by Edward J. Dodson, Cherry Hill, NJ
One of the most consistent issues civic leaders
have faced over the last half century is how to provide the
kind of public goods and services required to compete with
suburban communities and with other regions in the United
States (or locations in other countries). Large sections
of many cities in the United States have emptied or have
become home to households who do not have the incomes to be
self-supporting or the diversity of skills to make for
thriving communities. An ongoing challenge is how to raise
the revenue to pay for needed social welfare services while
trying to rebuild an aging infrastructure. Cities need to
foster a positive business climate and also create a safe
and healthy environment for residents and visitors.
Assistance from the Federal and State governments
has never been fully adequate to meet the rapidly
increasing costs of city government. With each budget
cycle, the revenue side of the equation has been addressed
by a combination of increased taxation and debt financing,
the latter a measure that only postpones the day of
reckoning. With every constituency and interest group
looking for "tax relief," the chosen course of action has
been to impose taxes on almost every form of asset and
every type of transaction that occurs in the city. While
this approach tends to spread the impact broadly across the
business community and residents, the longer-term impact is
to contribute to the overall decline of the city's economic
base.
For decades, some analysts, urban economists and
activists have been arguing that this could have been
avoided and that there are effective measures that will put
cities on a firm financial footing and a path of sustained
economic expansion. At the center of the recovery plan is
the issue of how the city raises its revenue -- its tax
policies.
What is not well-recognized is that not all taxes
have the same impact on an economy -- on individual and
business investment and location decisions, for example.
For businesses, taxes are costs they attempt to pass on to
customers in order to achieve targeted profit margins. In
a global economy this is not easily achieved, and
businesses subjected to intense price competition are
constantly looking for places to operate where they can
save on costs. A high wage tax indirectly affects
businesses as well because they must offer higher salaries
to management and technical workers to compensate for the
high wage taxes charged to work in the city. Ideally, the
interests of the city are the same as its business owners
-- to reduce to a minimum the taxation of income and assets
that otherwise raise costs.
Arguably even more significant to business
profitability and location decisions is the impact of how a
city taxes real estate. Taxes on real estate have long
been an important source of public revenue, although the
percentage of needed revenue collected from real estate has
fallen over the decades, in part because of the reasons
mentioned above but also because administration of the real
estate tax has been highly politicized and inefficient.
Assessments in most cities are adjusted infrequently, so
that properties may be assessed anywhere from 30% to more
than 100% of market value. The other serious problem is
that the tax on improvements (i.e., on buildings) equates
to a sales tax imposed each and every year. Property
maintenance, renovation and even new construction are
discouraged by high improvement taxes. Recognizing this is
so, cities frequently offer some owners periods of
abatement on new buildings or on the value of renovations.
There is an argument that says the strongest
pro-housing, pro-development and economically-sustaining
measure a city could adopt is to gradually exempt all
property improvements from taxation and rely on the value
of land parcels alone -- a shift to what economists call
"land value taxation." In order to meet revenue
objectives, the rate of taxation applied to land values
would be significantly higher than is now applied, so
owners of land parcels that are vacant and under-improved
would experience an increased tax obligation. Most
homeowners and most business owners would experience a
reduced property tax. Holding land idle (either for
speculative gain or simply because the costs of doing so
have been so low) would begin to cost owners considerably
more. Many would take action by developing the land to its
highest and best use or sell it to someone who would. The
effect would be felt most quickly in the central business
district and in other neighborhoods where land values are
high. Although land in neighborhoods where there is
widespread abandonment is generally low in value, here, at
least homeownership would be supported by reductions in the
property tax; and, if the tax rate on improvements is
eventually eliminated there would no financial penalty for
making extensive renovations.
If your city suffers from an ongoing loss in
population, a deteriorating housing stock and continued
abandonment of older, previously-industrialized areas, urge
your elected officials to examine the city's tax policies
in light of the consequences described above. If your city
suffers from a declining supply of decent, affordable
housing and is experiencing rapidly rising land prices that
drive out businesses and moderate-income residents, the
same solutions are applicable.
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(Editor's note: In Philadelphia the City
Controller is coming out strongly in favor of adopting LVT,
and Josh Vincent of the Center for Study of Economics has
managed to get a member of City Council to draft enabling
legislation. Ed Dodson has been working to pull together a
public forum on LVT, working with a civic group called the
Greater Philadelphia Urban Affairs Coalition. In
preparation for a meeting of the GPUAC Committee on
Economic Development, Dodson prepared this statement of the
case for LVT. Dodson may be emailed at ejdodson@home.com.)