July 2, 2009

Two-way property tax
Pay more for land, less for building, UNH prof says
By Jeff Mucciarone jmucciarone@hippopress.com

University of New Hampshire Professor Richard England has a theory for tax reform: tax the land more, and the buildings less. England isn’t calling for the elimination of a property tax, but he’s thinking it would make sense to give communities an option to enact a two-way property tax that taxes land at a higher rate than buildings. A move in that direction, particularly for urban areas in need of new development, would promote smart growth, reduce sprawl and speed development, he says. England co-edited the new book published by the Lincoln Institute of Land Policy, Land Value Taxation: Theory, Evidence and Practice.

Q:What’s the land tax all about?
A land tax is a variation on the property tax that we all know of and many of us hate. With a land tax, land values are taxed more heavily than improvements or renovations on buildings are. The traditional property tax assesses building values and land values at an equal rate. There’s no reason they have to be taxed at the same rate. Take the state of Pennsylvania — they’ve had almost a century’s experience taxing land values higher than building values.

What are the benefits of the land tax?
The original motivation in Pennsylvania and in some foreign countries was equity issues. Landowners were making lots of money off private land holdings and land speculation. It was kind of a populist one to collect more from the wealthy landowners. But economists today have very different reasons. ...Most academic economists think it would be a very good tax reform. The modern case would be that it’s a tool for local economic development. The reason being, you can collect more from local revenues from land values and less from building improvements. Really, you’re providing tax breaks to capital improvements. There are examples of cities that have gone into a death spiral from rising property tax rates. Gary, Indiana; East St. Louis, Illinois. They are very depressed cities. The government keeps raising the property tax rates to fund the local budget. The result is they’ve stopped all building maintenance, renovations, driven jobs out of the city limits.

Is this a good fit for New Hampshire?
I think it is. My recommendation would be the legislature enact a statute permitting any community to adopt this kind of taxation if they want to. That’s how it was done in Pennsylvania. Most Pennsylvania cities still have the traditional property tax, but some, Harrisburg and Scranton, have two-way property taxes, higher on land values. And so I’m thinking Claremont and Berlin, which are struggling, could use it as a local development tool. If the Statehouse allowed cities to adopt it, Franklin, Claremont or Berlin, who need a boost, could adopt it to create jobs and encourage new construction.

Places like Manchester, Nashua and Concord have historic, older buildings that maybe could use a push as well?
We’ve done simulation studies in Manchester and Berlin, simulated moving from traditional property taxes to two-way. It’s just computer simulations, but the best I can tell, it would encourage income growth and employment growth and it might even, and this is against intuition, could even increase land prices. On the one hand, it’s taxing land more heavily, but if in the process it’s encouraging income and employment growth, it could even increase land prices. If it did, that would really be a win-win. It doesn’t get much better than that.

So basically, the more land you own, the more you’ll pay in taxes?
The tax is not on acreage but on assessed land values. You would suspect an acre of land on Elm Street [in Manchester] would be a lot more valuable than an acre in Pittsburg up north. So the tax payment would be higher on the urban land. I’m not proposing this be adopted by small towns out in rural areas. This is more a strategy for urban growth and urban revitalization.

Places that use it, how’s it working?
Anecdotally, Scranton, a generation ago, was pretty depressed. These days, it’s doing pretty well. It’s hard to say that results from its form of property tax. We do know Harrisburg today is a lot healthier than it was before the land value taxation was introduced. The other case in the U.S. was in Hawaii. In the ’70s, they introduced land value taxation statewide in order to encourage tourism development. It was so successful in Honolulu ... there was a backlash from locals who thought it was over-development.

Are there any negatives to this method?
There’s a possibility those who own valuable land will pay more taxes. From an equity and political point of view, some landowners would at least be skeptical and maybe even opposed. I think that it can be overcome. ... The other groups who might fear this type of tax reform in some communities are homeowners, say situated on valuable waterfront properties. … That can be dealt with too, by creating a tax credit provision on the annual property tax so they wouldn’t end up paying more. One group who stands to gain from this big time is condo owners. Condo owners would be taxed on their share of the building and not very much on land.

That would seem to promote smart growth?
Exactly. That’s the reason I got interested. It’s a local tool for promoting smart growth. — Jeff Mucciarone