Pennsylvania's success with local property tax reform: the split rate tax

American Journal of Economics and Sociology, The,  April, 1997  by Alanna Hartzok

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Table 2

LAND TO BUILDING TAX RATIOS IN PENNSYLVANIA
CITIES USING THE TWO-RATE TAX

Cities                 Tax Ratio in 1996

Pittsburgh             5.61 to 1
Scranton               3.90 to 1
Harrisburg             4.00 to 1
McKeesport             4.00 to 1
New Castle             1.75 to 1
Washington             4.35 to 1
Duquesne               5.61 to 1
Aliquippa             16.20 to 1
Clairton               4.76 to 1
Oil City               1.23 to 1
Titusville             8.68 to 1

For instance, the small city of Aliquippa, which led the way towards the two-rate option for school districts, taxes land 16 times more heavily than buildings. Titusville's tax rate on land is nearly 9 to 1, while Harrisburg's ratio which has been 3 to 1, will soon change to 4 to 1.

III

Some Data on Consequences

Let us now consider how this has worked in Pittsburgh and Harrisburg in particular. Pittsburgh has the longest history of use of this approach which dates back to 1913. This city has extended its land value tax since that time so that now land values are taxed six times more heavily than are building values.

Pittsburgh has a more compact development pattern than many cities, with the big buildings concentrated in the downtown area, not sprawled across the land as is the case in so many cities where land speculation forces "leapfrog" development. Pittsburgh was highlighted in a Fortune magazine story (8/8/83) entitled "Higher Taxes that Promote Development." Research conducted by Fortune's real estate editor on the first four cities to go to the two-rate system independently verified that this approach does, indeed, encourage economic regeneration in the urban centers.

A recent study (Table 3) by University of Maryland economists, Wallace Oates and Robert Schwab, compared average annual building permit values in Pittsburgh and 14 other eastern cities during the decade before, and the decade after, Pittsburgh greatly expanded its two-rate tax. Pittsburgh had a 70.4% increase in the value of building permits while the 15 city average decreased by 14.4%. These findings about Pittsburgh's far superior showing are especially remarkable when it is recalled that this city's traditional basic industry - steel - was undergoing a severe crisis throughout the latter decade.

Table 3

AVERAGE ANNUAL VALUE OF BUILDING PERMITS (THOUSANDS OF CONSTANT 1982
DOLLARS)

City               1960-79      1980-89      % Change

Pittsburgh         181,734      309,727        +70.4
Akron              134,026       87,907        -34.4
Allentown           48,124       28,801        -40.2
Buffalo             93,749       82,930        -11.5
Canton              40,235       24,251        -39.7
Cincinnati         318,248      231,561        -27.2
Cleveland          329,511      224,587        -31.8
Columbus           456,580      527,026        +15.4
Dayton             107,798       92,249        -14.4
Detroit            368,894      277,783        -24.7
Erie                48,353       22,761        -52.9
Rochester          118,726       82,411        -30.6
Syracuse            94,503       53,673        -43.2
Toledo             138,384       93,495        -32.4
Youngstown          33,688       11,120        -67.0

Average of
the 15 cities      167,503      143,352        -14.4

Source: "The Impact of Urban Land Taxation: The Pittsburgh
Experience," by Wallace E. Oates and Robert M. Schwab,
forthcoming (March 1997) The National Tax Journal