Academic journal article The American Journal of Economics and Sociology

Lessons for Economic Reform Based on Pennsylvania's Experiences with the Two-Tiered Property Tax

Academic journal article The American Journal of Economics and Sociology

Lessons for Economic Reform Based on Pennsylvania's Experiences with the Two-Tiered Property Tax

Article excerpt

I

Introduction

URBAN REVITALIZATION EFFORTS HAVE TRADITIONALLY FOCUSED ON infrastructure improvements, industrial development bonds, tax abatements, and urban renewal grants. Over time, these forms of targeted aid have been supplemented by programs that benefit multiblock sections of downtown business districts, such as enterprise zones, downtown improvement districts, and tax increment financing. Although these initiatives have been adopted throughout the country, there is an option that has not been widely replicated: the two-tiered property tax.

Its infrequent use belies the fact that a two-tiered property tax offers significant incentives for urban redevelopment. Instead of imposing a uniform millage (1) on all of a parcel's elements, the two-tiered tax levies a higher tax rate on land than on improvements to land. Whenever a two-tiered tax replaces a single-rate property tax or whenever the tax rate differential between land and improvements is increased, the revisions raise the relative price of holding land and lower the relative cost of improvements. It is these changes that reduce the financial benefits of holding land for speculative purposes and provide incentives for improving the land. The two-tiered tax, therefore, generates incentives for redevelopment and a more efficient use of land.

Even though local governments may decide to institute this type of levy, legal and political factors may discourage its use. The equal protection and uniformity clauses of state constitutions determine whether or not a two-tiered tax is permissible. In the event that the levy is constitutional, local adoption cannot proceed unless the state government first enacts statutes authorizing its use. One of the key factors affecting the probability of enacting a state statute is the composition of local electorates and the political influence of lobbyists who represent their interests.

I have organized this article as follows. In Section II, I describe in greater detail the two-tiered tax's impact on redevelopment. This discussion is followed by Sections III and IV, where I review state constitutional provisions and the impact of social interests and lobbying groups on the adoption of state enabling legislation, respectively. Section V provides the foundation for an analysis of the Pennsylvania General Assembly's decision to extend two-tiered taxing authority to Pennsylvania's boroughs. (2) A summary of the findings and implications for other jurisdictions are contained in Section VI.

Pennsylvania is the focus of this study because of the frequency with which the legislature has dealt with the issue of two-tiered taxes in the state. Two-tiered taxes were originally placed on the agenda by Pennsylvania-born economist Henry George, who proposed to eliminate property taxes on improvements to land. Although the state legislature did not adopt George's notion of a land-value tax, legislation was enacted in 1913 that authorized cries of the second class (Pittsburgh and Scranton) to establish a two-tiered property tax within their boundaries. Since authorization was limited to these two cities, other jurisdictions could not legally institute a two-tiered tax under the original enabling statute. However, when the issue resurfaced during the 1950s, statutory authority to adopt the two-tiered property tax was extended to third-class cries. Nine school districts were added to the state statute in 1995 and, three years later, the General Assembly approved legislation that permitted boroughs to also implement the tax. Given the frequency with which Pennsylvania's legislature has considered, and enacted, enabling legislation, there is ample opportunity to examine the historical record for evidence of variables that influenced the legislature's behavior.

II

Economic Development Incentives Provided by the Two-Tiered Property Tax

SINCE PROPERTY TAXES ARE BASED UPON the value of both the land and the improvements to land, construction or renovation projects on landed property generate higher property values and a concomitant increase in annual property tax burdens. …

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