An Introduction to Two-Rate Taxation of Land and Buildings

Summary

"An Introduction to Two-Rate Taxation of Land and Buildings" is a survey paper by Jeffrey P. Cohen (then assistant professor of economics, Barney School of Business, University of Hartford) and Cletus C. Coughlin (deputy director of research and vice president, Federal Reserve Bank of St. Louis), published in the Federal Reserve Bank of St. Louis Review, May/June 2005, 87(3): 359–374. The full text was fetched and read (the original stlouisfed.org PDF URL has gone dead and now redirects to a FRASER browse page; the paper was recovered via a mirror on scispace.com, its abstract independently confirmed against IDEAS/RePEc). The article opens by quoting Nobel laureates Milton Friedman ("the least bad tax is the property tax on the unimproved value of land") and William Vickrey ("[the property tax is] a combination of one of the worst taxes... and one of the best taxes—the tax on land or site value") as intellectual authority behind renewed interest in split-rate taxation.

The Core Argument / Findings

The paper is a literature review and policy primer, not a new empirical study, structured in four parts: an elementary economic rationale for two-rate taxation, a history of its use in the United States (chiefly Pennsylvania), a summary of existing quantitative estimates of its effects, and a discussion of the practical and political obstacles to adoption.

The theoretical case. Cohen and Coughlin explain the standard efficiency argument: because land supply is fixed, a tax on land value does not reduce the quantity supplied and so creates no deadweight loss, unlike taxes on buildings or income, which discourage construction and work. Shifting from uniform property taxation toward taxing land more heavily than structures should therefore reduce the tax system's overall distortion and could "generate additional economic activity."

The Pittsburgh experience. The paper's central empirical case study is Pittsburgh, which sharply increased its land-tax-to-building-tax differential in 1979–80. Citing Oates and Schwab (1997), the authors report Pittsburgh saw a 70.4% increase in average annual building-permit value between 1960–79 and 1980–89 — the largest of 15 comparable Rust Belt cities, 13 of which saw building permits decline over the same period (only Columbus, +15.4%, also grew). Oates and Schwab's regressions found a positive, significant post-1979 coefficient only for Pittsburgh, concentrated in nonresidential and office permits rather than residential. Cohen and Coughlin flag that Oates and Schwab themselves called this "surprising" against standard theory (only the land rate rose; the building rate didn't fall) and that Pittsburgh was simultaneously undergoing a major post-steel revitalization effort ("Renaissance II"), muddying causal attribution.

Other estimates. Aside from Pittsburgh, "only one comprehensive study... has attempted to identify the actual effects of two-rate taxation" — most other work estimates only the hypothetical, short-run redistribution of tax burden. The paper summarizes Bowman and Bell (2004), who used parcel-level data from three Virginia jurisdictions to compute how liabilities would shift under a pure land tax, finding owners with high land-to-improvement ratios (vacant/underbuilt lots) would see liabilities rise while intensively developed parcels would see liabilities fall.

Practical and political obstacles. Administratively, the authors report Edwin Mills's (1998) argument that separating "raw land value" from improved-property value is difficult — land is rarely observed unimproved once developable, and hedonic pricing is hard to extend to commercial parcels. On revenue adequacy, they cite Mills's estimate that even a 100% tax on land rent might raise at most roughly 1% of property value — insufficient to replace existing revenue — while Netzer and McGuire, citing Pittsburgh, are more optimistic. The paper also cites theory (Lee 2003; Wildasin and Wilson 1998) arguing uniform taxation can be more efficient than pure land taxation when land is partly absentee-owned or landowners value risk-pooling across jurisdictions — a real complication to the textbook "land tax is always efficient" story. Politically, a shift to two-rate taxation creates clear winners (underbuilt, high-land-value owners) and losers (intensively improved, low-land-value owners), and the losers have strong incentive to organize opposition.

Relation to the Georgist Case

This is a mainstream (non-Georgist-advocacy) Federal Reserve publication making the efficiency case for taxing land more heavily than buildings, useful precisely because it is not written from a Georgist standpoint — the authors treat two-rate taxation as one policy option among several, note real theoretical counterarguments to "land taxation is always efficient," and flag the empirical evidence as thin. It directly supports the wiki's split-rate taxation increases construction benefit page, for which the Pittsburgh/Oates-Schwab finding is already a listed source, by providing an independent secondary summary confirming how that finding has been read by later economists (suggestive but confounded by Pittsburgh's concurrent redevelopment push). It is also a useful primer for split-rate taxation and Pennsylvania, tying the concept to its main real-world US laboratory.

Nuances and Limits

The paper is a survey, not new research, and its headline empirical claim — the Pittsburgh building-permit surge — carries the same caveats Oates and Schwab themselves gave: no quasi-experimental design isolates the tax change from Pittsburgh's concurrent "Renaissance II" redevelopment campaign, the effect concentrates in commercial/office rather than residential permits, and it is the only one of 15 comparable cities showing a significant positive break. The authors are candid that comprehensive real-world tests of two-rate taxation's effects are scarce — most literature they summarize models hypothetical short-run burden shifts rather than measured construction responses. The paper does not simply repeat the textbook "land tax is neutral" claim; it presents genuine efficiency counterarguments (absentee ownership, risk diversification) that qualify when uniform taxation might beat a pure land tax — a nuance the wiki's own pages should reflect rather than flatten. [VERIFY: the paper's citation of Mills's (1998) revenue-adequacy estimate (site rents "at most 1 percent of property values") is reported as Cohen and Coughlin summarize Mills; the original Mills chapter was not independently checked.]

Bears On

• Benefit: Split-rate taxation increases urban construction — this paper is an independent secondary summary and corroboration of the Pittsburgh/Oates-Schwab finding already cited on that page, and adds the cross-city building-permit comparison table (Pittsburgh +70.4% vs. 13 of 15 comparison cities declining).
• Concept: Split-Rate Taxation — supplies the standard efficiency rationale, US implementation history, and the leading practical/political objections (assessment difficulty, revenue adequacy, absentee-owner and risk-diversification counterarguments) that the concept page should represent.
• Place: Pennsylvania — the paper's central real-world case study is Pittsburgh's 1979–80 tax reform, directly relevant to Pennsylvania's role as the wiki's split-rate "natural laboratory."

See Also

• Split-Rate Taxation
• Split-rate taxation increases urban construction
• Pennsylvania
• Land Value Tax
• Henry George

Sources

1. Jeffrey P. Cohen & Cletus C. Coughlin (2005), "An Introduction to Two-Rate Taxation of Land and Buildings," Federal Reserve Bank of St. Louis Review, 87(3): 359–374. IDEAS/RePEc abstract · PDF mirror — used for the full text (original stlouisfed.org PDF link is dead, redirecting to a FRASER browse page).
2. Wallace E. Oates & Robert M. Schwab (1997), "The Impact of Urban Land Taxation: The Pittsburgh Experience," National Tax Journal, 50(1): 1–21 — the primary study summarized for the Pittsburgh building-permit findings; cited as reported in the secondary source, not independently re-read. wiki summary
3. Fed in Print listing — used to corroborate the direct PDF URL and bibliographic details. fedinprint.org/item/fedlrv/25220