Is Taxing Commercial Properties at a Higher Rate a Good Idea?

Important point from commenter Liam:

Do we really think it’s a good idea to tax commercial properties at a higher rate? I know everyone is salivating over the opportunity to raise more in property taxes without raising taxes on residents – the ultimate win-win! But there’s a whole lot of commercial property in Philadelphia that’s not the Comcast Center, and raising commercial rates will do a lot more than just soaking the rich.

I forsee this adding a large discouragement to mixed-use development. Why would I want to rent that vacant storefront in my building to a business, if converting it to an apartment gets me a tax break?

I would add that the long delay between assessments led to residential property being undertaxed relative to commercial property over the past couple decades, and as we would expect, this tax preference increased residential property’s share of the city tax base.

I’m seeing this being described as AVI shifting the tax burden onto residential properties, but that’s not really an accurate description of what is happening. The inaccurate assessments led to underdevelopment of commercial property over the past couple decades, and now it makes up a smaller share of the property tax base than many would prefer.

Taxing commercial property at a higher rate than residential would basically formalize this distorting effect, and ensure that commercial property continues to represent too small a share of the property tax base in the future.

In an ideal world I’d oppose this, but I don’t think city politics can process the argument that if we want commercial property to make up a larger share of the property tax base then the city should tax it at lower rates than residential. You can point out that years of undertaxing residential property led to residential growing as a share of the property tax base until you’re blue in the face, and that Philly could do the reverse to grow commercial property’s share, but that strikes me as an utterly unwinnable political argument.

Rather than harping on this point, I’d rather persuade city politicians to turn the property tax into a land value tax, with a negligible millage rate on buildings both commercial and residential. That way the city could set the commercial building millage rate a bit higher than the residential rate for political reasons, but the distorting impact would be very minimal since land value would be the biggest factor in people’s tax bills.

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