Land Tax in Johnstown, PA

Thank you for this opportunity to address the City of Johnstown government with this proposal to lower tax rates on all improvements and increase tax rates on all land.  The Center for the Study of Economics (CSE), a non-profit educational foundation, has been working with United States cities since 1980; the city assessor and several council-members in Pittsburgh founded our parent organization in 1926.  Such respected elected officials as Joseph Bendel, Jr. of McKeesport, Councilman Anthony Coughlan of Fairfax, Va. have served as directors of CSE.

The Idea

What is LVT?  LVT is a responsive, flexible form of the traditional real property tax. Under a land tax regime, the taxing jurisdiction reduces or eliminates the tax on all improvements.  To ensure that the taxing jurisdiction receives the same amount of revenue, it increases the tax rate on land.

Why should a community do this?  The property tax is, in fact, two separate and distinct taxes.  The property tax falls on land and on improvements (buildings) to land. 

The present property tax makes a city worse than it has to be.

• If someone improves the city by building a new structure or improving an older one, his or her taxes go up.
• If someone lets a building go to rack and ruin, they can go to the assessor and get an assessment reduction and the taxes go down.
• If someone owns vacant land, they are barely taxed and have no incentive to build.  The real incentive in the present system is to hold the land idle, hoping that the city (or their neighbors) improves the area and the vacant land will increase in value. The low holding cost encourages land speculation.

The present property tax penalizes those who improve the city and rewards those who hold it back. That’s exactly backwards.

It is an economic axiom that buildings – a product of labor and capital – can flee high rates of taxation in much the same way that taxes on sales, wages, personal property and inventories have fled some our more highly taxed jurisdictions.  It is also an axiom that the taxation of land has no such downside.  Land is immobile; the supply cannot be taxed out of existence. As Will Rogers said, “They ain’t making any more of it.”

In addition, unlike labor and capital, the value of land is directly related to government investment in infrastructure.  Many claim – with some justification - that it is inappropriate to tax that which people produce on their own time and their own dime. Yet, it is just as easy (and ethical) to permit government to recoup in taxes what it has created: land value.

Therefore, the philosophy behind land taxation is clear:

• a tax on land will not distort economic decision-making.
• a tax on land frees the market to exploit the locational advantages of the community.
• a tax on land best encourages highest and best use of land.

Why Land Value Taxation (LVT)?

LVT is a flexible form of the real property tax.  In Pennsylvania, land and building assessments are determined separately.  That means we have an opportunity to see how much tax falls on each component of someone’s home or business.  In Johnstown (with a rate of 36.44 mills), 22% of real property tax revenue comes from land.  So what?

That means that 78% of your revenue comes from buildings. In other words, if someone fixes up their house, their assessment goes up accordingly and their tax bill goes up accordingly.  That’s a disincentive to go ahead with such a project.   If buildings are taxed less, the city will have more and better buildings.  When LVT is used and promoted by a city, individuals take the plunge and maintain their properties. 

In the City of Johnstown, CSE suggests that 66.5% of tax revenue come from buildings, 33.5% from land. That means adopting tax rates of 56.267 mills on land values and 30.974 mills on improvement values.

LVT is in accord with ability-to-pay

Johnstown has a population that is aging.  LVT is far more preferable to senior citizens than the standard property tax.  Since senior citizens keep up their homes, and since, therefore, most of their tax bill comes from the structure itself; they would assuredly see a decrease in their taxes with LVT.  For families just starting out, a lowered tax bill means lower monthly mortgage payments. 

LVT attacks blight

Harrisburg, Pa., has employed and marketed LVT to great success.  They have pushed the idea hard, especially to homeowners and homesteaders.  In 1982, Harrisburg had 4,200 vacant structures.  Today, there are less than 500.

In Johnstown neighborhoods, it is reasonable to expect that this process would be repeated.

LVT targets land waste

Johnstown appears to have a lot of under-used, potentially profitable (for both business and government) land.  A program of higher tax rates on land will provide an incentive to develop or to sell to someone who will. 

There is indeed vacant land in Johnstown: 1,481 parcels.  This number does not include condemned or abandoned properties.  The situation is especially egregious when it is understood that the current city tax system does indeed:

• subsidize private land banking for those from outside the community,
• hike taxes for more productive citizens,
• lead to polluting and ugly properties,
• take away development opportunities.

LVT complements other incentive programs

LVT works within existing frameworks of planning, zoning and abatement/exemption programs.  For example, a program to exempt improvements to houses for a period of years is a good one.  Yet, what if some homeowners have already fixed up their homes before the program takes effect?  The possible resentment of “missing the boat” can be lessened by a general (albeit smaller) program of tax reduction for improvements.  In addition, when the period of exemption is over, LVT will cushion the financial blow from a sudden increase in taxable building/improvement value.

As one can surmise, LVT is very useful when combined with abatement programs.  Mayor Anthony Spossey of Washington, PA stresses that fact when he speaks to the success of LVT in his city.

LVT will lower taxes for most people

Although LVT should be (and has been) implemented with a slow, gradual shift to an emphasis on land taxes, homeowners and many businesses will see an immediate reduction in their tax bill.  The savings shift for the average homeowner or business owner will be modest at first:

• Residential properties will see an annual 4.79% drop in tax liability.
• Commercial parcels will see an annual 3.85% increase in tax liability.
• Vacant Parcels, the bane of any community, see the only class increase.  With a 65/35 revenue split, the annual increase is 54.41%

LVT is the Right Thing to do

It's gratifying to have met citizens and officials of Johnstown who know that this program is also an ethical (or, at least, MORE ethical) system of taxation.  I am glad we agree that there is a sea change coming in the way governments at all levels raise revenue.  From a policy standpoint AND from an ethical standpoint, a jurisdiction can do no better thing than to tax land values.

Thank you.

Johnstown, PA: Summary of the Effects of Two-Rate (Land Value) Property Taxation

This summary is to inform elected and administrative leaders in the City of Johnstown what the impact of land based real property taxation would have.  This office is grateful to the Assessment Department for their swift action in providing the necessary data.  The Assessment Department should also be quite proud of its work.  The assessments appear to be some of the most accurate and realistic of any jurisdiction we have studied.

After  tax-exempt properties were removed from the roll, there were 10,377 parcels.  The first order of business is to determine how many properties would save and how many would pay more with two-rate.  This is done by determining the building-to-land ratio (B: L) of Johnstown.  By dividing the assessed value of improvements by the assessed value of land, a ratio of 3.6273:1 is derived.  Simply, any parcel with a B: L above 3.6273:1 would save on their property taxes. Conversely, a ratio of less than 3.6273:1 would pay (Special cases are the six agricultural parcels; under the City enabling law, all agriculturally assessed property - both land and buildings – must be taxed as buildings.)

Findings

• When the whole property roll is looked at, 7,219 properties would save.  That’s 69.5%. 1,677 with at least some structure pay more (16.16%).  1,481 parcels are vacant and would pay more (14.27%)
• Residential properties fare better. Of 9,373 parcels, 6,875 save. That’s 73.35%. Of parcels with at least some structure, 1,209 pay (12.9%). The 1,289 (13.75%) vacant residential parcels of course all pay more
• 1,575 parcels pay more (30.21%).  These appear to be well-off properties or, conversely, substandard housing.
• Of 1,007 commercial properties, 344 save, (34.16) %.  471 with at least some structure (46.77%) pay more; vacant commercial parcels are 192 (19.07%)
• Of 1,481 vacant parcels all, of course, would see a rise in liability.  These few parcels make the 8.9% of land value in Johnstown.

Tax Rates - How LVT Works

The following example is not a mandate about what tax rates should be adopted.  We recognize that the Council and the Finance staff in Johnstown know best what rates to set. 

As it stands now, Johnstown gets 21% of its real property tax revenue from land.  For a town in economic competition with surrounding county land and towns, that’s not an effective way for the city to get the highest and best use of its land.  For example, with two-rate land taxation, a drop in the building rate by 15% would raise the revenue from land to a more sensible 33.5%.

To achieve this, Johnstown could adopt a building tax rate of 30.974 mills.  In order to ensure revenue-neutrality, the land tax rate will be to 56.267 mills.   Our study showed revenue neutrality.  However, it must be kept in mind that any number of tax rate scenarios are possible.

For example, Allentown, PA elected to bring in a 50/50 revenue split between buildings and land in gradually with five-year increments.

In one move, the city would signal its friendliness to development (and re-development), cutting taxes for those who have already made their stake in Johnstown as well as greatly enhance its economic development arsenal.

The shifts from classes will be small, except for vacant land 

Changes within classes

• The current average residential tax bill savings will drop $24; the average increase will be $3.
• The current median residential tax bill savings will drop$20; the median increase will be $12.
• The current average commercial/industrial tax bill will drop $173; the average increase will be $281.
• The current median commercial tax will drop  $53, the median increase will be $105 .

From the political and economic standpoints, it would appear that Johnstown would be able to take advantage of land based two-rate real property taxation.

Final Comments

It costs nothing to implement this idea. Only a software change is necessary.  The idea offers the idea of urban rejuvenation without added taxation or government programs.  No state or federal aid is necessary.

Everybody get as “tax break.”  It is common for a state or municipality to offer tax breaks to encourage development in a particular location.  The problem is that the taxes not paid by the favored few must be paid by everyone else.  LVT includes an incentive to everyone – whether their taxes go down or up – to improve the community.

A land tax is a very stable tax.  It is more stable than a tax on improvements. Cities need a stable tax base. It allows them to plan more easily when they have a consistent tax base.

Taxing land more than buildings discourages speculation.  People who speculate in land do not contribute to the community.  They hold land off the market, out of use, waiting for the value to rise.  They take no action nor make any investment to make the value rise.  They simply wait for the community to grow, which makes land more valuable.  Land held out of use denies opportunity to those who might use that land to improve themselves and thus the community.

Taxing land more than buildings discourages sprawl.  When land is taxed lightly there is little incentive to use it.  Land in the city has all the infrastructure and utilities, but if held off the market, people have to “hopscotch” over this land, out into the countryside to find available land.  This leads to loss of green countryside and farming.

The land tax is progressive.  The poor own little or no land and use very little.  They will pay the smallest share of land tax.  The middle class owns the land under their homes.  They will pay modest land taxes.  Corporate, absentee or wealthy individuals own the most valuable land.  They will pay most of a land tax.

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