LERTA stands for Local Economic Revitalization Tax Assistance. The goal in Bethlehem is to coax developers to build on the Geeting blog’s most hated surface parking lots, along 3rd St and 4th Street on Southside, so of course I am totally psyched about this.
The way things work now, if somebody were to build a building on one of the Southside surface lots, they’d end up paying higher taxes. Under the current property tax regime, a guy who owns a surface parking lot has a lower property tax burden than a guy who owns a building next door. If the guy with the surface lot builds a building, the building gets a new assessment, and his tax bill goes up. Obviously taxes aren’t the only consideration a landowner has, but that tax penalty on building is a straightforward disincentive to build on the lot.
Enter LERTA. In the LERTA tax abatement district, the tax penalty on building is delayed, as Lynn Olanoff explains:
LERTA doesn’t eliminate existing tax revenues, Kelly said. The LERTA discount is based on new assessments, with developers continuing to pay their pre-construction property taxes throughout the abatement period, Kelly said. The new property tax assessments are phased in over a 10-year period, with another 10 percent added on every year.
The landowner still ends up facing the tax penalty for improving the property, but it’s just phased in at 10% each year for 10 years. Usually how it works is that there’s a limited window of time for landowners to get the LERTA deal. You have to start construction before a certain date in order to qualify for the tax deferment. The point of this is to try to pull developments forward in time, from the future into the present. Maybe some of these surface lot owners have plans to eventually build a building, but don’t want to do it for another 10 years. Maybe they want to sit and speculate, waiting until rents on Southside are really high before they break ground.
By giving landowners a limited window of time to get the LERTA deal, the hope is that you can coax them to build sooner rather than later, and pull development projects from the future into the present.
So to recap, LERTA works by doing two things. It works by lowering the tax penalty on property improvements. And it works by sweetening the pot for landowners who choose to build sooner rather than later.
Now I will show you how the land value tax does both of these things, but in a cleaner better way.
Real estate is really two things – a plot of land, and a building. Bethlehem taxes both at the same millage rate, but Allentown taxes land at 5 times the rate for buildings. 20 other PA municipalities tax land at a higher rate than buildings. Some places only tax the land, and don’t tax the buildings at all.
Only taxing land would mean a permanent tax abatement for buildings. Whereas LERTA phases in the tax penalty over 10 years, with a land value tax the penalty never comes. The Bethlehem surface lot owners’ tax bills would not go up if they built buildings on the lots. This is better than LERTA for two reasons. The first is clear enough – no tax, no government penalty for developing land. The second reason is that everybody gets the deal. Not just the people who own property inside the LERTA boundaries, but the whole city.
The impact of a universal building tax abatement on the city’s economy would arguably be even more potent, since it wouldn’t just be huge expensive projects that benefit – it would also be thousands of tiny projects. People fixing up their houses and storefronts without worrying about a higher assessment. People building smaller buildings on vacant parcels in their neighborhoods. A lot of little developments would add up to a lot of economic activity for the city, and increase the city’s land value as people improve the appearance of their neighborhoods.
So there’s a carrot, but there’s also a stick. While there would be no tax penalty for building, the land value tax would penalize not building. That is how it would pull development projects from the future into the present. LERTA does this by setting a limited time window to get the special deal. The LVT does it by raising taxes on unimproved land. The surface parking lot owners on 3rd and 4th would have the same tax bill as the building owner next door.
The incentive is clear enough – the surface lot owners would need to build buildings to come up with an income stream sufficient to pay the higher tax bill, or else sell the land to someone else with the means to do it.
It’s a classic carrot and stick approach – abating taxes on property investment indefinitely, and penalizing land speculation and low-value land uses.
If Bethlehem wants to develop these parcels, and compete with Allentown and other cities who are trying to attract development, I can’t imagine a more efficient, effective or equitable way to do it. There’s no special handouts for special areas of the city – just simple rules that apply equally to all the city’s landowners. What’s more, when Allentown adopted the land value tax, fully 75% of property owners saw their taxes go down. This is a political winner. It would put more money in the pockets of a supermajority of property owners, while penalizing folks who are speculating and wasting land in the best areas of Bethlehem.