PITTSBURGH: The Early Experience through Today

Pittsburgh’s city council enacted local legislation in 1914 to implement the two-rate property tax structure. Two years earlier, the Housing Committee had published a pamphlet entitled An Act to Promote Pittsburgh's Progress, which recommended that all buildings in the city be taxed at a rate of 50 per cent less than land values, the change to be accomplished by gradual steps.

Combined with a reassessment of all real property in the city, the effects of what was a very modest shift in tax rates were considerable. In particular, construction of new buildings increased almost immediately. At the same time, owners of large, unimproved or under-improved parcels of land organized to have the law repealed. A new mayor sided with these opponents. Although the repealing bill passed the state legislature, supporters of the two-rate property tax also mobilized, and the Governor (Martin G. Brumbaugh) vetoed the bill. What came to be called The Graded Tax Plan (i.e., a two-rate property taxation with a heavier tax rate applied to land values) reached its full initial stage of implementation in 1925, at which time the tax rate on buildings fell to half that imposed on assessed land values.

Two years later, the local newspaper in Pittsburgh, the Post, commented on the changes already brought on by the new two-rate property tax:

“Formerly land held vacant here was touched lightly by taxation, even as it was being greatly enhanced in value by building around it, the builders being forced to pay the chief toll, almost as if being fined for adding to the wealth of the community. Now the builders in Pittsburgh are encouraged; improvements are taxed just one-half the rate levied upon vacant land. Building has increased accordingly.” 

Pittsburgh had a long way to go to become a livable city. Turning natural resources into steel and other industrial metals was the reason Pittsburgh’s economy grew and its population increased. Its location, at the confluence of two rivers – the Allegheny and Monongahela – to form the Ohio River, provided access to the U.S. interior and markets up and down the Mississippi River. The absence of laws restricting the dumping of chemical wastes into the water or air turned Pittsburgh into a heavily polluted region.

Aftermath of the Second World War

The assessed value of all real estate in the City of Pittsburgh for 1953 was set at $1.065 billion, out of which $414.3 million was on land value and $650.8 million on buildings. The rate of taxation applied to assessed land values was twice that placed on buildings ($32 per $1,000 of value versus $16 per $1,000 of value).

Pittsburgh experienced the same stresses on its economy that plagued most of the older “rust belt” cities of the northern United States. Development shifted to outlying areas of Allegheny County, made accessible by new highway construction. Pittsburgh was not able to increase its land area by annexation, as the city is surrounded by incorporated boroughs and towns. However, the two-rate property tax proved to be an effective tool for revitalization of Pittsburgh’s downtown area after the Second World War.

Pittsburgh’s reputation as an old industrial city, its air and water fouled by pollution, began to slowly change. The area where the three rivers converged was targeted for clearance of old warehouses and railway yards, to be transformed into a new "Golden Triangle." Over $50 million was eventually invested in the development of office towers adjacent to a park established on the site of the historic Fort Pitt. A steady stream of new office buildings, retail stores, and apartment buildings followed throughout the 1960s and 1970s. The character of the city experienced a dramatic change, evolving into communities where residents could live, work and play, and where finance, health care, education, high tech industries slowed what had been a constant out-migration.

A 1992 study by two economic professors published by the Lincoln Institute of Land Policy highlighted the incentive aspect of Pittsburgh’s two-rate property tax:

“Following the change in regimes at the end of the 1970s, Pittsburgh experienced a striking building boom, far in excess of anything that took place in other major cities in the region. The building boom was basically a center city phenomenon; it did not extend to the rest of the metropolitan area. It was moreover, a boom in commercial building activity. The residential sector experienced only a modest increase in new construction. …"

“The fiscal reform that accompanied Renaissance II had two important components: the huge increase in tax rates on land and large tax abatements on new structures. It is difficult in any rigorous econometric sense to separate the effects of these two measures. …Our sense is … that these abatements were probably the more important of the two tax incentives that we have considered…"

This is not, however, to downplay the role of land taxation. What the Pittsburgh experience suggests to us is that the movement to a graded tax system can, in the right setting, provide some stimulus to local building activity. The primary role of the land tax in all this is to provide the additional source of revenues that allows a reduction in the rate of improvements.” 

Recent Experience and Ongoing Challenges

Pittsburgh was granted a home rule charter in the mid-1970s, permitting city officials to raise revenue by whatever means they decided upon. A new mayor, Richard Caliguiri, took office in 1977, promising to oppose further tax increases. For 1979 and again in 1980 he proposed raising the city’s tax on wages to raise needed revenue. City Council instead voted to increase the tax on land values.

In 1979, the rate of taxation on land values was increased from 4.95% to 9.85% of assessed value. New construction jumped 22% over the previous year as measured by the dollar value of building permits issued, despite a fall-off in construction and renovation in the surrounding four-county area and in the nation at large. Data on real estate transactions also showed that vacant lot sales increased 16.5% in the first seven months after the land tax increase, indicating that the tax was putting pressure on inefficient landowners to develop their sites.

In 1980 officials increased the tax rate on land values to 12.55%, while reducing the rate on buildings to 2.475% -- creating a ratio of 5.07 to 1. Even with the county and school district taxes considered, the effective ratio was still 2.99 to 1.

After the change in tax rates, construction in 1980 leaped 212% above the 1977-78 average, setting the stage for the city’s second renaissance and the final stages of its movement away from heavy industry. As discussed, the adoption in 1980 of three-year tax exemption on all new buildings -- but not the land – further stimulated construction. In 1981 construction peaked at nearly six times the 1977-78 level. Then, for 1983 the tax rates were increased on both land and buildings – to 13.3% and 3.2%, respectively.

The value of building permits issued annually from 1980 to 1989 was, on average, 70% higher than it was between 1960 and 1979. Meanwhile, the cities of Buffalo, Cleveland, Detroit, Rochester and many others were experiencing declines. Pittsburgh's new construction activity during the 1980-1992 period was actually also equal to 65% of Philadelphia's, though the latter has four times the population.

In 2000, a long overdue Allegheny County-wide reassessment was completed. For the previous twenty years properties had remained assessed at 20 percent of the 1980 market values. The results of the reassessment were challenged by many property owners, particularly those in Pittsburgh. Following a lawsuit against the firm conducting the reassessment, a second firm was engaged to correct the problems. In the midst of this chaotic situation, property owners demanded action, and Pittsburgh’s City Council decided – despite over 80 years of positive experience – to return to a single rate of taxation on land and buildings. The subsequent consequences should have been anticipated. Permits issued for new construction and for property renovation declined in 2001 and have continued to fall each year since then. The city’s overall economy has suffered as a result. A 2006 report ranked Pittsburgh 80th out of 100 major markets for job growth and unemployment rates. 

Although the Pittsburgh region does not seem to be attracting many new businesses from outside, factors such as increases in suburban land and construction costs, as well as the high cost of automobile commuting, have stimulated a modest redirection of construction investment from the suburbs to the city. Also, demographic trends are driving the movement of higher income professionals and childless couples back into the city. Several thousand new condominium units and apartment buildings have come on the market or are near completion.

Facing severe budget shortfall in 2003, Pittsburgh’s Mayor Tom Murphy argued the city could not increase taxes without risking the loss of more businesses and residents. Critics of the city government recommended the sale of city-owned real estate in order to eliminate a $60 million deficit in its operating budget. The Allegheny Institute, a local policy group, argued that some of the 10,000 properties owned by the city and the local Urban Redevelopment Authority could have been packaged for development and auctioned off. The mayor countered that too much property in the city – nearly one-third, with an estimated market value of $13.5 billion -- was owned by tax-exempt nonprofits. Taxing these properties would raise an additional $70 million annually.

Not surprisingly, no steps were taken to raise needed revenue by imposing taxes on exempt properties. The city’s finances fell into such a desperate state that an Intergovernmental Cooperation Authority (the “ICA”) was established to oversee city finances and the budgeting process.

The current mayor, Luke Ravenstahl, assumed office in September 2006 following the death of Mayor Robert O’Connor. O’Connor took office just eight months earlier. The ICA approved a $420 million budget for 2007, anticipating revenue of $7.7 to come from casino gambling.  

As of 2010, expected revenues from such sources as casino gambling and flat revenues from direct taxes led to such “hail Mary” moves as a tax on college student tuitions in order to get revenues from not for profit  institutions.  Councilmember the reverend Ricky Burgess recently introduced an ordinance to  tax the land value of not-for-profits as a way to fairly raise revenue.

Also,  with the removal of an opponent of LVT as City Council President, and several meetings with newer Council members, the time appears to be ripe for a return to LVT as Pittsburgh loses more and more fiscal capacity to pay its bills.