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Pennsylvania's success with local property tax reform: the split rate tax
American Journal of Economics and Sociology, The, April, 1997 by Alanna Hartzok
I
Pennsylvania's Initiative
Pennsylvania has been experimenting with a new approach to property tax reform which has already begun to attract attention in New York, Maryland, and other states. This policy offers an entirely different angle to the current mainstream dialogue on property tax "reform" which consists mainly of efforts to reduce and curtail the use of property taxes while increasing sales or income taxes.
The property tax is actually two types of taxes, one upon building values, and the other upon land values. This distinction is an important one, as these two types of taxes have significantly different impacts on incentive motives and development results.
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Pennsylvania's pioneering approach to property tax reform recognizes this important distinction between land and building values through what is now known as the split-rate or two-tier property tax. The tax is decreased on buildings, thereby giving property owners the incentive to build and to maintain and improve their properties, and the levy on land values is increased, thus discouraging land speculation and encouraging infill development. This shifting of the tax burden promotes a more efficient use of urban infrastructure (such as roads and sewers), decreases the pressure towards urban sprawl, and assures a broader spread of the benefits of development to the community as a whole.
Taxing land values, while decreasing taxes on buildings, is sometimes proclaimed as a way to increase development. In today's world the word "development" is likely to be a red flag to many ears. However, it is important to keep in mind that the purpose of this policy is not first and foremost to encourage development, but rather to assure that the benefits of development be broadly shared while impacting as lightly as possible on existing ecosystems.
Current mainstream development models and methods in most cases contribute to the maldistribution of wealth. Statistics show that the richest 1% of Americans possess greater wealth than the bottom 90%.(1) The land value tax, in essence a type of user fee for access to limited natural resources, is a policy that both harnesses market incentives and individual initiative and furthers social cohesion and well-being by narrowing the rich/poor gap. There is even greater need to make this point now, when the direction is towards cutbacks in many social services, the removal of the bandages placed to hold back the hemorrhage of the body politic. Better tax policy could reduce the need for social services provided via government spending.
Land value taxation was a key policy recommendation made by the Committee on Banking, Finance and Urban Affairs of the House of Representatives, 96th Congress whose groundbreaking report was entitled "Compact Cities: Energy Saving Strategies for the Eighties."
Land value based public finance policies encourage home improvements and affordable housing. In Pennsylvania 85% of homeowners pay less with this policy than they do with the traditional flatrate approach. For those who do pay more, it is not significantly more and they tend to be wealthier homeowners who can better afford to pay a little more. Some, indeed, whose business efforts are encouraged by this policy, come out ahead.
II
The Current Situation in Pennsylvania
Fifteen Pennsylvania cities (Table 1) now use the two-rate approach. Pittsburgh and Scranton implemented this policy as far back as 1913. Since then enabling [TABULAR DATA FOR TABLE 1 OMITTED] legislation was passed which gave this option to third class cities as well. Land value tax policy in Pennsylvania really took off in the 1980's through the 'Johnny Apple-seed" work of Steven Cord, formerly a professor at Indiana University in Pennsylvania, now director of the Center for the Study of Economics in Columbia, Maryland.
In 1993, legislation sponsored by state representative Sue Laughlin extended the two-rate option to school districts of the third class that had coterminous boundaries with third class cities. Although only eight school districts met this qualification, it was a beginning. Currently, HB 2093, sponsored by Representative Ronald Buxton, would extend the two-rate tax option to all school districts.
In addition to this school district bill there are six other bills in the Pennsylvania State Legislature which would further extend the two-rate tax option. Twin bills in both the House and Senate would give the two-rate tax policy choice to the nearly 1000 boroughs of the state. Their total population is two-and-a-half million.
Bills, which are part of Representative Joseph Gladeck's enterprise package, extend the option to first and second class townships and cities of the first class (which applies only to Philadelphia). His "Tax Free Development Zone Act" (HB 1256) recommends that municipalities wishing to designate an area as a tax free zone use the split-rate tax as well.
Among the cities that have gone to the two-rate system there is a considerable spread between the taxes on the value of land and those on the value of buildings.
