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Contents
Introduction ..................................................................................................................................... 3
Principles and Practice of Land Value Tax Shifting........................................................................ 6
Two-rate Tax Shift Approach ...................................................................................................... 6
Improvement Exemption Tax Shift Approach ............................................................................ 8
Current Assessment and Tax Incidence Levels ..............................................................................11
Berlin, NH Distributions ............................................................................................................11
Lancaster, PA Distributions ....................................................................................................... 12
Philadelphia, PA Distributions .................................................................................................. 13
Two-rate Tax Incidence Levels ..................................................................................................... 13
Berlin, NH Distribution ............................................................................................................ 14
Lancaster, PA Distribution ........................................................................................................ 15
Philadelphia, PA Distribution .................................................................................................... 17
Improvement Exemption Tax Incidence Levels ........................................................................... 18
Berlin, NH Distribution ............................................................................................................ 19
Lancaster, PA Distribution ........................................................................................................ 21
Philadelphia, PA Distribution .................................................................................................... 22
Comparative Examination of Approaches .................................................................................... 24
Berlin, NH Comparison ............................................................................................................ 26
Lancaster, PA Comparison ........................................................................................................ 28
Philadelphia, PA Comparison ................................................................................................... 30
Conclusion .................................................................................................................................... 33
Appendix ....................................................................................................................................... 34
3
Introduction
Land value taxation (LVT) is the practical application of the government appropriation of
land rent, also known as the surplus value of production, a concept widely recognized since the
time of classical economists such as the Physiocrats, Adam Smith, David Ricardo, and Henry
George. Throughout history, these and other economic theorists have acknowledged land rent as
a publicly created portion of wealth that—due to land’s permanency and fixed supply—could
serve as an ideal source of tax revenue without any dead-weight loss to general levels of
LVT, as commonly studied and applied today, involves shifting tax levies from labor and
capital bases such as wages, business income, and sunk capital such as buildings onto the market
value (capitalized purchase price) of land. In Pennsylvania this effort has been facilitated
successfully in multiple municipalities through a tax reform called the ―two-rate‖ form of the
property tax (Plassmann 39). Operating within the existing property tax administrative structure,
the two-rate tax can be used to incrementally reduce tax levies on either the building portion of
Although the results of the two-rate property tax have been generally positive, recent
research and evidence suggests that several challenges associated with the adoption and
distributional impact of the tax can be addressed using a modified approach. Richard England
states that ―even if two-rate property taxation would generate substantial efficiencies for society
as a whole, some property owners could be worse off after its adoption. Thus, the political
challenge is to design reform proposals that offer social efficiency gains without provoking
a two-rate shift as a way to ameliorate regressive outcomes and reduce resistance to the reform
(England & Zhao 248). Under such a scheme, taxing jurisdictions would be enabled to grant ―a
tax liability credit on each property tax bill‖ along with the two-rate reform (England & Zhao
251). This approach is somewhat similar to existing tax relief measures such as rebates or circuit
breakers, but has the advantage of being automatically and universally applied to all taxable
property, whereas existing programs often require individual property owners to apply for the
Although this approach yielded more progressive results in subsets of the data set used in
his analysis, England’s tax credit is still suboptimal for the purposes of land value tax shifting.
The reason for this is because it takes too broad of an approach in providing tax credits, and
could end up subsidizing large numbers of small-scale abandoned or speculative land holdings at
the expense of productive properties. A better approach would keep the universal and automatic
enrollment process, yet target only the improvement value of the property for eligibility.
Two ways to do this would be either a tax credit, as in England’s proposal, applicable to
the improvement amount of the tax bill, or alternatively, as a tax deduction applicable to the
improvement value of the assessment. Both would achieve the same objective, but some
the process while the credit is ―back-loaded;‖ in many cases a front-loaded deduction can
simplify administration of the tax (what you see on the bill is what you pay). Also, a credit might
create more confusion among taxpayers, as even a revenue neutral shift would actually require a
larger total amount to be collected to account for the crediting, whereas a deduction would take
place during the rate-setting process and still equal the current revenue level. This could lead to
suspicions that the shift isn’t actually revenue neutral, and more money is being tax away than
5
needed. Additionally, a deduction on improvement value could actually eliminate the need for
two tax rates since it would, in effect, reduce taxes on buildings by reducing their taxable value,
providing another simplification of a potentially complicated reform. Since the ultimate objective
of land value tax shifting is to eliminate the tax rate on buildings (by decrementing it to zero),
This paper will thus consider the potential of the deduction option on a one-rate property
tax, which from here on will be called an improvement exemption. Using several data sets, we
will research the viability of this option not only as a way to improve the political economy of
the land value tax shift outcome, but also as an alternative solution in jurisdictions unable to
The data sets we will examine as part of our evaluation represent Berlin, NH;1 Lancaster,
PA;2 and Philadelphia, PA.3 Berlin and Lancaster were chosen because of their respective scales
as small and mid-sized cities, and because both are interested in evaluating a land value tax shift
but cannot because of the undesirable outcomes for their particular reasons. Philadelphia was
also selected because of its scale as a large city and the fact that a traditional two-rate LVT shift
would already work so well that we’d like to test the outcome of an improvement exemption
The approach will be to perform a comparative evaluation of the tax incidence levels of
the traditional two-rate tax versus the exemption on improvements for each of the sample
jurisdictions in a revenue-neutral manner. The two-rate approach will use the 50%-50% split
(explained below) on building and land proportions for the tax, while the improvement
1
http://www.berlinnh.gov/Pages/BerlinNH_Collector/taxrate; data submitted to our organization by City Manager
2
Data acquired from the Lancaster County property assessment database
3
Data provided by the Philadelphia Bureau of Revision of Taxes (http://brtweb.phila.gov)
6
exemption approach will use 50% of median value for Lancaster and Berlin data, and full median
for the Philadelphia data.4 These levels have been chosen for their simplicity in calculating shift
rates and defining outcome amounts. Different levels can always be used to slow or accelerate
the shifting process, and is a decision that must be made under the considerations of each taxing
jurisdiction.
to serve as a significant source for public finance without dead-weight loss inefficiencies. As
such, applications of LVT seek to shift current taxes levied on forms of labor and capital onto
Although there are multiple ways to perform the shift, the most common application in
the U.S. over the last century has been the two-rate method (also known as the graded, split-rate,
or two-tier tax, although these terms can be confused with other forms of the real estate tax as
implemented in other states). The traditional property tax uses one tax rate applied to the total
assessed value of each property. In the two-rate approach, separate tax rates are set for both
buildings and land, with the tax rate on land designed to bring in an increasing proportion of
revenue while the tax rate on buildings is reduced. This approach allows a jurisdiction to phase
out the tax rate on buildings over a period of time, often by 10 or 20 percent annually, while
maintaining revenue neutrality during a transition to a land tax. Pennsylvania is the principle
state to have applied the two-rate method, with each adopting jurisdiction taxing building values
4
The Lancaster and Berlin data sets provide full value for land and improvement assessments, while the Philadelphia
data set is set at a fractional assessment level, thus lowering the values and potentially skewing the outcome.
7
The two-rate method generally takes the following steps when done in a revenue-neutral
manner with current assessment levels: (1) set the building rate reduction percentage as a
coefficient between 0 and 1; (2) calculate the decreased improvement rate; and (3) calculate the
increased land rate necessary to meet the established revenue target in step 2. Steps 1 to 3 can be
where BRR is the percent to reduce the property tax rate, PTR is the current property tax rate,
BTR is the proposed building tax rate, LTR is the proposed land tax rate, BA is the total building
officials and the public, who often don’t generally think of changes in tax rates instead of tax
bases and have trouble with a set of assessment values instead of a combined total.
An alternative approach to establishing a land value tax is known as the ―50-50 revenue
split,‖ where the existing single rate applied to both buildings and land (and which generally
impacts building value higher) is replaced by allocating half of the total revenue from both
buildings and land equally, thus altering the proportion to favor land value more highly.
The steps for the 50-50 revenue split are as follows: (1) divide the current revenue amount in two
in order to derive the equal revenue amount; (2) divide the equal revenue amount by the total
building assessed value to derive the building tax rate; (3) divide the equal revenue amount the
by total land assessed value to derive the land tax rate. Steps 1 to 3 can be expressed through the
following formulas:
8
where ERA is the equal revenue amount, BTR is the proposed building tax rate, BA is the total
building assessment, LTR is the proposed land tax rate, and LA is the total land assessment.
For the purposes of our study we will be utilizing the 50-50 revenue split approach in
determining the two-rate tax impacts, as it provides both a simpler process and more dramatic
results among individual properties that the typical 10-20% building tax reductions usually
Using improvement exemptions, one can begin to remove improvement value out of the
tax base incrementally while maintaining taxation of total land value, thus allocating increasingly
higher proportions of the property tax to land value. This method is frequently used, albeit on a
temporary basis, for tax abatement schemes that reward investments in buildings by exempting
value added from increases in assessments and thus increases in tax incidence. Philadelphia, PA
and Berlin, NH both have such programs.5 An improvement exemption such as the one proposed
here would expand such programs to be (1) universal, applying to all improvement values old
and new; (2) automatic, requiring no individual administrative responsibility for applying for and
maintaining enrollment in the program; and (3) permanent, remaining in effect indefinitely
To exempt improvement assessments from taxable value, all that must be done is to
determine a dollar amount to exempt, either from the total existing improvement value or as
5
http://brtweb.phila.gov/brt.apps/FileViewer.aspx?category=Abatements&fname=GeneralInstToFileApp.pdf and
http://www.berlinnh.gov/Pages/BerlinNH_IndustrialDev/Incentives
9
applied to all new improvement value, often in conjunction with a cap on the level of exemption.
The process to do this is (1) establish an improvement exemption deduction amount; (2) reduce
the taxable building value of each property up to the deduction ceiling; (3) re-calculate the
property tax rate using the adjusted taxable building assessments and original land assessments.
where IED is the improvement exemption deduction, ABA is the adjusted building assessment
(being either the building assessment minus the exemption deduction or zero, whichever yields
the higher amount, and PTR as the property tax rate as adjusted to maintain current revenue
levels.
For the purposes of our study we will be utilizing either half the median improvement
value for jurisdictions assessed at full market value (Berlin and Lancaster), or the entire median
for jurisdictions utilizing fractional assessment levels (Philadelphia). But what makes this
Conventional economic theory holds that tax credits are more effective than deductions.
For a tax rate of 3% applied to a property taxable at $100,000 (with $80,000 in building value
and $20,000 in land value), a $1,000 dollar tax credit would reduce the tax bill of $3,000 by
$1,000, dollar for dollar, down to $2,000. If instead a $1,000 tax deduction was provided, it
would simply reduce the taxable property value to $99,000, and would result in a tax bill of
Because the improvement exemption instead indexes the deduction to a percentage of the
10
overall median improvement value, it improves the effectiveness of the deduction’s impact. If the
median improvement value was $50,000, and the jurisdiction decided to allow 50% of the overall
median ($25,000) to be deducted from the taxable value, our property would instead be valued at
$75,000, resulting in a tax bill of $2,250 and a savings of $750. This brings the tax reduction
potential of the deduction, ceteris paribus, closer to the credit; if the full median value was
instead deductible, the taxable value would drop to $50,000, resulting in a tax bill of $1,500 and
a savings of $1,500.6
The use of the median as a reference point in calculating the deduction amount also more
easily pegs the deduction to actual policy goals. In discussing the rationale for a $1,000 credit,
England and Zhao cite challenges in determining the most efficient yet equitable level:
―One methodological reason is that the uniformity assumption simplified our modeling
exercise. Another is that we do not have data on the age, income or assets of property
owners and, hence, cannot simulate credits linked to those variables. A practical political
reason for offering a uniform tax credit to every taxpayer is that this provision could
broaden support for property tax reform, especially among small business owners. If an
age– or income–based credit were implemented instead of a uniform credit on all tax
bills, then the tax rate on land values required to finance a revenue–neutral cut in the tax
A median-indexed deduction maintains uniformity, yet also gains progressivity from the fact that
improvement value generally reflects vertical equity characteristics, and can thus be used to peg
the deduction to target specific distributional levels. If specified using this formula, the
exemption indexing would be preserved during reassessments as well, requiring only an update
6
The introduction of an exemption requires the adjustment of the tax rate, which can change the outcome depending
on the property’s building and land value allocation. This example is only to illustrate the concept.
11
to the deduction amount and necessary tax rate. In the same case, a credit might require more
making the case for the approach, as opposed to a credit, by pointing out that deduction amount
would typically be more dramatic than an equivalent credit, such as $50,000 deduction compared
to a $1,000 credit offered annually. Such a benefit would be of pure political value, with no
technical advantage.
approaches, it will be useful to examine the current distribution of tax incidence for each
jurisdiction as a reference point. To do this, we will look at the current levels of our three main
factors: tax bases, tax rates, and tax revenues. Table 1 presents a summary of these current
In each jurisdiction, the tax base is the assessed total value of the jurisdiction’s real estate
(including land and improvements), the tax rate is expressed in millages, and the tax revenue
being the final result. For the purposes of our study, the tax bases and rates will change as we
deconstruct the property tax through the tax shift, yet the revenue levels will remain the same.
Berlin, NH Distributions
Berlin consists of 4,743 properties with total tax base of $484,165,549, of which
12
$419,558,200 (or 87%) is building value and $64,607,349 (or 13%) is land value, as shown in
Table 2. This produces an aggregate building to land ratio (B:L) of 6.49:1, which is somewhat
higher than normally expected ratios of approximately 4:1 or 5:1.7 The municipal property tax
rate is .0149, or 14.9 mills, which when applied to the tax base produces $7,214,067 in total
revenue.
Under the current tax structure, the average property has an improvement value of
$94,623, a land value of $14,571, and a total value of $109,194, yielding a tax bill of $1,627. The
highest paying property has a tax bill of $1, 659,294, and the lowest paying property has a tax
bill of $1.
Lancaster, PA Distributions
Lancaster consists of 17,704 properties with total tax base of $1,932,426,400, of which
$1,519,647,700 (or 79%) is improvement value and $395,171,300 (or 21%) is land value, as
shown in Table 3. This produces an aggregate building to land ratio (B:L) of 3.85:1, which is
more in line with expected ratios. The municipal property tax rate is 0.00964, or 9.64 mills,
which when applied to the tax base produces $18,458,855 in total revenue. The average property
has an improvement value of $85,836 and land value of $22,320, yielding a tax bill of $1,043.
7
The building to land ratio reflects the proportion of improvement to land values, where properties with high
proportions tend to decrease in incidence from land value tax shifting while properties with low proportions
experience increases.
13
Philadelphia, PA Distributions
which $9,214,883,448 (or 76%) is improvement value and $2,920,739,540 (or 24%) is land
value, as shown in Table 4. This produces an aggregate building to land ratio (B:L) of 3.15:1,
which is lower than average and due in large part to a concentration of very high land values.
The combined municipal and school property tax rate is .08264, or 82.64 mills, which when
applied to the tax base produces $1,002,887,884 in total revenue.8 The average property has an
improvement value of $15,949 and land value of $5,055, yielding a tax bill of $1,736.
for a revenue-neutral outcome. Of the three shifts, only Philadelphia produced a positive
outcome, with 74% of all properties seeing net decreases in tax incidence and only 26% seeing
net increases. For Berlin and Lancaster, the two-rate approach would remain unfeasible in a
8
For Philadelphia we are using a combined effective rate that includes both municipal and school tax rates and
revenue. This will not affect the comparisons with the other jurisdictions, however.
9
If the municipality has a high concentration of vacant or absentee-owned properties that absorb much of the
increase in tax incidence, adopting a two-rate tax might still be feasible using the argument that the added burden
will be shifted to unproductive and out-of-town owners, or ―taxing foreigners living abroad‖ as proposed in a Monty
14
Table 5: Overall outcome summaries of the two-rate shift approach (all cities)
Berlin, NH Distribution
To convert to a revenue-neutral two-rate tax in Berlin, the current rate of .0149, or 14.9
mills, would need to be split out with the building tax rate as .008597, or 8.597 mills, and the
land tax rate as .05583, or 55.83 mills.10 Applied to the current total building assessment of
$419,558,200 and total land assessment of $64,607,349, these two rates would yield $3,607,033
each and still total up to the $7,214,067 generated by the current rate. This outcome can be seen
in Table 6 below.
The difference under the two-rate tax would appear in the distribution of tax revenue now
taken from the building and land tax bases. The current rate yields $6,251,417, or 87%, of the tax
revenue from buildings and only $962,650, or 13%, from land, as given by the aggregate
proportion of building to land assessed value. Under the two-rate scenario as mentioned above,
however, building and land value would each yield 50% of total revenue, effectively reducing the
incidence level on buildings while increasing it on land. This results in a 42% decrease in tax
revenue from buildings and a 275% increase in tax revenue from land, demonstrating the
powerful impact the two-rate approach has in conducting a preferential shift from buildings to
Such a powerful shift potential using the two-rate approach creates a significant problem
for Berlin, however. Although this policy is able to achieve its goal from a fiscal perspective, its
social and political outcomes are significantly suboptimal and reduce the potential for adoption
of the reform. As seen in Table 5 above, the two-rate approach would produce an undesirable
overall outcome in these regards, as 2,442 (55%) properties would experience increases in
incidence levels and only 1,992 (45%) would experience a decrease. The average increase would
be $420, while the average decrease would be $515. The property with the highest increase
would pay an additional $376,860, while the property with the lowest decrease would save
$691,957.
Taking these factors into consideration is essential when making land value tax shift
recommendations, and the present outcome would prevent the recommendation of Berlin
adopting the two-rate tax. The goal of showing a broad benefit could not be met without even a
simple majority of properties that save, and thus would hinder any effort to make the case for this
reform.
Lancaster, PA Distribution
9.64 mills, would need to be split out with the building tax rate as .006073, or 6.073 mills, and
the land tax rate as 0.023356, or 23.225 mills. Applied to the current total building assessment of
$1,519,647,700 and total land assessment of $395,171,300, these two rates would yield
$9,229,428 each and still total up to the $18,458,855 generated by the current rate. This outcome
16
Again the difference under the two-rate tax would appear in the distribution of tax
revenue now taken from the building and land tax bases. The current rate yields $14,649,404, or
79%, of the tax revenue from buildings and only $3,809,451, or 21%, from land, as given by the
aggregate proportion of building to land value. Under the two-rate scenario as mentioned above,
however, building and land value would each yield 50% of total revenue, effectively reducing the
incidence level on buildings while increasing it on land. This results in a -37% decrease in tax
revenue from buildings and a 142% increase in tax revenue from land, again demonstrating the
powerful impact the two-rate approach has in conducting a preferential shift from buildings to
Unfortunately, the two-rate approach creates even more of a problem for Lancaster.
Looking again to Table 5 above, the two-rate approach would produce an undesirable overall
outcome, as 12,046 (68%) properties would experience increases in incidence levels and only
5,646 (32%) would experience a decrease.11 The average increase would be $119, while the
average decrease would be -$254. The property with the highest increase would pay an
additional $17,816, while the property with the lowest decrease would save $313,399.
Because of these factors, like Berlin, the present outcome would prevent the
recommendation of Lancaster adopting the two-rate tax. Having nearly 70% of the city pay
11
12 properties would see no change due to their total tax exemption status.
17
higher taxes would be nearly impossible to justify politically, even if the individual marginal
Philadelphia, PA Distribution
82.64 mills, would need to be split out with the building tax rate as .054417, or 54.417 mills, and
the land tax rate as .171684, or 171.684 mills. Applied to the current total building assessment of
$9,214,883,448 and total land assessment of $2,920,739,540, these two rates would yield
$501,443,942 each and still total up to the $1,002,887,884 generated by the current rate. This
Like our other two-rate examples, the difference under the two-rate tax would appear in
the distribution of tax revenue now taken from the building and land tax bases. The current rate
yields $761,517,968, or 76%, of the tax revenue from buildings and only $241,369,916, or 24%,
from land, as given by the aggregate proportion of building to land value. Under the two-rate
scenario as mentioned above, however, building and land value would each yield 50% of total
revenue, effectively reducing the incidence level on buildings while increasing it on land. This
results in a 34% decrease in tax revenue from buildings and a 108% increase in tax revenue from
land, for the third time consistently demonstrating the powerful impact the two-rate approach has
beneficial outcome for Philadelphia. As seen again in Table 5 above, the two-rate approach
would produce an highly desirable overall outcome, as only 148,820 (26%) properties would
experience increases in incidence levels while 402,743 (70%) would experience a decrease.12
The total amount shifted would be $91,145,853, with an average increase of $612 and an average
decrease of $227. The property with the highest increase would pay an additional $1,265,272,
while the property with the lowest decrease would save $1,054,473.
Each of these factors suggests that Philadelphia would benefit significantly by adopting
the two-rate tax. The overall income shows nearly 70% of the city benefiting from reduced
property taxes while allowing the city to reward capital investment and pressure unproductive
land back into use, and should provide a strong case for reform. A more granular analysis,
and absentee-owned properties would further strengthen the viability of a land value tax shift.
using either a full or 50% exemption of the jurisdiction-wide median improvement value while
still yielding a revenue-neutral outcome. As shown in the outcome summary in Table 9, all three
municipalities would benefit significantly under this approach, with Berlin approaching
Philadelphia’s percentage of properties saving under the reform and Lancaster actually exceeding
Philadelphia in the same measure. These outcomes hint at the potential for improvement
exemption to provide for otherwise unviable jurisdictions to again consider a land value tax shift.
12
26,217 (5%) properties would see no change due to their total tax exemption status. These exclusions will apply
under the improvement exemption approach.
19
Table 9: Overall outcome summaries of the improvement exemption shift approach (all cities)
Berlin, NH Distribution
establish an improvement exemption allowance. Using our criteria of half the median
improvement value for the municipality ($69,200), we get a figure of $34,600. Applying this
amount as a qualifying credit for each taxable property, we will have a total exemption in taxable
improvement value of $124,783,300, reducing our original building portion of the tax base 26%
With this adjusted tax base, the current rate of .0149, or 14.9 mills, would need to be
adjusted upwards 35% to .020073, or 20.073 mills, in order to remain revenue neutral. Applying
this new rate to the adjusted building assessment of $294,774,900 and existing total land
assessment of $64,607,349 would still yield the $7,214,067 generated by the current rate. This
Tax Base Type Tax Base Value Tax Rate Tax Revenue
The improvement exemption approach still impacts the distribution of tax revenue now
taken from the building and land tax bases. The current rate yields $6,251,417, or 87%, of the tax
20
revenue from buildings and only $962,650, or 13%, from land, as given by the aggregate
proportion of building to land assessed value. Under the improvement exemption scenario as
mentioned above, however, buildings would now yield $5,917,170 (85%) of total revenue while
land would yield $1,296,897 (18%) of total revenue, slightly reducing the incidence level on
buildings while more gradually increasing it on land. This results in a 5% decrease in tax revenue
from buildings and a 35% increase in tax revenue from land, resulting in a much less dramatic
outcome than the two-rate approach yet still allowing for a transition to a preferential shift from
Although the building to land shifting potential is much more nuanced using the
improvement exemption approach, its strength lies in dispersing the impact, and most
significantly, broadening the benefits. This means that it, too, can meet the fiscal objective while
additionally improving the social and political outcomes and thus improve potential for adoption
of the reform. As seen in Table 9 above, the improvement exemption approach would produce a
positive overall outcome in these regards, as only 1,198 (27%) properties would experience
increases in incidence levels while 3,236 (73%) would experience a decrease. The total amount
of incidence shifted is $1,024,921, with an average increase of $664 and an average decrease of
$246. The property with the highest increase would pay an additional $575,439, while the
The results of this outcome would suggest the recommendation of Berlin adopting the
improvement exemption tax structure. Almost ¾ of the entire jurisdiction would benefit from the
reform, and the dynamics of the improvement exemption approach would allow the local
economy to better transition during a land value tax shift without a detrimental burden being
Lancaster, PA Distribution
to first establish an improvement exemption allowance. Using our criteria of half the median
improvement value for the municipality ($53,600), we get a figure of $26,800. Applying this
amount as a qualifying credit for each taxable property, we will have a total exemption of taxable
building value of $448,819,400, reducing our original building portion of the tax base 30% to
With this adjusted tax base, the current rate of .00964, or 9.64 mills, would need to be
adjusted upwards 30% to 0.012591, or 12.591 mills, in order to remain revenue neutral.
Applying this new rate to the adjusted building assessment of $1,070,828,300 and existing total
land assessment of $401,030,400 would still yield the $18,628,590 generated by the current rate.
Tax Base Type Tax Base Value Tax Rate Tax Revenue
The improvement exemption approach still impacts the distribution of tax revenue now
taken from the building and land tax bases. The current rate yields $14,649,404, or 79%, of the
tax revenue from buildings and only $3,809,451, or 21%, from land, as given by the aggregate
proportion of building to land assessed value. Under the improvement exemption scenario as
mentioned above, however, buildings would now yield $13,483,131, or 73%, of total revenue
while land would yield $4,975,724, or 27%, of total revenue, slightly reducing the incidence
level on buildings while more gradually increasing it on land. This results in an 8% decrease in
22
tax revenue from buildings and a 31% increase in tax revenue from land, resulting in a much less
dramatic outcome than the two-rate approach yet still allowing for a transition to a preferential
Lancaster also demonstrates the dynamics of using the improvement exemption approach,
improving the social and political outcomes and thus improving the potential for adoption of the
reform. As seen in Table 9 above, the improvement exemption approach would produce a
positive overall outcome for Lancaster in these regards, as only 3,175 (18%) properties would
experience increases in incidence levels while 14,517 (82%) would experience a decrease. The
total amount shifted would be $1,913,336, with an average increase of $603 and the average
decrease of $132. The property with the highest increase would pay 31% more from an
additional $419,199, while the property with the lowest decrease would save 100% through a
$258 reduction.
The results of this outcome would suggest the recommendation of Lancaster also
adopting the improvement exemption tax structure. With over 80% of the entire jurisdiction
benefitting from the reform, an improvement exemption would offer the potential for a land
value tax shift to a municipality already interested in adopting the reform but unable to consider
Philadelphia, PA Distribution
need to first establish an improvement exemption allowance. For Philadelphia, since the
jurisdiction employs fractional assessments, we will utilize the full median improvement value
($10,462) for the municipality to more closely reflect actual values. Applying this amount as a
qualifying credit for each taxable property, we will have a total exemption of taxable building
23
value of $4,096,690,180, reducing our original building portion of the tax base 44% to
With this adjusted tax base, the current rate of .08264, or 82.64 mills, would need to be
adjusted upwards 51% to 0.124754, or 124.754 mills, in order to remain revenue neutral.
Applying this new rate to the adjusted building assessment of $5,118,193,268 and existing total
land assessment of $2,920,739,540 would still yield the $1,002,887,884 generated by the current
Tax Base Type Tax Base Value Tax Rate Tax Revenue
The improvement exemption approach still impacts the distribution of tax revenue now
taken from the building and land tax bases. The current rate yields $761,517,968, or 76%, of the
tax revenue from buildings and only $241,369,916, or 24%, from land, as given by the aggregate
proportion of building to land assessed value. Under the improvement exemption scenario as
mentioned above, however, buildings would now yield $638,514,357 (64%) of total revenue
while land would yield $364,373,526 (36%) of total revenue, slightly reducing the incidence
level on buildings while more gradually increasing it on land. This results in a 16% decrease in
tax revenue from buildings and a 51% increase in tax revenue from land, resulting in a much less
dramatic outcome than the two-rate approach yet still allowing for a transition to a preferential
Although the building to land shifting potential is much more nuanced using the
powerful broadening effect. The city would already benefit significantly under the two-rate
approach, yet the outcome become significantly more impressive under an improvement
exemption. As seen in Table 9 above, the improvement exemption approach would produce
decreases in incidence for 462,955, or 80%, of properties while causing increases in only 88,608,
or 15%, of properties, with the remaining 5% of properties remaining neutral. The total amount
of incidence shifted is $208,234,834 between properties, with an average increase of $2,329 and
an average decrease of $450. The property with the highest increase would pay an additional
$2,411,100, while the property with the lowest decrease would save $864.
The results of this outcome would suggest the recommendation of the improvement
exemption tax structure for Philadelphia. With 80% of the entire jurisdiction benefitting from the
reform, the progressive dynamics of the improvement exemption approach would allow the local
economy to better transition during a land value tax shift without the risk of significant burden
being disproportionately dropped on the lower brackets of properties. This would make the
reform more viable politically in a city with such a large population of low- and fixed-income
change approach using the dollar differential of both the two-rate and improvement exemption
scenarios. To do this we will employ a coding scheme that encapsulates the two outcomes for
Properties that see their tax bill increase (I) under both the two-rate (TR) and
improvement exemption (IX) scenarios will be classified as ―TR: I; IX: I.‖ Properties that see
their tax bill decrease (D) under both the two-rate (TR) and improvement exemption (IX)
25
scenarios will be classified as ―TR: D; IX: D.‖ Properties that see their tax bill decrease (D)
under the two-rate scenario yet increase (I) under the improvement exemption (IX) scenario will
be classified as ―TR: D; IX: I.‖ And finally, properties that see their tax bill increase (I) under the
two-rate scenario yet decrease (D) under the improvement exemption (IX) scenario will be
classified as ―TR: I; IX: D.‖ The small number of properties that see no change due to their
With each property coded as a pair of outcomes, it is possible to examine them against
several criteria as a way to understand and visualize the tax shift patterns of the two approaches.
For the purposes of our immediate research we will use two highly relevant measures: the
outcome during a land value tax shift. Each property has a B:L, and the entire jurisdiction has an
aggregate B:L. In shifting from buildings to land in the property tax, properties with a B:L higher
than the aggregate will see a decrease in incidence, while properties with a B:L lower than the
aggregate will see an increase. Therefore if a jurisdiction’s aggregate B:L is lower than the
average property B:L, a majority of properties will decrease, and vice versa. The B:L grids
The marginal change grids group the TR and IX outcomes for each property such that the
approach that maximizes the number of properties with a decreasing level incidence is given. If
one property’s marginal change is negative for one approach but positive for another, while
another is negative for both approaches, we can isolate these instances and make additional
inferences based on the distribution. The grids are also included in the appendix.
With these perspectives on the outcomes of TR versus IX for each jurisdiction, we can
26
Berlin, NH Comparison
under the latter proposal. Table 13 summarizes the set of outcomes in this case. Overall, we can
say that an improvement exemption produces a clearly positive outcome in broadening the base
What brought about this reversal? We can gain some insight from examining some
descriptive statistics for our outcome pairs, grouping each property by its code. Table 14 has the
results.
TR: D; IX: D 1,640 37% -$129 -$224 $114 $111 -$210,788 -$367,766
TR: I; IX: D 1,596 36% $179 -$268 $218 $114 $285,078 -$427,359
TR: I; IX: I 846 19% $875 $158 $2,168 $699 $739,844 $133,491
Sorting each outcome code by size, we see that the largest quadrant shift is ―TR: D; IX:
D‖ with a count of 1,640 properties, or 37%. Next is the ―TR: I; IX: D‖ group, with the 1,596
properties, or 36%. Third is the ―TR: I; IX: I‖ group, with 846 properties, or 19%. Finally, the
remaining properties belong to the ―TR: D; IX: I‖ group, with 352 properties, or 8%. Note that
27
within the top two groupings, the IX option yields decreasing outcomes in both cases whereas
the TR option does not, with the IX outcomes totaling the number of overall decreased incidence
Quite simply, the second largest group of properties would increase under TR but
decrease under IX, hinging the viability of a land value tax shift on adopting the better-
performing option for this group. Figure 1 illustrates this distribution, visualizing the large
concentration of properties that decrease under the IX approach. Examining the spatial
distribution on the chart, you can see this large number of properties that would benefit under IX
In terms of total outcome, we see that improvement exemptions would produce a positive
result where a two-rate tax could not, but what of the progressive nature of the distribution? The
average difference between the TR and IX options suggest that the IX approach would see more
properties saving in the top two tiers, while the TR approach creates an average increase in the
broader second tier while rewarding the smaller fourth tier. Comparing outcomes in the context
of property values can provide more clues, as done in Table 15 and Figure 2.
Table 15 shows that the building and land ratios for the first and second tiers of properties
represent the bulk of the city’s assessment composition. The aggregate B:L for Berlin is 6.49 and
the city-wide average is 5.69, which supports the theory of tax incidence outcomes for the two-
rate tax: outcome codes lower than the aggregate will pay more, while those higher will pay less.
28
However because of the way an improvement exemption works, properties slightly below would
be spared under the IX option, instead shifting the burden onto properties with little
improvement value (less than 1) and properties with higher overall average value, regardless of
their ratio. Figure 2 also illustrates the progressivity of the IX option, visualizing the clustering
of the ―IX: D‖ properties around the axis as generally lower overall valued properties with land
values less than $50,000 and building value less than $150,000, but still in substantial amounts.
Lancaster, PA Comparison
In Lancaster we also saw a reversal in outcomes when looking at a two-rate tax versus an
benefitting under the latter proposal. Table 16 summarizes the set of outcomes in this case.
Overall, we can say that an improvement exemption produces a dramatically more positive
outcome in broadening the base of properties that will benefit, whereas a two-rate solution
cannot.
Are the trends that lead to this reversal similar to Berlin? We can again gain insight from
examining some descriptive statistics for our outcome pairs, grouping each property by its code.
TR: I; IX: D 10,177 58% $63 -$129 $63 $46 $645,850 -$1,314,444
TR: D; IX: D 4,340 25% -$51 -$138 $63 $64 -$221,980 -$598,892
29
TR: I; IX: I 1,869 11% $421 $264 $1,236 $1,267 $787,672 $493,476
With each outcome code sorted by size, we see that the largest quadrant shift is ―TR: I;
IX: D‖ with a count of 10,177 properties, or 58%. Next is the ―TR: D; IX: D‖ group, with 4,340
properties, or 25%. Third is the ―TR: I; IX: I‖ group, with 1,869 properties, or 11%. Finally, the
remaining properties belong to the ―TR: D; IX: I‖ group, with 1,306 properties, or 7%. Note
again that within the top two groupings, the IX option yields decreasing outcomes in both cases
whereas the TR option does not, with the IX outcomes totaling the number of overall decreased
Notice, too, that this differs from Berlin; in this case, the largest group would actually
increase under TR, but decrease under IX. This outcome is particularly significant, particularly
hinging the viability of a land value tax shift on adopting the better-performing option for this
group. Figure 3 illustrates the overall distribution, again visualizing the large concentration of
properties that decrease under the IX approach but would increase under the TR option.
Examining the spatial distribution on the chart, you can see the especially large number of
properties that would benefit under IX yet would not under TR.
In terms of total outcome, we again see that improvement exemptions would produce a
positive result where a two-rate tax could not, but will it also have a more progressive
distribution of burden? The average difference between the TR and IX options suggest that the
IX approach again would experience more properties saving in the top two tiers, while the TR
approach creates an average increase in the broader second tier while rewarding the smaller
fourth tier. Comparing outcomes in the context of property values can provide more clues, as
Table 18 shows that the building and land ratios for the first and second tiers of properties
represent the bulk of the city’s assessment composition. The aggregate B:L for Lancaster is 3.85
and the city-wide average is 3.56, which again confirms the theory of tax incidence outcomes for
the two-rate tax. Fortunately, because of the way an improvement exemption works, properties
slightly below would be spared under the IX option—which in this case, would be both the first
and second tiers, instead shifting the burden onto properties with little improvement value (less
than 1) and properties with higher overall average value, regardless of their ratio. Figure 4 also
illustrates the progressivity of the IX option, visualizing the clustering of the ―IX: D‖ properties
around the axis as generally lower overall valued properties with land values less than $80,000
and building value less than $150,000, but still in substantial amounts.
Philadelphia, PA Comparison
In Philadelphia we saw that a two-rate tax performs well to begin with for a significant
majority of properties, and an improvement exemption shift only serves to expand the number of
properties that would benefit. Table 19 summarizes the set of outcomes in this case. Overall, we
can say that even against a promising two-rate option, an improvement exemption again
produces a more positive outcome in broadening the base of properties that will benefit under an
LVT shift.
31
How can an improvement exemption further optimize the tax shift outcome? We can
again gain insight from examining some descriptive statistics for our outcome pairs, grouping
TR: D; IX: D 379,142 69% -$144 -$484 $111 $207 -$183,606,539 -$54,585,168
TR: I; IX: D 83,805 15% $112 -$294 $168 $184 -$24,625,781 $9,385,336
TR: I; IX: I 65,010 12% $1,258 $1,495 $9,800 $15,479 $97,159,177 $81,760,499
With each outcome code sorted by size, we see that the largest quadrant shift is ―TR: D;
IX: D‖ with a count of 379,142 properties, or 69%. Next is the ―TR: I; IX: D‖ group, with 83,805
properties, or 15%. Third is the ―TR: I; IX: I‖ group, with 65,010 properties, or 12%. Finally, the
remaining properties belong to the ―TR: D; IX: I‖ group, with 23,598 properties, or 4%. As in
each other case, note that within the top two groupings, the IX option yields decreasing outcomes
for both tiers whereas the TR option does not, with the IX outcomes totaling the number of
Although, in the case of Philadelphia, the viability of an LVT shift is not bound to one
option or the other, the political economy objectives of broad support and progressive nature for
such a reform again call for the enhancing quality of the improvement exemption. Figure 5
illustrates the overall distribution, again visualizing the large concentration of properties that
32
decrease under the IX approach but would increase under the TR option. Examining the spatial
distribution on the chart, you can see the especially large number of properties that would benefit
In terms of total outcome, we see in the third instance that improvement exemptions
would produce a positive result, even more substantially then the already significant two-rate
outcome. Yet as before, we must additionally verify the level of progressivity for this scheme.
The average difference between the TR and IX options suggest that the IX approach again would
experience more properties saving in the top two tiers, while the TR approach creates an average
increase in the broader second tier while rewarding the smaller fourth tier. Comparing outcomes
in the context of property values can provide more clues, as done in Table 21 and Figure 6.
Table 21 shows that the building and land ratios for the first and second tiers of properties
represent the bulk of the city’s assessment composition. The aggregate B:L for Philadelphia is
3.15 and the city-wide average is 5.05, which explains the positive tax incidence outcomes for
the two-rate tax. This can be seen in the ―TR: D‖ code groupings in the first and fourth tiers.
would be incorporated, reducing perceived regressive tendencies that would favor the fourth
tier’s allocation advantage. Figure 4 also illustrates the progressivity of the IX option, visualizing
the clustering of the ―IX: D‖ properties around the axis as generally lower overall valued
33
properties with land values less than $20,000 and building value less than $30,000, comprising a
Conclusion
Based on the finding of our analyses in the cities of Berlin, NH; Lancaster, PA; and
Philadelphia, PA; it has been demonstrated that an improvement exemption has the potential to
not only improve the progressivity of outcomes in potential two-rate tax shift applications, but to
also establish viability of a land value tax shift in jurisdictions exhibiting characteristics that
The traditional two-rate approach remains a powerful policy tool for tax reform,
un- and underutilized land. However, this power can come at the expense of important policy
concerns, including the impact on income-poor and land-rich properties, a certainly complexity
in understanding and implementing two tax rates, and a more concentrating impact on polar ends
of the property spectrum, which as we’ve seen may risk the materialization of a broad opposition
effort.
structure that extends the benefits to a broader and more diffuse property base, appears simpler to
understand through retaining one rate and utilizing the common concept of exemptions, and
appears as a uniform dollar amount, universally applied, automatically enrolled, and permanently
enabled. Despite its clear benefits, several disadvantages exist for improvement exemptions,
including the fact that it hasn’t yet been fully implemented anywhere, returns less reward for
high improvement values, and produces less impact on vacant land. Such challenges will need to
34
In total, however, our findings make a strong case for consideration of improvement
exemptions as a first-class policy for land value tax shifting in a way that addresses
addition, it also seems likely that this tax deduction method may outperform a tax credit method
in this particular application, although additional comparative analysis using identical data sets
built-in amelioration mechanism for the property tax that can help address existing inequities in
the short-run while transitioning to the ideal structure of a purely land value tax excluding all
improvements. This can be done by simply incrementing the percentage of median improvement
value deductible from each year’s total tax liability until finally reaching the jurisdiction’s
Appendix
The following figures present the two forms of aggregate data visualizations for each of
the three data sets used in our analysis. Each chart plots the specified range of properties along
the axis, and is marked by a color and symbol code. In both graph types ―TR: I; IX: I‖ properties
are represented by a red X, ―TR: D; IX: I‖ properties are represented by an orange circle, ―TR:
D; IX: D‖ properties are represented by a green square, and ―TR: I; IX; D‖ properties are
represented by a blue cross. Within some charts one class of outcome codes will be densely
clustered together while other is significantly scattered, demonstrating the impact differentiation
The building to land plots display the outcome code of each property and its taxable value
13
At a certain point calculating the upper bounds through multipliers of the median can be dropped in favor of
simply dividing the revenue target by aggregate land values to derive the required land value tax rate.
35
allocation, demonstrating how a property’s composition between building and land impacts its
outcome under both the TR and IX scenarios. The marginal difference plots display the outcome
code of each property and its marginal change from the current tax bill for both the TR and IX
scenarios.
36
Cohen, Jeffrey P., and Cletus C. Coughlin. ―An Introduction to Two-Rate Taxation of Land and
England, Richard W. ―An Essay on the Political Economy of Two-rate Property Taxation.‖
England, Richard W., and Min Qiang Zhao. ―Assessing the Distributive Impact of a Revenue-
Neutral Shift from a Uniform Property Tax to a Two-Rate Property Tax with a Uniform
1997. <http://scholar.lib.vt.edu/theses/available/etd-61097-13834/>.