The Potential Impacts of a Split-Rate Property Tax in the City of Erie Kerry A. King Todd M. Nesbit The Sixth Annual ERIE Economic Conference Tuesday, August 14, 2007 The Economic Research Institute of Erie The Sam and Irene Black School of Business Penn State Erie

What is a Split-Rate Tax? Split-Rate Tax –Tax the assessed value of land at a higher rate

Example of Split-Rate Tax Value Tax Rate (mills) Tax Liability Single-Rate Tax LandBuildingTotal$50,000$200, $500$2,000$2,500 Split-Rate Tax LandBuildingTotal$50,000$200, $1,000$1,500$2,500

Panel A: Market For Land Panel B: Market For Buildings SBSB SLSL D B0 D B1 D L0 D L1 Q B1 Q B0 Q L0 P L0 P L1 P B0 P B1 P B1 +T = Q L1 =P L1 + T

Advantages Revitalization of dilapidated areas Infill development Discourages speculation More commercial development Creates jobs Larger quantity and better quality of housing

Disadvantages Less incentive to preserve green space Balancing efficiency and equity Regressive in nature Administrative costs Effects are gradual

Current Conditions in Erie (2006) 36,246 parcels Total value $2.57 billion Buildings: 76% (Land 24%) 3,397 vacant properties millage rate (1.021%) = $26 million $20 million from buildings, $6 million from land Average tax liability $723 per parcel Average B/L ratio: 3.18

Erie Property by Classification (Total Value = $2.57 billion)

Current Conditions in Erie (2006) Apartment –668 –LAND: Total Property = 15.16% –BUILDINGS: Total Property = 84.84% –B/L ratio = 5.60 –Total Tax Revenue = 3.60%

Current Conditions in Erie (2006) Commercial –3,410 –LAND: Total Property = 22.95% –BUILDINGS: Total Property = 77.05% –B/L ratio = 3.36 –Total Tax Revenue = 23.59%

Current Conditions in Erie (2006) Industrial –185 –LAND: Total Property = 20.42% –BUILDINGS: Total Property = 79.58% –B/L ratio = 3.90 –Total Tax Revenue = 3.98%

Current Conditions in Erie (2006) Residential –31,983 –LAND: Total Property = 24.88% –BUILDINGS: Total Property = 75.12% –B/L ratio = 3.02 –Total Tax Revenue = 68.83%

Tax Ratios and Revenue Neutral Tax Rates Tax Ratio (Land/Building) Land Millage Rate Building Millage Rate 1.00: : : : : : :

Percentage Point Change in Tax Liability Using 3.64:1

Percentage Point Change 3.64:17.78:124.35:1 Apartment Commercial Industrial Residential

Change in Average Tax Bill Per Parcel Using 3:64:1

Change in Average Tax Bill 3.64:17.78:124.35:1 Apartment-$ $ $ Commercial-$27.77-$44.37-$60.83 Industrial-$ $ $ Residential+$8.96+$14.31+$19.62

Average Change in Residential Tax Liability by Decile Using 3.64:1

Average Change in Apartment Tax Liability by Quintile Using 3.64:1

Average Change in Commercial Tax Liability by Quintile Using 3.64:1

Average Change in Industrial Tax Liability by Quintile Using 3.64:1

Transition from Single-Rate to Split-Rate Property Tax Tax Ratio (Land/Building) Years for Transition Decrease in Building Tax Ending Building Tax Rate 3.64: : : : : :

Final Word of Caution Implementing a split-rate tax with a simultaneous tax increase is strongly discouraged.