Land-Value Taxes in the Real World: Split-Rate Taxes

Tyler Cowen is skeptical about the possibility of a pure land-value tax, even though it has many theoretical benefits. In particular, Cowen points to a host of what we might call “Public Choice NIMBY” issues. In the real world, the same political forces that drive all of the current urban planning issues would either prevent it from being implemented at all, or prevent it from actually being implemented the way Henry George would have wanted.

I grant all these objections, but I do note that there have been multiple YIMBY successes in recent years, particularly in California where NIMBY forces are probably the strongest in the country. Still, if Cowen is mostly correct, are there any real-world options that offer some of the benefits of a LVT? In short, the main benefits are that the deadweight loss of the tax is very small, and that land is more likely to be used for its highest-valued use (which in many cases will mean more density, though this intersects with zoning policy).

Yes. For the clearest example, look to Pennsylvania. Cities are allowed to implement what is called a “split-rate property tax.” It does not only tax land, as a pure LVT would do, but instead taxes land at a higher rate than improvements. A ratio around 5:1 is typical (meaning land is taxed at 5 times the rate of improvements), though some cities have been as high as 26:1.

And this isn’t a tax only used in a few small backwaters. Some of Pennsylvania’s largest cities, such as Pittsburgh, Allentown, Scranton, and Harrisburg, have used this tax, with Philadelphia being the only large city in the state to never have one (Pittsburgh also dropped theirs in 2000, after nearly a century). And Detroit is currently seriously considering a split-rate tax, relying on the experience of Pennsylvania (see this policy paper from the Lincoln Institute on Detroit).

The split-rate tax, like any new policy that upsets the status quo, will have challenges being implemented. But it has one powerful benefit going for it in the transition: homeowners will get a tax cut during the implementation of a revenue-neutral split-rate tax. This benefit overcomes a lot of the NIMBY homeowner problems that plague reforms elsewhere in urban policy. Homeowners get a tax cut because other types of land will see a tax increase, including vacant land and downtown properties where land values are higher (and typically there are few single-family homes).

Also, the overall effect of the tax is to reduce land values while increasing the value of structures (as the tax is capitalized into property value). Since most owners of single-family homes have much more value in their home than the land underneath it, they will see the total value of their property rise.

What are the challenges of implementing a split-rate tax? The first is a legal one, since many state constitutions require uniformity of property taxation, often in their constitution. This would need to change before cities could adopt such a tax. The usual local politics will always exist as a potential impediment, but since homeowners stand to benefit the politics will be very different from typical urban issues. We should also look into why Pittsburgh and 6 other cities went back to a single-rate system, all of these changes happening since 2000. Apparently they did not find split-rate taxes to be a panacea, and the repeal of Pittsburgh appears to be (somewhat predictably) the result of a revolt by homeowners over a reassessment of property values.

Property tax assessment is already a thorny political issue in any jurisdiction. One drawback of a pure LVT or partial version such as the split-rate tax is that it makes assessment even more challenging and politically contentious. Exactly how much is the land under your home worth? In a neighborhood that is already fully built up with houses, the land itself no longer trades on markets separate from the structure. How will it be valued? Vacant lots being sold on the periphery of town aren’t necessarily a good proxy for land values citywide. Cowen points out a similar problem for new builders in a city, who may run into the political problem of their improvements being counted as land for tax purposes.

Like any new tax, a version of the LVT will face significant challenges. But for advocates of the LVT, the split-rate property tax of Pennsylvania seems like the best chance of capturing many of the benefits of a pure LVT, while overcoming at least some of the political challenges.

4 thoughts on “Land-Value Taxes in the Real World: Split-Rate Taxes

  1. weino7 February 15, 2023 / 11:41 pm

    How about Arkansas-centric articles, maybe serialize an update of the 2019 “Citizen’s Guide…”?

    How about an .xls populated with every tax exposure in Arkansas, starting with Jonesboro and Craighead County? While I use to compare locales, accurate tax rates would brighten the line within and across jurisdictions. Thanks.


  2. LVTfan February 19, 2023 / 10:22 am

    While I’m an enthusiastic supporter of LVT, I recognize that one of the problems in interpreting the results where municipalities are using it is that if the school district is not also using it, the results are muted. In two communities I’ve lived in, school taxes represented 80% and 90% of local taxes; if only 10% or 20% of the revenue comes from the municipality that has reduced the taxation on buildings while the school district continues with taxing buildings, it is more difficult to see the benefits of LVT.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s