Land Value Taxation
versus
Tax Increment Financing

Dan Sullivan

[Reprinted from a Land-Theory online discussion, 18 August 2000]

Right now, there is tremendous opposition to a tax increment financing plan being pushed by Pittsburgh's mayor. The plan contemplates giving hundreds of millions of dollars to a developer, and additional subsidies to prominent upscale retailers, such as Nordstrom's and Tiffany's.

I am hoping to not only end this travesty, but to parlay pressure against the mayor's scheme into support for a shift to land value tax. A shift is necessary, as there has been a major reassessment, requiring a reduction in tax rates to offset the increase. It is rumored that the mayor wants to mostly untax land, which got most of the increase. We want council to put the entire reduction on the building tax.

Description (LVT)

Real estate values are assessed separately for land and improvements. The tax rate is gradually lowered on improvements and increased on land, until, ideally, the entire real estate tax burden is on land only.

Description (TIF)

Developers petition local taxing jurisdictions to allocate improvement taxes on the additional value they create to the financing of the improvements themselves, or to ancillary improvements that would otherwise have been made by the developer. In effect, the developer is paying taxes to himself.

Government Spending (LVT)

There is no increase in government spending.

Government Spending (TIF)

Government spending is increased, not only to subsidize selected improvements, but to fund the bureaucracy that decides who will get the TIF deals and under what circumstances.

Complexity (LVT)

Adds a single sentence to the municipal code. Most counties are already required to assess land and building values separately, and it is good assessment practice to assess land and buildings separately, anyhow. A city, borough, or home-rule municipality may shift to land value tax as part of its annual budget process. The only public hearing required is the annual tax hearing.

Complexity (TIF)

A vast array of criteria and procedures are instituted, and constantly amended, to regulate who may qualify for TIFs and under what circumstances. Each TIF deal must be considered separately, involving negotiations with developers; presentations to the governing bodies of the three taxing jurisdictions; concurrence by the three taxing bodies; public hearings by each taxing body, and the assumption of debts by public authorities.

Corruption, Fraud and Cronyism (LVT)

The only opportunity for corruption is in the assessment of real estate values. Because land lies out of doors, and the factors that create land value are not concealable, it is more difficult to hide corrupt assessment practices with regard to land.

Corruption, Fraud and Cronyism (TIF)

Giving government officials the power to selectively grant millions of dollars to favored enterprises is a prescription for corruption, fraud and cronyism. For example, the big five contributors to the stadium tax campaign each got multi-million-dollar subsidies.

Citizen Tax Burden (LVT)

Most citizens pay substantially less under land value tax than under any other broad-based tax generating the same revenue.

Citizen Tax Burden (TIF)

Ordinary taxpayers must pay more in order to subsidize TIF recipients.

Effect on blighted property owners (LVT)

LVT reduces the tax burden on making improvements to blighted properties is while increasing the burden on these properties in their current condition. This makes owners inclined to either improve the properties or sell them to someone else who will improve them.

Effect on blighted property owners (TIF)

Blighted property owners are encouraged to hold out for subsidized development projects, which generally pay far more for land than the ordinary market value. Thus, while TIFs might help remove specific cases of blight, they encourage the persistence of blight generally.

Eminent Domain (LVT)

LVT reduces the need to resort to eminent domain for private development by making holders of blighted properties are more eager to sell and potential improvers more eager to buy.

Eminent Domain (TIF)

Because holders of blighted properties can unilaterally derail a subsidized project, and because holding out has little penalty, the need to resort to eminent domain is increased.

Public Debt (LVT)

Switching to land value tax creates no public debt. It stimulates the economy, it increases revenue from other taxes and thereby helps reduce debt.

Public Debt (TIF)

Tax increment financing uses municipal bonds, for which public authorities, and, ultimately, the taxing jurisdictions are responsible if the TIF project fails to pay off the bond obligations.

Risk (LVT)

All development risks and all increased returns are borne by the developer. The taxpayer is not at risk.

Risk (TIF)

The taxpayer is on the hook for TIF debts, and there is also greater risk that enterprises in TIF districts will leave once the TIF subsidy has expired. For example, Union Switch and Signal has a 20-year lease in a building that enjoys a 20-year TIF. When that lease ends, they can easily leave, or threaten to leave, if not granted another subsidy.

Track Record (LVT)

Fifteen Pennsylvania cities and one school district have shifted to land value tax. In every case, a surge of construction followed. Other Pennsylvania cities, which have not shifted to land value tax, have continued to decline. Subsidized economic development projects have had a spotty success record at best.

Underlying Principles (LVT)

LVT is consistent with the principles on which this country was founded. It has been supported by many of our forefathers, including William Penn, Ben Franklin, Thomas Jefferson, Tom Paine, Abraham Lincoln, and Woodrow Wilson. Today, it is embraced by such economists as Paul Samuelson, James Buchanan, Milton Freidman, and Pittsburgh's own Nobel Laureate, Herbert Simon.

Underlying Principles (TIF)

Taxing businesses while subsidizing competing businesses has been roundly condemned throughout history. While some economists see tax increment financing as having merit in some cases, where the production of export products brings money into the city, the use of TIF money to subsidize some retailers at the expense of others is inexcusable.