Rick is a Director at Just Economics, LLC. Just Economics specializes in helping communities re-engineer taxes, fees and regulations. Rick is an attorney with a Master’s degree in real estate and urban development. He has worked on issues related to state and local government for over 25 years. Rick established Just Economics, LLC in 2009.
Advice For Economic Development Professionals
Economic development professionals should be doing more to reduce barriers to business growth and retention. We say that we want more housing and jobs, but when a landowner constructs a new building (or improves and existing one) we raise their taxes. When an owner allows a building to deteriorate, we lower their taxes. These economic incentives are upside-down.
The typical property tax is only between 1% and 2% of value. But unlike a sales tax (paid only once at time of sale), a property tax is paid each and every year that an improvement adds value to a property. A net-present-value calculation shows that the economic impact of the property tax on buildings is equivalent to a one-time sales tax of between 10% and 20% on construction labor and materials. That’s a substantial cost barrier to investment.
On the other side of the coin, owners of boarded-up buildings and vacant lots typically pay relatively little. This makes it easy for them to sit and wait for new infrastructure or work by neighbors to make their site more valuable in the future. In the meantime, this artificial reduction in the supply of development sites results in real increases in land prices. High land prices discourage development on high-value sites and drive development to cheaper, but more remote sites. The resulting sprawl destroys farmland. It also destroys municipal budgets because expensive infrastructure must be duplicated in outlying areas.
This clarifies why many businesses seek property tax abatements as a condition for new investment. But why play favorites and exempt some businesses while not exempting others?
Economic development professionals should look to several Pennsylvania cities that are rectifying this situation. They are transforming their property tax into a value capture user fee. This is accomplished by reducing the tax rate on building values and increasing the tax rate on land values. Jurisdictions can collect the same property tax revenue, but the incentives are much more favorable for construction, improvement and maintenance of buildings. Not only does a lower building tax make buildings more affordable, but a higher land tax also creates downward pressure on land prices. So this is a potent tool for making a jurisdiction more affordable for all businesses, existing ones as well as newcomers.
I would be glad to assist your jurisdiction in designing and implementing this approach. For more information, see http://www.justeconomicsllc.com