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Pennsylvania's Success with Local Property Tax Reform: The Split Rate Tax

by Alanna Hartzok

Fifteen cities in Pennsylvania are pioneering an innovative approach to local tax reform that harnesses market incentives for urban renewal.

Opting for the so-called 'two-rate' or 'split-rate' property tax, these cities are lowering taxes on buildings, thereby encouraging improvements and renovations, while raising the tax on land values, thus discouraging land speculation. The resulting infill development as indicated by increased building permits means downtown jobs, efficient use of urban infrastructure, an improved housing stock, and less urban sprawl.

Cities in other states are poised to follow Pennsylvania's example.

  1. Pennsylvania's Initiative

    Pennsylvania has been experimenting with a new approach to property tax reform which has already begun to attract attention in New York, Maryland, and other states. This policy offers an entirely different angle to the current mainstream dialogue on property tax "reform" which consists mainly of efforts to reduce and curtail the use of property taxes while increasing sales or income taxes.

    The property tax is actually two types of taxes - one upon building values, and the other upon land values. This distinction is an important one, as these two types of taxes have significantly different impacts on incentive motives and development results.

    Pennsylvania's pioneering approach to property tax reform recognizes this important distinction between land and building values through what is now known as the split-rate or two-tier property tax. The tax is decreased on buildings, thereby giving property owners the incentive to build and to maintain and improve their properties, and the levy on land values is increased, thus discouraging land speculation and encouraging infill development. This shifting of the tax burden promotes a more efficient use of urban infrastructure (such as roads and sewers), decreases the pressure towards urban sprawl, and assures a broader spread of the benefits of development to the community as a whole.

    Taxing land values, while decreasing taxes on buildings, is sometimes proclaimed as a way to increase development. However, in today's world the word "development" is likely to be a red flag to many ears.

    It is important to keep in mind that the purpose of this policy is not first and foremost to encourage development, but rather to assure that the benefits of development be broadly shared while impacting as lightly as possible on existing ecosystems.

    Land value taxation was a key policy recommendation made by the Committee on Banking, Finance and Urban Affairs of the House of Representatives, 96th Congress whose groundbreaking report was entitled "Compact Cities: Energy Saving Strategies for the Eighties."

    Current mainstream development models and methods in most cases contribute to the maldistribution of wealth. Statistics show that the richest 1% of Americans possess greater wealth than the bottom 90%.1 The land value tax, in essence a type of user fee for access to limited natural resources, is a policy that both harnesses market incentives and individual initiative and furthers social cohesion and well-being by narrowing the rich/poor gap. There is even greater need to make this point now, when the direction is towards cutbacks in many social services, the removal of the bandages placed to hold back the hemorrhage of the body politic.

    Better tax policy could reduce the need for social services provided via government spending.

    Land value based public finance policies encourage home improvements and affordable housing. In Pennsylvania 85% of homeowners pay less with this policy than they do with the traditional flat-rate approach. For those who do pay more it is not significantly more and they tend to be wealthier homeowners who can better afford to pay a little more.

    Some, indeed, whose business efforts are encouraged by this policy, come out ahead.

  2. The Current Situation in Pennsylvania

    There are now 15 Pennsylvania cities (Table 1) using the two-rate approach. Pittsburgh and Scranton implemented this policy as far back as 1913. Since then enabling legislation was passed which gave this option to third class cities as well. Land value tax policy in Pennsylvania really took off in the 1980's through the "Johnny Appleseed" work of Steven Cord, formerly a professor at Indiana University in Pennsylvania, now director of the Center for the Study of Economics in Columbia, Maryland.

    Table 1

    Two-Rate Pennsylvania Cities as of 1995

    Two-Rate Since Date Land Tax Rate % Building
    Tax Rate %
    % *
    % of Tax on Land Removed
    From Buildings
    in $000's
    Aliquippa Schools '93
    Aliquippa '88
    Clairton '89
    Coatesville '91
    Connellsville '92
    DuBois '91
    Duquesne '85
    Harrisburg '75
    Lock Haven '91
    McKeesport '80
    New Castle '82
    Oil City '89
    Pittsburgh '13+
    Scranton '13+
    Titusville '90
    Washington '85
    Total amount of taxes removed from buildings: $88,767,010
    * One-Rate refers to the tax rate if there were no rate differentiation between land and buildings and the tax yield was unchanged. Scranton and Pittsburgh had a land tax to building tax ratio of 2 to 1 from 1913 until 1979 when both expanded land tax rates beyond that ratio.

    Please note: PA property tax rates are expressed in mills, i.e. Aliquippa: 16.3% = 163 mills

    Source: Center for the Study of Economics, 2000 Century Plaza, Suite 238, Columbia, MD, 21044

    In 1993, legislation sponsored by state representative Sue Laughlin extended the two-rate option to school districts of the third class that had coterminous boundaries with third class cities. Only eight school districts met this qualification, but it was a beginning. Currently, HB 2093, sponsored by Representative Ronald Buxton, would extend the two-rate tax option to include all school districts.

    In addition to this school district bill there are six other bills in the Pennsylvania State Legislature which would further extend the two-rate tax option.

    Twin bills in both the House and Senate would give the two-rate tax policy choice to the nearly 1000 boroughs of the state. Their total population is two and a half million.

    Bills, which are part of Representative Joseph Gladeck's enterprise package, extend the option to first and second class townships and cities of the first class (which applies only to Philadelphia). His "Tax Free Development Zone Act" (HB 1256) recommends that municipalities wishing to designate an area as a tax free zone use the split-rate tax as well.

    Among the cities that have gone to the two-rate system there is a considerable spread between the taxes on the value of land and those on the value of buildings. For instance, the small city of Aliquippa, which led the way towards the two-rate option for school districts, taxes land 16 times more heavily than buildings. Pittsburgh's tax rate on land is nearly six times the rate of buildings, the Titusville ratio is nearly 9 to 1, while Harrisburg's ratio which has been 3 to 1 will soon change to 4 to 1.

    Table 2

    Land to Building Tax Ratios in Pennsylvania

    Cities Using The Two-Rate Tax

    Cities Land-to-Buildings
    Tax Ratio (1996)
    New Castle
    Oil City
    5.61 to 1
    3.90 to 1
    4.00 to 1
    4.00 to 1
    1.75 to 1
    4.35 to 1
    5.61 to 1
    16.20 to 1
    4.76 to 1
    1.23 to 1
    8.68 to 1
    Source: Center for the Study of Economics,
    2000 Century Plaza, Suite 238, Columbia, MD 21044

  3. Some Data on Consequences

    Let us now consider how this has worked in Pittsburgh and Harrisburg in particular. Pittsburgh has the longest history of this approach dating back to 1913. This city has extended its land value tax since that time so that now land values are taxed six times more heavily than are building values.

    Pittsburgh has a more compact development pattern than many cities, with the big buildings concentrated in the downtown area, not sprawled across the land as is the case in so many cities where land speculation forces "leapfrog" development. Pittsburgh was highlighted in a Fortune magazine story (8/8/83) entitled "Higher Taxes that Promote Development." Research conducted by Fortune's real estate editor on the first four cities to go to the two-rate system independently verified that this approach does indeed encourage economic regeneration in the urban centers.

    A recent study (Table 3) by University of Maryland economists, Wallace Oates and Robert Schwab, compared average annual building permit values in Pittsburgh and 14 other eastern cities during the decade before and the decade after Pittsburgh greatly expanded its two-rate tax. Pittsburgh had a 70.4% increase in building permits while the 15 city average decreased by 14.4% of building permits issued. These findings about Pittsburgh's far superior showing are especially remarkable when it is recalled that this city's traditional basic industry - steel - was undergoing a severe crisis throughout the latter decade.

    Research based on building permits issued in the three-year period before and after the implementation of the two-rate tax policy in Pennsylvania cities consistently shows significant increases in building permits issued after the policy was put in place.

    Table 3

    Average Annual Value of Building Permits
    (Thousands of Constant 1982 Dollars)

    City 1960-79 1980-89 % Change

    15-City Average







    Source: "Urban Land Taxation for the Economic Rejuvenation of
    Center Cities: The Pittsburgh Experience" by professors Wallace
    Oates and Robert Schwab of the University of Maryland, 1992,
    available from Center for the Study of Economics, 2000 Century
    Plaza, Suite 238, Columbia, MD 21044

    Pennsylvania is a pioneer leading the way and this is being increasingly acknowledged. A Wall Street Journal article (3/12/85) was entitled "It's the Land Tax, by George, That Sets Pennsylvania Apart." (The reference is to Henry George who drew great public attention to these possibilities a long time ago.)

    Recently the headline of an article in The Washington Post (9/24/95) simply stated "D.C. Should Learn From Pittsburgh." Stories in the Philadelphia Inquirer (6/5/95) and the Philadelphia Weekly (7/19/95) urged the adoption of land value tax policy. The Herald Mail announced (10/8/95) "Hagerstown Council to Consider Split Tax Rate." This is a just a small sampling of the rapid increase in media attention to this policy.

    To turn now to Harrisburg which was once considered one of the most distressed cities in the nation. Harrisburg since 1982 has sustained an economic resurgence that has garnered national acclaim. It twice won the top United States community honor as All-American City, along with the top state recognition from the state Chamber of Business and Industry as Outstanding Community in Pennsylvania, all because of Harrisburg's development initiatives and progress.

    Harrisburg taxes land values three times more than building values. This city's glossy promotional magazine points to its 2/3 lower property tax millage on improvements than on land as one reason why businesses should locate there.

    Mayor Stephen Reed of Harrisburg sent the following letter to Patrick Toomey, businessman, civic activist, and member of the Home Rule Commission of Allentown (10/5/94):

    "The City of Harrisburg continues in the view that a land value taxation system, which places a much higher tax rate on land than on improvements, is an important incentive for the highest and best use of land in already developed communities, such as cities.

    In our central business district, for example, our two-tiered tax rate policy has specifically encouraged vertical development, meaning highrise construction, as opposed to lowrise or horizontal development that seems to permeate suburban communities and which utilizes much more land than is necessary.

    With over 90% of the property owners in the City of Harrisburg, the two-tiered tax rate system actually saves money over what would otherwise be a single tax system that is currently in use in nearly all municipalities in Pennsylvania.

    We therefore continue to regard the two-tiered tax rate system as an important ingredient in our overall economic development activities.

    I should note that the City of Harrisburg was considered the second most distressed in the United States twelve years ago under the Federal distress criteria. Since then, over $1.2 billion in new investment has occurred here, reversing nearly three decades of very serious previous decline. None of this happened by accident and a variety of economic development initiatives and policies were created and utilized. The two-rate system has been and continues to be one of the key local policies that has been factored into this initial economic success here."

    Here are a few of the improvements mentioned in the Harrisburg promotional literature2:

    • The number of vacant structures, over 4200 in 1982, is today less than 500.

    • With a resident population of 53,000, today there are 4,700 more city residents employed than in 1982.

    • The crime rate has dropped 22.5% since 1981.

    • The fire rate has dropped 51% since 1982.

    These results are especially noteworthy when one considers the fact that 41% of the land and buildings of Harrisburg cannot be taxed by the city because it is owned by the state or non-profit bodies.

  4. Maryland and Beyond

    Now on to the state of Maryland which has had some very interesting recent developments. Enabling legislation for the two-rate policy was vetoed by the Governor in April 1994. Immediately following the veto the Henry George Foundation of America, based in Columbia, began to research the history of the property tax in Maryland. The HGFA suspected the existence of an earlier law permitting municipalities the two-rate tax option.

    After weeks of law library research HGFA found a 1916 law in the 1994 Annotated Code of Maryland that had gone through several permutations. This indicated that Maryland municipalities could go to the two-rate system.

    The Attorney General of the state of Maryland was asked for an opinion and after researching the statutes, on January 25, 1995 issued Option #95-002 which confirmed the authority of municipalities (with the exception of Baltimore) to set differential property tax rates.

    The small town of North Beach will probably go to the two-rate system next April, and Hyattsville may soon follow. Mayor Steven Sager of Hagerstown, which has only 35% home ownership, is urging his city council to move in this direction.

    Joshua Vincent of the HGFA reports that the buildings to land ratios in Maryland are "more professional, less politicized. There is no distortion of residential assessments such as that existing in Pennsylvania. As a result, upper and upper-middle class homeowners pay their fair share but the poor and the working class get a real break."

    No doubt Pennsylvania could be learning more about accurate assessment practices from Maryland while Maryland is learning how best to implement the two-rate tax system based on Pennsylvania's successful experiences so far. But interest is being shown in other states and cities as well.

    Last February assessments expert Ted Gwartney, Walter Rybeck of the Center for Public Dialog, and this paper's author were asked by West Virginia Delegate, Bruce Petersen, to speak to the State House of Delegates about Pennsylvania's land value tax. Delegate Petersen is writing enabling legislation for land value taxation for West Virginia.

    The mayors of Wheeling and Cincinnatti have stated that they would like to move their local public finance in this direction.

    Detailed studies on the effects of the two-rate policy have been conducted for Washington, DC, St. Louis, Missouri, and the state of Washington. There are groups actively supporting this policy in these places as well as in nearly every state in the United States and numerous other countries as well.

    The City of Amsterdam in New York has recently received permission to implement the two-rate tax policy and will serve as a pilot project for that state.

  5. The Art of Tax Improvement

    While much has been learned about the successful use of land value based local public finance in Pennsylvania, mistakes have been made. For instance, the City of Uniontown reverted back to the flat rate system after an initial experience with the two-rate approach. What happened in Uniontown? Here the two-rate shift was combined with an overall tax increase the same year. A handful of irate community residents equated the two-rate policy with the tax increase and had it rescinded.

    There is a lesson here in the "art of tax improvement." It is necessary to move to the two-rate system while maintaining a revenue neutral tax base, at least initially. Another key is to move gradually. One generally accepted guideline is to shift no more than 20% of the taxes off of buildings and onto land each year for a period of five years, or 10% each year for a period of ten years, in order to fully shift all taxes off buildings and onto land values.

    Such a gradual transition, combined with community education, allows the citizenry to make the adjustments required, particularly to orient away from expectations of speculative gain in real estate land price escalation and towards investment in the development of affordable housing and business activities. Obviously as buildings are taxed less their value might rise, while the value of the more heavily taxed land should fall. While more research of these types of effects is needed it would appear from the long continuation of this tax policy in areas that have tried it that it meets with voter approval.

  6. The Needs For The Public To Be Informed

    With the many positive results of this policy in Pennsylvania, why have only 15 cities implemented it, when 50 cities could do so? Why is the main thrust and public discussion focused there as elsewhere on reducing reliance on property taxes and giving local municipalities options to levy sales and income taxes?

    The truth is that the word has just simply not gotten out. The success so far has come from the persistent efforts of just a handful of devoted activists who have educated city council members and urged them to adopt this policy.

    But the majority of state legislators, public officials, community leaders, and the public at large remain for the most part in the dark. This does appear to be gradually changing in the legislature though because of the several current land value tax bills already mentioned. Both the Pennsylvania League of Cities and Municipalities and the State Association of Boroughs have professional lobbyists following these bills.

    Unfortunately at this time, few economics or government professors at the university level introduce their students to this policy. Indeed this macroeconomics approach has been taught not by mainstream academic institutions but for the most part by the devoted teachers who volunteer their time at the Henry George School of Social Science, headquartered in New York with branches in Philadelphia, Chicago, San Francisco, Los Angeles, and Santo Domingo, and by the important work of the Robert Schalkenbach Foundation, also in New York.

    There is a great need for institutions like the Jerome Levy Economist Institute to come to the fore of enlightened economic education and to teach their students about public finance policies that further free market incentives while at the same time narrowing the gap between the rich and the poor.

    I feel a great deal of appreciation for the Jerome Levy Economics Institute for sponsoring this "Land, Wealth, and Poverty" conference and I thank you very much for the opportunity to present this information to you today.

Download Spreadsheet of Pennsylvania Local Land Tax Rates (Microsoft Excel)

  1. David Kotz, "How Many Billionaires Are Enough?" New York Times, 19 October, 1986

Alanna Hartzok, M.A., is the United Nations Non-Governmental Organization Representative for the International Union for Land Value Taxation, Secretary of the Council of Georgist Organizations, State Coordinator for the Pennsylvania Fair Tax Coalition, and director of Earth Rights Institute, a newly established consulting organization.

Her address is P.O. Box 328, Scotland, PA 17254, USA
Phone: 717-264-5036 FAX: 717-263-2820

This article was published in The American Journal of Economics and Sociology, April, 1997 (41 East 72nd St., NYC, NY, 10021) and is a slightly revised version of her talk at the Jerome Levy Economics Institute of Bard College conference on "Land, Wealth, and Poverty" held at Annandale-on-Hudson, NY on November 2 - 4, 1995. The kindness of the Director of the Institute, Dimitri B. Papadimitriou in allowing this reproduction and of Professor Kris Feder for helping to organize the Conference is acknowledged.

A subsequent version of this paper since it contains a brief elaboration of the earth trusteeship concepts of John McConnell, Earth Day Founder, credits him as a co-author. An edited version also appears in A World That Works: Building Blocks for a Just and Sustainable Society, a 1997 TOES (The Other Economic Summit) book edited by Trent Schroyer and available from Bootstrap Press, Tel/Fax: 800-316-2739.