Forget Special Abatements. It’s Time for Universal Abatements on Property Improvements

(Cross-posted from Keystone Politics)
Gary Lewis likes the land tax idea for Scranton, but proposes a 4 mill tax on the purchase price of a property. This is similar to what Philadelphia is proposing to do with the Actual Value Initiative (AVI), where properties will be assessed based on sale price:

  • Tax the purchase price of the property at a rate of 4 mills. This would allow the tax base to adjust because sales prices would rise as the local economy improved. It would also provide an incentive for public servants to work in the best interest of the community.
  • Use our current data! The assessor’s office already has the purchase price recorded for every parcel in the city (for example, take a look at this page). If the Purchase was done more than 20 years ago, have the parcel owner hire a city-vetted appraiser to determine the homes value. The cost of the assessment could be deducted from the next years tax bill, thereby eliminating the need for the city to foot the cost.

This also provides for stability in the homeowner’s finances: you never have to worry about reassessment. The only way taxes could rise is if the millage rate increased (which shouldn’t happen if the politicians and public servants are doing well managing the local economy).

Won’t this drive out development? Hardly. It will encourage developers to purchase blighted/cheap property and then renovate it as the money used in renovation won’t be taxes until the property sells (because that is the only time the “tax basis” resets).

This would preserve the key attribute of the land tax, which is that there’s no tax penalty for improving your property.

Under the current property tax regime, there’s too much deadweight loss. That is, too many small improvements that people might be inclined to make don’t end up happening because of the tax penalty. Naturally we can’t know how many property improvements have been foregone over the years, but it’s easy to imagine how lots of small improvements could add up to a lot of land value. If people respond to the end of the tax penalty by repairing facades in dumpy older neighborhoods, the cumulative effect will be to make those neighborhoods more desirable, increasing the value of the land, and thus increasing the value of the city’s land tax base.

Many cities are sort of feeling their way toward this concept, but with more unwieldy tools like TIF and LERTA. With the state pulling back on RACP development subsidies in recent years, more cities and towns are looking to these special tax districts or tax abatements to attract development. It’s not that this is all bad, but with the special abatements you start running into problems of governments trying to pick winners, suspicions of political patronage, and the expectation by developers that there will be some kind of government pot of cash available for just about any development project. It would be better to just tax the land and give everyone a universal abatement on property improvements.

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