“We Have to Shift …to Taxing What Does Not Move”

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Via Miriam Hill, Center City District director Paul Levy is making great points about the need for pro-growth tax reform in Philly:

“We have to shift from taxing what is mobile to taxing what does not move,” he said at a news conference about the report. Mayor Nutter had started reducing the wage tax, but then held it steady when the recession reduced city revenue. His administration plans to restart those reductions in the middle of next year, but the Center City District wants that to happen more quickly.

“The simple argument, it seems to me, is that taxes and wages depress demand. It’s not that we have weak office demand,” Levy said. “It’s that we have a tax structure that deflects office demand to the suburbs. It causes the higher-wage jobs to move to the suburbs … and that, I think, weakens one of the major sources of demand for retail.”

That’s exactly right, although I would draw a clearer distinction between taxing property improvements and taxing land. Property improvements are capital, and capital and labor are elastic – if you tax them, you will get less of them at the margins.

Land, however, is not elastic. The supply of land is always the same. If you tax land values, nobody will make less land. Landowners can’t take Philly’s land out of Philly.

Funding more public services with a land value tax on unimproved land would be a good idea, because land value is just the value added by the community.

Think about it: land values only increase in a neighborhood when a bunch of properties in the neighborhood improve. That raises the value of the nice buildings, as well as the price of vacant lots in the neighborhood. Taxing only the unimproved land would recapture that value for the public, instead of giving vacant lot owners and speculators a windfall. Plus, the land value tax can’t be passed along to tenants – it’s borne entirely by the land owner.

Speculation’s not the entire problem with vacant land in Philly, but it’s definitely a big part of the problem. Bills like this one from Maria Quinones-Sanchez that raise the cost of owning vacant buildings and vacant land are generally a good idea, since they tend to drive out people who aren’t really serious about doing anything to develop the parcel.

But for exactly the same reason, it’s a good idea to tax unimproved land as a way to raise general revenue.

This would also be a good way to bring some relief to property tax payers in high-demand neighborhoods. If you tax vacant lots and surface parking lots and other unimproved land at the same rate as multi-family condos and office buildings,  speculators and others wasting expensive land on low value uses will pick up the tab for a greater share of the city’s budget, and responsible property owners will pay less.

Mayor Nutter’s Actual Value Initiative (AVI) would work well with a land value tax, since it would put greater development pressure on vacant lot owners in expensive areas to add more housing quickly, or sell to somebody else who will add more housing. Currently, speculators like to hold out on building until rents are too high. But with AVI, the land tax bill would start to bite speculators as soon as rents started rising, pushing them to build more housing faster.

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