United States

American Journal of Economics and Sociology, The,  Dec, 2000  by Walter Rybeck

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One must preface the findings by stressing that two-rate cities are not models of perfection. They all wrestle with continuing social, economic, and political problems. The question is whether conditions in these cities are getting better or worse. The studies address that question.

The positive results borne out by many studies have been too consistent to be dismissed as coincidences. Following are among the significant changes detected time and again after adoption of the reform:

* Taxes on the majority of owner-occupied and rental homes were reduced.

* Construction and rehabilitation of residential and commercial buildings were stimulated.

* The serious escalation of housing prices and rents experienced by most US cities was averted in the two-rate cities as housing supplies expanded.

* Central business districts were revitalized as they attracted greater private investment.

* More efficient land use resulted as the city's idle lots and under-used buildings were put into productive use; this in turn reduced the pressure for costly and environmentally harmful urban sprawl.

A. How It Works

Not a pure land tax, the two-rate tax lets the property tax burden fall more heavily on land values, less on building values. The mechanism is simple. As in most American taxing jurisdictions, the assessor first appraises the separate market value of land and buildings for each taxable parcel. However, instead of applying one tax rate to the total of these two values, the local government imposes a higher rate on the land assessment and a lower rate on the building assessment.

Since the 1970s, many two-rate cities have taken advantage of the Local Economic Revitalization Tax Act (LERTA), Pennsylvania's abatement law. This program offers commercial and industrial properties a sliding scale benefit--90 percent of the value of new structures is tax exempt the first year, 80 percent the second, and so forth, until the exemption disappears. The underlying land remains fully taxable. Use of LERTA gives an added push to the tax relief aspect of the two-rate tax.

B. Graded or Gradual

Pittsburgh and Scranton pioneered this system in 1914. Over ten years they increased the rate differentials in small grades until the rate on land was double the rate of buildings. This is why it was called the graded tax. [39]

Introducing the system gradually makes it politically palatable. It does not rock the boat. Moving slowly delays potential benefits. However, if the full reform would arouse too much opposition from land speculators to gain acceptance, this foot-in-the-door feature has unquestionable merit.

C. The Golden Triangle

Pittsburgh thrived with its two-to-one land-building ratio. After World War II, despite the decline of its steel industry, Pittsburgh enjoyed a renaissance. Sixty new buildings and skyscrapers costing over $700 million shot up on former rail yards and warehouse areas. An area that had employed 4,000 gave jobs to 20,000 after the privately financed renewal. David Lawrence, mayor at the time, stressed the importance of the "stick"--the higher rate on land--saying it "discouraged hoarding of vacant land for speculation." His successor, Mayor Joseph M. Barr, emphasized the "carrot," saying "fine structures erected through private investment as part of the renewal program benefited by the lower tax rate on buildings." [40] The business district framed by two rivers, called the Golden Triangle, won nationwide acclaim when many other American cities were loosing their vitality. [41]