LAND VALUE TAX: It’s Worked To Cut Taxes, Boost Economies

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BY STEVEN CORD/ Any state or city can do what the headline above suggests.

They only need to tax land assessments more, and, as a result, what is produced (such as buildings) less. The studies listed here show when we replace economically harmful taxes with an economically beneficial one, what will happen:

Most taxpayers will be taxed less because their land assessment tax will be less .

All non-land owning renters (office as well as apartment renters) will pay less space rent. The building tax can be passed on to them, but it will be less, and the land tax can’t be passed on to them. New construction and renovation would become more profitable because they’d be taxed less. Perhaps they could be tax-exempted entirely for the first seven years (but not the tax on their land assessment, of course).

Nothing in economics seems as well substantiated. Eight American winners of the Nobel Prize in economics have endorsed this tax, but they didn’t know how to implement it.

 We can tell you how to do that. Suppose you own some vacant land and you read in the newspaper the tax on land will be gradually increased in the ensuing years, wouldn’t you develop that land or sell to someone who will? So isn’t this, then, a tax that creates development and jobs?

The only way to reduce taxes on production (housing and developments) is to tax land instead. Here are some empirical summaries of the land-value tax in actual operation.

The contiguous cities of Allentown and Bethlehem in Eastern Pennsylvania are very comparable in size and economy. In 1997, Allentown started taxing buildings less than land; Bethlehem did not. Allentown’s new private construction and renovation grew by 32% in dollar value in the three years after the shift to land value, over what occurred in Bethlehem.

These figures come from a study of building-permits on file in the Allentown and Bethlehem city halls by Benjamin Howells (science researcher and one-time Allentown councilman), William Kells (science-oriented businessman) and Steven Cord (professor).

Washington and nearby Monessen (both in Southwestern Pennsylvania) are roughly comparable in size and economy. After Washington started shifting some of its tax off buildings onto land in 1985, its new private construction and renovation increased by 33% in dollar value in the three years after its two-rate adoption, as compared to the prior three years. But during the same time period, nearby Monessen, which kept its single rate, saw new private construction and renovation actually decrease by 26%.

Connellsville, Pa. saw its new private construction and renovation jump 3.46 times in the three years after it adopted a two-rate LVT property tax as compared to the prior three years. This jump over-shadowed the modest 1.07-time increase in new private construction and renovation of nearby one-rate Uniontown during the same time period. The two cities are quite comparable, although Uniontown is the county seat and is somewhat larger. In July 1993, the Aliquippa School District adopted a two-rate building-to-land property tax. Its new private construction and renovation spurted like a geyser. In 1994-95, it was 2.3 times greater than for 1991-92.

In 1989, Clairton, Pa., an industrial suburb of Pittsburgh, was under direct State fiscal control, officially labeled “financially distressed.” It took the advice of the prestigious Pennsylvania Economy League and adopted two-rate LVT. Building assessments were taxed at 2.105% and land assessments at 10% (instead of both at 3.7%).

During the three-year period after the switch, its taxable building permits were 8.5% more than in the three years before (based on building-permit records in Clairton City Hall). This is to be compared to the 5.8% decline in all US building permits issued during the same time.

Pittsburgh, Pa. increased its land-tax rate (but not its building-tax rate) in 1979 and 1980; its building-permit issuance then became 3.57 times higher than in the previous years of 1974-1978, despite a steady decline in its steel industry.  Compared to this 3.57 increase, U.S. office-building permits increased only 1.6 times (neither increase adjusted for inflation). In 1984, Pittsburgh again increased its land tax but not its building tax. In the following two years, its new construction and renovation increased 6.2 times faster than US construction and renovation, again despite the continuing decline in Pittsburgh’s steel industry.

Pittsburgh’s 1985 building permits increased 2.29 times over 1984; in 1986, they were 2.38 times greater than in 1984.

A study by professors Wallace Oates and Robert Schwab, both of the University of Maryland, reported 15 large Northeastern cities in the US averaged a decline of 15.5% in their annual value of building permits issued between 1960-1969 and 1980-1989, but two-rate LVT Pittsburgh recorded a 70.4% increase.

A Washington, D.C. Council-authorized study done in the 1970s concluded if only land was taxed (not building assessments), there would be these tax reductions: single family homes 18.1%, two-family homes 20.9%, row houses 14%, walkup apartments 8.9%, elevator apartments 22.5%.

Random-sample studies in 16 US cities substantiated most home-owners would pay less with a two-rate building-to-land property-tax shift.

The best study of all, perhaps, is a huge negative study, right here in Pennsylvania. What happens if a jurisdiction switches from two-tiered taxation back to a single tax on real property?

Pittsburgh had been taxing land assessments more than building assessments ever since 1915, but in 2001, it reverted to taxing both types of assessments at the same rate.

Why did the City do that? Briefly, well-to-do voters in Pittsburgh were suddenly aroused to fever pitch about their property tax as never before because a county reassessment increased their land assessments by five to eight times overnight – an absolute political no-no (most County Council members lost their next election).

These voters thought they would pay less if they got the land-tax rate brought down to the building-tax rate, so they pressured City Council to reduce the land-tax rate. They were completely unaware of the many Pittsburgh studies supporting land-value taxation, and of course the property tax of most homeowners in the city shot up.

After the two-rate rescission, Pittsburgh’s private new construction (now more taxed) declined 19.57% (inflation-adjusted) in the three years after rescission as compared to the three years before, while the value of construction nationwide increased 7.7% (also inflation-adjusted).

A computer examination of the entire Pittsburgh assessment roll found the rescission caused 54% of all property owners to pay more property tax. As for non-landowning tenants (office tenants also), eventually they all paid more space-rent, because more building tax was passed on to them but the land value tax never can be. Since big cities generally have many tenants (both residential and business), they would particularly benefit from a building-to-land property-tax switch.

This LVT rescission has actually been a blessing in disguise, because it enables us to examine the effects of a land-to-building tax switch.

The only way to reduce taxes on production is to tax land instead. If you encounter doubters, be sure to ask them to present empirical evidence. They can’t.

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3 Responses to LAND VALUE TAX: It’s Worked To Cut Taxes, Boost Economies

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