Retooling Property Taxes
How Re-Engineering the Property Tax Can Be Successful
GroundSwell, March-April 2010]
The following article is reprinted with permission
from the March 2010 issue of Public Management magazine,
published by the International City/County Management Association
(ICMA), Washington, D.C.
How did some local governments generate adequate revenue during a
failing economy, reduce property taxes for most homeowners, entice new
private development without subsides, retard sprawl, and keep housing
affordable? Certainly a timely question. During this prolonged
recession, shrinking funds are forcing localities to cut back on
services when they are most needed by people suffering from loss of
homes and jobs.
Several dozen cities dug themselves out of a hole by re-engineering
their property tax. They reduced taxes on homes and other buildings
and raised taxes on land. Pennsylvania's capital city demonstrates the
potency of this medicine.
In 1980, Harrisburg, Pennsylvania, was cited by HUD as one of the
nation's most distressed cities. It had lost 800 businesses and a
third of its population in 20 years. Mayor Stephen Reed initiated the
two-rate tax in that era, reducing the tax rate on buildings to
one-half the rate on land.
Reed, who continued as mayor until January 2010, credits the reform
with playing a major part in reversing the city's downward slide. Most
of the 5,200 stores and housing units that were boarded-up when he
took office are replaced or back in use. Since then, new construction
and rehabilitation of existing structures increased the city's taxable
real estate from $212 million to over $1.6 billion. Businesses on the
tax rolls rose from 1,908 to more than 9,100 by the start of 2009.
Seeing these positive effects, Harrisburg reduced its tax rate on
improvements to one-sixth the rate on land.
Tax hikes on idle sites induced owners to put them to use,
discouraging sprawl. Reed said, "Unused urban land is what pushes
development into open spaces. Many states try to save farmland by
buying development rights. That's expensive. Without spending a dime,
we achieved the same goal with our two-tier tax."
Upside-Down Property Tax
The conventional property tax combines two distinct taxes, one on
land and one on improvements. Taxpayers dislike the tax on buildings--
for good reason. The more they invest, the higher their tax. In
contrast, owners who let structures deteriorate are rewarded with
lower taxes. Taxing good buildings heavily and poor buildings lightly
is like giving blight and slums an engraved invitation to invade a
That's only the half of it. The good part of the tax, on land values,
generally is too low, especially on vacant sites. Assessors look at
the non-existent income streams of bare lots and mistakenly assign low
values to them, ignoring their potential. This promotes land
speculation, a prime cause of runaway housing prices, sprawl and
How so? Speculators hold prime sites vacant, waiting for population
growth and local government services to make these sites more
valuable. Plots kept in cold storage create an artificial shortage of
developable sites. This drives urban land prices up, drives growth to
the outskirts, and fuels more speculation until a boom, based largely
on thin air, goes bust.
Virtues of Taxing Land
Taxing land more and buildings less takes the profit out of
speculation, putting land users rather than land holders in the
driver's seat. Unlike taxes on most anything else, taxes on site
values reduce land prices. Good things flow from this remarkable fact,
as these examples show.
Aliquippa, Pennsylvania, not only lost jobs when LTV's steel mill
closed 20 years ago, a court order reduced LTV's property tax from $1
million to $200,000. The city reduced tax rates on buildings, making
the tax rate on land 16 times higher than on improvements. This
enabled Aliquippa to collect $450,000 from LTV's valuable site, and it
nudged LTV to promptly find new occupants for its plant. Within a few
years, the city treasury had a surplus. City Administrator Thomas
Stoner says the two-rate tax "favors residences and puts more
weight on industrial properties." This Rust Belt city still
struggles economically but its housing costs remain affordable.
Peoria, Illinois, adopted tax reform under an enterprise zone law to
revive a seven-mile strip of obsolete factories and blighted
warehouses. This area along the Illinois River employed 2,000 people
in 1980, down from 50,000 in its heyday. Taxes on new or renovated
buildings were reduced 75 percent for five years, 50 percent for the
next five. Reductions did not apply to land values. The city offered
no subsidies to entice new firms. Building activity mushroomed, land
values rose, and so did tax revenues. The dollar value of industrial
and commercial building permits quickly rose from 8 percent to 29
percent of the citywide total. Tax incentives favoring instead of
discouraging growth worked their magic.
Southfield, Michigan, attracted impressive growth after Mayor James
Clarkson and assessor Ted Gwartney in the 1960s corrected the city's
under-assessment of land. Land was assessed too low at 10 percent of
value and buildings too high at more than 70 percent of value.
Assessing both at market value touched off dramatic expansion. Average
homeowners won a 22 percent tax reduction. Detroit, literally across
the street, failed to follow Southfield's lead and was in decline long
before the fall of its auto industry. Note that Southfield did not
adopt a land tax. Its turnaround came from simply obeying the law of
the conventional property tax and assessing both land and improvements
at current value.
Local governments can replicate these successes by taking these
- Get state legislators to permit taxing land and buildings at
different rates, if not already allowed.
- Keep land assessments at current market value to get maximum
mileage from the tax. (Inequitable land assessments in 2000
scuttled the two-rate tax in Pittsburgh, which had been a shining
example of urban revitalization via tax reform.)
- Run a computer simulation of a two-rate tax--lower rates on
improvements, higher rates on land--to identify who pays more or
less, to determine the optimum shift, and to avoid surprises.
Organizations like the Center for the Study of Economics in
Philadelphia, which designed many of the Pennsylvania reforms, can
provide guidance on this phase.
- Start with a revenue-neutral reform. If the community generates
the same tax receipts citywide as under the traditional system,
opponents cannot mischaracterize the tax shift as a tax increase.
- Set land value rates as high as politically feasible. Everybody
loves lower taxes on homes. The initial rate on land, however,
should not be set so high that owners of vacant sites, whose taxes
will rise, might defeat the measure. Once in operation, rate
differentials can gradually be widened. In 2009, for example,
Altoona, Pennsylvania, expanded its land tax rate to 27 times
higher than its tax on buildings; and DuBois, Pennsylvania, last
year reduced its building tax rate to only 0.2 percent, so its
land tax rate is 44 times higher, or 8.8 percent.
Pocketbook Obstacles to Enactment
Landholders with little or no improvements on prime sites pay
relatively minimal taxes under the conventional property tax. Shifting
taxes off improvements and on to land values means their taxes go up.
In Allentown, Pennsylvania, for example, the publisher of the local
newspaper held acres of central city sites used for surface parking
lots, and he managed for years to get the mayor to veto the two-rate
tax approved by a majority of council persons, until council
eventually won the day. In West Virginia, powerful coal interests, who
pay low taxes on their assets, have consistently blocked the
legislature's efforts to give cities and counties the option of using
a two-rate tax in that state.
Here is a quick summary of the obstacles:
Obstacle 1: Advantages are not well known.
Remedy: Enable taxpayers to answer, "How will this affect me?"
Run a computer simulation of the proposed change, showing who
benefits and who pays more. Typically, after a large majority see
they will pay less, they tend to favor enactment.
Obstacle 2: Political power of opposition. Real estate interests
are among top contributors to political campaigns. Surface parking
lot owners, slumlords, or others who pay more under the reform may
use their political clout to block enactment.
Remedy: Fortunately, most land speculators in America also tend to
be entrepreneurs. So it is important to show them how their tax
reductions as business people, and as homeowners too, counteract the
higher taxes on their unimproved or under-improved land holdings.
Incentives vs. Police Powers
New London, Connecticut, became notorious when the Supreme Court
affirmed its right to condemn and replace good homes with commercial
development. Widespread outcries arose against such aggressive use of
condemnation powers. In July 2009, Governor Jodi Rell signed an act
permitting New London to launch a land value tax pilot project that is
now being designed. This use of tax reform to stimulate a local
economy, as an alternative to manipulation of property rights, will be
important to track.
Harrisburg and the other cities cited used many measures in addition
to tax reform to spur renewal, fiscal stability, and economic growth.
Their land tax attacked the land speculation that often undermines the
effectiveness of those other measures. Shifting taxes off buildings
onto land is a vital but missing item in the tool kit of most local
The reform changes urban dynamics. Lower taxes on improvements
promote development instead of penalizing it. Higher land taxes return
to the local government the site values that result directly from
improved public services and facilities. Land taxes also spur in-city
growth, opening the way to new enterprises and jobs. They keep housing
prices from soaring into the stratosphere--and then tumbling. To save
localities and prevent the next crash, the land tax has the earmarks
of a reform whose time has come.