An old tax proposal could mean new growth for Philadelphia

Most county and municipal governments in Pennsylvania are funded primarily with property taxes. Sometimes, they add on an earned income tax, too. Philadelphia is the opposite — the city wage tax is the major burden on those who live and work in the city, with the property tax being comparatively low.

It’s kind of strange, when you think about it: the wage tax concentrates the pain of taxation on one group — the people earning wages. That’s good news for retirees and for people who’ve already made their money, but bad for people trying to earn a living and improve their financial situation. Meanwhile, people who own a lot of property have a much lower tax burden than they would in nearly any other part of the Commonwealth.

No one is going to complain much about the one tax Philadelphia’s City Council hasn’t raised as high as possible. But the disparity leads one to consider a way the city could reduce other taxes and bring itself into line with the rest of the state, while also shifting the incentives that sometimes stifle growth and drive middle-income families to flee to the suburbs.

One old answer is getting new attention in the city: the land value tax.

Typically, property taxes — including those used across the Commonwealth — tax both the land and any value-adding improvements to it. That makes sense at first glance; both make the property more valuable, so both should be taxed.

But whenever the government taxes something, it discourages it in at least a marginal way.

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Taxing improvements to a property — charging people more because they built something or improved it — means discouraging that investment. When the city or county charges more for newly improved property, they are telling owners that it would be cheaper to leave it as a vacant lot. People will still build, of course, because we need houses to live in and businesses can earn profit from a structure, even if it costs them more in taxes. But at the margin, traditional property tax discourages construction and economic growth.

The land tax reverses that disincentive by only taxing the underlying land. Land is worth what it’s worth and they aren’t making any more of it. By taxing the land alone, the city sends the message that building is good. In high-value areas, it encourages high-density construction — just what housing advocates and urbanists say we need to bring down the cost of living.

The idea was first seriously proposed by Henry George in the 19th century. He called it the “single tax,” because it was intended to take the place of all other taxes. That sounds great — until you realize that the way it would do so was by levying a 100% tax on the value of land rents every year — that is, if a landowner rents land out for $10,000 a year, the tax would be $10,000. If the owner doesn’t rent out the land, the tax is on the imputed income — the amount the land would have earned in rent. That’s a large tax, but if other taxes were reduced to compensate, it might be effectively revenue-neutral, while also vastly simplifying the tax system for everyone.

This would all entail a vast reordering of society’s finances.

George ran for mayor of New York on this platform in 1886 and placed second, but that was the high water mark for Georgism. Now, though, some old ideas are being reimagined as people look for a way to revitalize cities and make them more affordable. 5th Square, which describes itself as “Philly’s urbanist political action committee,” held a public meeting on Georgist land taxes last month.

5th Square’s point man on land tax, Russell Richie, explained more about how this would all work in practice. (Full disclosure: he is also my brother-in-law.) Land value, he said, could be figured out “without much difficulty. Vacant land sales, teardowns, and sales of uninhabitable buildings, and paired sales analysis can all be used to figure out land value for sites around the city, then you interpolate among them to get land values for untransacted sites.”

So, you can figure out what land is worth by the prices that similar properties have sold for. Rent — and imputed rent — is harder to figure, but the concept of imputed income already exists in income tax law, even if the average taxpayer rarely has to deal with it. The city already assesses land value under the current system. A new system could just use a percentage of the value as a proxy for the rent.

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Could the city reasonably tax it at 100%, as George suggested, and have that replace all other taxes? Richie says that’s not likely. “I’m not working towards that right now,” he told me, “nor is any serious reformer I know.”

But even if the shift is just from the current property tax system to one that taxes land alone, the results could be more growth in the city and greater incentives to build more housing. After all, if a vacant lot is taxed the same as an apartment building, what landowners in their right minds would refuse to build something? And for the average homeowner, Richie says the shift to land value could save an average of $275 per property per year. And the shift away from the wage tax could make life easier for young workers just starting out.

It’s a system with a lot of promise, and it’s encouraging to see people thinking of real reform in the city, not just muddling through with an increasingly dysfunctional system.

The challenge, as with any tax system in the city, is to keep corruption out of it. A City Council that merrily tweaks zoning through councilmanic prerogative — often for corrupt purposes — would likely do the same for land valuations. But these numbers have the virtue, at least, of being simple and public. Maybe there would be less room for political shenanigans.

The last real era of reform in Philadelphia was the early 1950s, and from taxes to corruption to zoning and more, we are long overdue for another. Whether land value tax is a part of it or not, it is a breath of fresh air to see people seriously discussing change and renewal.