Two-Tier Property Tax
Would Spell Relief, Revenue

Daniel John Sobieski

[Reprinted from the Chicago Sun-Times, 19 August 1989]

The recent blitz of quadrennial reassessments and higher tax levies on property owners left hundreds, facing a doubling of the second installment of their property taxes with thousands more struggling to deal with increases of 50 percent to 70 percent. Politicians claim that the rising cost of government services plus dwindling revenues, coupled with reduced federal aid, leaves them with a choice of cutting local programs to the bone or raising revenue through tax increases.

State and local governments have at their disposal, however, a source of untapped revenue, more than adequate to meet present and future needs, which can make possible tax relief for homeowners without destroying the incentives for economic growth.

What is this magic source of revenue and growth? You're standing on it. Land. But, you say, we already tax property. And, as Shakespeare would say, there's the rub.

We tax property and the land it rests on as a single unit. The present single-tier property tax discourages the builder or those who simply want to improve or renovate their structures. It rewards decay and neglect. It has been a prime factor in the decline of our inner cities.

Steven Cord, en economics professor at Indiana University of Pennsylvania notes: "An owner who just sits on prime city land and keeps it idle is rewarded with low property taxes, and yet he can make big, speculative, unearned profits by selling it at some future time. What about the man who builds on his city site? He puts up office buildings and housing, and is penalized by high taxes year after year, not just once."

In the mid-1970s, Pittsburgh also faced a severe fiscal crisis, but was determined to maintain essential services and raise the necessary revenues rather than slide into debt. A farsighted city councilman suggested that a land tax be considered. The property tax was split into a tax on land and a tax on buildings - with the former being four times the rate of the latter.

But by the third year of the plan, construction in Pittsburgh was up 600 percent, despite the decline of its basic industry, steel. In a recent survey Pittsburgh was named the nation's most livable city.

Under the system here, a developed lot is taxed more than a neighboring undeveloped lot. A property owner who improves his structure is penalized through higher assessments for any improvement he makes. Thus the current tax system encourages land to remain idle, encourages property to remain unimproved, facilitates urban decay, .rewards the land speculator, punishes the homeowner and entrepreneur, and inhibits growth of the tax base.

Those communities around the nation that have split the traditional property tax have created an incentive to develop property, or to sell to someone who will through the increased economic activity and growth leading to an expanded tax base, it has been possible to raise revenues while rates have remained stable or even declined for homeowners. According to the Center for the Study of Economics, Pittsburgh homeowners in those areas with less than median incomes save at least $700,000 a year with the city's two-tier property tax.

Other Pennsylvania cities - Harrifiburg, Scranton, McKeesport and New Castle - followed Pittsburgh's lead with higher land tax rates and, in some cases, reduced building rates. All five cities either enjoyed substantial increases in new construction or saw, in neighboring cities of comparable characteristics, the number and value of new construction took nose dives.

Rep. William D. Coyne (D-Pa.) says a two-rate property tax would cut most homeowners' taxes, bring down rents for moat apartment dwellers, and require land speculators to pay a larger share of local revenue. "This reform has given Pittsburgh the lowest housing costs of any large city," he said. "To stop blight and overpricing from eroding federal housing programs, cities and states should look to this pro-housing tax reform."

The Rev. William J. Byron, economist and president of Catholic University, says the land tax might also help to solve the problems of homelessness and affordable housing. "It's a scandal that homelessness is growing while boarded-up apartments stand idle," he said. "Modest tax changes might help bring these abandoned units back into use."

The land tax is an idea whose time has come.