Call for examples

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Permalink Reply by Rick Rybeck on March 3, 2011 at 5:08pm

Transforming the Traditional Property Tax Into a “Value Capture User Fee”

The traditional property tax is partly responsible for urban sprawl. It rewards real estate speculation while punishing property development and maintenance. Speculators, at little cost, can hoard prime development sites, pushing developers to seek cheaper land at more remote locations.

Several Pennsylvania cities have rectified this situation by shifting the property tax off of buildings and onto land values. These jurisdictions still collect the revenues that they need – but the incentives facing property owners are very different. Under the new approach, it is less costly to construct, improve or maintain a building. At the same time, it becomes much more expensive to hold onto boarded-up buildings and vacant lots. The economic imperative to develop land is greatest where land values are high – which is near transit and other public infrastructure amenities.  This infill development defines TOD and makes it work.

Assessments should continue to report the full market value of both land and buildings. However, the tax rate on buildings could be reduced or eliminated. Revenues are maintained by adjusting the tax rate on land values.

Reducing the tax rate on building values makes buildings less costly to construct and maintain. (Unlike a sales tax which is paid only once, a property tax on buildings is paid when a property is improved and every year thereafter that the improvement adds value to the property. Thus, a 1% or 2% property tax has the economic impact of a sales tax of between 10% and 20%.) Surprisingly, increasing the tax rate on land values reduces land prices. The reason that building taxes make buildings more expensive whereas land taxes make land cheaper lies in the fact that buildings are produced whereas land is fixed in supply.

Also, unlike building values, land values are not determined by the owner. Land values are created by the work of a community in making particular locations good places to live and work. Thus, taxes on land “capture” publicly-created values and return them to the public. In this way, public goods and services like roads and transit can become self-financing.

In the mid 1970s, downtown Harrisburg Pennsylvania contained thousands of boarded up buildings and vacant lots. After transforming its property tax into a value capture fee, there was a revitalization of the downtown. Over a decade, the number of vacant and boarded-up properties was reduced by more than 80%. Was this a coincidence? When McKeesport adopted this same reform, two neighboring towns (Clairton & Duquesne) did not. In spite of a regional recession, building permits grew in McKeesport while they continued to decline in Clairton and Duquesne. Eventually, both Clairton and Duquesne adopted this reform as well. According to an article in the National Tax Journal, this approach to property taxation was also partly responsible for Pittsburgh’s downtown renaissance during the 1980s.

Economic theory and empirical evidence show that shifting property taxes off of buildings and onto land can promote more affordable housing, jobs and more compact development. This reduces sprawl and makes walking, biking and transit more convenient and more economically viable forms of transportation.  

Attachments:

• Using Value Capture to Finance Infrastructure & Encourage Compact Development (April 04).pdf, 107 KB
• PA Cities - SRT Bldg Permit Data - Oct 1995.pdf, 578 KB

Permalink Reply by Tarry Edington on March 4, 2011 at 10:42am

In development of your toolkit, please include a section that addresses how transit oriented development does not serve well rural communities.  Transit is most commonly provided in communities of dense population where there is potential of high ridership.  Rural communities do not have the level of population that justifies transit service.  When distributors of public money for housing development make it a condition of eligibility or competiveness to be located near transit service to receive funding, they write off rural communities.  Public policy needs to include provision for funding to those communities that do not have transit service.  I urge your toolkit to acknowledge this reality and offer concepts that provide policy makers with guidance on how to set policy that provides equity to communities without transit service.  

Permalink Reply by Emily Salomon on April 27, 2011 at 1:30pm

The webinar, "Peter Calthorpe Tells All: Regional Planning Around the Country" hosted by Smart Growth America, PolicyLink, Reconnecting America, and the National Housing Conference provided a detailed example about Salt Lake City's Envision Utah long-term planning process and efforts to extend light rail throughout the region.  This is a great example that stray's from many of the cities I hear about related to TOD (Portland, Seattle, Bay Area region, etc).  You can access a recording of the webinar here.  

During the Q &A portion of the event, Calthorpe provided interesting commentary on why he thinks the Salt Lake City region was successful at  integrating affordability into the region's planning process compared to other regions in the U.S. He attributed much of the success to the involvement of the Mormon Church in the process, which serves as an important reminder how valuable diverse and broad partnerships are in planning for equitable and affordable TOD.