After talking about the uniformity clause and the wage tax, our discussion turned to real estate taxes and the possibility, now denied by the uniformity clause, of taxing commerical property at higher rathes than residential property.
As most folks who follow the issue know, implicit in the Tax Reform Commission’s recommendations is the notion the city will make up lost revenues from reducing the wage tax and the BPT when property values—and thus property taxes—rise. Lots of people, rich and poor, who are used to our low property taxes, don’t care much for this idea. And it is especially threatening to people with low incomes in gentrifying areas. I favor a plan to limit these real estate tax increases by allowing people to put off paying tax increases over a certain percentage until the time they sell their house. Brett is supportive of ideas of this kind as well. But, as Brett pointed out, if we could constitutionally tax commercial property at higher rates than residential property, we could to some extent deal with the troubling issue of rising real estate values by lowering tax rates on residential properties. At the same time, we could secure increased revenues by keeping rates unchanged for commercial properties.
Now I am sure lots of readers are now wondering how Brett can oppose the gross receipts and net profits taxes on businesses while favoring the higher tax rates on commercial than residential properties. There are a couple of answers, I think
First, Brett believes that by cutting business privilege taxes, we are likely to stimulate new business investment in Philadelphia and that, together with declining wage taxes, will, in encourage people to move into the city. Economic growth will, in turn, lead to rising property values and, so long as we keep real estate tax rates more or less stable, increased tax revenues for the city.
So long as real estate tax revenues increase because of increasing property values, not increased tax rates, the owners of real property—land and buildings—are not really losing out. For their properties are substantially increasing in value and thus the real or imputed rental value of those properties will be increasing as well, and certainly enough to pay higher taxes. This process can create severe individual and political problems when low income residents do not have the cash flow to pay their taxes. But, in most cases, it is not a social problem when low profit margin business cannot pay higher real estate taxes. When that happens, it may be best for everyone if a higher profit margin business moves in and the lower profit margin business moves to another location. (Obviously there are cases where social problems do arise if, for example, low margin businesses like supermarket cannot survive in Center City. This problem can be resolved through creative tax amd other economic development policies, such as low interest loans to help low margin businesses relocate.)
From a progressive point of view, people who own land and buildings in areas with rising real estate values should pay more in taxes because those rising values are, in some possibly large part, the result of public policy—whether it be tax cuts, or investments in new streetscapes, or the development of new transit lines—or of the actions of other private business owners who have invested in their area of the city.
Secondly, if we tilt our real estate tax towards land rather than improvements on the land, the efficiencu costs of the increasing value of land—and increasing taxes as well—is particularly small. If we were to raise tax rates on improvements to land, then businesses might decide to build office buildings in some other jurisdiction. But, as the Henry George School has long argued, land can’t move and they aren’t making any more of it. If land can’t move, land owners can’t avoid taxation by moving out of town. And much of the value of land in highly developed places like Center City is what economists call a economic rent, that is, a value created mainly by scarcity. There are never any general efficiency costs to taxing economic rents. And there is much to be said from a progressive point of view for taxing them. Economic rents based onthe scarcity of some good–whether it is land or, say, the natural talents that gives one an ability to score points in the NBA–give people economic rewards far beyond necessary to get them to do their jobs well.
By and large, then, I find myself agreeing with Brett about the virtues of taxing commercial and residential properties at different rates. And, by the way, that is not a new idea. New York City is notorious for the low tax rates it places on single family homes in the outer boroughs and particularly in Queens. (Tax rates are higher for apartment buildings, co-op, and condos, partly because those taxes are easier to hide from consumers than taxes on single family homes.)
So, where does that leave us? Brett Mandel, the leader of what some of my other friends call the right wing anti-tax movement in the city thinks that, up to a point, progressive taxation is a great idea, and wants to change the constitution’s uniformity clause to allow it. And so do those folks in the left wing pro-tax movement.
Is there some potential here to get progressives of all sorts together on this issue? Can we extend this agreement to people in the labor and business communities? At a transit press conference I once stood on a stage between Mark Schweiker of the chamber of commerce and Pat Eiding of the AFL-CIO—who both favored dedicated funding for transit—and talked about the lion lying down with the lamb. (They started arguing, however, about which one of them was the lion and which was the lamb.) Can it happen again? Can we develop a creative, consensus position on taxation composed of some of the elements I have described here:
1. Progressive income taxation instead of the wage tax
2. Large reductions in business taxes.
3. A shift to real estate taxes as property values rise, combined with differential rates for residential and commercial property and the protection of low income residents who can’t afford to pay increasing real estate taxes.
4. An economic development program that includes targeted investments in schools, commercial corridor revitalization—perhaps through local initiatives supported by the city—and aggressive crime control efforts.
And, if we can come up with a consensus view that rests on progressive taxation, can we sell it in Harrisburg? My guess is that, right now, we can’t. The real right wing—the Republicans in Harrisburg—don’t like progressive taxation one bit. But if Governor Rendell helps his fellow Democrats in November, the partisan balance might shift a great deal.
If it doesn’t, then there is one other possibility. If all the state legislators from Philadelphia could agree, could we perhaps convince the General Assembly to amend the uniformity clause for cities of the first class, that is, Philadelphia? Could we do it this year so that we don’t have to wait too long for this constitutional amendment to be adopted? (Constitutional amendments have to passed in two different legislatures and then passed by the voters in a referendum.)
I’m willing to put some time and effort into encouraging public and private discussions of these ideas if there is some prospect of that a consensus view of taxation would lead to a movement to overturn the uniformity clause, at least for Philadelphia.