Earth Rights Institute - Working Groups

An Examination of the Results Experienced in Four Pennsylvania Municipalities Following Moderate Increases in the Effective Rate of Taxation Applied to Land Values

Edward J. Dodson, M.L.A.
Earth Rights Institute
July 2007

Overview and Summaries for Pittsburgh, Scranton, Harrisburg and Allentown, Pennsylvania, USA compiled by Ed Dodson
followed by SWOT Analysis by Alanna Hartzok

INTRODUCTION

Progressive Momentum

Late in the nineteenth century, an organized citizens movement arose in the United States determined to change the way revenue was raised to pay for public goods and services. With arguments taken from the writings of political economist Henry George (shown immediately below), activists sought to introduce legislation that would exempt from taxation what were defined as productive economic assets and activities. These included all goods produced by labor, including the capital goods on which modern industrialized economies were already dependent. Public revenue would thereafter come from the value of land (i.e., of locations in cities and towns, of agricultural and mineral-laden lands, and from those assets freely provided by nature for human exploitation and use.)

Public support for the wholesale movement toward land values as the sole or primary source for public revenue never materialized. The proposal aroused vocal and well-financed opposition in a nation where landed interests were politically powerful. Yet, decades following Henry George’s death in 1897 were characterized by determined efforts to mitigate the social ills associated with the American System, as it had evolved over the first century of the nation’s existence.

In the Commonwealth of Pennsylvania a small number of elected officials and civic leaders continued to make the case for the reforms championed by Henry George. Working within the confines of state constitutional law, they focused their energy on the system of property taxation and the granting of authority over public finance to local government. What developed was a sustained strategy to promote adoption of a system of property taxation that applied a higher rate of taxation of assessed land values than to the value of property improvements.

Constitutional Authority

Supporters of the two-rate property tax managed to build sufficient support to have the Pennsylvania state constitution amended:

“The sponsors of the measure were able to enlist the support of Mayor William A. Magee for a bill embodying the recommendations of the committee, which was introduced in the State Legislature as a mandatory measure … applying to the two second-class cities, Pittsburgh and Scranton …” ⁱ

The bill was signed by then Governor John K. Tener (left) on May 15, 1913, and officials in Scranton and Pittsburgh instructed the assessors of their respective cities to complete the first separate assessment of land and buildings as required by the act.

Unrealized Potential

One of the most important observations by leading political economists of the 18th and 19th centuries was that land values are societally- rather than individually-created. Locations in cities and towns have exchange value because of the aggregate investment in public and private amenities and improvements. Every parcel of land has some potential rental value, depending on the desirability of the location for commerce or residential use. Market forces cause this potential rental value to be capitalized into land prices.

By the time local governments began to impose even modest taxes on land values, land prices had a long history of rising (and sometimes falling) in response to changing market conditions. As the role of local government expanded to include funding of public schools and the development of regional infrastructure, authority to raise needed revenue by the taxation of property was extended to county government and to school districts. Unfortunately, the bill adopted by the Pennsylvania legislature applied to municipal governments only (excepting those organized as boroughs rather than cities, counties and school districts). The result was to greatly negate the potential of the taxation of land values to stimulate economic growth and to push owners of land to develop their land to its highest and best use – as determined by existing zoning and other regulations..

PITTSBURGH

The Early Experience

Pittsburgh’s city council enacted local legislation in 1914 to implement the two-rate property tax structure. Two years earlier, the Housing Committee had published a pamphlet entitled An Act to Promote Pittsburgh's Progress, which recommended that all buildings in the city be taxed at a rate of 50 per cent less than land values, the change to be accomplished by gradual steps.

Combined with a reassessment of all real property in the city, the effects of what was a very modest shift in tax rates were considerable. In particular, construction of new buildings increased almost immediately. At the same time, owners of large, unimproved or under-improved parcels of land organized to have the law repealed. A new mayor sided with these opponents. Although the repealing bill passed the state legislature, supporters of the two-rate property tax also mobilized, and the Governor (Martin G. Brumbaugh) vetoed the bill. What came to be called The Graded Tax Plan (i.e., a two-rate property taxation with a heavier tax rate applied to land values) reached its full initial stage of implementation in 1925, at which time the tax rate on buildings fell to half that imposed on assessed land values.

Two years later, the local newspaper in Pittsburgh, the Post, commented on the changes already brought on by the new two-rate property tax:

“Formerly land held vacant here was touched lightly by taxation, even as it was being greatly enhanced in value by building around it, the builders being forced to pay the chief toll, almost as if being fined for adding to the wealth of the community. Now the builders in Pittsburgh are encouraged; improvements are taxed just one-half the rate levied upon vacant land. Building has increased accordingly.” ⁱⁱ

Pittsburgh had a long way to go to become a livable city. Turning natural resources into steel and other industrial metals was the reason Pittsburgh’s economy grew and its population increased. Its location, at the confluence of two rivers – the Allegheny and Monongahela – to form the Ohio River, provided access to the U.S. interior and markets up and down the Mississippi River. The absence of laws restricting the dumping of chemical wastes into the water or air turned Pittsburgh into a heavily polluted region.

Aftermath of the Second World War

The assessed value of all real estate in the City of Pittsburgh for 1953 was set at $1.065 billion, out of which $414.3 million was on land value and $650.8 million on buildings. The rate of taxation applied to assessed land values was twice that placed on buildings ($32 per $1,000 of value versus $16 per $1,000 of value).

Pittsburgh experienced the same stresses on its economy that plagued most of the older “rust belt” cities of the northern United States. Development shifted to outlying areas of Allegheny County, made accessible by new highway construction. Pittsburgh was not able to increase its land area by annexation, as the city is surrounded by incorporated boroughs and towns. However, the two-rate property tax proved to be an effective tool for revitalization of Pittsburgh’s downtown area after the Second World War.

Pittsburgh’s reputation as an old industrial city, its air and water fouled by pollution, began to slowly change. The area where the three rivers converged was targeted for clearance of old warehouses and railway yards, to be transformed into a new "Golden Triangle." Over $50 million was eventually invested in the development of office towers adjacent to a park established on the site of the historic Fort Pitt. A steady stream of new office buildings, retail stores, and apartment buildings followed throughout the 1960s and 1970s. The character of the city experienced a dramatic change, evolving into communities where residents could live, work and play, and where finance, health care, education, high tech industries slowed what had been a constant out-migration.

A 1992 study by two economic professors published by the Lincoln Institute of Land Policy highlighted the incentive aspect of Pittsburgh’s two-rate property tax:

“Following the change in regimes at the end of the 1970s, Pittsburgh experienced a striking building boom, far in excess of anything that took place in other major cities in the region. The building boom was basically a center city phenomenon; it did not extend to the rest of the metropolitan area. It was moreover, a boom in commercial building activity. The residential sector experienced only a modest increase in new construction. …

“The fiscal reform that accompanied Renaissance II had two important components: the huge increase in tax rates on land and large tax abatements on new structures. It is difficult in any rigorous econometric sense to separate the effects of these two measures. …Our sense is … that these abatements were probably the more important of the two tax incentives that we have considered…

This is not, however, to downplay the role of land taxation. What the Pittsburgh experience suggests to us is that the movement to a graded tax system can, in the right setting, provide some stimulus to local building activity. The primary role of the land tax in all this is to provide the additional source of revenues that allows a reduction in the rate of improvements.” ⁱⁱⁱ

Recent Experience and Ongoing Challenges

Pittsburgh was granted a home rule charter in the mid-1970s, permitting city officials to raise revenue by whatever means they decided upon. A new mayor, Richard Caliguiri, took office in 1977, promising to oppose further tax increases. For 1979 and again in 1980 he proposed raising the city’s tax on wages to raise needed revenue. City Council instead voted to increase the tax on land values.

In 1979, the rate of taxation on land values was increased from 4.95% to 9.85% of assessed value. New construction jumped 22% over the previous year as measured by the dollar value of building permits issued, despite a fall-off in construction and renovation in the surrounding four-county area and in the nation at large. Data on real estate transactions also showed that vacant lot sales increased 16.5% in the first seven months after the land tax increase, indicating that the tax was putting pressure on inefficient landowners to develop their sites.

In 1980 officials increased the tax rate on land values to 12.55%, while reducing the rate on buildings to 2.475% -- creating a ratio of 5.07 to 1. Even with the county and school district taxes considered, the effective ratio was still 2.99 to 1.

After the change in tax rates, construction in 1980 leaped 212% above the 1977-78 average, setting the stage for the city’s second renaissance and the final stages of its movement away from heavy industry. As discussed, the adoption in 1980 of three-year tax exemption on all new buildings -- but not the land – further stimulated construction. In 1981 construction peaked at nearly six times the 1977-78 level. Then, for 1983 the tax rates were increased on both land and buildings – to 13.3% and 3.2%, respectively.

The value of building permits issued annually from 1980 to 1989 was, on average, 70% higher than it was between 1960 and 1979. Meanwhile, the cities of Buffalo, Cleveland, Detroit, Rochester and many others were experiencing declines. Pittsburgh's new construction activity during the 1980-1992 period was actually also equal to 65% of Philadelphia's, though the latter has four times the population.

In 2000, a long overdue Allegheny County-wide reassessment was completed. For the previous twenty years properties had remained assessed at 20 percent of the 1980 market values. The results of the reassessment were challenged by many property owners, particularly those in Pittsburgh. Following a lawsuit against the firm conducting the reassessment, a second firm was engaged to correct the problems. In the midst of this chaotic situation, property owners demanded action, and Pittsburgh’s City Council decided – despite over 80 years of positive experience – to return to a single rate of taxation on land and buildings. The subsequent consequences should have been an