Exempt Buildings from Real Estate Tax

Herbert Barry, III

[A letter submitted to the Pittsburgh Post Gazette. Reprinted from GroundSwell, January-February 2007]

Tax exemptions are granted for various worthy purposes, including medical expenses and charitable contributions. Greater beneficial effects can be obtained by exempting buildings from real estate tax. Buildings are desirable products of human enterprise and labor. The community benefits when a home, office, store, or factory is constructed, improved, or repaired. Taxable real estate therefore should be defined as a parcel of unimproved land, exempting the improvements on it.

Most tax exemptions have the disadvantage of requiring higher tax rates to replace the lost revenue. When buildings are tax exempt, replacement of the revenue by a higher tax rate on land is beneficial rather than detrimental for the community. Higher tax rates on land make real estate more available at lower prices. Land is a natural resource that should benefit the community and not exclusively the lucky owner. Wealthy individuals and corporations own more than their fair share of the most expensive and extensive land. Much of their wealth is attributable to prevalently insufficient assessment and taxation of their valuable land.

When revenue from tax exempt buildings is replaced by higher tax rates on land, the tax is reduced for owners whose building has a higher percentage of the total property value than the average for all taxable properties. Most homeowners inhabit a well maintained house on a small plot of land in a residential area that is not highly expensive. Tax exemption of their home therefore will reduce their property tax.

More than a dozen cities in Pennsylvania have lower tax rates on buildings than on land. The lower rate on buildings constitutes a partial but not complete tax exemption. Tax exemption of buildings can and probably should be gradual, such as beginning with 25% exemption. An important advantage of complete exemption of buildings, both residential and commercial, is that the value of buildings does not need to be assessed. The value of land can be assessed more accurately, inexpensively, and without the need for the assessor to intrude into buildings.

Tax exemption of buildings should be applied to farms and forests in addition to cities. Land is much less valuable in areas with low population density For many farmers, the value of their house, barn, silo, and other structures greatly exceeds the value of their fields. Higher tax rates on rural land would make more land available at lower prices, thereby benefiting new farmers and counteracting the tendency for large expanses of rural land to be owned by wealthy individuals and corporations.

Real estate taxes are generally limited to local governments. States and the federal government obtain revenues from taxes on sales, income, capital gains, and estates of deceased wealthy individuals. These taxes on products of human enterprise and labor detract from desirable activities. The state and federal governments can benefit the entire taxed population by substituting a tax on unimproved land for the various detrimental taxes. The substitution is feasible because the annual tax on land will remain much less than the value for the owner. Land values are augmented by the increased construction resulting from tax exemption of buildings.