How Philadelphia Can Avoid Decay
PITTSBURGH, PHILADELPHIA MULL PAST & FUTURE OF PROPERTY TAX REFORM
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Philadelphia's city council will hold hearings starting Wednesday, January 30, on a fiscal reform plan proposed by City Controller Jonathan Saidel. The plan includes shifting property tax burdens from property improvements to land values. This "land value taxation" plan would make housing more affordable and would cause land speculators and slum landlords to clean up and participate in the community economy.
Will Philadelphia save itself from decay, by using the land value taxation plan that has worked well in other cities, or will politicians ruin the plan and betray the city's hardworking people? The Progress Report has received special permission to reprint this recent article from State Tax Notes. You can reach State Tax Notes by clicking here
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by Timothy Catts
In Philadelphia, a report written by Controller Jonathan Saidel will get its day before the city council January 30. Illustrated with examples of the economic benefits reaped by Allentown and Harrisburg, it proposes that the city begin to tax land at a higher rate than buildings.
Across the state in Pittsburgh, a city that for 88 years taxed land at a rate as high as nearly six times the tax on buildings, is nearing the end of its first year with a traditional, single-rate property tax.
Land value taxation, the idea at the heart of each city's debate, is the brainchild of 19th-century philosopher Henry George. George proposed to tax land values exclusively, exempting buildings. He believed that the land tax would encourage development, discourage sprawl and speculation, and reduce the tax burden on the poor.
Pennsylvania has been a laboratory for George's ideas since 1913, when Pittsburgh and Scranton began taxing land at twice the rate of improvements. Pittsburgh [temporarily] abandoned its adaptation of land value taxation last year in the wake of a controversial reassessment. But now, even with its own assessment controversy, Philadelphia is considering adopting the Progressive Era reform 120 years after its inception.
Even if the city does not adopt a two-tiered property tax, "it's good that these changes are on the agenda at all," Brett Mandel, director of financial and policy analysis in the Controller's Office, told State Tax Notes.
The controller's report cites increases in the value of building permits in Harrisburg and Allentown, two of the more than a dozen Pennsylvania cities using a split-rate property tax. A similar study published in the National Tax Journal in 1997 showed a similar increase in Pittsburgh in the early 1980s, when the tax rate on land was increased to more than five times the rate on buildings. That study credits the split-rate property tax with a supporting role in a substantial building boom.
But the Philadelphia controller's new report does not mention Pittsburgh. That city scrapped its two-tier property tax after a controversial reassessment and an approaching mayoral election made it politically untenable.
The Pittsburgh reassessment began in 1997, when Court of Common Pleas Judge R. Stanton Wettick Jr. struck down Allegheny County's 16- month-old ban on reassessments, which had blocked the reassessment of existing properties, but allowed first-time assessments of new structures. The county hired Sabre Systems and Service, an Ohio firm specializing in property appraisal, to complete the court-mandated reassessment.
The first sign of trouble surfaced in July 2000, when County Executive Jim Roddey delayed the mailing of the first assessment notices for 2001. A study by the daily Pittsburgh Tribune-Review had found that new market values for three properties north of Pittsburgh had increased by a factor of more than one thousand.
When city residents received their new assessment notices, they discovered that the market value of their property values had increased by an average of 54 percent. The proportion of value assigned to land had risen from below 20 percent countywide to above 25 percent, and the total market value of residential properties and their share of the total increased significantly. Citywide, land values nearly doubled, rising to $ 2.8 billion. Property values increased so much that the city was forced to slash the tax on land from 184.50 mills to 31.37 mills and the tax on improvements from 32 to 5.44 to comply with a state law that caps real estate tax revenue increases to 5 percent a year.
The Post-Gazette, Pittsburgh's other daily newspaper, found that properties with houses costing between $ 10,000 and $ 32,500 were assessed, on average, at 168 percent of their actual market value.
"It was a circus," Robert P. Strauss, a Carnegie Mellon University economics professor and supporter of Pittsburgh's two-tiered property tax, told State Tax Notes. He blamed faulty assessment techniques, bad tax maps, and incorrect comparisons of sales of disparate properties for the large increase.
"There was a lack of political will to do this right," the Center for Local Tax Research's Dan Sullivan told State Tax Notes, a charge that local political leaders deny. According to Sullivan, Sabre should have assessed properties' land first, then assigned the remaining value to whatever improvements were present.
But an independent audit of Sabre's work conducted by Marsh USA Inc. in September 2000 found that the reassessments fell within accepted accuracy standards. A Tribune-Review study completed in April 2001 supported Marsh USA's conclusions.
Sabre President Dan Muthard did not return calls seeking comment. Sabre is being sued by the city over the 2001 reassessment.
The first round of reassessment notices mailed to city residents in the fall of 2000 did not break down the market value of their homes into land value and building value, causing confusion among taxpayers who could not verify their assessment results. As the early December 2000, deadline for property owners to contest the reassessment's results approached, over 87,000 appeals had been filed.
In the weeks after the reassessment's results were certified in early January 2001, City Council President Bob O'Connor (D) announced his candidacy for mayor and proposed that Pittsburgh move to a single-rate property tax.
Mayor Tom Murphy (D) responded by announcing a plan that would have reduced the ratio of the tax on land to the tax on buildings from almost 6-to-1 to 3-to-1. A lawsuit filed by the city that would have locked land values at 15 percent of market value was dismissed, and by early February Murphy had proposed his own single-rate property tax to the city council. Murphy's plan passed, setting the new tax's rate at 10.8 mills. A $10,000 homestead exemption was also included. Pittsburgh's split-rate property tax had been shelved. But it may not be dead.
"There's a window of three to five years" to return to a split- rate tax, "and it's closing," Kevin Forsythe, a lawyer in Pittsburgh Controller Tom Flaherty's office, told State Tax Notes. Flaherty told the Tribune Review last November that he would support a return to a two-tiered property tax -- if assessments come down.
Craig Kwiecinsky, a spokesperson for Murphy, said it would be "inappropriate to speculate" about whether Pittsburgh will return to a two-tiered property tax. The city has already committed to a single-rate tax for 2002, he said, and while there was nothing "fundamentally flawed" with the old system, the city favors a single rate now because it simplified an already confusing situation for residents.
In Philadelphia, officials are aware of Pittsburgh's struggles with the split-rate property tax. There, a December 2001 series of articles in the Philadelphia Inquirer highlighted property tax assessment problems in the city and its environs, noting that assessments often varied greatly in neighboring towns -- and on neighboring houses.
"In an ideal world, you would want to address those problems separately," Mandel told State Tax Notes. "We could just make sure we do a good job of assessing moving forward."
David Glancey, who chairs Philadelphia's Board of Revision of Taxes, told State Tax Notes that he does not support a switch to a two-tiered property tax. He estimated that changes to the way the property tax is administered could cost as much as $7 million, and he said that he is unsure of the economic benefit.
"I am not sure that taxation is as high in the hierarchy in driving development as proponents (of a two-tiered property tax) say it is," he told State Tax Notes. "If this was day one of the world, land value taxation is something we could think about," Glancey said. "I'm not convinced we'd see the benefits its proponents support."
Michael Weir, senior fellow at the Pennsylvania Economy League and author of a study that downplayed the split-rate tax's effect on Pittsburgh's economy, told State Tax Notes that he believed the biggest benefit of a higher land tax for Pittsburgh was a shift in the tax base toward commercial properties. That benefit was reversed in the most recent assessment. Unless such a shift away from taxing residences is the change Philadelphia is trying to make, he said, the city should avoid the split-rate property tax.
Lincoln Institute Senior Fellow Joan M. Youngman told State Tax Notes that while there is bound to be "sticker shock" any time that assessments are radically changed, a split-rate property tax is an alternative that cities such as Philadelphia and Pittsburgh should consider. Raising the tax on land could allow a city to eliminate other damaging taxes, such as a wage tax or sales tax, that hurt business inside the city lines, she said. That might be exactly what some cities need.
"If we don't do something about taxes here, the city will continue to decline," Mandel told State Tax Notes. The Philadelphia City Council will vote January 30 on whether to allow a discussion of the controller's report.
In Pittsburgh, sentiment for a return to two-tiered property taxation remains strong. Residents and policymakers are dividing into two camps, Forsythe said: One favors a tax on land exclusively, the other wants to abolish property taxes altogether. Forsythe told State Tax Notes that he supports a land tax.
"Usually the right thing loses," he said. "I don't think it's [a move toward a land tax is] going to happen, but I wish it would."
For more on Philadelphia's need for fiscal reform, and the prospects for land value taxation, see these:
Commentary from the Philadelphia Daily News
Background and Summary (courtesy of Common Ground-U.S.A.)
Controller Saidel's Report
Tell your opinion to the Philadelphia City Council! Just click here and you will get an opportunity to send messages to the Mayor and Council -- automatically and free of charge. Courtesy of hallwatch.org
Should Philadelphia seek property tax reform? What would you suggest? Tell your views to the members of Philadelphia's city council, using the link above. You can also tell The Progress Report:
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