The implosion of revenues for local and state governments over the past seven years, and a stalled, weak recovery leaves public discussion on funding the public/civic sector in the tired old debate between tax-and-spend and cut and slash. In weak regional economies and in times of recession, the first tax revenue to slide are income taxes, then sales taxes, then business taxes, and lastly property taxes. Property taxes are built upon a far more stable base than other forms of tax, and they are now understood to be generally progressive in impact.
This piece is written in Philadelphia, a city with a school district that serves 190,000 students, yet exists in a state of permanent fiscal crisis (a $216 Million deficit), structural crisis (funding by borrowing, aging infrastructure) and an ongoing crisis of mission (fewer libraries, fewer staff, more danger, and ongoing failure to serve its students).
Unless the nation wants to finally run up the white flag, we need to be adults about taxes and tax policy. We must not consider taxation as an “either/or” issue.
The need to reject “left” and "right”
Generally, the conservative view of government asserts all taxes are bad. To some degree, that's true. Likewise, we have a liberal view of government which asserts that taxes are the price we pay for a civilized society. To some degree, that’s just as true.
The problem is finding a middle ground as our national and local services and infrastructures fail. Perhaps there is a better way to ensure that essential government is fully funded, while providing an environment for shared and broad based economic growth.
Instead of current musty policies of tax and ideology, let’s return to a concept of economics and taxation called "classical." There are many applications of classical economics, but most vital today with homeowners underwater and an oversupply of unused inventory is the reviled property tax.
The property tax is one of the most hated, misunderstood and contradictory of taxes. Reasonable people believe the property tax destroys communities, while equally reasonable people are convinced that tax caps such as Proposition 13 in California have crippled local economies and communities. In a high tax climate, the money and work needed to keep buildings standing leaks to other areas causing urban sprawl. High residential and business taxes ramps up the price of mortgages, keeping much of America’s wealth locked up in the world of financial paper instead of creating real wealth.
The answer is to parse the property tax in practice, so let’s break it down. The property tax is actually two taxes, a tax on buildings and a tax on land. For example, Baltimore has a tax rate of 2.248% on both land and buildings. Sounds 50/50 right? Wrong. In fact, about 70% of tax revenue comes from buildings, 30% from land values.
That wreaks havoc on a city trying to compete with the cheaper sprawling counties surrounding it. What Baltimore needs - strong buildings, commerce and neighborhoods - are taxed at more than double the amount than land. We've produced a map to highlight the disparities between Baltimore and its surrounding jurisdictions. Truly, Baltimore has far to go to make itself competitive with other jurisdictions.
So, the tax on buildings is lousy in many ways. Ask any homeowner what happens when they fix up their house and the answer’s the same: "my taxes go up!" The tax on land value is very different. Notably, land values are the product of the community. Every government that provides good schools, good public safety and good services creates land value. The better those services are, the higher the land values are. Higher land values can recycle back to the community in the form of taxation, weaning us from dependence on taxing production for both business and employees, leading to growth and opportunity up and down the ladder.
That's why a tax on land values is an appropriate system to fund government services, while lifting the burden off productive activities. That's why in a stressed economy, the concept of land value taxation – or LVT – is gaining greater respect and attention.
Wherever LVT is used, the results are the same: tax bills for homeowners and productive business tend to go down. Blighted or vacant properties owned by slumlords or speculators see their tax bills rise to a fair share. Publicly created value is returned to the public.
LVT - by providing a permanent universal abatement on the building component of the property tax - boosts construction, removing the penalty that comes with improving a plot of land. LVT is used worldwide in various forms. Hong Kong, Sydney, Copenhagen and American cities like Altoona and Allentown all have variations of the land value tax. In fact, LVT has permitted the city of Altoona to eliminate permanently the tax on buildings from the city ledger.
If the tired old scripts of taxes can be flipped, we can both preserve government revenues and create wealth for all.