Let's Try Incentive Taxation
Reforming the Property Tax System
Here is a reprint of a classic article by one of the nation's top experts on property tax reform.
by Steven CordUrban tax experts are giving increasing support to property tax reform designed to:
- Reduce the costs of construction and rehabilitation.
- Invigorate our central business districts.
- Stop the urban sprawl into our clean-and-green countryside.
- Allow cities and school districts to raise revenue more easily.
The proposal is sirnple enough: instead of taxing land and buildings at the same millage rate (as we do now) tax land at a higher rate than buildings.
For example, Harrisburg now taxes land at 23 mills and buildings at 17 mills. Pittsburgh taxes land at 49 mills and buildings at 24.5 mills.
If a city or school district needs more revenue from the property tax, it can raise the millage on land only, rather than on both land and buildings.
Or they can gradually phase out the property tax or buildings altogether over a period of five years and end up taxing land only.
"How can a simple change like that solve all those problems?" some will ask.
(1) It will reduce the costs of construction and rehabilitation. If we add up the property tax payments or on average building paid each year during its entire life span, those payments will amount to more than half of the original construction cost! Housing is a necessity, but we tax it almost as heavily as cigarettes and liquor. No wonder there's a shortage of low-cost housing.
By un-taxing buildings, we considerably reduce their cost. This alone can spur a healthy construction boom. Let a property owner improve his building, and his property tax goes up. But if we tax land instead, then we can remove this major obstacle to rehabilitation while maintaining city revenues.
But in addition, by taxing land more heavily, we require it to be used efficiently, as determined by the market at any given time (within zoning limitations, of course).
Rural land not needed for development will remain that way, but the land value tax will require valuable urban land to be used efficiently, and it will be easier to do so if buildings are un-taxed - a carrot and stick approach.
(2) This reform will invigorate our central business districts. It will promote the construction of apartment buildings near the downtown stores, which need walk-in traffic to prosper.
It will spur the rehabilitation of our blighted commercial districts. One building owner might not want to rehabilitate his building if he's located in a blighted downtown area; but if all the owners in the area are spurred into renewal, then renewal becomes profitable for all owners.
No wonder a research study by the Urban Land Institute calls this property tax reform "the golden key to urban renewal . . . and not at public expense."
(3) This is how to protect our unspoiled countryside. By taxing land more, buildings less, urban land will be used more efficiently; and the urge to spill and sprawl over the surrounding countryside would be considerably reduced.
Our population is expanding, and some encroachment on the fringe is inevitable; the younger generation has to live somewhere. But inefficient sprawl is an enemy which could be stopped by taxing land more heavily.
In New Zealand, the city of Wellington taxes land values while Auckland doesn't. Both cities are geographically similar, but Auckland's sprawl is noticeably greater than Wellington's.
Isn't it about time we protected our countryside?
(4) Cities and school districts can raise revenue more easily. Homeowners pay less in taxes when we tax land at a higher rate (after all, we're un-taxing their buildings, which is the major part of their investment). The tax is therefore mildly progressive - in accord with ability to pay. And it is for this reason that cities and school districts can raise revenue with the least harm to most taxpayers.
It is obviously easier to get more revenue from a tax (as on land) which will help rather than hurt.
Dr. Steven B. Cord is the former director of the Center for the Study of Economics and the Henry George Foundation of America, and founder/editor of Incentive Taxation. He is the author of Society at the Crossroads. This article originally appeared in the Johnstown Tribune-Democrat.
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