.

Table of Contents

I.	List of Figures and Tables	3
II.	Introduction	4
III.	Methodology	5
IV.	Literature Review	6
V.	Existing Examples of Land Value Taxation	15
VI.	The Philadelphia Proposal	20
VII.	Is Passage of a Land Value Tax feasible in Philadelphia	27
VIII.	How Will a Shift to Land Value Taxation Alter Patterns of Land Use?	36
IX.	The Need for Accurate Land Assessment	43
X.	Conclusion	48
XI.	Bibliography	50
XII.	Appendixes	53

List of Tables

[EDITORIAL NOTE: Except for Table 1, the Figures, Tables and Appendices are not reproduced here. A file in Word format containing this non-text material is available upon request from SCI.]

Table 1:	The Effect of the City Controller's Proposed Shift to Land Value Taxation and the Annual Tax Burden on Different Types of Philadelphia Properties	26
Table 2:	The Impact of Land Value Taxation on Residential Properties by Council District	30
Table 3:	Sunoco's Tax Burden	34
Table 4:	The Tax Structure and Downtown Building Decisions	41
Table 5:	Fixing the Assessments of Baltimore Ave	46

List of Figures

Figure 1	Changes in the Number and Value of Building Permits in Harrisburg
Figure 2	Vacant Property in Philadelphia by Zip Code	21
Figure 3	Median Household Tax burden in the Philadelphia Region	23
Figure 4	Change in the Tax Burden on the 1900 Block of Market St	38
Figure 5	Office Leasing Activity: Center City and the Region, 1989-1999	39
Figure 6	Land Values Per Square Foot on Baltimore Ave.	45

Introduction

Currently a debate is raging in Philadelphia about the relative merits of land value taxation. This debate was generated by the City Controller's proposal to replace the existing property tax with a land value tax. Rather than taxing land and structures at the same rate, the Controller suggests taxing land at three times the rate of structures. The Comptroller's Office estimates that, if a land value tax were to replace the existing real estate tax, 80 percent of Philadelphia homeowners would receive a modest tax break while the tax burden on underdeveloped or undeveloped properties would triple. Such a change in the structure could dramatically alter how land is used in Philadelphia.

When compared to most other types of taxation, a land tax is both more efficient and more equitable. Land is unique because, no matter how much you tax it, the supply will never change. This makes it possible to levee a tax on land rents without changing people's production decisions and stifling economic progress. Land taxation is more equitable because it recaptures for society that portion of property value that is derived from the community. Additionally, there are both theoretical and empirical reasons to believe that a land value tax would help stimulate Philadelphia's economy and revitalize its neighborhoods.

Most of the existing American land tax municipalities are quite small. As such, there is some uncertainty about how this type of tax would affect land use in a city as large as Philadelphia. My research is designed to partially fill this void.

Methodology and Data

Studying the effect of a tax structure that has not yet been implemented posed serious methodological problems. In order to compensate for a lack of empirical data, it was necessary to firmly ground this research in economic theory, and to draw from a variety of different data sources. This paper is divided into different sub-sections, each of which contributes to an overall understanding of how the land tax will impact Philadelphia.

In the first of these sub-sections, different U.S. land tax municipalities are examined in order to provide a framework in which to think about how such a tax might affect Philadelphia. A cursory examination of these municipalities was accomplished by bringing together several different scholarly studies, newspaper articles, and interviews. The second section identifies why a change in Philadelphia's tax structure is necessary and analyzes the proposal put forward by the City Controller. Much of the data for this section came from the Controller's office, newspaper articles, and interviews. The third sub-section attempts to answer the question of whether or not the Controller's proposal is politically feasible. Data for this section came from testimony in front of city council, newspaper articles, interviews, field research, and an analysis (using assessment figures collected by the Bureau of Revenue and Taxation) of several key properties. The fifth section seeks to identify exactly how the adoption of land value taxation would alter patterns of land use. This is accomplished using the 1900 block of Market Street as a case study. The final section examines how the impact caused by land value taxation will diminish if efforts are not made to improve the accuracy of property assessment in Philadelphia.

Throughout the research process, data was collected from: newspapers, websites, interviews with land tax experts, meetings, lectures, personal correspondence, transcripts of testimony presented in front of City Council, informational packets given to council members, and official reports produced by the Philadelphia City Controller's Office and Philadelphia Department of City Planning. Although it is possible to get much of the data used for the empirical sections of this research directly from Bureau of Revenue and Taxation, most of my data was taken from www.hallwatch.org because this site's internal search engines made data analysis more feasible.[1]

Literature Review

What is the Land Value Tax?

Land value taxation traces its roots back to the 19th century, when classical economists David Ricardo theorized about the existence and importance of land rents.[2] Ricardo's theory stemmed from his observation that more can be produced on fertile land than on land of poor quality. As a result, the highest quality land commands the highest rent. The poorest farmable land garners no rent, because all of the earnings from this land go to cover labor and capital cost. From these observations Ricardo's law of rent is derived: the rent of land is determined by the excess of its produce over that which the same application can secure from the least productive land in use.[3] Ricardo goes on to theorize that, as the population grows, more poor land must be cultivated in order to meet the growing demand. Thus the rent "earned" by good land increases. This phenomenon (coupled with the fact that poor land necessitates increased labor input to maintain minimal output) results in falling profit levels for everyone except for the few lucky land owners who prosper without themselves contributing to the productive process. Ricardo claimed that since rents gobble up profits, and profits lead to investment, which leads to growth, rising rent costs indirectly hinder societal economic progress.

Ricardo's theory, that land rents would absorb all of the fruits of progress, was later built upon by the late 19th century social philosopher Henry George. Convinced that, "the association of poverty with progress is the great enigma of our times," George sought to unravel this riddle in his groundbreaking book, Progress and Poverty. In this book George eloquently expresses his belief that poverty exists in America's rapidly growing cities (in the midst of unprecedented prosperity and unparalleled rates of growth) because owners of land and other "natural opportunities," appropriate the fruits of other people's capital and labor. To bring about greater economic justice without stifling economic progress, George proposed that the government adopt a "single tax" on land. George's argument for land value taxation has two primary components, one ethical and one relating to economic efficiency.

George believed that increasing land rents are not created by the fruits of the landowner's labor and, as such, they should be taxed away for the good of society. To support his theory, George points out that land or "site" value is not created by the actions of an individual owner, but by the community, acting in three capacities. First, society provides the legal institutions of land ownership from which the concept of land value springs. Land would be of little value without the legal framework which assures land owners that their investments won't be taken away from them without due compensation. Second, the larger community is the provider of infrastructure and other amenities (good schools, roads, police protection, etc) which give land much of its value. Third, it is the community, in the shape of the market, which causes local economies to grow and develop directly affecting land values (in the past ten years the demand for land in San Francisco has risen, causing land values to rise, because a market boom attracted more jobs and capital to the region). On first blush it may appear as if the value of agricultural land is only linked to the soil's fertility, but without legal protection, a network of roads upon which crops can be transported, or markets in which to sell these crops, agricultural land becomes infinitely less valuable. Thus, as scholar Dick Netzer claims, "the ethical conclusion is than that the community, not the individual site owners, should recoup the fruits of these economic activities."[4]

In addition to the ethical argument, George claims that there are convincing economic reasons for implementing the single land tax; namely that a tax on land rent it is the most efficient type of taxation possible. Unlike other forms of taxation, a tax on land rents does not stifle economic growth. In order to understand this claim it is first important to understand that typically, under perfect competition, economic rents only exist when a change in supply is not possible. Because the supply of land is fixed, land rents can accrue.[5] Although, theoretically, any type of economic rents could be taxed without distorting production decisions, in the long run it is nearly impossible to tax rents on capital or labor. This is because when the market is working perfectly no rents on capital or labor exist. The supply and price of capital and labor change as demand changes, until an equilibrium is reached and no rent is left. Thus, in a perfectly functioning market, it is impossible to tax the rent on capital and labor. Any tax on an elastic good (such as labor and capital) will simply reduce the amount people are willing to consume. This stifles economic growth and leads to economic inefficiencies.[6] In contrast, because the supply of land is fixed, it is possible for land rents to accrue, allowing the land to be taxed without distorting production decisions that lead to economic inefficiency.[7]

Throughout the rest of our discussion it is important to note the difference between property and land. Although these two terms are commonly viewed as interchangeable, throughout this paper the term property will be used to describe the combination of land and all structures on the land. Hence, property rent is the combined return on land and capital improvements. The term land value refers to the value of land without improvements, the residual value after the value of other assets that exist on the land are removed. Unlike land taxes, the implementation of property taxes results in economic distortions because people no longer have an incentive to improve their property and use it efficiently.


What do Critics Say about the Land Value Tax?

Leo Tolstoy once claimed that, "people do not argue with the teachings of George, they simply do not know it…and it's impossible to do otherwise with his teachings, for he who becomes acquainted with it cannot but agree."[8] Although this statement is not completely true, most critics of the land tax do not doubt the validity of George's theory; they question how practical it would be to implement such a policy.

Some scholars, such as Dick Netzer, point out that the sudden implementation of a new land value tax would unjustly victimize recent buyers of land.[9] Netzer claims that (until the market had time to adjust) a pure land tax could be confiscatory in its nature.[10] A similar criticism is that voters and elected officials would likely be sympathetic to any individuals who found themselves bankrupt as the result of the new tax. These may be valid concerns, but as Steven B. Cord argues, a gradual shift towards land value would give both markets and people time to adjust and to begin putting land to its best use.[11] Landowners who are not currently maximizing their land's productive potential would have time to adjust and would therefore be able to avoid a huge tax increase. Though gradual implementation delays potential benefits, land tax proponents such as Walter Rybeck suggest that when a full tax reform would arouse too much political opposition to gain acceptance, a land tax should be gradually adopted.[12] This can easily be achieved by gradually increasing the land tax to structure tax ratio.

Henry George and the original single tax supporters advocated replacing all local, state, and federal taxes with a single tax on land rents. Several prominent land tax critics claim that though a single tax may have been possible at the turn of the century, when Henry George first wrote Progress and Poverty, such a tax is no longer feasible. Since 1933 persistent and reoccurring unemployment has produced pressure for increased federal spending. This has caused government spending to skyrocket. According to economist Arthur P. Becker "government intervention has grown to the point where the public sector now comprises 35 percent of Gross National Product and 49 percent of national income."[13] Thus, because the magnitude of U.S. government expenditures has greatly increased in the past 100 years, it is no longer possible to generate sufficient revenue from a land tax to run the federal government. Other land tax critics argue that, because the trend of increasing government spending permeates all levels of government, it is not even feasible to finance local government expenditures with a single land tax. While this may be a valid argument against single taxation, this criticism does not hold when a two-rate land tax is implemented alongside other types of taxes. Despite the fact that property taxes are currently a major source of revenues for local jurisdictions,[14] even the most ardent advocates of land value taxation seem to agree that, "with the commitments of modern governments, land value taxation would, by itself, be hard pressed to raise sufficient revenue to cover all spending demands."[15] Rather than advocating for a single tax, most modern followers of Henry George envision a scenario in which land value taxation accounts for a significant share of all local public sector revenue (10-20%).[16]

Perhaps the most frequent criticism of land value taxation is that an accurate assessment of land values is impossible, or too costly, to obtain. In theory, a tax that is levied on the value of land alone does not cause any economic distortions, but in order to levy such a tax, assessors must have the ability to estimate the value of land separately from improvements. Implicit in George's single tax argument is the assumption that appraisers would always be well supplied with plenty of nearby unimproved land, so that the improved land sites could be valued easily by comparison.[17] Although this assumption made sense in George's day, the American landscape has dramatically changed since then. Now, data on the value of unimproved land can be difficult to obtain because in urban areas most parcels of land have already been improved [18]

Virtually everyone on both sides of the land tax debate agrees that "the single greatest challenge to any type of land value taxation system is accurate valuation of land on a large scale."[19] Skepticism about the feasibility of urban land valuation has historically proven to be a major stumbling block to serious consideration of two-rate property taxes. However, recent advances in computerized property assessment tools have important implications for this debate. Assessors now have access to a vast array of sophisticated techniques that enable them to accurately determine the value of urban land (for a detailed description of the most common land assessment techniques see Appendix B). More then twenty years ago, Oliver Oldman of Harvard Law School wrote, "the key to developing an accurate land-value assessment role is the process of land-value mapping."[20] New computerized methods of spatial data analysis make this type of mapping possible and make it difficult to reject land value taxation on the grounds that accurate land valuation is not possible


What do Proponents of Land Value Taxation Claim?

Most scholars agree that the majority of the benefits associated with land value taxation accrue because land is fixed both in supply and location. Arlo Woolery, in a paper about taxation policies in China, points out that one of the strongest arguments for a land-based tax is its relative stability. Woolery claims that since land, unlike other forms of wealth, is fixed in its location it makes an ideal tax base.[21] Similarly, Andrew Reschovsky suggests that revenues from land value taxation would be more stable over the course of the business cycle than either a tax on income or consumption (although he conditions his statement by claiming that there is a need for more research on the topic).[22] Often government deficits arise because, while government spending is relatively fixed in the short term (an increasing percent of the budget is devoted to non discretionary spending), tax revenues fluctuate with the business cycle. Any method of taxation that promises a relatively constant revenue stream would have obvious benefits.

Advocates of the land value tax have long argued that land value taxation results in increased societal economic prosperity by encouraging landowners to maximize the productive potential of their land. Working from the assumption that people own productive land and capital assets because of the return they yield, Georgian theorists claimed that the most efficient economic climate occurs when land owners seek the use of their assets that yields the greatest return available (the highest and best use of the land). Thus, when every parcel of land is already being put to its highest and best use (within the legal limits imposed by zoning regulation) the land tax is neutral and does not affecting production decisions. However, if speculators are holding large amounts of land fallow and off of the market, scholars argue that a land tax would increase productivity by inducing speculators to use their land more productively. Because, as Becker claims, "high speculative land values lower profitable investment opportunities and lead to unemployment," any system that discourages speculation would increases economic productivity.[23]

Economists and policy makers have long assumed that, even if land value taxation is not allocatively neutral (because of existing inefficiencies in land use), at the very least it is more efficient than other existing forms of taxation. In the past twenty years, several scholars have demonstrated that a tax on land value is non-neutral,[24] but Duck-Ho Lim suggests that, because the land tax is still more efficient than other forms of taxation, any such findings are of little practical significance.[25] Using a two period model Lim proves that while a land value tax may be distortionary, its economic impact is significantly less than the impact caused by a wage tax of equivalent yield. Lim's findings reinforce what other scholars have long argued: namely that, in order to alleviate poverty and stimulate progress, the introduction of a land value tax must be commensurate with sharply reduced taxes on earnings and other economic endeavors.[26] Analyzing the tradeoff between land rent taxes and capital income taxes, Thomas J. Nechyba, demonstrated that land taxes are significantly more efficient than capital taxes.[27] Similarly, in a purely theoretical paper, Mitch Kunce proves that, when local jurisdictions are allowed to tax land as well as two distinct types of capital, the most efficient choice will always be a pure land tax.[28]

Not only do proponents of the land tax claim that it is an economically efficient form of taxation, they argue that it is an incredibly powerful urban planning tool. Henry George predicted that, "if land were taxed to anything near its rental value, no one could afford to hold land that he was not using."[29] By penalizing random, unplanned withholding of land from more extensive development, land value taxation could theoretically reduce land speculation and promote increased urban density. Because a pure land tax would result in lower taxes in decaying areas and higher taxes in rapidly growing areas, land taxes could help cover the cost of new development and could channel development back into the largely abandoned urban core. Proponents of the land tax claim that, "if true land values have fallen to very low levels, as they do in 'urban decay settings,' a moderate stimulus to redevelopment should emerge, given that the costs of demolition are not too high and potential profits can become sufficiently large."[30] Thus, when properly implemented, a land value tax would promote urban renewal in the city core.

Existing Examples of Land Value Taxation

Before beginning to look at how a land value tax would impact Philadelphia, it is helpful to examine other municipalities that have implemented land taxes. Even though most local governments in the United States rely on property taxes, very few modern American municipalities have any type of gradated, two-tiered, or split-rate land value tax. Land value taxation is most popular outside of the United States; countries such as New Zealand, Australia, Denmark, South Africa, Kenya, and Jamaica all have various forms of land value taxation. Though it never gained widespread acceptance in the U.S., several American land value "experiments" have taken place during the past century. Examining those U.S. cities where a land tax has been implemented makes it possible to more accurately predict how such a tax will impact Philadelphia.


New York City

After World War I, New York suffered a severe housing shortage. To solve this problem, the Governor Al Smith, turned to the theories developed by Henry George, and persuaded the New York Legislature to create a law allowing New York City to implement a land tax. For the next ten years, New York City's property tax was transformed into a land tax. The success of this tax can be seen in the fact that during this time new construction tripled in New York City, while barely doubling in other big cities.[31] Anecdotal evidence suggests that not only was there more housing available during this time, but the increase in construction spurred the creation of more jobs and higher wages for construction workers.[32] In 1928 the economic boom slowed as property owners began to anticipate the expiration of the tax-shift law, and in 1929, the stock market crash officially marked the start of the great depression and the end of New York's experiment with land taxation.


Land Value Taxation in Pennsylvania

In the United States, the overwhelming majority of land tax municipalities are in Pennsylvania. Pennsylvania is the only state that allows all of its first, second, and third class cities to tax land and structures at different rates. A two-rate tax is a hybrid between the traditional property tax and a pure land value tax. Two-rate taxes are theoretically expected to have the same impact as pure land value taxes, only diminished in magnitude. The greater the ratio of land tax rate to structure tax rate the more a two-rate tax resembles a land value tax. Between 1972 and 1994, fifteen Pennsylvania cities used some sort of two-rate property tax. Although preliminary studies found that there was no significant change in new construction, the most recent and most statistically sophisticated study, conducted by Florenz Plassmann and Nicolaus Tideman, found that cities with two-rate property taxes enjoyed significantly higher levels of construction then they would have with a traditional property tax.[33]

[FIGURE 1 NOT REPRODUCED FROM THE ORIGINAL] Figure 1: changes In The Number and Value of Building Permits in Harrisburg

Harrisburg has had a higher tax on land since 1974, and in the last 14 years the rate of land taxation has almost doubled, rising from 2.6 to 5. During this time there have been notable increases in the number of building permits and in the total value of the permits issued throughout the city. The city has also managed to reduce its vacant building stock from more than 4,200 to fewer than 500 during the past two decades - a drop of approximately 90 percent. According to Harrisburg Mayor Stephen Reed:

"the two-rate tax policy is a significant economic development incentive. Absent such a policy, there is no question that much of the rehabilitation and new construction of the current era in Harrisburg would not have occurred and other projects which would still have been accomplished would likely have been of smaller size and impact."[34]

Figure 1 illustrates that a correlation exists between an increased land to building tax ratio and the number and value of building permits issued. Although yearly volatility (due to changes in the county's economic climate) is to be expected, the graph illustrates that increases in the number and value of building permits correlates with increases in Harrisburg's land to building tax ratio. The magnitude of the increase in permit value is particularly impressive. This indicates that more money is being invested into each property being built.


Pittsburgh, Pennsylvania

Pittsburgh has long relied upon a two-rate land tax.[35] In 1914, Pittsburgh became the first large city in the Unites States to implement any sort of land value tax. Their initial plan was to tax land at twice the rate as buildings. The 2:1 ratio was proposed for political rather than theoretical reasons and represented a compromise between land tax opponents and proponents. Rallying popular support for pure land value taxation was thought to be politically impossible. Ardent supporters of land value taxation consoled themselves with the thought that even a 2:1 land tax was better than the traditional property tax. They also reasoned that after people in Pittsburgh were exposed to the benefits of a two-rate tax, they would readily support a bigger land to structure ratio. In 1979, as part of a wide-sweeping urban revival, the city restructured its property tax system by raising the rates on land to more than five times the rate on structures. During the 1980's, Pittsburgh bucked the trend of steady decline set by similar rust-belt cities and experienced a dramatic boom in new building construction. An empirical analysis of the Pittsburgh experience suggests that, "while a shortage of commercial space was a primary driving force behind the expansion, the reliance on increased land taxation played an important supporting role by enabling the city to avoid rate increases in other taxes which would have impeded development."[36]

Pittsburgh's progressive land value taxation was abandoned in 2001. According to land tax expert, Joshua Vincent, the catalyst for this change was a mangled, long overdue, reassessment that enraged local property owners.[37] Robert P. Strauss, professor of economics and public policy at Carnegie-Mellon University, offers a slightly more complicated explanation. He claimed that Pittsburgh's abandonment of the two-rate tax is, "mostly a political story, but also partially a residential-non-residential story, and intertwined with the awful experience of reassessment at the county level, and the differences between a Republican county executive and new form of county government, and a traditional, big city Democratic Mayor."[38] Essentially, the politically unpopular reassessments came during an election year, and the incumbent made a campaign issue out of it. Because Alleghany County had not done any comprehensive reassessments in thirty years, many people were faced with dramatically higher taxes. The incumbent, unable to place all of the blame on the county's reassessment, argued that the split-rate tax was the culprit. After being elected, he kept his campaign promise and got rid of the split-rate land value tax.

A preliminary study, conducted in May of 2002 by the Center for the Study of Economics, found that in 2001 Pittsburgh experienced a 38.1% drop in residential building permits. During the same time period there was only 1.5% decease in residential building permits throughout Pennsylvania.[39] Although it is too soon to definitively blame the drop in building permits on the change in tax structure, many experts are predicting that it won't be long before Pittsburgh readopts some form of land value taxation.

The Philadelphia Proposal:

Philadelphia's dramatic population loss, an abundance of vacant properties, and the oppressively heavy tax burden faced by remaining city residents indicates that the time is ripe for a change in how the city generates revenue and collects taxes. In light of this finding, the City Controller's Tax Structure Analysis Report is examined.


The Need For a Change in Philadelphia's Tax Structure

"The population of Philadelphia will end the century about where it began: roughly 1.3 million residents. However, between the beginning and the end of the century was a booming middle."[40] Philadelphia reached its population peek in 1950 at 2.1 million and since that time there has been a veritable exodus out of the city. Although no neighborhood remained unaffected by the changes in Philadelphia's fortune, the city's depopulation pattern was not an even one. "By mid-century, Philadelphians were already abandoning the older sections of North and South Philadelphia for new developments in Southwest Philadelphia and the Greater Northeast."[41] This has meant that the older sections of the city have experienced dramatic decreases in their population that far outpace the citywide rate of population decline. In the past fifty years, some city blocks have lost 80-90 percent of their peak population. As people moved away, the city's housing stock fell into disuse. This lead to increased rates of abandonment in select neighborhoods throughout the city. For a map of vacancies in Philadelphia by neighborhood see Appendix C. Today this is manifested as dramatically different vacancy rates throughout the city. See Figure 2 for a break down of vacancy rates by Philadelphia zip code. According to a 2000 survey conducted by the Department of License and Inspections, three different zip codes in Philadelphia have vacancy rates between thirty and forty two percent, while twelve zip codes have vacancy rates below two percent. Just as striking as the unequal incidence of abandonment is the total magnitude of Philadelphia's vacancy problem; the city wide average is close to 10%!

[FIGURE 2 NOT REPRODUCED FROM THE ORIGINAL] FFigure 2: Vacant Property in Philadelphia by Zip Code

Some of Philadelphia's vacant properties have been completely abandoned. Other properties are essentially valueless; when the surrounding neighborhood deteriorates beyond a certain point landowners can neither sell the land nor find any productive use for it. However, the majority of the city's vacant properties could be put to a productive use if the owners were given the right economic incentives. Under the current tax structure, if these owners improve their decaying properties, they will face hefty increases in their real estate tax bill. If however they do nothing, and let the structures on their land fall apart, they will continue to pay very low real estate taxes. When real estate taxes are sufficiently low, landowners can afford to wait and see what will happen to the neighborhood before deciding what course of action to take. This may be good for the individual property owner who is betting that land values will eventually increase so that he can sell the property and make a bundle, but the rest of the neighborhood pays a price when buildings are allowed to deteriorate and lots are left vacant. In addition to attracting rodents, un-wanted residents, and vandals, vacant lots and abandoned buildings give potential investors the impression that no one cares about the neighborhood.

As residents left the city, the tax burden on those who remained increased. This occurred for two reasons. First, there was a simultaneous decrease in the number of taxpayers and average taxpayer's ability to support city services. Second, as the city's population shrunk the budget failed to adapt accordingly. This is due to a lack of foresight on the part of city officials and an increased demand for city services on the part of those resident who remained. Because the level of city service provision remained constant as the tax base decreased, the tax burden per resident increased. Year after year as the tax base shrunk, local politicians chose to hold constant or even increase taxes rather than cut back on levels of services provision. Philadelphia's taxes are now the highest in the region. Figure 3 gives a breakdown of the tax burden faced by the median household in different parts of the Philadelphia metro region. This comparison of the tax burden faced by median households in the region illustrates how much greater the tax burden currently is for Philadelphia residents. Figure 3 also illustrates that the tax burden for workers commuting into Philadelphia is greater than for non-commuters. This adversely affects both employees and employers. Businesses that wish to remain competitive, and still stay in the city, must pay their employees more to compensate for the increased wage tax they face as commuters. Thus, high Philadelphia tax rates, particularly high income taxes, hurt residents and businesses.

[FIGURE 3 NOT REPRODUCED FROM THE ORIGINAL] Figure 3: Median Household Tax Burden in the Philadelphia Region

In its January 2001 A Philadelphia Report Card, the Federal Reserve Bank of Philadelphia found that, "the city is near its peak of revenue-generating capacity - that is, raising taxes shrinks the city's economy and tax base so much that revenues will not rise significantly."[42] This leaves elected city officials in a difficult position; they cannot raise taxes and they cannot easily reduce service levels (which would upset the municipal unions and would likely cause more residents to flee to the suburbs in order to find better schools and safer streets.) Some experts, such as those at the Federal Reserve Bank, suggest that though it may at first seem counterintuitive, the solution lies in cutting taxes. "While lowering taxes will reduce the city's tax revenues it will increase economic activity in the city. Thus, in the long run, the annual revenues loss will be less than the initial loss in taxes."[43] The City Controller takes a different approach and suggests that by readjusting rather than reducing the tax burden it will be possible to stimulate the economy without causing a loss of revenue and therefore a loss in services.


The City Controller's Tax Structure Analysis Report

Recognizing that something needs to be done to change Philadelphia's economic climate, the City Controller's office created a comprehensive Tax Structure Analysis Report. This report describes many of the economic problems facing Philadelphia, explains how recent tax cuts have produced favorable results, and proposes a series of key changes. The Controller's goal was to stimulate the economy through tax reform without reducing revenue and therefore necessitating a cut in service provision. By significantly reducing business taxes, and by shifting the tax burden to reduce the residential wage tax and encourage development, the Controller's Office argues that it will be possible to stimulate the economy without changing the city budget. Part of the controller's plan involves transforming the real estate tax into a split-rate land value tax and then shifting the tax burden from the wage tax onto the newly modified real estate tax.

The Controller's Office proposes taxing land at 3.44 times the rate of structures so that half of the Real Estate Tax revenues come from land and half from buildings. Currently land only generates 22.5 percent of the Real Estate Tax revenues even though it is taxed at the same rate as structures. Initially the shift towards land value taxation would be revenue neutral, meaning that, in the first year, revenues generated by the higher tax on land and the lower tax on structures would be sufficient to meet the current revenue projections for the Real Estate Tax. Using property assessment data from the Board of Revision of Taxes (BRT), the Controller's Office estimates that approximately 78 percent of residential taxpayers would see their Real Estate Taxes reduced with this shift, while approximately two thirds of those whose taxes might increase would see increases of less that $100 per year.[44] This shift in tax structure is designed to discourage speculation and encourage both center city development and neighborhood revitalization.

The Controller's Office also proposes reducing the city Wage Tax to 4.0 percent and increasing the city's real estate tax to create a budget-neutral first-year shift. In this context, the term budget-neutral refers to the fact that revenues generated by the Wage Tax plus the Real Estate Tax, after the proposed shift, would be sufficient to meet the current combined revenue projections for those taxes. In this scenario the Controller's Office predicts that, "only individuals whose homes have a resale value of more than three times their annual household income might see an increase in taxes."[45] This proposed shift capitalizes on the fact that land taxes distort people's economic incentives less that other types of taxation. People can leave the city but they can't take their land with them. As a full analysis of this portion of the Controller's plan is beyond the scope of this paper, this research builds from the assumption that the wage tax portion of the controller's plan is not implemented.

Using data files from the Board of Revision of Taxes, the City Controller's office was able to determine how different types of properties would be affected if Land Value Tax replaced the existing Real Estate Tax. In addition to showing how much of each different type of property exists in the city, Table 1 indicates what percentage of properties in each category will see a reduction in their taxes, an increase in their taxes up to $100, and an increase of over $100.

Table 1: The Effect Of The City Controller's Proposed Shift To Land Value Taxation And The Annual Tax Burden On Different Types of Philadelphia Properties

Building Type	Percentage Of The Total Taxable City Assessment	Properties With Reduced Taxes	Properties With Tax Increases Up To $100	Properties With Tax Increases > $100
Residential	54%	78.2%	14.7%	7.0%
Commercial	23%	28.0%	20.6%	51.4%
Apartments & Hotels	15%	72.3%	15.9%	11.8%
Industrial	5%	35.1%	15.0%	49.8%
Store with Dwelling	2%	54.3%	25.2%	20.5%
Vacant Land	1%	0.7%	70.5%	28.9%
Total	100%	71.6%	18.0%	10.4%

Source: City Controller's Offfice Analysis of Year 2000 Board of Revision of Taxes Data File


From this table it is obvious that overwhelming majority of people living in the city will see a decrease in their Real Estate Taxes (78.2 percent of all home owners and 72.3 percent of apartments will have a reduced tax burden).[46] This reduction in residential taxes will be made up by the fact that most industrial property, commercial property, and almost all vacant land will faced an increased tax burden. However, it is important to remember that the full tax structure analysis report partially compensates many industrial and commercial property owners by reducing several key business taxes.[47] Thus, the only clear losers are the owners of vacant property.

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