Mayor Murphy recently spent his last day in office. I thought it would be nice to discuss one of his last motions as a councillor:
Request Manager report on potential of a split rate property tax which is weighted more heavily on land rather than buildings and any required legislative changes to enable such a transition.
He spent a while describing this system of property taxation, one I’m somewhat familiar with. For those unacquainted with the concept, property value has two components: the improvement (usually a building, sometimes crops, irrigation, etc) and the land the improvement sits on. Normally, these two components are combined and the owner is taxed a percentage of that value. A split tax splits these two components and charges a higher rate for the land component than the improvement component. This isn’t to be confused with having a different rate on commercial and residential property.
Mayor Murphy added to his motion that this would need to be done in concert with examining zoning and infrastructure’s impact upon property values, and how this can incentivize “certain types of activities here in the City.” Councilor Kennedy said he would be interested in seeing the report Mayor Murphy is basing his argument on (there are many), and highlighted the political difficulties and potential problems with getting this to work within the Massachusetts legislature. Mayor Murphy said he would send links, and there was no other discussion.
The idea behind a split-rate tax (sometimes called two-rate tax) is that a tax on buildings is a disincentive to build or improve buildings. The commercial tax rate in Lowell as approved by City Council is 31.75 mills, or $31.75 for every $1,000 assessed. Therefore, someone puts $200,000 into improving a building now has to pay $6,350 a year more.  If the tax on buildings is lower, there’s less of a disincentive. This is combined with a higher land value tax. That means that having a dilapidated building or an empty lot without a revenue-producing improvement is very expensive. Holding land speculatively is now expensive, and landowners are encouraged to build as quickly as possible.
There is some justification behind this: the landowner isn’t very responsible for increases in land value. If a city builds a subway (or perhaps a trolley) near some property, the land value will increase, even if the property owner didn’t do a thing. Increased safety/security, a stronger downtown, and all sorts of other public and private actions can influence neighbors’ property values. An increased tax is a way to “pay back” the community for this increase. In addition, a tax on land creates no “dead weight loss,” which you can read about here. (p. 364)
Many urban planners love the idea of a split rate tax, and it has been credited as being an integral piece of Pittsburgh’s resilience (link to Dan Sullivan’s chapter on “Why Pittsburgh’s Real Estate Never Crashes”) compared to other rust belt cities (such as Detroit). Harrisburg and Scranton are other cities that have a split rate tax, and they are seen as generally doing better than comparable cities in New York. Not only does the higher land tax encourage property owners to develop or sell, but the extra revenue from the land tax can be used to for services (transit, better schools, more police) to spur demand.
There are a number of challenges to implementing a split rate tax:
- Changing the tax rate necessarily creates “winners” and “losers.” In this case, the losers would be those who own run-down properties or those who own properties that require a lot of land for a relatively cheap building (think box stores, restaurants, or warehouses with large parking lots). It’s politically dangerous to press for any policy that creates “losers,” even when it’s better for the city as a whole. 
- Regular, careful assessments are more necessary because the changing value of land, rather than new construction, becomes the most important determining factor of property tax bills.
- It’s difficult to accurately assess the value of land vs. the value of land + improvements. Although the assessor already does this, it has to go under a lot more scrutiny when the components are taxed differently. 
- As Mayor Murphy stated, other incentives such as infrastructure improvements must create demand for this strategy to have an effect. It cannot revive a dead market on its own, but it might be able to take better advantage of a lukewarm market.
- State legislation has to allow this unorthodox system. As far as I’m aware, Massachusetts legislature allows different rates for different classes of property (residential, commercial, etc) but the land and improvement may not be taxed at different rates (following Chapter 59 Section 38).
Is this a feasible system for Lowell? It’s an exciting proposal, and one worth examining. Even though most of the cities in PA instituted their taxes at the beginning of the twentieth century or between 1975-1991, Altoona, PA, made a switch to taxing 100% on the value of land and 0% of improvements in 2002, showing there still is appetite for alternative taxation systems in some parts of the country. The challenges are steep, but I would bet they could be overcome if the strategy had both a high-level champion admired by the business community and broad public support. The question is whether there’s enough demand in Lowell–or enough property owners “sitting” on underutilized land holding out for higher prices–to justify the strategy’s pursuit.
If anyone knows of other Massachusetts towns pursuing two-rate tax, let me know in the comments or on Facebook!
1. Of course, it’s not this simple: spending $200k on a building doesn’t automatically make its assessed value $200k more, and if a building is in a Tax Increment Financing (TIF) zone like the Hamilton Canal District, they get a tax break for a certain number of years. For my planner friends, MA calls what other states call tax exemption zones TIFs. The mechanism for capturing property value increases that we call TIFs in every other state are called DIFs in MA.
2. Next Cities mentions these winners and losers in Pittsburgh: “…the council hiked the land tax to six times the property billings, in 1989. Eight years later, a review of the city’s practice concluded that it churned out revenues with ‘no damaging side effects on the urban economy.’ Even so, in five years’ time, the city’s unique tax structure was ended, as wealthy homeowners outmaneuvered downtown developers and poorer residents to strike it down. Those two disparate parties who stood to gain from the system, but failed to defend it, reflect the somewhat unlikely coalition of progressive urbanists and real estate developers forming around value capture proposals.”
3.This is another part of what caused Pittsburgh to abandon its split-rate system in 2001. Assessments for years had been undervaluing wealthy neighborhoods’ lands. After a reassessment of the land value of properties in that Pittsburgh’s county caused tax bills to spike, hundreds of appeals were filed, and a mayor ran on a platform of abolishing the system. He was voted in by the aforementioned homeowners. There is still controversy over whether the assessments were done correctly and it took years for Pittsburgh to work through the appeals. This is a problem with the assessments, not the tax system, but they’re rolled together in voters’ minds.