An experiment in truly bold tax reform quietly died last summer, when the Pennsylvania city of Altoona scrapped its land value tax.
Starting in 2011, the small city in central Pennsylvania employed a tax system unique among U.S. cities. It taxed properties based on the value of land, not on the value of structures.
As the only example of a town with a land value tax, Altoona was the incarnation of tax economists’ dream. Despite support from economists across the political spectrum, however, the tax eventually foundered on the realities of administrative complexity and politics in Altoona.
Land value tax proponents have sought to experiment with a 100 percent land value tax since the idea was popularized by 19th-century political economist and journalist Henry George. George suggested land value taxes as a way of rewarding strivers and business owners who build up cities and generate commerce — and of denying financial returns to owners of land merely because they happen to own the land.
The concept has strong intellectual support. Milton Friedman, the father of modern free-market economics, called the land value tax “the least bad tax.” That logic is simple: Taxing discourages whatever it is that is taxed. Tax income, and you will get fewer workers working fewer hours. Tax investment, and you will get fewer new ventures and smaller factories. Tax land, however, and the supply of land remains the same.
More recently, the land value tax has received interest from the Left. Joseph Stiglitz, the liberal Nobel Prize-winning economist, suggested in a recent paper that the land value tax might be the proper response to the rising wealth inequality identified by Thomas Piketty in his surprise bestseller Capitalism in the 21st Century, a book that emboldened liberals calling for taxing the rich.
Peter Orszag, Barack Obama’s former budget director, suggested in a 2015 op-ed a proposal for a national land value tax for similar egalitarian purposes.
Losing population and tax base, Altoona began trying out the land value tax in 2002 on the recommendation of the Center for the Study of Economics, a Philadelphia think tank that advocates land value taxes.
In 2011, the city began levying taxes solely on land value and not at all on property value.
Joshua Vincent, the head of the Center for the Study of Economics, portrayed the reform as a way to boost a struggling city. Altoona, he said, was out of the “economic mainstream now, sort of flyover country if you will. They were stuck with vacant land and had no practical way to attract investment.”
The idea was that, by eliminating taxes on building, the land value tax system would spur construction and increase density in the downtown area.
Some projects that would be marginal calls with property taxes would be feasible with no taxes, said Nicolaus Tideman, a Virginia Tech economist. “The idea that taking taxes off of improvements motivates greater investments is uncontroversial among economists,” he said.
Advocates could point to some empirical evidence that Altoona would see business stimulated by the tax system. A 1997 study from University of Maryland economists found that when Pittsburgh lowered taxes on structures relative to land in the late 1970s, it experienced a “building boom” that allowed it to escape the worse fates that befell other Rust Belt cities.
And in Altoona, Vincent says, the land value tax provided relief for the vast majority of homeowners and businesses.
Nevertheless, five years later, land value tax advocates don’t have clear examples to point to of projects or investments in the city that would have been made without the tax system in place, and the reform has been undone.
Matt Pacifico, the town’s mayor, blamed the land value tax’s political failure on two major factors.
The first was that the incentive created by the city’s land value tax was limited, because the county and the school district imposed property taxes. The tax break for investment created by the land value tax, accordingly, made up just a small fraction of overall property-related taxes.
Another major problem was that the tax system was so unusual that potential residents and businesses struggled to understand the potential benefits of moving to or investing in the city. When campaigning, Pacifico noticed that many residents didn’t realize Altoona had a unique tax system that incentivized building. In some cases, businesses might have been turned off by the relatively high rate of tax on land, not understanding that there was no rate of tax on structures.
David Butterbaugh, the only councilman to vote against repeal of the land value tax, agreed with that autopsy. “The main reason it did not succeed is because we were the only ones doing it,” he said. “Nobody seemed able to wrap their heads around the numbers.”
While some of the benefits failed to materialize, the town also heard complaints. Residents interested in adding vacant lots or side lots to their properties objected that those additions would have increased their tax bills as if there were a house on the added land, even if it was just an empty lot.
In part, penalizing unused or underdeveloped land is part of the logic of the land value tax, which is meant to reward commerce rather than real estate speculation.
“Yeah, you would have a high tax rate on land, but the city was not really interested in making it easy to hold onto and buy vacant land,” Vincent said. Altoona, though, had a particular problem in that the penalties for buying unused land could be overly steep if the land was valued as if it were developable, but it really was not. Reassessments didn’t come frequently enough to prevent that problem.
In the end, said Butterbaugh, developers who had invested in the downtown area complained when the council moved to repeal the land value tax, seeing that their investments would be taxed. But that was not enough to stave off repeal.
Yet the trial run in Altoona may have helped advance the goals of Henry George and his intellectual followers. City officials said that while the tax was in place, it earned interest from national media and places as far away as England and elsewhere in Europe intrigued by land value taxes.
Vincent said his group is still optimistic about future toeholds for the land value tax. He has received interest from city officials in Connecticut, New Hampshire and Wyoming. “Because Left and Right can agree philosophically, we’re finally breaking through,” he said.
