Scranton Pennsylvania: Finding Common Ground
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Incentive Taxation

Scranton Pennsylvania: Finding Common Ground

As of this writing (July 23, 2012), the city of Scranton Pennsylvania has been making front-page news in the same company as Stockton and San Bernardino California.  Scranton is nearly broke.  To understand why, one would have to trace the history of the city from the end of the second world war until today' here is an attempt:

First, the coal left, then the railroads that carry the coal left and then the industries that powered America for the South and then overseas.  The population slumped, and as the non-residential tax base disappeared, taxes – particularly school taxes – became onerous in the form of wage taxation, the poison pill of many Pennsylvania cities, like Philadelphia, Pittsburgh, Reading and Scranton.  Wage taxation at the local level has been shown to be dangerous for cities in a mobile age, leading to lower wages and fewer jobs.

Once upon a time, in the 1920s to 1940s Scranton like other cities had only a property tax.  It was a property tax different from the one understood (and hated) by most people.  Scranton's property tax was a land value tax that tax land values at twice the rate of building values.  The earliest evidence from Scranton's civic leaders were quite favorable to what was known as the "graded tax."

For quite some time, Scranton has fallen deeper into debt and the tax base shriveled with a sizable portion of land not on the tax rolls. Currently, debt Scranton is currently about 20% of the annual budget all of which is come to a head with national news stories reporting on seemingly intractable differences between the mayor and the city Council on how to plug budget holes, reduce debts and maintain services.  To boil down the dispute, city Council believes issuing municipal bonds to provide operating revenue is the way to go, and the mayor believes that property taxes must be increased dramatically over the next several years to close the gaps.  This is all in addition to the Scranton Parking Authority missing a bond payment that could jeopardize borrowing in the future.  That bond was in the amount of $16 million issued in 2004, and will be hard to pay off

We would suggest that Scranton reach deep down into its bag of tools and pull out and tune up that rusty instrument known as the graded tax.  

The rationale is clear:

1. The wage tax in Scranton is already pinned as high as it can go considering how low wages are in that city.
2. Most of the tax base is now residential.  Taxpayers cannot afford a significant "right now"
across-the-board increase.  There's plenty of taxable land however sitting empty and owned by dentists from New Jersey (or someone close to that).
3. Municipal bonds – if you can find a lender – are essentially a tax increase but one that comes due down the road.  With Scranton's current debt, the terms would likely create a bottom line in 10 years or so that would exceed a tax increase now.
4. Business taxes can't be increased, and many new businesses in the city of Scranton are tax abated for years anyway.

At this point, there is no easy way out. Again,Scranton is tearing itself apart while the city suffers.    The community ought to come together and close these deficits and secure the city by using community created land values.  It may take some time, but with sensible tax policy (i.e. reducing business taxes, wage taxes and building taxes to nearly nothing), Scranton would have a revenue stream that is dependable but would create an environment attractive where it was not before.  

There would be difficulties and switch entirely to a tax on land values for both city and school. Permissive legislation for the school district would be needed.  The County of Lackawanna would have to finally complete and certify a full reassessment.

To reconcile and find common ground, the leaders and citizens of Scranton need only look under their feet.

7 Comments to Scranton Pennsylvania: Finding Common Ground:

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Mark Koerner on Thursday, July 26, 2012 12:23 AM
Vince-- Doesn't Scranton already have a graded tax at the rate of 6:1, buildings versus land? I would think that would be "pretty good" from your standpoint--certainly better than the vast majority of America's thousands of cities. But clearly the partial land-value-tax doesn't seem to have helped Scranton escape very severe troubles. I'm not blaming the two-rate system; I'm just saying it hasn't benefited Scranton enough for you or anyone else to use it as a showcase city. Nor can a further shift (8:1? 16:1? 32:1?) if assessments continue to lag years behind the actual value of the properties. One idea that might help: Dezoning. A swath of Scranton could be dezoned, which would encourage business owners to build there rather than outside of Scranton's city limits. All building codes would remain in place, as would any land-use ordinances that affect the whole city. Again, this would encourage construction, which would improve the tax base. Ideas that probably won't work: a Terence Powderly Festival, named after the Electric City's most famous mayor. Likewise for a Joe Biden Festival.
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Joshua Vincent on Thursday, July 26, 2012 12:58 PM
Dear Mr. Kroemer: I appreciate the points you make; we ourselves have made that observation in the past. Scranton does indeed have a graded tax, but unhappily the city has chosen to make the property tax a rather small portion of the city budget. For FY 2012 ( the property tax is dwarfed by a tax on wages, which is a particular problem in the state of Pennsylvania. So although the land value tax is "pretty good" from our perspective I don't think it has much bearing either way is a factor on the local economy. It's simply too small. So at present, it's not our position that the land value tax as it exists works very well. It IS our position that with adoption of good values, and swapping bad taxes onto the land portion of the property tax Scranton would at the very least see revenue stability, and very likely a retrenchment of economic activity within the city borders. The fact that the valuation of property is woefully inaccurate has essentially forced the city to depend upon business taxes and wage taxes which, in point of fact, have been shown to keep a local economy down. In Scranton and the rest of Lackawanna County one can easily sit on a plot of land that could be sold for $2,700,000 and pay aggregate in property tax $2,000 a year! During a time when the land value tax played a much more significant role in the cities revenues, construction was robust particularly in relation to analog cities in the region (Carbondale and Wilkes-Barre). That was then and this is now. Your observation that dezoning would have a positive impact on Scranton is likely true. I would go above and beyond a swath however. A swath of land with no zoning would be highly valuable and desirable. The landowner would be able to hike the asking price and thereby drive away prospective builders. This outcome is been noted over the years with enterprise zones all over the United States as well as in Pennsylvania. As you know, Houston Texas has no zoning. Proponents of zoning (just about everybody in government in planning circles) assert that this is just awful except for one reality: it works. I think that innovative ideas like de- or down-zoning, coupled with a very high effective tax on land and a corresponding reduction of wage, building and business taxes would bring the tax base to where Scranton could be a self-supporting city, without granting privileges and abatements to artificially gin up the market.
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Scott Baker on Thursday, August 16, 2012 5:51 PM
Josh - Isn't it the case that if you raise the Land Value Taxes, even in a revenue neutral way with other taxes coming down commensurately, you will eventually get to the "sweet spot" wherein landowners will be forced to sell idle land or develop it? Either outcome, assuming other taxes have been lowered favorably as noted, ought to result in more opportunity, jobs, and significant economic improvements, even in depressed post-industrial towns like Scranton, don't you agree? Mayor Reed, Mayor of Harrisburg from 1981-2008, credits the 6:1 LVT to Building Value Tax (BVT) with restoring Harrisburg from (his words) "the second worst city after East St. Louis" when he took office, to one of the best small cities in America today. His successor, Mayor Linda Thompson also claims Harrisburg could not be where it is without the LVT. Given this, what else do the city officials of Scranton need to see? Is proof not enough?

Joshua Vincent on Wednesday, August 22, 2012 3:47 PM
Dear Mr. Baker, I like your "sweet spot" analogy. Scranton is in a somewhat unique position in that like many Pennsylvania cities after World War II it adopted significantly higher taxes on labor (the wage tax) and capital (a myriad of business taxes that are clearly nuisance taxes". So, I agree that the first step Scranton has to take is to switch its reliance on the wage tax to the property tax. The objection will be that assessments are off. They may be. Yet, statutorily those are the values the cities forced to use, imposed by the suburbia-based Lackawanna County commissioners by refusing to reassess. This leaves the mayor and the council of Scranton in a bind: they believe they must rely on wage taxes even though it is abundantly clear that there aren't enough wages earned in the city of Scranton to pay current budget items and year-out debt obligations. They cannot raise business taxes either. Many of the big-ticket businesses left long ago; much of Scranton is now tax exempt or empty lots. On the other hand, Council is convinced that relying on the property tax is bad policy for Scranton's residents who are primarily elderly and/or poor. Both sides in this effort are correct that there is need for higher taxes. Scranton though has not taken advantage of its land value tax to make land a much greater source for any future revenue increases. As all the past mayors of Harrisburg have noted, if people want to sit on vacant land they may. They just have to pay for the privilege.
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