Improvement Exemption Approach to Land Value Tax Shifting:

A Study of Three Cities

September 10, 2009

Eron Lloyd

Summer 2009 Independent Study

Dr. Lisa Wilder, Advisor

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Contents

Introduction ..................................................................................................................................... 3
Principles and Practice of Land Value Tax Shifting........................................................................ 6
Two-rate Tax Shift Approach ...................................................................................................... 6
Improvement Exemption Tax Shift Approach ............................................................................ 8
Current Assessment and Tax Incidence Levels ..............................................................................11
Berlin, NH Distributions ............................................................................................................11
Lancaster, PA Distributions ....................................................................................................... 12
Philadelphia, PA Distributions .................................................................................................. 13
Two-rate Tax Incidence Levels ..................................................................................................... 13
Berlin, NH Distribution ............................................................................................................ 14
Lancaster, PA Distribution ........................................................................................................ 15
Philadelphia, PA Distribution .................................................................................................... 17
Improvement Exemption Tax Incidence Levels ........................................................................... 18
Berlin, NH Distribution ............................................................................................................ 19
Lancaster, PA Distribution ........................................................................................................ 21
Philadelphia, PA Distribution .................................................................................................... 22
Comparative Examination of Approaches .................................................................................... 24
Berlin, NH Comparison ............................................................................................................ 26
Lancaster, PA Comparison ........................................................................................................ 28
Philadelphia, PA Comparison ................................................................................................... 30
Conclusion .................................................................................................................................... 33
Appendix ....................................................................................................................................... 34
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Introduction
Land value taxation (LVT) is the practical application of the government appropriation of

land rent, also known as the surplus value of production, a concept widely recognized since the

time of classical economists such as the Physiocrats, Adam Smith, David Ricardo, and Henry

George. Throughout history, these and other economic theorists have acknowledged land rent as

a publicly created portion of wealth that—due to land’s permanency and fixed supply—could

serve as an ideal source of tax revenue without any dead-weight loss to general levels of

economic activity (Cohen & Coughlin).

LVT, as commonly studied and applied today, involves shifting tax levies from labor and

capital bases such as wages, business income, and sunk capital such as buildings onto the market

value (capitalized purchase price) of land. In Pennsylvania this effort has been facilitated

successfully in multiple municipalities through a tax reform called the ―two-rate‖ form of the

property tax (Plassmann 39). Operating within the existing property tax administrative structure,

the two-rate tax can be used to incrementally reduce tax levies on either the building portion of

the property tax or from activities of private enterprise.

Although the results of the two-rate property tax have been generally positive, recent

research and evidence suggests that several challenges associated with the adoption and

distributional impact of the tax can be addressed using a modified approach. Richard England

states that ―even if two-rate property taxation would generate substantial efficiencies for society

as a whole, some property owners could be worse off after its adoption. Thus, the political

challenge is to design reform proposals that offer social efficiency gains without provoking

formation of anti-reform coalitions‖ (3).

England’s recommendation is to introduce the use of a uniform credit in conjunction with

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a two-rate shift as a way to ameliorate regressive outcomes and reduce resistance to the reform

(England & Zhao 248). Under such a scheme, taxing jurisdictions would be enabled to grant ―a

tax liability credit on each property tax bill‖ along with the two-rate reform (England & Zhao

251). This approach is somewhat similar to existing tax relief measures such as rebates or circuit

breakers, but has the advantage of being automatically and universally applied to all taxable

property, whereas existing programs often require individual property owners to apply for the

program, many of which do not.

Although this approach yielded more progressive results in subsets of the data set used in

his analysis, England’s tax credit is still suboptimal for the purposes of land value tax shifting.

The reason for this is because it takes too broad of an approach in providing tax credits, and

could end up subsidizing large numbers of small-scale abandoned or speculative land holdings at

the expense of productive properties. A better approach would keep the universal and automatic

enrollment process, yet target only the improvement value of the property for eligibility.

Two ways to do this would be either a tax credit, as in England’s proposal, applicable to

the improvement amount of the tax bill, or alternatively, as a tax deduction applicable to the

improvement value of the assessment. Both would achieve the same objective, but some

differences in approach require careful consideration. First off, a deduction is ―front-loaded‖ in

the process while the credit is ―back-loaded;‖ in many cases a front-loaded deduction can

simplify administration of the tax (what you see on the bill is what you pay). Also, a credit might

create more confusion among taxpayers, as even a revenue neutral shift would actually require a

larger total amount to be collected to account for the crediting, whereas a deduction would take

place during the rate-setting process and still equal the current revenue level. This could lead to

suspicions that the shift isn’t actually revenue neutral, and more money is being tax away than
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needed. Additionally, a deduction on improvement value could actually eliminate the need for

two tax rates since it would, in effect, reduce taxes on buildings by reducing their taxable value,

providing another simplification of a potentially complicated reform. Since the ultimate objective

of land value tax shifting is to eliminate the tax rate on buildings (by decrementing it to zero),

waiving the need for it at all may be advantageous.

This paper will thus consider the potential of the deduction option on a one-rate property

tax, which from here on will be called an improvement exemption. Using several data sets, we

will research the viability of this option not only as a way to improve the political economy of

the land value tax shift outcome, but also as an alternative solution in jurisdictions unable to

utilize the traditional two-rate approach.

The data sets we will examine as part of our evaluation represent Berlin, NH;1 Lancaster,

PA;2 and Philadelphia, PA.3 Berlin and Lancaster were chosen because of their respective scales

as small and mid-sized cities, and because both are interested in evaluating a land value tax shift

but cannot because of the undesirable outcomes for their particular reasons. Philadelphia was

also selected because of its scale as a large city and the fact that a traditional two-rate LVT shift

would already work so well that we’d like to test the outcome of an improvement exemption

against it for comparison.

The approach will be to perform a comparative evaluation of the tax incidence levels of

the traditional two-rate tax versus the exemption on improvements for each of the sample

jurisdictions in a revenue-neutral manner. The two-rate approach will use the 50%-50% split

(explained below) on building and land proportions for the tax, while the improvement

1
http://www.berlinnh.gov/Pages/BerlinNH_Collector/taxrate; data submitted to our organization by City Manager
2
Data acquired from the Lancaster County property assessment database
3
Data provided by the Philadelphia Bureau of Revision of Taxes (http://brtweb.phila.gov)
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exemption approach will use 50% of median value for Lancaster and Berlin data, and full median

for the Philadelphia data.4 These levels have been chosen for their simplicity in calculating shift

rates and defining outcome amounts. Different levels can always be used to slow or accelerate

the shifting process, and is a decision that must be made under the considerations of each taxing

jurisdiction.

Principles and Practice of Land Value Tax Shifting

As mentioned above, LVT is supported by the widely-held principle of land rent’s ability

to serve as a significant source for public finance without dead-weight loss inefficiencies. As

such, applications of LVT seek to shift current taxes levied on forms of labor and capital onto

land as effectively and equitably as possible.

Two-rate Tax Shift Approach

Although there are multiple ways to perform the shift, the most common application in

the U.S. over the last century has been the two-rate method (also known as the graded, split-rate,

or two-tier tax, although these terms can be confused with other forms of the real estate tax as

implemented in other states). The traditional property tax uses one tax rate applied to the total

assessed value of each property. In the two-rate approach, separate tax rates are set for both

buildings and land, with the tax rate on land designed to bring in an increasing proportion of

revenue while the tax rate on buildings is reduced. This approach allows a jurisdiction to phase

out the tax rate on buildings over a period of time, often by 10 or 20 percent annually, while

maintaining revenue neutrality during a transition to a land tax. Pennsylvania is the principle

state to have applied the two-rate method, with each adopting jurisdiction taxing building values

4
The Lancaster and Berlin data sets provide full value for land and improvement assessments, while the Philadelphia
data set is set at a fractional assessment level, thus lowering the values and potentially skewing the outcome.
 7

at a lower rate than land values.

The two-rate method generally takes the following steps when done in a revenue-neutral

manner with current assessment levels: (1) set the building rate reduction percentage as a

coefficient between 0 and 1; (2) calculate the decreased improvement rate; and (3) calculate the

increased land rate necessary to meet the established revenue target in step 2. Steps 1 to 3 can be

expressed through the following formulas:

where BRR is the percent to reduce the property tax rate, PTR is the current property tax rate,

BTR is the proposed building tax rate, LTR is the proposed land tax rate, BA is the total building

assessment, and LA is the total land assessment.

While straightforward in application, this approach is often seen as complex by both

officials and the public, who often don’t generally think of changes in tax rates instead of tax

bases and have trouble with a set of assessment values instead of a combined total.

An alternative approach to establishing a land value tax is known as the ―50-50 revenue

split,‖ where the existing single rate applied to both buildings and land (and which generally

impacts building value higher) is replaced by allocating half of the total revenue from both

buildings and land equally, thus altering the proportion to favor land value more highly.

The steps for the 50-50 revenue split are as follows: (1) divide the current revenue amount in two

in order to derive the equal revenue amount; (2) divide the equal revenue amount by the total

building assessed value to derive the building tax rate; (3) divide the equal revenue amount the

by total land assessed value to derive the land tax rate. Steps 1 to 3 can be expressed through the

following formulas:
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where ERA is the equal revenue amount, BTR is the proposed building tax rate, BA is the total

building assessment, LTR is the proposed land tax rate, and LA is the total land assessment.

For the purposes of our study we will be utilizing the 50-50 revenue split approach in

determining the two-rate tax impacts, as it provides both a simpler process and more dramatic

results among individual properties that the typical 10-20% building tax reductions usually

attempted when initiating such a shift.

Improvement Exemption Tax Shift Approach

Using improvement exemptions, one can begin to remove improvement value out of the

tax base incrementally while maintaining taxation of total land value, thus allocating increasingly

higher proportions of the property tax to land value. This method is frequently used, albeit on a

temporary basis, for tax abatement schemes that reward investments in buildings by exempting

value added from increases in assessments and thus increases in tax incidence. Philadelphia, PA

and Berlin, NH both have such programs.5 An improvement exemption such as the one proposed

here would expand such programs to be (1) universal, applying to all improvement values old

and new; (2) automatic, requiring no individual administrative responsibility for applying for and

maintaining enrollment in the program; and (3) permanent, remaining in effect indefinitely

instead of expiring after a defined incentive period.

To exempt improvement assessments from taxable value, all that must be done is to

determine a dollar amount to exempt, either from the total existing improvement value or as

5
http://brtweb.phila.gov/brt.apps/FileViewer.aspx?category=Abatements&fname=GeneralInstToFileApp.pdf and
http://www.berlinnh.gov/Pages/BerlinNH_IndustrialDev/Incentives
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applied to all new improvement value, often in conjunction with a cap on the level of exemption.

The process to do this is (1) establish an improvement exemption deduction amount; (2) reduce

the taxable building value of each property up to the deduction ceiling; (3) re-calculate the

property tax rate using the adjusted taxable building assessments and original land assessments.

These steps can be expressed using the following formulas:

where IED is the improvement exemption deduction, ABA is the adjusted building assessment

(being either the building assessment minus the exemption deduction or zero, whichever yields

the higher amount, and PTR as the property tax rate as adjusted to maintain current revenue

levels.

For the purposes of our study we will be utilizing either half the median improvement

value for jurisdictions assessed at full market value (Berlin and Lancaster), or the entire median

for jurisdictions utilizing fractional assessment levels (Philadelphia). But what makes this

approach more effective than a tax credit, as proposed by England?

Conventional economic theory holds that tax credits are more effective than deductions.

For a tax rate of 3% applied to a property taxable at $100,000 (with $80,000 in building value

and $20,000 in land value), a $1,000 dollar tax credit would reduce the tax bill of $3,000 by

$1,000, dollar for dollar, down to $2,000. If instead a $1,000 tax deduction was provided, it

would simply reduce the taxable property value to $99,000, and would result in a tax bill of

$2,970, saving only $30.

Because the improvement exemption instead indexes the deduction to a percentage of the
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overall median improvement value, it improves the effectiveness of the deduction’s impact. If the

median improvement value was $50,000, and the jurisdiction decided to allow 50% of the overall

median ($25,000) to be deducted from the taxable value, our property would instead be valued at

$75,000, resulting in a tax bill of $2,250 and a savings of $750. This brings the tax reduction

potential of the deduction, ceteris paribus, closer to the credit; if the full median value was

instead deductible, the taxable value would drop to $50,000, resulting in a tax bill of $1,500 and

a savings of $1,500.6

The use of the median as a reference point in calculating the deduction amount also more

easily pegs the deduction to actual policy goals. In discussing the rationale for a $1,000 credit,

England and Zhao cite challenges in determining the most efficient yet equitable level:

―One methodological reason is that the uniformity assumption simplified our modeling

exercise. Another is that we do not have data on the age, income or assets of property

owners and, hence, cannot simulate credits linked to those variables. A practical political

reason for offering a uniform tax credit to every taxpayer is that this provision could

broaden support for property tax reform, especially among small business owners. If an

age– or income–based credit were implemented instead of a uniform credit on all tax

bills, then the tax rate on land values required to finance a revenue–neutral cut in the tax

rate on building values would be lower.‖ (251)

A median-indexed deduction maintains uniformity, yet also gains progressivity from the fact that

improvement value generally reflects vertical equity characteristics, and can thus be used to peg

the deduction to target specific distributional levels. If specified using this formula, the

exemption indexing would be preserved during reassessments as well, requiring only an update

6
The introduction of an exemption requires the adjustment of the tax rate, which can change the outcome depending
on the property’s building and land value allocation. This example is only to illustrate the concept.
 11

to the deduction amount and necessary tax rate. In the same case, a credit might require more

readjustments using potentially arbitrary and increasingly political criteria.

Finally, in a practical sense, an improvement exemption may exhibit an advantage when

making the case for the approach, as opposed to a credit, by pointing out that deduction amount

would typically be more dramatic than an equivalent credit, such as $50,000 deduction compared

to a $1,000 credit offered annually. Such a benefit would be of pure political value, with no

technical advantage.

Current Assessment and Tax Incidence Levels

Before evaluating the impact levels of the two-rate and exemption improvement

approaches, it will be useful to examine the current distribution of tax incidence for each

jurisdiction as a reference point. To do this, we will look at the current levels of our three main

factors: tax bases, tax rates, and tax revenues. Table 1 presents a summary of these current

conditions for each of our jurisdictions.

Jurisdiction Tax Base Tax Rate Tax Revenue

Berlin, NH $865,575,798 0.0149 $1,469,748
Lancaster, PA $1,914,819,000 0.00964 $18,458,855
Philadelphia, PA $12,135,622,988 0.08264 $1,002,887,884

Table 1: Current bases, rates, and revenues (all cities)

In each jurisdiction, the tax base is the assessed total value of the jurisdiction’s real estate

(including land and improvements), the tax rate is expressed in millages, and the tax revenue

being the final result. For the purposes of our study, the tax bases and rates will change as we

deconstruct the property tax through the tax shift, yet the revenue levels will remain the same.

Berlin, NH Distributions

Berlin consists of 4,743 properties with total tax base of $484,165,549, of which
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$419,558,200 (or 87%) is building value and $64,607,349 (or 13%) is land value, as shown in

Table 2. This produces an aggregate building to land ratio (B:L) of 6.49:1, which is somewhat

higher than normally expected ratios of approximately 4:1 or 5:1.7 The municipal property tax

rate is .0149, or 14.9 mills, which when applied to the tax base produces $7,214,067 in total

revenue.

Under the current tax structure, the average property has an improvement value of

$94,623, a land value of $14,571, and a total value of $109,194, yielding a tax bill of $1,627. The

highest paying property has a tax bill of $1, 659,294, and the lowest paying property has a tax

bill of $1.

Taxable Improvements Taxable Land Taxable Total

$419,558,200 $64,607,349 $484,165,549
87% 13% 100%

Table 2: Berlin, NH assessment values

Lancaster, PA Distributions

Lancaster consists of 17,704 properties with total tax base of $1,932,426,400, of which

$1,519,647,700 (or 79%) is improvement value and $395,171,300 (or 21%) is land value, as

shown in Table 3. This produces an aggregate building to land ratio (B:L) of 3.85:1, which is

more in line with expected ratios. The municipal property tax rate is 0.00964, or 9.64 mills,

which when applied to the tax base produces $18,458,855 in total revenue. The average property

has an improvement value of $85,836 and land value of $22,320, yielding a tax bill of $1,043.

7
The building to land ratio reflects the proportion of improvement to land values, where properties with high
proportions tend to decrease in incidence from land value tax shifting while properties with low proportions
experience increases.
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Taxable Improvements Taxable Land Taxable Total

$1,519,647,700 $395,171,300 $1,932,426,400
79% 21% 100%

Table 3: Lancaster, PA assessment values

Philadelphia, PA Distributions

Philadelphia consists of 577,780 properties with total tax base of $12,135,622,988, of

which $9,214,883,448 (or 76%) is improvement value and $2,920,739,540 (or 24%) is land

value, as shown in Table 4. This produces an aggregate building to land ratio (B:L) of 3.15:1,

which is lower than average and due in large part to a concentration of very high land values.

The combined municipal and school property tax rate is .08264, or 82.64 mills, which when

applied to the tax base produces $1,002,887,884 in total revenue.8 The average property has an

improvement value of $15,949 and land value of $5,055, yielding a tax bill of $1,736.

Taxable Improvements Taxable Land Taxable Total

$9,214,883,448 $2,920,739,540 $12,135,622,988
76% 24% 100%

Table 4: Philadelphia, PA assessment values

Two-rate Tax Incidence Levels

The first tax shift scenario we will examine is the two-rate structure using the 50-50 split

for a revenue-neutral outcome. Of the three shifts, only Philadelphia produced a positive

outcome, with 74% of all properties seeing net decreases in tax incidence and only 26% seeing

net increases. For Berlin and Lancaster, the two-rate approach would remain unfeasible in a

general sense without conducting a more granular examination of the outcome.9

8
For Philadelphia we are using a combined effective rate that includes both municipal and school tax rates and
revenue. This will not affect the comparisons with the other jurisdictions, however.
9
If the municipality has a high concentration of vacant or absentee-owned properties that absorb much of the
increase in tax incidence, adopting a two-rate tax might still be feasible using the argument that the added burden
will be shifted to unproductive and out-of-town owners, or ―taxing foreigners living abroad‖ as proposed in a Monty
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Increased Incidence Decreased Incidence

Municipality
Count Percentage Count Percentage

Berlin 2,442 55% 1,992 45%

Lancaster 12,046 68% 5,646 32%

Philadelphia 148,820 26% 402,743 74%

Table 5: Overall outcome summaries of the two-rate shift approach (all cities)

Berlin, NH Distribution

To convert to a revenue-neutral two-rate tax in Berlin, the current rate of .0149, or 14.9

mills, would need to be split out with the building tax rate as .008597, or 8.597 mills, and the

land tax rate as .05583, or 55.83 mills.10 Applied to the current total building assessment of

$419,558,200 and total land assessment of $64,607,349, these two rates would yield $3,607,033

each and still total up to the $7,214,067 generated by the current rate. This outcome can be seen

in Table 6 below.

Tax Base Type Tax Base Value Rate Revenue

Building $419,558,200 0.008597 $3,607,033

Land $64,607,349 0.055830 $3,607,033

Total $484,165,549 n/a $7,214,067

Table 6: Two-rate tax structure for Berlin, NH

The difference under the two-rate tax would appear in the distribution of tax revenue now

taken from the building and land tax bases. The current rate yields $6,251,417, or 87%, of the tax

revenue from buildings and only $962,650, or 13%, from land, as given by the aggregate

proportion of building to land assessed value. Under the two-rate scenario as mentioned above,

however, building and land value would each yield 50% of total revenue, effectively reducing the

incidence level on buildings while increasing it on land. This results in a 42% decrease in tax

Python skit on who best to tax.

10
Rounded to 6 decimal points for precision
 15

revenue from buildings and a 275% increase in tax revenue from land, demonstrating the

powerful impact the two-rate approach has in conducting a preferential shift from buildings to

land for tax purposes.

Such a powerful shift potential using the two-rate approach creates a significant problem

for Berlin, however. Although this policy is able to achieve its goal from a fiscal perspective, its

social and political outcomes are significantly suboptimal and reduce the potential for adoption

of the reform. As seen in Table 5 above, the two-rate approach would produce an undesirable

overall outcome in these regards, as 2,442 (55%) properties would experience increases in

incidence levels and only 1,992 (45%) would experience a decrease. The average increase would

be $420, while the average decrease would be $515. The property with the highest increase

would pay an additional $376,860, while the property with the lowest decrease would save

$691,957.

Taking these factors into consideration is essential when making land value tax shift

recommendations, and the present outcome would prevent the recommendation of Berlin

adopting the two-rate tax. The goal of showing a broad benefit could not be met without even a

simple majority of properties that save, and thus would hinder any effort to make the case for this

reform.

Lancaster, PA Distribution

To convert to a revenue-neutral two-rate tax in Lancaster, the current rate of .00964, or

9.64 mills, would need to be split out with the building tax rate as .006073, or 6.073 mills, and

the land tax rate as 0.023356, or 23.225 mills. Applied to the current total building assessment of

$1,519,647,700 and total land assessment of $395,171,300, these two rates would yield

$9,229,428 each and still total up to the $18,458,855 generated by the current rate. This outcome
 16

can be seen in Table 7 below.

Tax Base Type Tax Base Value Rate Revenue

Building $1,519,647,700 0.006073 $9,229,428

Land $395,171,300 0.023356 $9,229,428

Total $1,914,819,000 n/a $18,458,855

Table 7: Two-rate tax structure for Lancaster, PA

Again the difference under the two-rate tax would appear in the distribution of tax

revenue now taken from the building and land tax bases. The current rate yields $14,649,404, or

79%, of the tax revenue from buildings and only $3,809,451, or 21%, from land, as given by the

aggregate proportion of building to land value. Under the two-rate scenario as mentioned above,

however, building and land value would each yield 50% of total revenue, effectively reducing the

incidence level on buildings while increasing it on land. This results in a -37% decrease in tax

revenue from buildings and a 142% increase in tax revenue from land, again demonstrating the

powerful impact the two-rate approach has in conducting a preferential shift from buildings to

land for tax purposes.

Unfortunately, the two-rate approach creates even more of a problem for Lancaster.

Looking again to Table 5 above, the two-rate approach would produce an undesirable overall

outcome, as 12,046 (68%) properties would experience increases in incidence levels and only

5,646 (32%) would experience a decrease.11 The average increase would be $119, while the

average decrease would be -$254. The property with the highest increase would pay an

additional $17,816, while the property with the lowest decrease would save $313,399.

Because of these factors, like Berlin, the present outcome would prevent the

recommendation of Lancaster adopting the two-rate tax. Having nearly 70% of the city pay

11
12 properties would see no change due to their total tax exemption status.
 17

higher taxes would be nearly impossible to justify politically, even if the individual marginal

impact was determined to be fairly low through more granular analysis.

Philadelphia, PA Distribution

To convert to a revenue-neutral two-rate tax in Philadelphia, the current rate of .08264, or

82.64 mills, would need to be split out with the building tax rate as .054417, or 54.417 mills, and

the land tax rate as .171684, or 171.684 mills. Applied to the current total building assessment of

$9,214,883,448 and total land assessment of $2,920,739,540, these two rates would yield

$501,443,942 each and still total up to the $1,002,887,884 generated by the current rate. This

outcome can be seen in Table 8 below.

Tax Base Type Tax Base Value Rate Revenue

Building $9,214,883,448 0.054417 $501,443,942

Land $401,030,400 0.171684 $501,443,942

Total $1,932,426,400 n/a $1,002,887,884

Table 8: Two-rate tax structure for Philadelphia, PA

Like our other two-rate examples, the difference under the two-rate tax would appear in

the distribution of tax revenue now taken from the building and land tax bases. The current rate

yields $761,517,968, or 76%, of the tax revenue from buildings and only $241,369,916, or 24%,

from land, as given by the aggregate proportion of building to land value. Under the two-rate

scenario as mentioned above, however, building and land value would each yield 50% of total

revenue, effectively reducing the incidence level on buildings while increasing it on land. This

results in a 34% decrease in tax revenue from buildings and a 108% increase in tax revenue from

land, for the third time consistently demonstrating the powerful impact the two-rate approach has

in conducting a preferential shift from buildings to land for tax purposes.

 18

Unlike Berlin or Lancaster, however, the two-rate approach creates a significantly

beneficial outcome for Philadelphia. As seen again in Table 5 above, the two-rate approach

would produce an highly desirable overall outcome, as only 148,820 (26%) properties would

experience increases in incidence levels while 402,743 (70%) would experience a decrease.12

The total amount shifted would be $91,145,853, with an average increase of $612 and an average

decrease of $227. The property with the highest increase would pay an additional $1,265,272,

while the property with the lowest decrease would save $1,054,473.

Each of these factors suggests that Philadelphia would benefit significantly by adopting

the two-rate tax. The overall income shows nearly 70% of the city benefiting from reduced

property taxes while allowing the city to reward capital investment and pressure unproductive

land back into use, and should provide a strong case for reform. A more granular analysis,

particularly examining the impact on residential, owner-occupied properties compared to vacant

and absentee-owned properties would further strengthen the viability of a land value tax shift.

Improvement Exemption Tax Incidence Levels

The second tax shift scenario we will examine is the improvement exemption structure,

using either a full or 50% exemption of the jurisdiction-wide median improvement value while

still yielding a revenue-neutral outcome. As shown in the outcome summary in Table 9, all three

municipalities would benefit significantly under this approach, with Berlin approaching

Philadelphia’s percentage of properties saving under the reform and Lancaster actually exceeding

Philadelphia in the same measure. These outcomes hint at the potential for improvement

exemption to provide for otherwise unviable jurisdictions to again consider a land value tax shift.

12
26,217 (5%) properties would see no change due to their total tax exemption status. These exclusions will apply
under the improvement exemption approach.
 19

Increased Incidence Decreased Incidence

Municipality
Count Percentage Count Percentage

Berlin 1,198 27% 3,236 73%

Lancaster 3,175 18% 14,517 82%

Philadelphia 88,608 15% 462,955 80%

Table 9: Overall outcome summaries of the improvement exemption shift approach (all cities)

Berlin, NH Distribution

To convert to an improvement exemption property tax in Berlin, we would need to first

establish an improvement exemption allowance. Using our criteria of half the median

improvement value for the municipality ($69,200), we get a figure of $34,600. Applying this

amount as a qualifying credit for each taxable property, we will have a total exemption in taxable

improvement value of $124,783,300, reducing our original building portion of the tax base 26%

to $294,774,900 and resulting in an adjusted total tax base of $359,382,249.

With this adjusted tax base, the current rate of .0149, or 14.9 mills, would need to be

adjusted upwards 35% to .020073, or 20.073 mills, in order to remain revenue neutral. Applying

this new rate to the adjusted building assessment of $294,774,900 and existing total land

assessment of $64,607,349 would still yield the $7,214,067 generated by the current rate. This

outcome can be seen in Table 10 below.

Tax Base Type Tax Base Value Tax Rate Tax Revenue

Building $294,774,900 0.020073 $5,917,170

Land $64,607,349 0.020073 $1,296,897

Total $359,382,249 0.020073 $7,214,067

Table 10: Improvement exemption property tax structure for Berlin, NH

The improvement exemption approach still impacts the distribution of tax revenue now

taken from the building and land tax bases. The current rate yields $6,251,417, or 87%, of the tax
 20

revenue from buildings and only $962,650, or 13%, from land, as given by the aggregate

proportion of building to land assessed value. Under the improvement exemption scenario as

mentioned above, however, buildings would now yield $5,917,170 (85%) of total revenue while

land would yield $1,296,897 (18%) of total revenue, slightly reducing the incidence level on

buildings while more gradually increasing it on land. This results in a 5% decrease in tax revenue

from buildings and a 35% increase in tax revenue from land, resulting in a much less dramatic

outcome than the two-rate approach yet still allowing for a transition to a preferential shift from

buildings to land for tax purposes.

Although the building to land shifting potential is much more nuanced using the

improvement exemption approach, its strength lies in dispersing the impact, and most

significantly, broadening the benefits. This means that it, too, can meet the fiscal objective while

additionally improving the social and political outcomes and thus improve potential for adoption

of the reform. As seen in Table 9 above, the improvement exemption approach would produce a

positive overall outcome in these regards, as only 1,198 (27%) properties would experience

increases in incidence levels while 3,236 (73%) would experience a decrease. The total amount

of incidence shifted is $1,024,921, with an average increase of $664 and an average decrease of

$246. The property with the highest increase would pay an additional $575,439, while the

property with the lowest decrease would save $514.

The results of this outcome would suggest the recommendation of Berlin adopting the

improvement exemption tax structure. Almost ¾ of the entire jurisdiction would benefit from the

reform, and the dynamics of the improvement exemption approach would allow the local

economy to better transition during a land value tax shift without a detrimental burden being

dropped on the lower brackets of properties.

 21

Lancaster, PA Distribution

To convert to an improvement exemption property tax in Lancaster, we would again need

to first establish an improvement exemption allowance. Using our criteria of half the median

improvement value for the municipality ($53,600), we get a figure of $26,800. Applying this

amount as a qualifying credit for each taxable property, we will have a total exemption of taxable

building value of $448,819,400, reducing our original building portion of the tax base 30% to

$1,070,828,300 and resulting in an adjusted total tax base of $1,465,999,600.

With this adjusted tax base, the current rate of .00964, or 9.64 mills, would need to be

adjusted upwards 30% to 0.012591, or 12.591 mills, in order to remain revenue neutral.

Applying this new rate to the adjusted building assessment of $1,070,828,300 and existing total

land assessment of $401,030,400 would still yield the $18,628,590 generated by the current rate.

This outcome can be seen in Table 11 below.

Tax Base Type Tax Base Value Tax Rate Tax Revenue

Building $1,070,828,300 0.012559 $13,483,131

Land $449,191,850 0.012559 $4,975,724

Total $1,483,234,550 0.012559 $18,458,855

Table 11: Improvement exemption property tax structure for Lancaster, PA

The improvement exemption approach still impacts the distribution of tax revenue now

taken from the building and land tax bases. The current rate yields $14,649,404, or 79%, of the

tax revenue from buildings and only $3,809,451, or 21%, from land, as given by the aggregate

proportion of building to land assessed value. Under the improvement exemption scenario as

mentioned above, however, buildings would now yield $13,483,131, or 73%, of total revenue

while land would yield $4,975,724, or 27%, of total revenue, slightly reducing the incidence

level on buildings while more gradually increasing it on land. This results in an 8% decrease in
 22

tax revenue from buildings and a 31% increase in tax revenue from land, resulting in a much less

dramatic outcome than the two-rate approach yet still allowing for a transition to a preferential

shift from buildings to land for tax purposes.

Lancaster also demonstrates the dynamics of using the improvement exemption approach,

improving the social and political outcomes and thus improving the potential for adoption of the

reform. As seen in Table 9 above, the improvement exemption approach would produce a

positive overall outcome for Lancaster in these regards, as only 3,175 (18%) properties would

experience increases in incidence levels while 14,517 (82%) would experience a decrease. The

total amount shifted would be $1,913,336, with an average increase of $603 and the average

decrease of $132. The property with the highest increase would pay 31% more from an

additional $419,199, while the property with the lowest decrease would save 100% through a

$258 reduction.

The results of this outcome would suggest the recommendation of Lancaster also

adopting the improvement exemption tax structure. With over 80% of the entire jurisdiction

benefitting from the reform, an improvement exemption would offer the potential for a land

value tax shift to a municipality already interested in adopting the reform but unable to consider

it because of broad assessment inequities under the current values.

Philadelphia, PA Distribution

To convert to an improvement exemption property tax in Philadelphia, we would again

need to first establish an improvement exemption allowance. For Philadelphia, since the

jurisdiction employs fractional assessments, we will utilize the full median improvement value

($10,462) for the municipality to more closely reflect actual values. Applying this amount as a

qualifying credit for each taxable property, we will have a total exemption of taxable building
 23

value of $4,096,690,180, reducing our original building portion of the tax base 44% to

$5,118,193,268 and resulting in an adjusted total tax base of $8,038,932,808.

With this adjusted tax base, the current rate of .08264, or 82.64 mills, would need to be

adjusted upwards 51% to 0.124754, or 124.754 mills, in order to remain revenue neutral.

Applying this new rate to the adjusted building assessment of $5,118,193,268 and existing total

land assessment of $2,920,739,540 would still yield the $1,002,887,884 generated by the current

rate. This outcome can be seen in Table 11 below.

Tax Base Type Tax Base Value Tax Rate Tax Revenue

Building $5,118,193,268 0.124754 $638,514,357

Land $2,920,739,540 0.124754 $364,373,526

Total $8,038,932,808 0.124754 $1,002,887,884

Table 12: Improvement exemption property tax structure for Philadelphia, PA

The improvement exemption approach still impacts the distribution of tax revenue now

taken from the building and land tax bases. The current rate yields $761,517,968, or 76%, of the

tax revenue from buildings and only $241,369,916, or 24%, from land, as given by the aggregate

proportion of building to land assessed value. Under the improvement exemption scenario as

mentioned above, however, buildings would now yield $638,514,357 (64%) of total revenue

while land would yield $364,373,526 (36%) of total revenue, slightly reducing the incidence

level on buildings while more gradually increasing it on land. This results in a 16% decrease in

tax revenue from buildings and a 51% increase in tax revenue from land, resulting in a much less

dramatic outcome than the two-rate approach yet still allowing for a transition to a preferential

shift from buildings to land for tax purposes.

Although the building to land shifting potential is much more nuanced using the

improvement exemption approach, Philadelphia is a valuable jurisdiction to demonstrate the

 24

powerful broadening effect. The city would already benefit significantly under the two-rate

approach, yet the outcome become significantly more impressive under an improvement

exemption. As seen in Table 9 above, the improvement exemption approach would produce

decreases in incidence for 462,955, or 80%, of properties while causing increases in only 88,608,

or 15%, of properties, with the remaining 5% of properties remaining neutral. The total amount

of incidence shifted is $208,234,834 between properties, with an average increase of $2,329 and

an average decrease of $450. The property with the highest increase would pay an additional

$2,411,100, while the property with the lowest decrease would save $864.

The results of this outcome would suggest the recommendation of the improvement

exemption tax structure for Philadelphia. With 80% of the entire jurisdiction benefitting from the

reform, the progressive dynamics of the improvement exemption approach would allow the local

economy to better transition during a land value tax shift without the risk of significant burden

being disproportionately dropped on the lower brackets of properties. This would make the

reform more viable politically in a city with such a large population of low- and fixed-income

property owners, including residents and businesses.

Comparative Examination of Approaches

In order to compare the results of each pair of outcomes, we will utilize a marginal

change approach using the dollar differential of both the two-rate and improvement exemption

scenarios. To do this we will employ a coding scheme that encapsulates the two outcomes for

each individual property as a pair.

Properties that see their tax bill increase (I) under both the two-rate (TR) and

improvement exemption (IX) scenarios will be classified as ―TR: I; IX: I.‖ Properties that see

their tax bill decrease (D) under both the two-rate (TR) and improvement exemption (IX)
 25

scenarios will be classified as ―TR: D; IX: D.‖ Properties that see their tax bill decrease (D)

under the two-rate scenario yet increase (I) under the improvement exemption (IX) scenario will

be classified as ―TR: D; IX: I.‖ And finally, properties that see their tax bill increase (I) under the

two-rate scenario yet decrease (D) under the improvement exemption (IX) scenario will be

classified as ―TR: I; IX: D.‖ The small number of properties that see no change due to their

special overall tax exemption status will be filtered out as neutral.

With each property coded as a pair of outcomes, it is possible to examine them against

several criteria as a way to understand and visualize the tax shift patterns of the two approaches.

For the purposes of our immediate research we will use two highly relevant measures: the

building to land ratio (B:L) and marginal change grids.

As discussed earlier in the paper, the B:L is an important indicator of a property’s

outcome during a land value tax shift. Each property has a B:L, and the entire jurisdiction has an

aggregate B:L. In shifting from buildings to land in the property tax, properties with a B:L higher

than the aggregate will see a decrease in incidence, while properties with a B:L lower than the

aggregate will see an increase. Therefore if a jurisdiction’s aggregate B:L is lower than the

average property B:L, a majority of properties will decrease, and vice versa. The B:L grids

display these distributions, and are included in the appendix.

The marginal change grids group the TR and IX outcomes for each property such that the

approach that maximizes the number of properties with a decreasing level incidence is given. If

one property’s marginal change is negative for one approach but positive for another, while

another is negative for both approaches, we can isolate these instances and make additional

inferences based on the distribution. The grids are also included in the appendix.

With these perspectives on the outcomes of TR versus IX for each jurisdiction, we can
 26

now make comparisons of the performance of each approach.

Berlin, NH Comparison

In Berlin we saw a reversal in outcomes when looking at a two-rate tax versus an

improvement exemption shift, with a significant majority of properties ultimately benefitting

under the latter proposal. Table 13 summarizes the set of outcomes in this case. Overall, we can

say that an improvement exemption produces a clearly positive outcome in broadening the base

of properties that will benefit, whereas a two-rate solution cannot.

Increased Incidence Decreased Incidence

Tax Type
Count Percent Count Percent

Two-rate 2,442 55% 1,992 45%

Improvement Exemption 1,198 27% 3,236 73%

Table 13: Berlin, NH tax shift comparison

What brought about this reversal? We can gain some insight from examining some

descriptive statistics for our outcome pairs, grouping each property by its code. Table 14 has the

results.

Code N % TR Avg. IX Avg. TR S.D. IX S.D. TR Sum IX Sum

TR: D; IX: D 1,640 37% -$129 -$224 $114 $111 -$210,788 -$367,766

TR: I; IX: D 1,596 36% $179 -$268 $218 $114 $285,078 -$427,359

TR: I; IX: I 846 19% $875 $158 $2,168 $699 $739,844 $133,491

TR: D; IX: I 352 8% -$2,313 $1,880 $14,865 $13,158 -$814,133 $661,634

Table 14: Outcome statistics for Berlin, NH

Sorting each outcome code by size, we see that the largest quadrant shift is ―TR: D; IX:

D‖ with a count of 1,640 properties, or 37%. Next is the ―TR: I; IX: D‖ group, with the 1,596

properties, or 36%. Third is the ―TR: I; IX: I‖ group, with 846 properties, or 19%. Finally, the

remaining properties belong to the ―TR: D; IX: I‖ group, with 352 properties, or 8%. Note that
 27

within the top two groupings, the IX option yields decreasing outcomes in both cases whereas

the TR option does not, with the IX outcomes totaling the number of overall decreased incidence

in Table 13 for that option.

Quite simply, the second largest group of properties would increase under TR but

decrease under IX, hinging the viability of a land value tax shift on adopting the better-

performing option for this group. Figure 1 illustrates this distribution, visualizing the large

concentration of properties that decrease under the IX approach. Examining the spatial

distribution on the chart, you can see this large number of properties that would benefit under IX

yet would not under TR.

In terms of total outcome, we see that improvement exemptions would produce a positive

result where a two-rate tax could not, but what of the progressive nature of the distribution? The

average difference between the TR and IX options suggest that the IX approach would see more

properties saving in the top two tiers, while the TR approach creates an average increase in the

broader second tier while rewarding the smaller fourth tier. Comparing outcomes in the context

of property values can provide more clues, as done in Table 15 and Figure 2.

Code N % Avg. B:L Avg. Building Avg. Land Avg. Total

TR: D; IX: D 1,640 37% 8.24 $79,666 $9,127 $88,793
TR: I; IX: D 1,596 36% 4.38 $62,131 $13,932 $76,062
TR: I; IX: I 846 19% 0.47 $24,510 $25,141 $49,651
TR: D; IX: I 352 8% 13.64 $480,141 $17,428 $497,570

Table 15: Berlin, NH Average Assessment Values by Outcome

Table 15 shows that the building and land ratios for the first and second tiers of properties

represent the bulk of the city’s assessment composition. The aggregate B:L for Berlin is 6.49 and

the city-wide average is 5.69, which supports the theory of tax incidence outcomes for the two-

rate tax: outcome codes lower than the aggregate will pay more, while those higher will pay less.
 28

However because of the way an improvement exemption works, properties slightly below would

be spared under the IX option, instead shifting the burden onto properties with little

improvement value (less than 1) and properties with higher overall average value, regardless of

their ratio. Figure 2 also illustrates the progressivity of the IX option, visualizing the clustering

of the ―IX: D‖ properties around the axis as generally lower overall valued properties with land

values less than $50,000 and building value less than $150,000, but still in substantial amounts.

Lancaster, PA Comparison

In Lancaster we also saw a reversal in outcomes when looking at a two-rate tax versus an

improvement exemption shift, with a significant majority of properties again ultimately

benefitting under the latter proposal. Table 16 summarizes the set of outcomes in this case.

Overall, we can say that an improvement exemption produces a dramatically more positive

outcome in broadening the base of properties that will benefit, whereas a two-rate solution

cannot.

Increased Incidence Decreased Incidence

Tax Type
Count Percent Count Percent

Two-rate 12,046 68% 5,646 32%

Improvement Exemption 3,175 18% 14,517 82%

Table 16: Lancaster, PA tax shift comparison

Are the trends that lead to this reversal similar to Berlin? We can again gain insight from

examining some descriptive statistics for our outcome pairs, grouping each property by its code.

Table 17 has the results.

Code N % TR Avg. IX Avg. TR S.D. IX S.D. TR Sum IX Sum

TR: I; IX: D 10,177 58% $63 -$129 $63 $46 $645,850 -$1,314,444

TR: D; IX: D 4,340 25% -$51 -$138 $63 $64 -$221,980 -$598,892
 29

TR: I; IX: I 1,869 11% $421 $264 $1,236 $1,267 $787,672 $493,476

TR: D; IX: I 1,306 7% -$928 $1,087 $9,076 $11,954 -$1,211,542 $1,419,860

Table 17: Outcome statistics for Lancaster, PA

With each outcome code sorted by size, we see that the largest quadrant shift is ―TR: I;

IX: D‖ with a count of 10,177 properties, or 58%. Next is the ―TR: D; IX: D‖ group, with 4,340

properties, or 25%. Third is the ―TR: I; IX: I‖ group, with 1,869 properties, or 11%. Finally, the

remaining properties belong to the ―TR: D; IX: I‖ group, with 1,306 properties, or 7%. Note

again that within the top two groupings, the IX option yields decreasing outcomes in both cases

whereas the TR option does not, with the IX outcomes totaling the number of overall decreased

incidence in Table 16 for that option.

Notice, too, that this differs from Berlin; in this case, the largest group would actually

increase under TR, but decrease under IX. This outcome is particularly significant, particularly

hinging the viability of a land value tax shift on adopting the better-performing option for this

group. Figure 3 illustrates the overall distribution, again visualizing the large concentration of

properties that decrease under the IX approach but would increase under the TR option.

Examining the spatial distribution on the chart, you can see the especially large number of

properties that would benefit under IX yet would not under TR.

In terms of total outcome, we again see that improvement exemptions would produce a

positive result where a two-rate tax could not, but will it also have a more progressive

distribution of burden? The average difference between the TR and IX options suggest that the

IX approach again would experience more properties saving in the top two tiers, while the TR

approach creates an average increase in the broader second tier while rewarding the smaller

fourth tier. Comparing outcomes in the context of property values can provide more clues, as

done in Table 18 and Figure 4.

 30

Code N % Avg. B:L Avg. Building Avg. Land Avg. Total

TR-I; IX-D 10,177 58% 2.93 $51,130 $17,923 $69,053
TR-D; IX-D 4,340 25% 5.03 $54,154 $10,353 $64,507
TR-I; IX-I 1,869 11% 1.73 $103,716 $57,698 $161,414
TR-D; IX-I 1,306 7% 6.95 $436,770 $45,941 $482,711

Table 18: Lancaster, PA average assessment values by outcome

Table 18 shows that the building and land ratios for the first and second tiers of properties

represent the bulk of the city’s assessment composition. The aggregate B:L for Lancaster is 3.85

and the city-wide average is 3.56, which again confirms the theory of tax incidence outcomes for

the two-rate tax. Fortunately, because of the way an improvement exemption works, properties

slightly below would be spared under the IX option—which in this case, would be both the first

and second tiers, instead shifting the burden onto properties with little improvement value (less

than 1) and properties with higher overall average value, regardless of their ratio. Figure 4 also

illustrates the progressivity of the IX option, visualizing the clustering of the ―IX: D‖ properties

around the axis as generally lower overall valued properties with land values less than $80,000

and building value less than $150,000, but still in substantial amounts.

Philadelphia, PA Comparison

In Philadelphia we saw that a two-rate tax performs well to begin with for a significant

majority of properties, and an improvement exemption shift only serves to expand the number of

properties that would benefit. Table 19 summarizes the set of outcomes in this case. Overall, we

can say that even against a promising two-rate option, an improvement exemption again

produces a more positive outcome in broadening the base of properties that will benefit under an

LVT shift.
 31

Increased Incidence Decreased Incidence

Tax Type
Count Percent Count Percent

Two-rate 148,820 26% 402,743 70%

Improvement Exemption 88,608 15% 462,955 80%

Table 19: Philadelphia, PA tax shift comparison

How can an improvement exemption further optimize the tax shift outcome? We can

again gain insight from examining some descriptive statistics for our outcome pairs, grouping

each property by its code. Table 20 has the results.

Code N % TR Avg. IX Avg. TR S.D. IX S.D. TR Sum IX Sum

TR: D; IX: D 379,142 69% -$144 -$484 $111 $207 -$183,606,539 -$54,585,168

TR: I; IX: D 83,805 15% $112 -$294 $168 $184 -$24,625,781 $9,385,336

TR: I; IX: I 65,010 12% $1,258 $1,495 $9,800 $15,479 $97,159,177 $81,760,499

TR: D; IX: I 23,598 4% -$1,562 $4,628 $14,690 $47,506 $109,211,820 -$36,858,793

Table 20: Outcome statistics for Philadelphia, PA

With each outcome code sorted by size, we see that the largest quadrant shift is ―TR: D;

IX: D‖ with a count of 379,142 properties, or 69%. Next is the ―TR: I; IX: D‖ group, with 83,805

properties, or 15%. Third is the ―TR: I; IX: I‖ group, with 65,010 properties, or 12%. Finally, the

remaining properties belong to the ―TR: D; IX: I‖ group, with 23,598 properties, or 4%. As in

each other case, note that within the top two groupings, the IX option yields decreasing outcomes

for both tiers whereas the TR option does not, with the IX outcomes totaling the number of

overall decreased incidence in Table 19 for that option.

Although, in the case of Philadelphia, the viability of an LVT shift is not bound to one

option or the other, the political economy objectives of broad support and progressive nature for

such a reform again call for the enhancing quality of the improvement exemption. Figure 5

illustrates the overall distribution, again visualizing the large concentration of properties that
 32

decrease under the IX approach but would increase under the TR option. Examining the spatial

distribution on the chart, you can see the especially large number of properties that would benefit

under IX yet would not under TR.

In terms of total outcome, we see in the third instance that improvement exemptions

would produce a positive result, even more substantially then the already significant two-rate

outcome. Yet as before, we must additionally verify the level of progressivity for this scheme.

The average difference between the TR and IX options suggest that the IX approach again would

experience more properties saving in the top two tiers, while the TR approach creates an average

increase in the broader second tier while rewarding the smaller fourth tier. Comparing outcomes

in the context of property values can provide more clues, as done in Table 21 and Figure 6.

Code N % Avg. B:L Avg. Building Avg. Land Avg. Total

379,14
TR: D; IX: D 2 69% 6.64 $10,983 $1,866 $12,849
TR: I; IX: D 83,805 15% 2.24 $7,520 $3,646 $11,166
TR: I; IX: I 65,010 12% 0.63 $24,134 $21,805 $45,939
TR: D; IX: I 23,598 4% 7.23 $120,833 $20,773 $141,606

Table 21: Philadelphia, PA average assessment values by outcome

Table 21 shows that the building and land ratios for the first and second tiers of properties

represent the bulk of the city’s assessment composition. The aggregate B:L for Philadelphia is

3.15 and the city-wide average is 5.05, which explains the positive tax incidence outcomes for

the two-rate tax. This can be seen in the ―TR: D‖ code groupings in the first and fourth tiers.

Through implementation of an improvement exemption, however, the second tier of properties

would be incorporated, reducing perceived regressive tendencies that would favor the fourth

tier’s allocation advantage. Figure 4 also illustrates the progressivity of the IX option, visualizing

the clustering of the ―IX: D‖ properties around the axis as generally lower overall valued
 33

properties with land values less than $20,000 and building value less than $30,000, comprising a

substantial amount of the total properties.

Conclusion
Based on the finding of our analyses in the cities of Berlin, NH; Lancaster, PA; and

Philadelphia, PA; it has been demonstrated that an improvement exemption has the potential to

not only improve the progressivity of outcomes in potential two-rate tax shift applications, but to

also establish viability of a land value tax shift in jurisdictions exhibiting characteristics that

otherwise would make the reform unfeasible.

The traditional two-rate approach remains a powerful policy tool for tax reform,

benefitting from its established applications in Pennsylvania and internationally, a strong

economic development focus on rewarding capital investments, and an aggressive targeting of

un- and underutilized land. However, this power can come at the expense of important policy

concerns, including the impact on income-poor and land-rich properties, a certainly complexity

in understanding and implementing two tax rates, and a more concentrating impact on polar ends

of the property spectrum, which as we’ve seen may risk the materialization of a broad opposition

effort.

As an alternative, the improvement exemption approach offers a more progressive

structure that extends the benefits to a broader and more diffuse property base, appears simpler to

understand through retaining one rate and utilizing the common concept of exemptions, and

appears as a uniform dollar amount, universally applied, automatically enrolled, and permanently

enabled. Despite its clear benefits, several disadvantages exist for improvement exemptions,

including the fact that it hasn’t yet been fully implemented anywhere, returns less reward for

high improvement values, and produces less impact on vacant land. Such challenges will need to
 34

be addressed through further refinements of the policy.

In total, however, our findings make a strong case for consideration of improvement

exemptions as a first-class policy for land value tax shifting in a way that addresses

aforementioned short-comings in the traditional two-rate approach in cases where appropriate. In

addition, it also seems likely that this tax deduction method may outperform a tax credit method

in this particular application, although additional comparative analysis using identical data sets

and econometric modeling would be necessary. Improvement exemptions essentially offer a

built-in amelioration mechanism for the property tax that can help address existing inequities in

the short-run while transitioning to the ideal structure of a purely land value tax excluding all

improvements. This can be done by simply incrementing the percentage of median improvement

value deductible from each year’s total tax liability until finally reaching the jurisdiction’s

maximum improvement value.13

Appendix
The following figures present the two forms of aggregate data visualizations for each of

the three data sets used in our analysis. Each chart plots the specified range of properties along

the axis, and is marked by a color and symbol code. In both graph types ―TR: I; IX: I‖ properties

are represented by a red X, ―TR: D; IX: I‖ properties are represented by an orange circle, ―TR:

D; IX: D‖ properties are represented by a green square, and ―TR: I; IX; D‖ properties are

represented by a blue cross. Within some charts one class of outcome codes will be densely

clustered together while other is significantly scattered, demonstrating the impact differentiation

for that class in the specific configuration.

The building to land plots display the outcome code of each property and its taxable value

13
At a certain point calculating the upper bounds through multipliers of the median can be dropped in favor of
simply dividing the revenue target by aggregate land values to derive the required land value tax rate.
 35

allocation, demonstrating how a property’s composition between building and land impacts its

outcome under both the TR and IX scenarios. The marginal difference plots display the outcome

code of each property and its marginal change from the current tax bill for both the TR and IX

scenarios.
 36

Figure 1: Berlin marginal change plots

 37

Figure 2: Berlin building to land value ratio plots

 38

Figure 3: Lancaster marginal difference plots

 39

Figure 4: Lancaster building to land ratio plots

 40

Figure 5: Philadelphia marginal difference plots

 41

Figure 6: Philadelphia building to land ratio plots

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Cohen, Jeffrey P., and Cletus C. Coughlin. ―An Introduction to Two-Rate Taxation of Land and

Buildings.‖ Federal Reserve Bank of St. Louis Review (2005): 359-374.

England, Richard W. ―An Essay on the Political Economy of Two-rate Property Taxation.‖

2004. 30 Aug 2007 <http://66.223.94.76/pubs/dl/895_England%20PDF.pdf>.

England, Richard W., and Min Qiang Zhao. ―Assessing the Distributive Impact of a Revenue-

Neutral Shift from a Uniform Property Tax to a Two-Rate Property Tax with a Uniform

Credit.‖ National Tax Journal 58.2 (2005): 247-260.

Plassmann, Florenz. ―The Impact of Two-Rate Taxes on Construction in Pennsylvania.‖ 24 Jun

1997. <http://scholar.lib.vt.edu/theses/available/etd-61097-13834/>.