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Pennsylvania, USA

An Examination of the Results Experienced in Four Pennsylvania Municipalities Following Moderate Increases in the Effective Rate of Taxation Applied to Land Values

Edward J. Dodson, M.L.A.
Earth Rights Institute
July 2007

Overview and Summaries for Pittsburgh, Scranton, Harrisburg and Allentown, Pennsylvania, USA compiled by Ed Dodson
followed by SWOT Analysis by Alanna Hartzok

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 (shown immediately below), 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 …” i

The bill was signed by then Governor John K. Tener (left) 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.


Unrealized Potential

One of the most important observations by leading political economists of the 18th and 19th centuries 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 and best use – as determined by existing zoning and other regulations..

PITTSBURGH


The Early Experience

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 under-improved parcels of land organized to have the law repealed. A new mayor sided with these opponents. 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 (i.e., a two-rate property taxation with a heavier tax rate applied to land values) 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 new two-rate property tax:

“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.” ii

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.

Aftermath of the Second World War

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 two-rate property tax 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.

A 1992 study by two economic professors published by the Lincoln Institute of Land Policy highlighted 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.” iii

Recent Experience and Ongoing Challenges

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. iv

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.

SCRANTON


The Early Experience

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.

Thereafter, 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 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

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.

Scranton’s civic leaders had never made a serious attempt to put the potential of the two-rate property tax 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. This was (and continues to be) generally true throughout Pennsylvania. However, within the communities that have adopted the two-rate property tax, the tax burden carried by buildings is lower than in neighboring communities that continue to impose the same rate on both land and buildings.

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.

Recent Experience and Ongoing Challenges

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 AND ALLENTOWN

A bill granting to Pennsylvania’s 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 have been shifting their municipal tax base towards the capture of land value while reducing taxes on buildings. Among these are the state Capital, Harrisburg, and Allentown. The experience of these two additional cities is described below.

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 to increase tourism to the city, and the downtown area has continued to attract new job-creating businesses.

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. Another way to view this is that Harrisburg now taxes land value six times heavier than building value. Mayor Reed, who has been a strong advocate for working people in his city, described the Harrisburg experience as follows in a 1994 letter to Patrick Toomey, a member of the Home Rule Commission of Allentown later elected to the U.S. House of Representatives:

"The City of Harrisburg continues in the view that a land value taxation system, which places a much higher tax rate on land than on improvements, is an important incentive for the highest and best use of land in already developed communities, such as cities.

“In our central business district, for example, our two-tiered tax rate policy has specifically encouraged vertical development, meaning highrise construction, as opposed to lowrise or horizontal development that seems to permeate suburban communities and which utilizes much more land than is necessary.

“With over 90% of the property owners in the City of Harrisburg, the two-tiered tax rate system actually saves money over what would otherwise be a single tax system that is currently in use in nearly all municipalities in Pennsylvania.

“We therefore continue to regard the two-tiered tax rate system as an important ingredient in our overall economic development activities.

“I should note that the City of Harrisburg was considered the second most distressed in the United States twelve years ago under the Federal distress criteria. Since then, over $1.2 billion in new investment has occurred here, reversing nearly three decades of very serious previous decline. None of this happened by accident and a variety of economic development initiatives and policies were created and utilized. The two-rate system has been and continues to be one of the key local policies that has been factored into this initial economic success here."

Harrisburg’s revitalization continues. A stable tax base combined with steady economic growth has provided the means to address the housing and other needs of the city’s poor and elderly.

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 after voters overwhelmingly adopted a home rule charter consolidating the powers within the city government. Under the new governmental plan, city officials agreed to freeze all local business taxes and that portion of the property tax applied to buildings. The city would from that point on meet any increased need for revenue by increasing the rate of taxation on assess land values.

In 1997 a small group of major landowners in Allentown attempted to have the above increased reliance on the taxation of land values repealed. A proposal was placed on the ballot for a vote during that year’s election. Had this measure passed, over 80 percent of Allentown’s homeowners would have experienced higher property tax bills. Despite a well-funded advertising campaign filled with false and misleading statements – and the use of an airplane to put their message into the sky above Allentown – the citizens voted to retain the new revenue structure for the city. An important result of the shift was that nearly three out of every four properties in Allentown experienced a reduction in taxation.

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.

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).

Allentown’s use of the two-rate property tax over the past decade has cushioned the impact of broader economic factors affecting other cities in the region, particularly Bethlehem (which continues to tax land and buildings at the same rate). Manufacturing, at one time the dominant activity in the Allentown metropolitan area, now provides just 15 percent of total employment in the area. The service sector now dominates employment, concentrated in the areas of health services, education and government. Jobs in health services continue to grow at a rapid pace; many businesses report having trouble finding qualified workers to fill 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. These last two companies 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.

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 in an early stage of responding to a reverse migration of people from the suburbs into urban neighborhoods. Quality of life decisions are the same in the Allentown area as elsewhere in the United States (e.g., the escalating cost of owning an automobile and rising suburban property taxes are making urban living once again attractive. An aging population is once again finding urban living more convenience, and the cultural amenities of cities attractive once there are no longer school-age children in the household.

City officials and real estate developers are responding to current demographic trends and to the potential demand for residential housing in and near the center of Allentown. New residential housing as part of a mixed-used development on a former industrial property along the Lehigh River is now underway. 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, under construction 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.

THE FUTURE FOR THE TWO-RATE PROPERTY TAX THROUGHOUT PENNSYLVANIA

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.

Another development has recently occurred with important implications 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.

SUMMARY

The history of the two-rate property tax in Pennsylvania provides strong evidence that communities adopting even a modest tax shift in the direction of land values experience real benefits. The greater the tax shift, the greater the benefits. The Allentown case also demonstrates that when the logic behind the tax shift is clearly explained, they will vote to continue its use even when powerful vested interests are mobilized against the idea. However, Pittsburgh’s recent experience demonstrates that even the best public policies can and do suffer when elected officials feel threatened by public outrage over wholly unrelated matters. Harrisburg has benefited by having knowledgeable and dedicated leadership holding the Office of Mayor for almost three decades.

What happens in these and other cities in Pennsylvania in the future will continue to depend on thoughtful civic leaders willing to support change from what their communities have been doing almost since they were settled. Every year that goes by adds to the body of data available to compare the experience of two-rate cities to neighboring one-rate cities. The Philadelphia-based Center for the Study of Economics monitors construction permit data across the state and consults with communities expressing an interest in adopting the two-rate property tax. The Center’s newsletter, Incentive Taxation, reports on the progress achieved by new and existing two-rate cities. Concluding a study on the two-rate property tax for officials of the City of Johnstown, Pennsylvania prepared in February, 2005, The Center’s director, Joshua Vincent addressed the question of how this measure helps those at the lower end of the socio-economic ladder:

“The poor own little or no land and use very little. They will pay the smallest share of land tax. The middle class owns the land under their homes. They will pay modest land taxes. Corporate, absentee or wealthy individuals own the most valuable land. They will pay most of a land tax. “

Notes

i Percy Williams. “Land Value Taxation: The Pennsylvania Experience.” Land Value Taxation Around the World, Robert V. Andelson, editor (New York: Robert Schalkenbach Foundation, 1955).

ii Quoted in: Ibid.

iii Wallace Oates and Robert Schwab. “The Impact of Urban Land Taxation: The Pittsburgh Experience.” (Cambridge, MA: Lincoln Institute for Land Policy, 1992), pp.

iv 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.”


SWOT ANALYSIS

Pittsburgh:

Strengths: City council enacted local enabling legislation which, combined with a reassessment of all property and a modest shift towards land value taxation, resulted in the construction of new buildings almost immediately. Supporters have sometimes successfully mobilized political forces to maintain and further the policy, which proved to be an effective tool for revitalization of Pittsburgh’s downtown area after World War II. The character of this formerly degrading steel manufacturing 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. A 1992 study concluded that “the primary role of the land tax is to provide the additional source of revenues that allows a reduction in the rate of improvements.” Data on real estate transactions have conclusively shown that the tax encouraged owners of underutilized sites to develop their sites or sell to those willing and able to do so.

A bill granting to Pennsylvania’s 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 have been shifting their municipal tax base towards the capture of land value while reducing taxes on buildings.

Weaknesses: There has been considerable inconsistency in support for and application of the policy throughout the past several decades. Sometimes the City Council was favorable while its mayor was opposed, and sometimes the reverse occurred. Although the policy has proven to be important to the economic health of the city, insufficient understanding of this policy on the part of both city officials and civic leaders, particularly as it interfaced with a recent land value reassessment, resulted in a reversion to a single rate of taxation on both building and land values.

Opportunities: After the year 2000 reversion to a heavier tax on buildings and a lighter tax on land values, permits for new construction and for property renovation have declined each year thereafter and the city is facing a severe budget shortfall and has fallen into a desperate state. There is now an opportunity for public officials and residents of Pittsburgh to learn from their decades of experience with taxation policy, to realize that the land value taxation approach resulted in the most favorable conditions for the city, and to reinstate and expand this approach to financing their city.

Threats: Owners of large, unimproved or under-improved parcels of land, which pay more than owners of well-utilized urban sites, have sometimes organized to have the law enabling LVT repealed at state or municipal levels. When a chaotic situation regarding property reassessment emerged this, combined with lack of widespread understanding of the benefits of land value based taxation, resulted in a reversion to heavier taxation of improvements compared to land.

SCRANTON:

Strengths: In 1925 Scranton reduced its tax on building values to only half as much as land values. In 1980 city leaders voted to almost double the tax rate on land with no additional tax on buildings. Building permits increased significantly (22%) in 1980 – 81 compared to 1977-79. A similar city nearby (Wilkes-Barre) which taxed improvements heavier than land values suffered a 44% loss in building permits issued during the same time period. A Scranton mayor who understood the benefits of shifting the tax policy to a system of land value capture proposed to fully implement a land value tax based system and eliminate all taxes on buildings.

Weaknesses: Poor assessments and the lack of civic leadership in support of the shift to land value based taxes blocked and inhibited the implementation of this public finance approach. The lack of enabling legislation on the state level disallowed the city to shift its tax base towards land value capture for the county and school districts. Although the region around this city has been a storehouse of natural resources including coal, oil and natural gas, there was no momentum to capture these resource rents for the benefit of the people as a whole. Improving infrastructure, education and other amenities which would have then likely enabled emergence of a more diversified economy to mitigate the booms and busts of a largely resource extractive economic base. The lack of an integrated, holistic approach to resource rent capture has impeded social and economic progress.

Opportunities: There are city officials and university officials of Scranton who understand the benefits of the land value capture policy approach. They could bring together civic and grassroots leaders to develop and promote a program for full implementation of land value capture for the city. Such a program would include passage of state enabling legislation for land value capture for counties and school districts, accurate assessments of both surface land and mineral resource values, a transparent land value capture implementation plan, and broad public education about this policy approach.

Threats: Pressure to delay implementation to a full land value tax shift arose because of serious property assessment issues. The fact that Scranton area school districts were not permitted to shift towards land value capture because of lack of enabling legislation on the state level has considerably diluted the potential benefits of land value capture for Scranton.

HARRISBURG

Strengths: This city began the shift towards a land value based tax system in 1975 and from that point on continued to decrease the tax rate on buildings while increasing the tax rate on land value. For most of this era, Harrisburg has experienced remarkable political stability, undertook important projects to which successfully attracted new job-creating businesses and residents.

This city had previously experienced severe economic distress but with the new tax policy successfully harnessing economic and social forces the number of vacant structures dropped substantially and the city was considered the second "best investment" city in the Eastern U.S. two consecutive years in a national banking institution poll. Crime and fire rates have significantly decreased while businesses, private sector jobs and homes have increased in number after three decades of previous decline.

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. Another way to view this is that Harrisburg now taxes land value six times heavier than building value. Mayor Reed, who has been a strong advocate for working people in his city, described the Harrisburg experience as follows:

"The City of Harrisburg continues in the view that a land value taxation system, which places a much higher tax rate on land than on improvements, is an important incentive for the highest and best use of land in already developed communities, such as cities.

“With over 90% of the property owners in the City of Harrisburg, the two-tiered tax rate system actually saves money over what would otherwise be a single tax system that is currently in use in nearly all municipalities in Pennsylvania.

“We therefore continue to regard the two-tiered tax rate system as an important ingredient in our overall economic development activities … and one of the key local policies that has been factored into this initial economic success here."

Harrisburg’s revitalization continues. A stable tax base combined with steady economic growth has provided the means to address the housing and other needs of the city’s poor and elderly.

Weaknesses: Property taxes which pay for education are a substantial portion of local taxes in Pennsylvania, usually substantially more than half the local tax base. However, school district taxing jurisdictions are not permitted by the state of Pennsylvania to shift their tax base towards land value capture because enabling legislation has not yet been passed at the state level. Therefore school districts continue to tax buildings and other improvements to the city at a significantly higher rate than land values. The inability of Harrisburg’s school districts to shift to land value taxation significantly dilutes the ability of the city to further increase the benefits to be derived from this tax policy. For example, the need for additional affordable housing in the city could be better met if all taxing jurisdictions could untax buildings and improvements and encourage full utilization of valuable land via land value capture.

Another weakness of this policy in Harrisburg is the fact that a significant land area of the city is utilized for state government buildings and therefore is untaxed.

Also, unfortunately there is currently no attempt being made to educate the public about the benefits of their city’s tax policy and therefore there is no citizen mobilization to extend this policy approach via the passage of statewide enabling legislation for the land value tax option for school districts. This is unfortunate in that Harrisburg is the capitol city of Pennsylvania and the legislative offices are all located in the heart of the city.

Opportunities: The fact that Harrisburg has experienced such a strong economic turn-around under this tax policy is a factor contributing to Mayor Steven Reed having been voted Number One Mayor in the United States and Number Three Mayor in the world in 2006 and a resulting high visibility for the city. In that the benefits of this tax policy have been well documented and well articulated, the opportunity exists to further this policy approach via the building of a populist movement in the city to lobby for enabling legislation for school districts. With passage of such legislation the city would be well-positioned to further increase the overall benefits of this approach to public finance.

Threats: With so few public officials and civic leaders who fully understand the several advantages of their city’s public finance policy approach there is a threat that whenever a new mayor is elected the city could revert to a regressive form of taxation policy in future.

ALLENTOWN

Strengths: The City Council voted in 1994 reform local taxation and the change took effect in 1996 after voters overwhelmingly adopted a home rule charter consolidating the powers within the city government. The plan was to freeze all local business taxes and that portion of the property tax applied to buildings and from that point on meet any increased need for revenue by increasing the rate of taxation on assessed land values. Despite an attempt by a small group of major landowners in Allentown to thwart this policy, the citizens were well-informed about the benefits of this approach via a grassroots educational campaign and voted to retain the new revenue structure for their city.

An important result of the shift towards a land value based public finance system was that nearly three out of every four properties in Allentown experienced an immediate reduction in taxation, including the great majority of homeowners. Those who paid more under the new system held sites that had not been fully utilizing their capacity to contribute to the overall well-being of the city.

Each year since 1996 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. Allentown’s new private construction and renovation grew by 32% in dollar value in the three years after it first adopted the this system of taxation as compared to the prior three years. The city also benefited by abatements on new construction and low income tax credits.

Weaknesses: Allentown, as is the case with most of the other cities in Pennsylvania which have been shifting their tax base off buildings and building improvements and onto the value of land sites, cannot utilize this system for the purposes of financing their public educational system which is a substantial portion of local tax needs.

Opportunities: Service sector jobs are plentiful especially in the areas of health services. Many businesses report having trouble finding qualified workers to fill available positions. If these businesses were to be better informed about the benefits of land value based public finance system they would have the potential to build and support a civic movement for state enabling legislation to fund Allentown’s school district via land value taxes and thereby strengthen and improve public education in order to train workers to fill these positions.

Allentown is another city in an early stage of responding to a reverse migration of people from the suburbs into urban neighborhoods due to the escalating cost of owning an automobile, the rising of suburban property taxes, and an aging population which is finding urban living more convenient and attractive. These newcomers to the city should be given information about the benefits of land value taxation in order to continue to build a populist base of support for the continuance and augmentation of this tax approach.

Threats: An insufficient knowledge base on the part of either the general public or local elected public officials could undermine the progress of implementation of this policy approach here as elsewhere. Also there is a threat on the level of state government, where some members of the state legislature, uninformed about the benefits and success of this policy in the municipalities, has led them to put forth bills to replace property taxes with income taxes. If such bills were to pass this policy approach would be seriously undermined in Allentown and in all other towns and cities of the state.

Overall SWOT Analysis for the state of Pennsylvania, USA:

Strengths: In the Commonwealth of Pennsylvania a small number of elected officials and civic leaders have successfully made the case for the land value capture/tax policy. Working within the confines of state constitutional law, they managed to build sufficient support to have the Pennsylvania state constitution amended several times, each time extending this policy option to a greater number of municipalities throughout the state.

Based on the experiences of the nearly two dozen cities and towns which have been reforming their local tax system in this direction, usually in small steps, the benefits are noted from one to three years after implementation. The benefits have been measured primarily by researching and tracking the increase in both the number of building permits and building values. The fiscal and social conditions of the municipality usually improves as a result of this enhanced utilization of valuable urban land sites. There is a direct relationship between the degree to which the policy is implemented and the benefits observed as a result.

These cities have usually taken a gradual but steady approach toward this system of public finance within their capacity at the local level. In most cases they have been reducing taxes on buildings and building improvements while capturing more of the economic rent from land values. Thus benefits have been attained via a tax shift rather than the need for an overall increase in the tax burden. When civic leaders who understand this policy approach do see a need to increase taxes, they have chosen to capture more of the economic rent of land rather than raising taxes on workers, homes or productive capital.

Citizens of the third largest city of the state have demonstrated that, with sufficient information concerning the benefits of this approach, it can be voted into effect by popular referendum.

Experience with this policy in Pennsylvania provides solid examples that shifting public finance towards land value taxation while decreasing taxes on the built environment properly harnesses market forces for development while curbing land speculation and land price escalation, thus maintaining and furthering housing affordability.

Recent developments in information technology have been pioneered in the state of Pennsylvania and have proven to be very useful for both public education and fair and efficient implementation of land value capture policy.

Weaknesses: 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 bills adopted by the Pennsylvania legislature which enabled the shift to land value taxation apply to municipal governments only, not to school districts and counties. The result has been to weaken the potential for a fuller implementation of this policy approach.

A full land value capture/taxation system does not simply impose another tax but would substantially lower or eliminate taxes on labor, especially for lower income workers. A state legislature does not have the power to reduce or eliminate federal payroll and other income taxes. The income tax burdens at the federal level weakens what would otherwise be an enhanced purchasing capacity for workers if their taxes were decreased. If income taxes were to be decreased, this combined with the affordable land access which is maintained and furthered by land value capture, could substantially address the problem of poverty and need for more affordable housing.

Sometimes the opposing voices of the small minority of citizens who would have to pay more in order to pay their fair share under this approach have been stronger than the voices of the majority who would have to pay less while still paying their fair share.

Insufficient information or misinformation on the part of public officials and civic leaders concerning how to interface property assessments and land site valuation with the land value capture policy have sometimes resulted in set-backs to this approach to public finance.

There has been insufficient public education and information dissemination about the benefits of land value capture policy at both the state and local levels. As a result a broader utilization of this approach is not being adopted as rapidly as could otherwise be the case.

Opportunities: The knowledge of how to implement this policy and the benefits of this approach have been clearly demonstrated in a number of cities of Pennsylvania. This should make it possible for other cities and taxing jurisdictions to enact it with confidence.

Cities currently enacting this policy to some degree could take stronger steps in this direction.

Enabling legislation which would extend this policy option to school districts has been written and awaits legislative sponsorship and an organized citizens movement to promote its passage through the state legislature.

The states largest city – Philadelphia – has its school district boundaries coterminus with its municipal boundaries and thus under existing law is permitted to implement land value capture on a broader basis than currently existing examples. A detailed “Tax Structure Analysis Report” was prepared, printed and distributed by the office of the city controller and recommends a shift to land value capture policy. Significant momentum of citizen support to implement the policy has been generated.

Threats: Well-organized and powerful lobbies for big land and real estate interests at both state and local levels have sometimes effectively worked against this policy approach.

The governor and most members of the state legislature have insufficient knowledge and information about the benefits of land value capture/taxation policy. They are under the erroneous belief that property taxes are regressive and that income taxes are more progressive. The risk is that the state legislature could pass legislation that would freeze or eliminate property taxes (and this would include land value taxes) in favor of increased labor income taxes.

The public at large lacks both information and leadership concerning the benefits of capturing primarily the economic rent of land rather than placing tax burdens on their homes, labor and productive capital. Thus the overall zeitgeist concerning tax policy combined with the incapacity of state and local government to reduce federal income taxes yields a significant impediment to full implementation of land value taxation in the state of Pennsylvania.