Excerpts:

Like most municipalities, Millbourne (Penn.) relied heavily on property taxes. The city taxed land and the buildings on top of the land at the same rate, which is typical for cities across the country. And the Sears store was the largest structure in town on the largest parcel—17 acres. “For many years,” says Mayor Tom Kramer, “that area of land was the meat and potatoes of the borough.” But when Sears closed and the building was demolished, the property tax revenue all but evaporated.

Millbourne fell into financial ruin. Five years after the store closed, the borough was designated as financially distressed by the state. That made it eligible for additional financial support and debt restructuring, but it was no help to the community’s reputation or self-image. The mark would remain on Millbourne’s back for 21 years.

The town was unable to lure in new development with tax breaks, so to avoid financial ruin, it leaned on its homeowners to fill the gap in municipal finances. Tax bills skyrocketed between 1993 and 2014. But city leaders ultimately realized the long-term vitality of Millbourne could not be financed by single-family homeowners. High taxes would eventually chase residents away. At the very least, continued increases to property taxes could spark a tax revolt like those that challenged high property rates in California in the 1970s and, closer to home, costly reassessments in Pittsburgh in 2001.

Where Sears once stood, weeds and wildlife have taken over. And from the train platform, the empty lot remains an eyesore in Millbourne. But the gash in the borough’s finances has been mended. The town turned to an old yet radical idea to raise revenue. It enacted a land value tax, levying high rates on the land itself and none at all on the structures built there. The tax burden was shifted. Homeowners saw their tax bills cut nearly by a third. Meanwhile, the Sears property, which still swallows up more than a third of the land in the city, saw its tax bill double.

The land value tax, a 19th-century idea, not only raised necessary funds to keep the city afloat financially, but, as intended, forced landowners to make more productive use of other large properties. A former car dealership and a bowling alley, the second and third largest parcels in Millbourne, are now under development. “It’s sort of a stick-and-carrot approach,” Kramer says.

It was a chance meeting with Dodson, the Temple University professor, that convinced mayor Kramer that a land value tax would be the right fit for Millbourne. Kramer was open to any ideas that would generate the revenue necessary to save the town fiscally, without placing any more burden on single-family homeowners.

Kramer faced strong headwinds from real estate interests. Even when the local political climate supports a land value tax, adoption is difficult. In Pennsylvania, as in most states, state law severely limits the ability of a municipality to make major changes to how it collects taxes. But Pennsylvania may be a straw in the wind.

It’s an idea that quite a few local governments, most but not all of them in Pennsylvania, are starting to think about.

Comment:

This story is not unique; it happened in cities that elected to adopt LVT throughout Pennsylvania – which via the state constitution authorizes local jurisdictions to use a split-rate tax. In the parlance of local finance, it’s known as “incentive taxation”. As mayor Kramer says, it is both a stick and a carrot – simultaneously. In Millbourne, the property tax burden was shifted off fully developed sites onto vacant and underutilized sites. This provided the incentive to put land into productive use.

Closer to home, in Oregon, the Northwest Economic Research Center at Portland State University completed a new study of LVT effects. Looking at four commercial corridors in the rapidly increasing land value neighborhoods of Northeast Portland, researchers found most underdeveloped lots paid annual taxes of only a few thousand dollars. A land value tax would about triple the taxes on those sites. If the same lots were redeveloped at full zoned capacity the tax burden would increase only marginally. But here’s the real deal: If the tax system remained as an equal rate on land and building assessments, the redeveloped sites would see their taxes jump twenty or thirty times. That’s three or four times the land value tax bill. Now that’s incentive taxation!