Land Value Property Tax Under Consideration in Seven States

Published June 1, 2005

The unpopularity of the property tax is axiomatic, yet it remains the revenue source of choice for most local governments, including school districts. Sales taxes are regressive, and business and income taxation tend to deflate any local economy in this age of mobile people and capital.

For local governments wondering what to do, one idea making headway is land value taxation (LVT).

Whereas the typical real property tax applies to land and improvements on the land at the same rate, LVT taxes land at a higher rate, while reducing or even eliminating the tax on improvements. Under LVT private land is taxed on the basis of its value rather than how it is used, encouraging cities, especially older ones, to consider LVT as a way to provide a stable revenue source without punishing investment.

Twenty cities in Pennsylvania have used LVT for several decades, and serious efforts are underway to expand its use in the Keystone State and permit cities in other states to use it. Harrisburg, the state capital, uses LVT and has experienced lower taxes for homeowners and employers and a rare revival of a once-moribund downtown. Mayor Stephen Reed credits LVT with playing a major role in Harrisburg’s rejuvenation.

“As part of our economic development incentives, the land value tax policy is key, and without it, a significant amount of new investment would not have occurred here during recent years,” Reed said.

Reed added that while land value tax policy is one of several tools the city uses to improve its economy and quality of life, without land value taxation “it would be particularly more difficult to attract and retain taxable real estate investment.”

Philadelphia Considering Adoption

Nearly unique among U.S. cities, Philadelphia has suffered from a lethal tax “cocktail” of local income taxes, punitive business taxes, low property taxes, and a reputation for a city government more concerned with dealmaking than sane policy.

That may be changing. Last year, the Philadelphia Tax Reform Commission recommended adoption of LVT. In late 2001 the Philadelphia city controller, Jonathan Saidel, had released a landmark tax reform document that embraced land value taxation. This year, the local assessment authority will reassess the entire city (an important step in preparing for LVT), and Saidel is running for mayor.

Three separate studies indicate nearly 80 percent of the city’s homeowners–and nearly all poor, working, and senior homeowners–would see tax reductions under an LVT plan.

LVT Movement Spreads

The experience of Pennsylvania towns, especially Harrisburg, has led to the introduction of seven LVT bills currently pending in Alabama, Connecticut, Maryland, and Minnesota.

The law with the best chance of passage is in Connecticut. SB 977 will permit cities with a population greater than 100,000 to enact LVT. That includes such troubled towns as Hartford and New Haven.

After decades of infusions of taxpayer cash with little result, people in those towns now believe the tax system itself must be changed to encourage capital investment and address the real problem of speculation in vacant land and abandoned buildings.

“The City of Hartford as well as other municipalities across the state lose a great amount of revenue for undeveloped land and vacant lots when such lots are paved over and used as parking facilities,” said Hartford Mayor Eddie Perez at legislative hearings in March. “By correcting this problem with a land value tax, the state will create a more equitable system where all businesses pay their fair share of property tax (not only those in buildings).”

Absentee Owners Would Pay

A study (“Impact of a Two-Rate Tax in Hartford”) conducted in 2004 by this author for the Center for the Study of Economics showed 78 percent of Hartford homeowners would get a tax decrease, and vacant lots owned by (mostly) absentees would receive a tax increase, under an LVT system.

Many urban professionals and officials are coming to believe the nation’s cities can’t be fixed by government subsidies, government intervention, and more taxes. “Taxing the ground rent that otherwise accretes to locations makes real estate more liquid and responsive to market forces,” said political scientist and consultant H. William Batt, who has studied LVT for state and local governments. “Untaxing wages and interest provides the additional wherewithal for wider and deeper entry into those markets.”

Joshua Vincent ([email protected]) is executive director of the Center for the Study of Economics, based in Philadelphia.

For more information …

For more information on land value taxation, visit the Web site of the Center for the Study of Economics,