Tax and Mend

“The mayor wants to rely on a playbook that goes back to every recession since 1930,” says R. Joshua Vincent, executive director of the Henry George Foundation of America Center, speaking of Michael Nutter. “It sounds corny, but why in a city of poor people are poor people being expected to shoulder the city’s burden?”

Whether it’s libraries or pools, neighborhood folk are feeling the pain. But Vincent and those in his organization think there’s an alternative to all this penny- pinching: a new kind of tax reform—the kind that will blow the roof off the Philadelphia tax structure. Vincent and other experts call it “Tax 2.0.” And the accelerant for this roof-blowing? Land Value Taxation, or LVT.

LVT is half of the city property tax—the half nobody knows. Building or structures taxation—the tax city residents have come to dread—encourages blight because as buildings improve, taxes get raised, which is debilitating for a home or small business owner. Conversely, utilizing LVT puts the onus back onto big business and the slumlords. By taxing the land and lowering (if not abolishing) the tax on structures, the city reaps tax revenue in a more even-handed way.

“If you look at the newspapers, they’re saying business taxes are dropping, transfer taxes are dropping, wage taxes are dropping. But you don’t hear anything about real estate taxes dropping,” says Vincent. “That’s because people pay their real estate taxes. They always do. So our idea is that real estate taxes will end up being more of a go-to tax.”

LVT typically carries a higher rate than structures taxation, and experts agree that most city taxpayers would see significant decreases in property taxes under a tax configuration that puts LVT to use. This theory has held in other Pennsylvania towns like Altoona and Allentown in the wake of the steel industry collapse. Harrisburg was brought back from near bankruptcy via LVT.

But the small-city model of tax restructuring using LVT could prove disastrous for a large, urban center.

“I’ve talked to a lot of people around the world about this issue,” says Barry Mescolotto, acting director of assessments for the City of Philadelphia. “I spoke to a delegate we had here recently from an African country that just went through a civil war, and didn’t have taxes at all, and who came here to study the way we assess property. I said to him, ‘If I were starting fresh, like you are, and had very few buildings that were worth anything, I would absolutely set up the tax structure to use LVT from the beginning.’ It’s easy to maintain, very efficient and it works.”

But Mescolotto sees obstacles when implementing LVT in a fully developed city: “Who’s to say what the land is worth under all these buildings?”

Nonetheless, Mescolotto’s office is implementing a new valuation system called RealWare, which values each property as a separate component from the land.

“But we can’t totally remove improvement assessments in a modern city because you can’t easily tell the difference between amenities to residential properties,” he points out.

Vincent knows there are obstacles.

“We have to really persuade people. This is an idea that can be brought in without hurting the ‘big dog,’” he says. “Here people are a little nervous because most valuable land, really valuable land, which would be taxed, is owned by corporate entities that are rather powerful.”

Simply put, LVT rates are higher for land than for property. Therefore, corporations, abandoned lots, empty zoned-for-retail structures and high rises would be taxed enormously under LVT, while the corner bodega owner and many rowhome neighborhoods would get reassessed to a lower rate than the current standard.

“Say a guy owns a ramshackle house in North Philly, and his tenants say, ‘Why don’t you fix the roof and put in new bathrooms and pipes?,’” says Robert Inman, professor of finance and economics at Penn. “And he says, ‘Okay, maybe you’ll pay a little more in rent, but the assessor will come by and bump up my taxes,’ so he doesn’t do it. The property part of the property tax discourages people from improving their homes.”

That, says Vincent, is what LVT could help resolve.

“We would be shifting away from having people sitting on land that’s blighted or underused,” he says. “There’s so much vacant land out there. The more valuable the city becomes, the more land value tax revenue can come in and we can leave small businesses and home owners alone.”

Philadelphia had a tax reform commission a few years ago with Michael Nutter as chairman. Yet reform commissions don’t necessarily create lasting reform. Professor Inman read the report the commission released, and notes that changes like these won’t be easy, especially after moving away from two very unpopular taxes: the city wage tax and the gross receipts tax.

“Change is very difficult. If a new tax has a lot of attractive features, the most important thing to do in any kind of reform is to spend the money wisely,” he says. “Spending money from a land tax to continue reducing the other two taxes would be a real improvement for the city economy. But to have change you really have to have progressive political leadership that’s willing to say, ‘I understand that most of the city’s going to be better off with change, so let’s try this.’”