Local Government Tax and Land Use Policies in the United States: Understanding the Links

Wallace E. Oates and Robert M. Schwab

Economists have had a long-standing interest in land taxation. ¹ The physiocrats, Adam Smith, David Ricardo, James Mill, John Stuart Mill and, most notably, Henry George, all wrote extensively on the subject. They disagreed on many issues, but they were unanimous on one point: since the supply of land was perfectly inelastic, land taxes would be borne entirely by landowners and would not distort economic decisions. Despite this interest, our experience with land-value taxation is actually very limited. In the United States, virtually no governments use a pure land tax and only a small handful rely on a split-rate system where land is taxed more heavily than structures. Consequently, we have little idea about the actual consequences of a land tax.

We have tried to provide some evidence on this point by looking at a recent 'natural experiment' in Pittsburgh. In 1979 and 1980, Pittsburgh restructured its property tax system so that land was taxed at more than five times the rate on structures. The facts of the Pittsburgh case are both clear and dramatic. Pittsburgh enjoyed a boom in non-residential construction following the change in tax policy. Annual construction was on average 70 per cent higher in Pittsburgh during the 1980s than in the 1960s and 1970s. In sharp contrast, development fell sharply in most comparable, older, Rust Belt central cities. The interpretation of these facts, however, is far from clear. Some have argued that the graded land tax was the key factor behind Pittsburgh's build

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