The city of Pittsburgh desperately needs residential tax abatement to spur economic development and to hold onto current residents while attracting new ones.
Christopher Briem is a regional economist at the University Center for Social and Urban Research, University of Pittsburgh (email@example.com).
Remarkably, both announced Democratic candidates for mayor this past week proposed property-tax abatements for selected neighborhoods, starting with Downtown. But neither goes far enough. To be fair and effective, any new abatement must apply to all city neighborhoods.
Many hail the host of condominium projects coming online in or near Downtown as evidence that the city can compete successfully for new residents. But Downtown is just one neighborhood. Even if all Downtown and nearby projects are successful, an outcome still more speculative than evident, they barely would offset the continuing population decline across the city and its 90 neighborhoods.
By eliminating or lowering taxes on all new residential construction in the city, a universal tax abatement would provide ample encouragement to investment. If applied evenly, across the city, such a program would be a variation of the two-tiered tax Pittsburgh had in place for almost a century.
Pittsburgh's two-tiered system taxed land at a higher rate than structures. Championed by 19th century economist Henry George, its purpose was to provide disincentives against holding land vacant or unproductive.
In 1913 Pittsburgh became the largest municipality in the nation to implement a two-tiered property tax. Originally land was taxed at twice the rate of structures. In 1979, then-Councilman and future Congressman Bill Coyne proposed strengthening the split tax, and the city increased the ratio to nearly six-to-one.
Some consider that reinforcement of the tiered tax to be the real impetus for the building boom now called Renaissance II. Whether the tiered tax deserves that much credit is debated, but the city did experience unprecedented levels of new construction in the 1980s during a period of regional economic decline.
However, homeowners in neighborhoods with relatively high land values found themselves disproportionately taxed and let the powers-that-be know it. Pittsburgh ended its two-tiered tax system after the 2001 reassessment of property values in Allegheny County, replacing it with the more common practice of applying the same tax rates to both land and structures.
In the meantime, municipalities across Pennsylvania were going in the opposite direction, putting in place tax abatements akin to the tiered tax and those proposed this past week for Pittsburgh. Philadelphia has had success spurring housing growth with a nearly universal 10-year tax abatement on residential investment.
Non-selective abatements of this sort encourage higher-density development and have at least one advantage over a two-tiered tax: They don't invoke the ire of residents whose tax bills go up when they improve their property under a two-tiered tax.
Any such tax abatement in Pittsburgh also should be universal and not limited to a few big projects in any one part of the city, given its potential for spurring investment across all city neighborhoods. Anyone who is willing to invest in improving his or her property should get the same benefits large developers receive for high-profile projects.
Consider the criticism that erupts when a major new development project is offered tax abatements or other publicly funded incentives. The anger is not directed at the tax breaks themselves, but at their selective application. Only a few individual companies or developers appear to get such advantages. If these incentives make sense for a few large projects, they make that much more sense for many small ones.
But why even consider tax abatements for a city in such dire financial straits? New construction Downtown not withstanding, residential construction within the city is reaching all-time lows. In recent years new housing units have declined to the point that little revenue would be lost from an abatement on investment that isn't happening anyway.
What is more important is that the city keep residents from leaving Pittsburgh. The city's future is not dependent upon whether this year's budget is notionally balanced. Fiscal triage on the city budget has yet to substantially lower any tax borne mostly by city residents. And that high tax burden on city residents continues to force families and future taxpayers to move to lower-taxed suburban communities. As long as that disparity exists, the cost structure and legacy debt of the city will fall on an ever-smaller population, a vicious cycle that results in ever-higher tax rates on everyone, accelerating the decline of the city.
Implementing a broad tax-abatement program need not be limited to the city of Pittsburgh, either. Pennsylvania's Act 108, enacted in 1998, enables a tiered tax to be used in all Pennsylvania boroughs. The need for new community investment extends to communities across the commonwealth that are experiencing population decline and disinvestment.
A century ago, Pittsburgh set an example for the state and nation by being on the cutting edge of tax reform. It's time to go back to the future.