Looking for Solutions to Poor Land Use
and Unfair Property Tax?

Albert L. Hydeman, Jr.

[At the time this paper was written in 1973, Mr. Hydeman was Executive Deputy Secretary of the Department of Community Affairs, Commonwealth of Pennsylvania. The published source is not known]

There are two pressing national concerns looking for a solution: (1) how properly to develop and implement a land use policy, and (2) what are the alternatives to the traditional property tax which has been criticized as inequitable. A good many national, state and local experts are presently in a dialogue on alternate approaches to solve these two thorny issues. I would like to join this dialogue with an idea that has thrashed around in my mind for some time.

Many years ago Henry George first articulated the hypothesis of a single tax or a land value tax. Within the past few years a number of well documented reports have been written which would lead one to believe that the land value tax might be a viable alternative to the property tax. For a number of reasons, which I hope to pose in this article, I believe that it may also be the beginning of a method to deal with the national land use problem.

Let us first take a good hard look at the method from which about 87% of local tax revenues are derived -- the property tax. Property taxes are assessed somewhat differently from state to state, so I will confine my evaluation to the Commonwealth of Pennsylvania. Assessment of property is done in most instances by the county government. Assessment is most heavily based on improvements on the land and very slightly on the land itself. Therefore, it places a heavy tax on past, present, and future improvements, which has discouraged and many times has prevented improvements.

On the issue of better housing, or better yet on the issue of slum housing, the owners have a disincentive to improve properties. The low taxes paid on low and substandard buildings allows them to reap a high income on their minimal investment. Improvements cost them more in a higher tax rate without necessarily increasing their income from the investment commensurately. Likewise the owner of land on the urban fringe can retain his holdings and allow it to increase in value while developers move farther out to find land where cost is more economical. In both of these instances land is not being used for its highest and best use. Additionally, the use in one case contributes to bad housing, and in the other, to suburban sprawl. These are just two examples of the problem the property tax poses.

The property tax has a tendency to be inequitable in a number of ways. Each county in the Commonwealth has a different method of assessment and each uses a different ratio of market value. Therefore two identical properties with identical improvements side by side across county lines would be assessed and taxed at different values. At a recent public hearing held by DCA, it was stated that in a single borough property taxes varied from 7% of the market value to 21% of the market value, despite the fact that the Supreme Court has held such lack of uniformity to be invalid. Presently there is no mandate that assessors be professional appraisers. These problems could be overcome through a statewide uniform assessment procedure based upon full market value.

However, a uniform procedure would still not change all of the regressive features of the property tax.

(1) The lack of single standard real property value.

(2) The heavy tax on improvements which create an atmosphere of inhibiting renewal or improvement.

(3) The low tax on unused land which allows the owner to hold the land while public monies through development of the infra-structure of roads and other public improvements increase his investment. His investment is increased at a much higher percentage that the low tax he pays on the land. In' fact, he makes his profit from subsidy provided by other taxpayers.

(4) An individual holding the land as above, creates artificial boundaries to development. Developers have to leapfrog these properties to find properties to develop, thus creating suburban sprawl and imposing additional costs to the taxpayer in development of services to these far-flung developments.

(5) The property tax has another feature that is particularly regressive. It is most inequitable to low and moderate income home owners who represent the largest segment of the population.

Now how can the land value tax obviate some of these and other concerns? First, let us define the land value tax. It is a tax on land and land only based on the highest and best use to which that land should be put. So, in a residential area similar land would be taxed at the same rate per acre whether or not it is improved. This would put pressure on the owner to develop or sell for development his holdings as the taxes would be too high to allow him to hold the land for speculation.

A number of studies indicate that through the use of land value tax the tax burden would be more uniformly spread to all land owners, and in many instances would provide a much broader yield of taxes. A national conference held in 1968 published a report that indicated use of land value tax reduces taxes on most individually owned houses. This certainly would be desirable for it would give the home owner more disposable income for property improvement, for which, incidentally, he would not be penalized with higher taxes under land value tax.

Imposition of this form of assessment and tax could accomplish the following:

(1) It would exert pressure on the holder of underused land and unused land to put it to better use immediately in urban and developing areas.

(2) It would lead to more orderly development of urban and suburban areas. Communities would develop from the core out instead of the present leap-frog development caused by land owners holding lend near the core for speculation.

(3) There would be a substantial saving of public funds, with more density of development. The cost of roads, sewer lines, and other public costs would be reduced end services such as police and fire could be provided in a better and more economical fashion.

(4) It could reduce or eliminate the need for urban renewal subsidies as we now know it as lend holders would be forced to improve properties to have a proper investment/cost ratio. It would also probably reduce the rates for privately owned utilities as a result of density of development.

(5) Individuals or businesses would not be penalized with increased taxes for improving their structures.

(6) Agricultural land would be taxed at a lower rate so that the farmer would not be under pressure to sell land to developers. Today, as the urban fringe spreads, agricultural land is taxed at an ever increasing rate to a point that the owner finds it uneconomical to farm and desirable to sell for subdivision.

9 (7) The land value tax would slow down land price inflation. This tax would be regressive to those holding land for speculation. Through its imposition it would tend to have land sold for development early at a lower price. A side effect would be to lower housing cost.

These and other reasons would indicate that the land value tax may lead the way to a land use policy and a method to eliminate the property tax.

It is quite evident that an immediate imposition of the land value tax would be inequitable and unfair. However, it could be staged over a period of fifteen years. It would take at least five years for the Commonwealth to develop a statewide land use plan which would be used as the basis for the land value tax. On the sixth year, a tax would be levied on improvements and land on a 90% - 10% basis. Each succeeding year improvements would be taxed at 10% less and the land at 10% more. By the sixteenth year the land would be taxed at a value of its highest and best use.

It is a certainty that there is not going to be a mad scramble to impose a land value tax. I only hope that this short report will generate discussion about this equitable and useful tax form. It is important that we find an alternate to the property tax, as presently imposed, as many communities have reached the point of no return -- they cannot tax properties under the current system at a higher rate. The land value tax would certainly give the community a broader and more equitable base from which to work. We must also find a way to a land use policy before we use up our best agricultural land and our open spaces for development. I propose that the imposition of the land value tax will give us a leg up on better land utilization.