If the city really wants to make our tax structure better for everyone, it should focus on reforming property taxes. Specifically, it should adopt what is commonly referred to as a “land value tax.”
Last month, Philadelphia City Council’s Committee of Finance heard extensive testimony regarding legislation to reform business taxes to make Philadelphia a more attractive location for new and existing businesses. During the hearing, Council members engaged in a balancing act, attempting to accommodate competing desires: growing the city’s economy, limiting the number of people whose taxes would increase because of the change, and increasing the number of jobs available to residents.
However, if the city really wants to make our tax structure better for everyone, it should instead focus on reforming property taxes. Specifically, it should adopt what is commonly referred to as a “land value tax.”‘
Three good reasons
Like most local governments, Philadelphia taxes land and improvements at the same rate as “real estate.” A land value tax would split the two — raising the tax rate applied to owning land relative to the rate applied to homes and other buildings on that land. This structure, which exists in more than a dozen municipalities and school districts across Pennsylvania, has three primary virtues.
First, this structure would penalize speculators who hold vacant land or abandoned buildings, by increasing the cost of holding parcels that provide no economic value. Raising the tax bill for land and lowering the cost of constructing, maintaining and rehabilitating structures will give landowners an incentive to maximize the productive use of their property — or pay for the harm their underutilized land causes to the value of surrounding properties.
Second, weighting taxes toward land would help many Philadelphia residents by shifting the tax burden. Under the current system, homes represent a significant portion of the value by which property taxes are assessed. Redistributing taxes from improvements to land would effectively shift much of that burden from residents to commercial properties. Taxing commercial properties at a higher rate than residential ones is common in other large cities, and something that Philadelphia attempts indirectly through its homestead exemption and burdensome business use and occupancy tax.
Third, a land value tax structure would have a positive effect on future economic growth. While Council considers ways to draw more business into Philadelphia, it may seem counterproductive to burden commercial properties. But focusing the tax burden away from privately created improvement value in favor of recapturing the publicly created value of land creates a virtuous cycle. Specifically, the land value tax targets the excess paid to landlords above their investment in offices and rental space throughout Philadelphia. Tying the city’s tax base to its immovable elements — like land — allows Philadelphia to impact the broadest base possible and with the lowest rate, an efficient way of generating government revenue.
No need to choose between equity and growth
The Actual Value Initiative (AVI), Philadelphia’s recent citywide reassessment, created the perfect opportunity for adopting a land value tax while underscoring why such a shift is necessary. After decades of neglected assessments, many residents experienced sizable increases in their property taxes, while commercial properties saw a net property tax decrease.
There is an alternative to squabbling about the tax abatement and other ways to balance the cost within the existing real estate tax structure while also maintaining development. The city should leverage its newfound commitment to yearly assessments to address our equity and growth. While tax shifts are being considered, we do not need to choose between these interests. To achieve a fair vision of development, Philadelphia should adopt the land value tax.
Frank Iannuzzi is a Law and Public Policy Scholar at Temple University’s Beasley School of Law.