also equal to 65% of
Philadelphia's, though the latter has four times the population.
In 2000, a long overdue Allegheny County-wide reassessment was
completed. For the previous twenty years properties had remained
assessed at 20 percent of the 1980 market values. The results of the
reassessment were challenged by many property owners, particularly
those in Pittsburgh. Following a lawsuit against the firm conducting
the reassessment, a second firm was engaged to correct the problems.
In the midst of this chaotic situation, property owners demanded
action, and Pittsburgh's City Council decided - despite over 80 years
of positive experience - to return to a single rate of taxation on
land and buildings. The subsequent consequences should have been
anticipated. Permits issued for new construction and for property
renovation declined in 2001 and have continued to fall each year since
then. The city's overall economy has suffered as a result. A 2006
report ranked Pittsburgh 80th out of 100 major markets for job growth
and unemployment rates. [5]
Although the Pittsburgh region does not seem to be attracting many
new businesses from outside, factors such as increases in suburban
land and construction costs, as well as the high cost of automobile
commuting, have stimulated a modest redirection of construction
investment from the suburbs to the city. Also, demographic trends are
driving the movement of higher income professionals and childless
couples back into the city. Several thousand new condominium units and
apartment buildings have come on the market or are near completion.
Facing severe budget shortfall in 2003, Pittsburgh's Mayor Tom Murphy
argued the city could not increase taxes without risking the loss of
more businesses and residents. Critics of the city government
recommended the sale of city-owned real estate in order to eliminate a
$60 million deficit in its operating budget. The Allegheny Institute,
a local policy group, argued that some of the 10,000 properties owned
by the city and the local Urban Redevelopment Authority could have
been packaged for development and auctioned off. The mayor countered
that too much property in the city - nearly one-third, with an
estimated market value of $13.5 billion -- was owned by tax-exempt
nonprofits. Taxing these properties would raise an additional $70
million annually.
Not surprisingly, no steps were taken to raise needed revenue by
imposing taxes on exempt properties. The city's finances fell into
such a desperate state that an Intergovernmental Cooperation Authority
(the "ICA") was established to oversee city finances and the
budgeting process.
The current mayor, Luke Ravenstall, assumed office in September 2006
following the death of Mayor Robert O'Connor. O'Connor took office
just eight months earlier. The ICA approved a $420 million budget for
2007, anticipating revenue of $7.7 to come from casino gambling. To
date, there has been no determined effort made by members of City
Council to reinstate the two-rate property tax structure.
Another develop has recently occurred with important implications not
only for Pittsburgh but for all Pennsylvania communities. A Common
Pleas Judge, r. Stanton Wettick, has ruled that the failure to keep
property assessments current with changes in market value is
unconstitutional. This decision has prompted Allegheny County
officials to file an appeal to the state Supreme Court. If the higher
court affirms the ruling of the lower court, all counties in the state
would be required to modernize their assessment systems. Accurate
assessment of land values would appropriately and effectively shift
the burden of taxation from property owners living in areas with
declining land values to those benefiting by rising values. There is
almost always a strong correlation in such cases between land values
and the quality of public goods and services available.
Scranton
In the face of a declining economy but needing additional revenue to
balance the city's budget, Scranton's leaders voted in 1980 to almost
double the tax rate on land assessments (leaving its building tax rate
untouched). The city also exempted all newly constructed commercial
and industrial improvements from the property tax for ten years. The
result was that Scranton's building permits increased 22% in 1980-81
as compared to 1977-79. By comparison, nearly Wilkes-Barre suffered a
44% loss in building permits issued during the same time period.
In 1982, Scranton's mayor, James B. McNulty, proposed that his city
move all the way to full land-value taxation and eliminate taxes on
buildings altogether. Scranton's tax rates at the time were 9.6% on
land and 2.55% on buildings. However, the mayor was pressured to delay
implementation of the full tax shift because of serious property
assessment issues that would have impacted downtown property owners.
Unfortunately, Scranton's assessments were at the mercy of county
officials. The assessments, set by Lackawanna County, had not been
adjusted for several decades. The lone downtown department store, The
Globe, paid 222 times as much tax per square foot of land as a much
newer shopping mall located at the edge of the city. The Globe's
downtown land had an assessed value of $26.66 per square foot, while
city land beneath mall had an assessed value of just 12 cents per
square foot.
In Scranton during the early 1980s, school funding absorbed 58 cents
of every real-estate-tax dollar collected inside the city. At the same
time, the city periodically increased the rate on land values until,
by 1983, nearly $4 was being raised from land taxes for each $1 of
taxes on buildings. Here, again, however, the one-rate property tax
imposed by the school district and county reduced the overall ratio to
only $1.77 of land taxes for each $1 of building taxes.
Harrisburg
Harrisburg, the state capital of Pennsylvania, is a relatively small
city. The population as reported in the 2000 census was just under
49,000. The metropolitan area in which Harrisburg sits had a
population of nearly 644,000, and until very recently the city
continued to lose population each year.
Harrisburg adopted the two-rate property tax system in 1975. With
increases made consistently from that point on, the city today taxes
buildings at one-third the rate applied to land values, collecting 36%
of all city real estate tax dollars from land. For most of this era,
Harrisburg has experienced remarkable political stability. Stephen R.
Reed was elected mayor in 1981 and has been re-elected ever since,
making him the longest serving mayor of Harrisburg.
During Mayor Reed's term in office, the city undertook important
projects to attract new businesses and residents. A National Civil War
Museum was constructed, and a new Hilton Hotel opened in downtown
Harrisburg.
According to the Harrisburg Office of Business and Industrial
Development, the number of vacant structures, some 4,200 in 1982, has
now dropped to less than 500 and over $700 million in new private
investment has been attracted. It was, in fact, voted the No.2 "best
investment" city in the Eastern U.S. two consecutive years in a
national banking institution poll. Crime and fire rates have dropped
while businesses, private sector jobs and homes have increased in
number after 3 decades of decline. Mayor Reed has stated "our
two-tiered rate policy has specifically encouraged vertical
development, meaning high-rise construction as opposed to low-rise or
horizontal development that seems to permeate suburban communities and
which utilizes much more land than is necessary."
Relieved from the burden of heavy taxation, new homes and businesses
sprang up. In 1980 there were 1,908 businesses on Harrisburg's tax
rolls; in 2002 there were 5,976.
Currently, the City of Harrisburg taxes assessed land values at a
rate of 2.44%, while the rate on assessed building values has been
lowered to just 0.4%.
Allentown
The City of Allentown is located in the northeastern region of
Pennsylvania and has the third largest population in the state with
105,000 people. Allentown's City Council voted in 1994 to introduce
the two-rate form of property taxation, and the change took effect in
1996. Each year since then, the difference between the rate of
taxation on land and that on buildings has expanded. The current rates
are 3.62% on assessed land values and 0.77% on assessed building
values.
An important result of the shift was that nearly three out of every
four properties in Allentown experienced a reduction in taxation.
Allentown's new private construction and renovation grew by 32% in
dollar value in the three years after it first adopted the two-rate
system as compared to the prior three years. Between 1990 and 2000,
only around 325 new housing units were constructed in the city. Data
is not available on the yearly housing starts. Thus, it is uncertain
what percentage of these units benefited by the shift to the two-rate
property tax (or by abatements on new construction, low income tax
credits, historic tax credit, or other subsidies).
Despite a decade of experience with the two-rate property tax,
broader economic factors have continued to dampen Allentown's
revitalization. Manufacturing, at one time the dominant activity in
the Allentown metropolitan area, continues to decline to just 15
percent of total employment in the area. The service sector now
dominates employment, concentrated in the area of health services.
Jobs in this sector continue to grow at a rapid pace; many businesses
report having trouble finding qualified workers available positions.
Unfortunately, the suburban areas have been the primary beneficiary of
some 33,000 new jobs created between 1996 and 2004. The metropolitan
area has been selected as the headquarters or principal plant
locations for major corporations such as Mack Trucks and Bethlehem
Steel, as well as Fortune 500 companies Air Products and Chemicals,
and Pennsylvania Power & Light Corporation, the last two are
physically located in the City of Allentown. Consistent with the
current trend in many Pennsylvania cities, the largest employer in the
city is a hospital - Lehigh Valley Hospital -- with 6,500 employees.
Although the city had a long history of being home to several notable
breweries, only one (now owned by Miller Brewing) continues operation.
Civic leaders in the City of Allentown are attempting to reverse the
city's fortunres. The Allentown Economic Development Corporation
(AEDC), a nonprofit corporation managed by a board of directors
representing the leaders of business, industry, civic groups, and city
government, has as its mission the long-range economic growth and
diversity of the city of Allentown. AEDC operates the Bridgeworks
Enterprise Center, a facility that offers tenants shared centralized
services such as educational business counseling and management and
financial assistance. Relocation assistance is available for those
companies that outgrow the incubator space.
Allentown is another city beginning to benefit by the reverse
migration of people from the suburbs into urban neighborhoods. Quality
of life decisions are the same in the Allentown area as elsewhere.
This potential demand has stimulated an ambitious downtown
revitalization project that includes new residential housing, as well
as mixed-used development on a former industrial property along the
Lehigh River. Several turn-of-the-century industrial facilities are to
be renovated under a public-private partnership utilizing a
combination of public and private funds. The anchor is the America On
Wheels Transportation Museum, located in a former Lehigh Valley
Transit Company building. Other amenities include a river walk and a
tie-in to the Delaware and Lehigh Canal, as well as boating activities
along the river.
Conclusions
The theoretical foundations in support of the taxation of land values
(or, more accurately, the public collection of the potential location
rental values of land parcels) are quite extensive. Attention to the
subject by economists in the twentieth century was often cursory and
lacking in intellectual rigor. The work of several generations of
political economists going back to Adam Smith and his French
contemporaries was on the whole ignored. Many textbooks published
during the last half century and longer did not even attempt to
analyze land markets as distinct from the markets for capital goods.
One of the economists who remained faithful to the approach taken by
earlier political economists was Harry Gunnison Brown. His 1932 text,
The Economic Basis of Tax Reform, is arguably the classic
exploration of the effects of taxation on economies. The reader is
urged to read this text in full for a comprehensive explanation of why
both logic and ethics recommend the shifting of public revenue to
location rental values and other sources of rent. On the moral
argument alone, Brown asks and answers the most important question:
"What is there in our economic life more
significant - more portentous, indeed - than the fact that a
majority must pay the relatively few for the privilege of living and
of working on those parts of the surface of the earth which
geological forces and community development have made desirable?"
[6]
Brown's ethical perspective is one that has never gained general
acceptance by people in the United States, a nation blessed with a
large land area and (for the most part) a temperate climate. Until the
awakened conscience of the environmental movement, land and natural
resources were looked upon as assets to be exploited and discarded
without much regard for the needs of future generations.
Ethics is not one of the central motivations of the civic leaders and
public officials who have supported the move to the two-rate property
tax for their cities. What they hope for is to raise needed revenue to
replace declines experienced when population and commerce have
departed. Or, as in the case of Pittsburgh, looked for a method of
paying for extensive new public infrastructure as a basis for
stimulating widespread urban revitalization.
Of the above cities that have to some degree adopted the two-rate
property tax, the best case to this point is that of the state
capital, Harrisburg. Yet, even the Harrisburg experience has been
hampered by the failure of the county and school district to move
similarly.
The immediate future of these cities and others with the two-rate
property tax in operation is likely to be held hostage to national and
global economic forces. These cities have not escaped the inflation in
land prices that has fueled the U.S. real estate climate for more than
a decade, although disinvestment continues in some former industrial
sections and neighborhoods populated by lower-income minorities.
Thoughtful city leaders might think seriously about how best to
enhance overall public policies to weather what some economists
forecast as a prolonged recessionary downturn. Several observations
made in a 1977 paper by an economic professor named Arthur P. Becker
deserve repeating for every policy analyst and policy maker:
"The drain of the economic rent of land is the most
pervasive income drain of all. Since land and its services are
supplied by nature, the economic rent of land constitutes a surplus
payment for production and therefore one variety of nonproductive
income. Because all economic activity requires the use of land for
space and for other resources as well, the drain imposed by land
rents for leasing or land values for purchase is inevitable and
enormous, ranging all the way from choice urban land sites to oil
lands. …
"Tax policies in supply management should establish as a first
priority the taxing of the producers surplus or land, labor capital.
Implementing this goal will require a skillful design. It is not
sufficient for total tax burdens to be less than total producers'
surplus. Incentives can be impaired if some portions of the supply
of labor and capital are taxed in excess of their producers' surplus
while other portions of labor and capital are taxed at less than
their producers' surplus. If labor and capital are sufficiently
mobile these disparities may be overcome in time, otherwise they
will persist with the consequences of lower real incomes in the
overtaxed areas and industries, as well as lower investment,
employment and output." [7]
From this, the strategy I would recommend to cities is to follow
Arthur Becker's guidance in restructuring the system of public revenue
in their communities. Rather than merely adopting the two-rate
property tax as an incremental shift, do so with the intent of fully
exempting all property improvements from the tax base in as short a
period as possible. Doing so needs to be accompanied by annual
reassessment of property based on up-to-date market data. At some
point in the transition to a land-only tax base, the selling price of
land will begin to stabilize and eventually begin to fall. The reason,
as explained earlier in this paper, is that there will be less and
less potential location rental value to be capitalized into a selling
price for land parcels. A theoretical possibility is that land prices
might fall to near zero; approaching this point requires that a
different type of land assessment is performed - bringing an end to
conventional ad valorem assessments to that of annual rental values.
Investment and commerce should be simultaneously encouraged by
putting into place plans to reduce taxes on individual incomes and
business revenues. The aggregate effect of these changes is to create
a citywide enterprise zone without the need for targeted subsidies,
tax abatements or other measures now commonly resorted to as tools of
economic development.
NOTES AND REFERENCES
- Percy Williams. "Land
Value Taxation: The Pennsylvania Experience." Land Value
Taxation Around the World, Robert V. Andelson, editor (New
York: Robert Schalkenbach Foundation, 1955).
- Quoted in: Ibid,/i>.
- Michael Weir and Lillian E.
Peters. "Development, Equity, and the Graded Tax in the City
of Pittsburgh," Property Tax Journal, Vol.5, 1986.
p.73.
- Wallace Oates and Robert
Schwab. "The Impact of Urban Land Taxation: The Pittsburgh
Experience." (Cambridge, MA: Lincoln Institute for Land
Policy, 1992)
- Quoted in: Ben Semmes. "Pittsburgh
Placed Near Bottom of Country's Labor Market, Survey Says,"
Pittsburgh Business Journal, September 29, 2006 "While
Pittsburgh's economy has stabilized in recent years, the region's
labor market lags behind those of most other major metropolitan
areas, according to a new study by Bizjournals, a unit of American
City Business Journals, the corporate parent of the Pittsburgh
Business Times. …Pittsburgh ranked 80th out of 100 major
markets in the survey, which focused on job growth and
unemployment rates. Bizjournals used a nine-part formula to
analyze midyear data from the U.S. Bureau of Labor Statistics,
covering 2001 to 2006."
- Harry Gunnison Brown. The
Economic Basis of Tax Reform (Columbia, MO: Lucas Brothers,
1932 ), p.342. Note: At the time this text was published, Brown
served as Professor of Economics at the University of Missouri.
- Arthur P. Becker. "Full
Employment Without Inflation," Survey of Business
(March-April 1977).
|
