Friday, October 10, 2008

A great idea for Salem

An important idea for Salem

The Henry George Foundation publishes an "Incentive Taxation (IT)" newsletter that talks about an important historical idea for a better tax system:  one that shifts taxes off productive activity and onto land ownership.  This is both fair and efficient -- fair because most of the value of land is created by people other than the owner, efficient because land ownership is the one source of wealth that is not diminished by a tax.

As the new reality brings the return of hard times to America, cities that are willing to innovate and to rethink the basics are the ones that are going to thrive.  Any town that's willing to move taxation off of improvements (buildings) and onto land ownership will see a revival of its urban core.  Look at the many gaps in the urban fabric in Salem -- this is caused by the number of unused and underused lots, which are owned by speculators.  Land value taxation (LVT), the system discussed in the piece below, is the solution.  While the article below is about Philadelphia, the points apply to every city in the US.

[Incentive Taxation or IT] is based in Philadelphia, PA, and the hammer is starting to come down; Philly is not alone, however. A search of news stories from across the country tells the tale: from annually distressed Pittsburgh, PA (since they lost LVT) to usually robust Columbus, OH. The implosion on Wall Street is forcing New York City to consider higher property taxes; summer flooding in Cedar Rapids, IA, wrecked much of the tax base causing tax hikes, and Las Vegas/Clark County is seeing foreclosures and tumbling revenues, as are California and Georgia. 

The Philadelphia Story 

Mayor Michael Nutter hinted at trouble recently, when he indicated that a deficit of $450 million over five years is looming. Some believe $90 Million a year (around 2.25% of the total budget) is not a big deal, but it is[1] . Cities have to face the fact that in the near to mid-term businesses will contract, and the returns on invested pension funds will be much lower than forecast. 

For decades, Philadelphians have lived with taxes that led to job loss and a declining population. The "new" Center City is great, but it is simply filling a vacuum of empty offices that small to medium firms abandoned for the 'burbs because they didn't have the connections and the clout to get great deals and abatements. 

Perhaps the expense side of Philadelphia should be trimmed, as the local editorials are saying. Small savings add up quickly in a city budget that pays not just for essential services but camps, concerts, and flowers in the park. 

If we as a community think we ought to have these things, we must find a source of revenue that is stable – one depending less on a tax vulnerable to the shocks of global financial markets and totters on a volatile small base, which defines the most taxes on business. 

Isn't it time to increase tax revenue by switching from taxes on mobile businesses and jobs? If so, then what do we tax? Wages? No way! Sales? A regressive tax! 

Property tax? Better, but the property tax is two taxes, both with very different characteristics and behaviors. The first, a tax on buildings, hurts the best that our community has to offer: those that want to build and maintain their properties. The second, a tax on land value, would put downward pressure on sites making them more affordable. 

Any economist will tell you that land values are not created by someone's hard work, but rather one's community neighbors. A high land value tax means that community-created land values come back to us as revenue. A low tax on land produces lots that sit vacant for years, inviting land speculation, and parking lots where buildings should be. A tax on land value has provided a stable revenue source in Arden, DE[2]

So, let the tax reductions continue, as the reformers of the recent past (led by Michael Nutter) envisioned. $90 million annually can be raised elsewhere, not least by initiating a higher tax on land values. This would guarantee that: small business would not be socked; high value locations would fill in with shops, and homeowners see a lower tax since their land is further out. Tax reduction "signals" creating jobs, and commerce would strengthen without hurting revenue flows so essential to Philadelphia.