The Shift to Land in American Cities: Evidence of Increased Development

Cities that have enacted split-rate taxes in the United States have seen increased development than their peers. Altoona relates to land taxes?

Hello,

For those who know, this is my third post of Peoples Land. I am starting the Tom Johnson Foundation, and I plan to talk more about my vision for the organization in the coming months, but for now: I am working to advance legislation to shift taxes to the value of land in cities and states nationwide. I am doing this through national and local coalition building, while also engaging in impact assessments and research on split-rate taxes. If you have an interest, or have ideas/connections, please send me an email: greg [at] tomjohnson.org.

If you find my writing interesting, consider subscribing.

There has been a decent amount happening in the world of land, so I will start with the digest before diving into the cities who have enacted split-rate taxes.

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The Land Digest:

• Detroit Mayor Mike Duggan to Run for Governor
  
  Mike Duggan has served as Detroit mayor since 2014 and is a champion of smart tax policy, having advocated for shifts to land value. Duggan speaks about the issue with elegance. He avoids the high-level theory and utopian visions that often bog down the land value tax movement. Instead, he focuses on telling the story of the people of his city. I particularly like his 2023 keynote address at the Mackinac Center which shows he can engage in sophisticated policy conversations in a way unseen in many politicians. In the address, he tells the story of generations of homeowners who pay high property taxes while their neighboring land sits vacant with debris and weed build up. When asked if he knows Henry George, he says no. He cares about sound policy presented in sound ways.

  
  Around a month ago, he announced he would not run for reelection for Detroit mayor, and subsequently confirmed a run for governor, with one notable twist. He is running as an independent. I presume this move will allow him to avoid the negatives of running in a primary where he would have to shift more progressive than perhaps he otherwise would want. Instead, he can now focus on coalition building across party lines, but it's a risky bet.
  
  Duggan was unable to implement a shift in taxes to land value during his time as Detroit mayor due to state preemption. The bill to enable Detroit got caught up by Democrats in the state house. Perhaps that too plays a role in his decision to run as an independent. The decision means that any movement on state-enabling legislation is unlikely in the next two years as Democrats are unlikely to cooperate with Duggan. Regardless, as Governor, Duggan will be able to champion the issue at a state level.

  

  Mike Duggan, Detroit Mayor who put his support behind Harris-Walz, is running for Governor as an independent.

• Detroit City Council President Mary Sheffield announces run for mayor
  
  Sheffield is expected to build on the work of Duggan in regards to land value taxes, though may focus her efforts on entertainment taxes (taxes on tickets to sporting events and performance venues).
  
  

• Spokane adopts land value shift authorization as a state legislative priority
  
  Spokane is interested in adopting a land value shift but cannot due to the Washington state constitution. City council members voted 5-2 to make authorization a key priority in their state legislative focus. The two opposing votes seemed more related to process than substantive objection, with one councilmember expressing desire to see more impact assessments of a land value shift prior to asking the state for authorization.
  
  

• Opinion: Could a Land Value Tax ease the housing crisis in Oklahoma City?
  
  

• Sierra Club: Legalizing Land Value Tax: A Tool for Sustainable Community Growth

Now on to today’s post…

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The Shift to Land in American Cities: Evidence of Increased Development

Split-rate taxes are proven to increase development in the cities that have adopted them. In my last post, I introduced Georgeville, a fictional city that embraced land value taxation to transform its urban landscape. While several real-world cities have shown promising results with split-rate taxation, none have yet fully realized the comprehensive vision I outlined for Georgeville.

Legal barriers have limited widespread adoption as most cities and counties are preempted from implementing split-rate taxes by state laws or constitutions. Therefore, real-world examples come primarily from Pennsylvania and Hawaii, whose stories I'll share in this post.

These case studies show that while split-rate taxes can effectively spur development, their success depends heavily on implementation. Some cities ultimately abandoned the policy, highlighting that taxpayers need clear communication and transparency. While I'll dive deeper into implementation strategies in future posts, the path to success starts with data-driven tools for estimating land and improvement values, supported by transparent annual modeling that keeps citizens informed.

The best available evidence from studies on implementation in Pennsylvania suggests split-rate taxes decrease vacancy and encourage development. Like most policy issues, measuring the policy impact of split-rate taxes is not perfect as confounding variables are inevitable. However, though imperfect, the evidence matches the simple theory: when you remove financial penalties from an action (development), that action will occur more.

The following is largely a summation of a couple of bodies of work. I highly recommend them:

• First, Mark Allen Hughes of the University of Pennsylvania provides descriptive analysis of the history of split-rate taxes in Pennsylvania cities (Why So Little Georgism in America: Using the Pennsylvania Case Files to Understand the Slow, Uneven Progress of Land Value Taxation, 2006, Lincoln Institute of Land Policy)

• Second, two economics professors at the University of Hawaii at Manoa, Sally Kwak and James Mak, provide in-depth coverage of the history of Hawaii’s implementation of split-rate taxes (Political Economy of Property Tax Reform: Hawaii’s Experiment with Split Rate Property Taxation, 2011, American Journal of Economics and Sociology).

Pittsburgh

Pittsburgh's implementation of split-rate taxation stands as the most prominent example in the United States. In 1911, following a decade of strong population growth, Pittsburgh revisited its tax scheme and lobbied the state legislature to allow split-rate taxes, an authorization that stands today. Shortly after, Pittsburgh passed a phased-implementation of a split-rate tax. By 1925, land was taxed at twice the rate as property. In 1979, the tax ratio expanded to 4:1, and then to 5:1 in 1980.

For decades, the system appeared to drive development and investment. But in 2000, everything changed. After a controversial five-year freeze on assessments, the county conducted a mass reassessment that revealed land values had been systematically underassessed. As tax bills shot up, public anger boiled over.

City Council President Bob O'Connor, challenging incumbent Mayor Tom Murphy, seized on the confusion. He pointed to seemingly absurd cases where modest homes were taxed more heavily than downtown skyscrapers. "The only reason anyone would fight a single-rate system is to protect the big boys Downtown," O'Connor declared, though he missed how the split-rate had incentivized those tall buildings in the first place.

Within weeks of the reassessment notices going out, and amid a heated mayoral campaign, Pittsburgh's 88-year experiment with split-rate taxation came to an abrupt end. Despite O’Connor’s rhetoric, eliminating the split-rate system decreased taxes for the wealthiest wards and increased taxes for the poorest.

Allentown, PA

In 1996, Allentown, a post-industrial city struggling to recover, voted in favor of a Home Rule Charter that included a split-rate tax. The proposal was led by a local resident, Pat Toomey, who would go on to become a US Senator, and taxed land at a 5:1 ratio with property.

After implementation, 70% of residential tax parcels saw a tax decrease. Allentown saw higher rates of development than neighboring cities. As of 2023, land value accounted for roughly a third of Allentown’s tax revenue. While similar post-industrial cities have struggled with decline, Allentown's split-rate system has helped fuel steady development and recovery.

Harrisburg, PA

Harrisburg's population peaked at 90,000 in the 1960s before Hurricane Agnes devastated the city in 1972, dumping more rainfall there than in any other affected area. Seeking to rebuild, Harrisburg enacted a split-rate tax in 1975. When vacancy rates remained high in 1982, the city intensified its approach, raising the land-to-property tax ratio to 6:1.

Since implementation, Harrisburg saw increased building permits and an 85% decrease in vacant lots. Despite facing both post-industrial decline and hurricane devastation, Harrisburg successfully spurred development. Four decades later, the split-rate tax remains in place.

Altoona, PA

If you did not know Altoona, PA a couple of weeks ago, you probably do now as the suspect in the United Healthcare murder was arrested in an Altoona McDonald’s. Altoona is a small city with just over 40,000 residents and implemented a split-rate tax in 2011. The experiment lasted just five years. Residents struggled to understand the tax structure, and some faced unexpected increases on vacant land adjacent to their homes. By 2016, public pressure led to the policy's repeal. While Altoona's brief experience doesn't offer enough data for meaningful analysis, it serves as a cautionary tale about the importance of communication and transparency in implementing split-rate taxation.

The Economic Evidence from Pennsylvania

Pennsylvania, where about 20 municipalities have implemented split-rate taxation, provides nearly all our economic evidence about the policy's impact. Pittsburgh, the largest adopter, offers the most compelling case study.

A 1993 study done by Wallce Oates and Robert Schwab compared Pittsburgh's rate of growth to 15 other rust belt cities, including Cleveland, Detroit, and Rochester. All cities followed a general trend of decreased development and economic stagnation, including Pittsburgh. However, after significant expansion of the split-rate tax, Pittsburgh’s economy diverged from the other rust belt cities, with an increase in building permits of over 250 percent. The divergence also occurred when comparing Pittsburgh to its suburbs.

Spencer Banzhaf and Nathan Lavery strengthened these findings by looking at all Pennsylvania municipalities with a split-rate tax. Exploiting the fact that most cities implemented split-rate taxes in the 1980s and using decennial Census data, they found that cities with a split-rate tax have a five percentage point increase in the number of housing rooms per square mile with particularly strong growth in multi-family units. Split-rate taxes encouraged infill development and decreased urban sprawl.

Economics professors Florenz Plassma and T. Nicolaus Tideman attempted to disentangle the effect of split-rate through comparing split-rate cities to 204 similar cities in Pennsylvania based on Census demographics. Their findings aligned with previous research: cities with split-rate taxation saw increased building permits.

While none of these studies is perfect as we can't run controlled experiments with cities, the evidence consistently points in one direction. And the evidence matched a strong theory. I return to Oates and Schwab:

“It is clearly impossible to disentangle fully the effects of all the various elements of the [split-rate] effort. Nevertheless, theory and evidence together do… suggest a reasonable interpretation of the Pittsburgh experience [of a striking building boom].”

Hawaii

Hawaii stands as the only state to implement split-rate taxation statewide, running the experiment from 1965 to 1977. The policy emerged from a unique set of challenges: Hawaii had the nation's highest concentration of land ownership and significant vacant land, while its residents' average income lagged 20% below the national average and tourism began to boom. These conditions prompted the state to adopt split-rate taxation to stimulate development and encourage more land onto the market.

The policy coincided with dramatic economic growth, though its specific impact is difficult to isolate. The policy came after Hawaiian statehood in 1959 and during the first commercial jet flights to Hawaii in 1966, both catalyzing tourism. Ironically, the resulting economic boom and increased reliance on immigrant labor sparked an anti-growth movement. By 1977, amid this backlash, the state repealed its split-rate tax system to stymie growth.

In 1978, Hawaii devolved property tax authority to its counties, allowing them to experiment with their own split-rate policies. Three counties took different approaches:

Hawaii County adopted split-rate taxation from 1983 to 2002. Today, it maintains a modified version, applying split rates only to non-owner occupied residential and agricultural properties.

Honolulu County took an unusual path, implementing an inverse split-rate tax from 1989 to 1998, taxing buildings at a higher rate than land to deliberately slow development and deter Japanese investment firms from purchasing luxury properties. The county has since returned to a single rate.

Kauai County first adopted split-rate taxes in 1985 to encourage rebuilding after Hurricane Iwa. However, facing rapidly rising property values in 2006, the county reversed course, switching to an inverse split-rate system before ultimately abandoning differential taxation in 2014.

As of today, none of Hawaii's counties maintains a traditional split-rate tax system.

Conclusion:

Split-rate taxes in Pennsylvania and Hawaii demonstrate their ability to be a tool to encourage development. In today’s affordability crisis, they may be the best tool a city and state may have to encourage growth and vitalization.

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Citations:

Banzhaf, H. Spencer, and Nathan Lavery. "Can the Land Tax Help Curb Urban Sprawl? Evidence from Growth Patterns in Pennsylvania." Journal of Urban Economics 67, no. 2 (2010): 169-179.

Plassmann, Florenz, and T. Nicolaus Tideman. "A Markov Chain Monte Carlo Analysis of the Effect of Two-Rate Property Taxes on Construction." Journal of Urban Economics 47, no. 2 (2000): 216-247.

Oates, Wallace E., and Robert M. Schwab. "The Impact of Urban Land Taxation: The Pittsburgh Experience." National Tax Journal 50, no. 1 (1997): 1-21.

Richard F. Dye and Richard W. England. 2010. Assessing the Theory and Practice of Land Value Taxation. Lincoln Land Institute. https://www.lincolninst.edu/app/uploads/legacy-files/pubfiles/assessing-theory-practice-land-value-taxation-full_0.pdf