Philadelphia, land value tax LVT
Written By Joshua Vincent
Shifting the Philadelphia property tax from the standard and corrosive one to one that rewards community building and repels speculation in blight is again making the news. Today’s Inquirer, August 12, features an op-ed by editor Kyle Sammin.
With the active participation of the Philadelphia urbanist group 5th Square, LVT supporters and representatives of the Philadelphia city government and the community are gearing up for an education and outreach effort. LVT has gotten close to adoption in the past. Opposition from speculators and absentee property owners has always been enough to turn this essential reform aside. The times are changing.
Philadelphia 2024: Land Value Tax Shift Outcomes, A Revenue Impact Report
Land value taxation is a reform of the traditional property tax system. Instead of using a flat rate on land and building values (currently 13.998 Mills), the rates are shifted to produce a revenue-neutral outcome.
In 2024, 27.78% of property tax revenue is collected from taxable land values. That small percentage is unhelpful for the community because it means that the weight of the property tax falls mainly on buildings (about 72% of tax revenue).
Land values in any taxing jurisdiction are unique: unlike buildings, jobs, or businesses, land value is created by the investments and activities of the public and city government. No one person or entity can create land value. Therefore, the goal of any property tax shift is to recoup the investment made by the community and use it for public purposes.
A corresponding goal is to relieve the tax burden on existing or soon-to-be-created buildings, jobs, or businesses.
What is the takeaway from that percentage of land revenue? It’s a direct subsidy to those holding onto vacant or blighted land. There is no incentive for the landowner to do something with the property or sell it to somebody who will. Let’s take a fairly typical example.
This is 2150 S. 3rd St. in the Whitman neighborhood, a prime property that has the potential to provide scarce housing in a city where housing affordability is at a premium.
It’s for sale at $1,200,000, but the city thinks the site is worth $1,600,000. Property taxes for this considerable lot are $22,488. The photo shows that at least 6 or 8 complementary rowhouses can be built. This location in the Whitman neighborhood is an urbanist’s dream, with high marks for walkability, bicycle access, and mass transit services.
But there are caveats. What if nobody wants to pay the asking price? In practice, all over Philadelphia, vacant lots sit idle, sometimes for decades. Why? Well, they will tell you that the market is not there – yet. So, why not lower the asking price? They will tell you it’s worth $23,000 a year to sit and wait for the ship to come in. And wait and wait and wait. On the supply side, if the landowner wants to do some work, he could build buildings and apply for a tax abatement. Always controversial in Philadelphia, the abatement program is a tacit admission that the current property tax can discourage positive action.
Alternatives
Property taxes are a stable and efficient source of revenue. During COVID-19, property taxes held their own while other regressive taxes dropped. But it taxes the wrong things (buildings) too highly and bad things (vacant lots and blighted buildings) too lightly.
A Tax Shift
There is a commonly held belief that the city can encourage growth if taxes are cut. Maybe. But cutting taxes also cuts revenues for much-needed services like schools and infrastructure. A more rational way to tax is by shifting the tax burden from buildings onto land values. In Philadelphia, this concept has been considered off and on for decades. The persistence of this concept has demonstrated that it’s a viable and serious alternative to the current system.
Studies performed by CSE (and others ) demonstrate the tax shift will maintain revenues in the face of constantly improving property valuations. Since the 1980s, studies have confirmed that neighborhoods and small businesses will benefit from a permanent universal tax abatement on their buildings. The land value tax shift will also help current owners of property who have taken seriously the effort to keep up their houses and offices over the years without any apparent reward.