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Split Tax Would Encourage Buildings - Not Vacant Lots

December 17, 2006

Legislation proposed earlier this year would have authorized Connecticut's large cities to levy a two-rate tax, also known as a "split tax," on land and buildings. Mayor Eddie Perez supported the idea, and is likely to push for it again next year.

At present, the tax rate is the same on land and buildings, but the assessment, the valuation of the property for tax purposes, is different.

On average in Hartford, 15 to 20 percent of an assessment is for the land and 75 to 80 percent is the value of the building (For downtown high-rises, well over 90 percent of the valuation is for the building.) So if a property is assessed at $100,000, to use a round number, $80,000 to $85,000 is the value of the building and $15,000 to $20,000 is the land it sits on.

Since the tax rate is the same, the owner pays much more tax on the building than on the land.

What if that were reversed? What if the majority of tax were instead paid on the land? Would the change make a difference? Would it be sound public policy for Hartford?

A high tax rate on buildings in Hartford might be part of the explanation for urban decay, because it encourages the abandonment of marginal buildings and discourages repairs, because the work will cause taxes to rise.

So, the higher tax on buildings leads to a decrease in the number, quality and sizes of buildings that residents and businesses want. In a number of cases, major buildings have been demolished to save on the tax bill.

Unlike the number, quality and size of buildings, the amount of land in Hartford cannot change, regardless of whether the land tax rate rises or falls. An owner cannot demolish land to save on taxes. So an increase in land tax would not affect property owners' behavior in the same way as a higher tax on buildings. In theory at least, since there would be less tax avoidance, the city would collect more tax revenue.

Advocates of the split tax believe lower taxes on buildings would encourage renovation and new construction, because there'd be less of a penalty for doing the work. Also, there would be a greater incentive for people to replace abandoned buildings and parking lots with useful structures such as affordable housing.

Looking at these advantages, some people might wonder why the city needs to have a tax on buildings at all. The reason is that if the building tax was completely eliminated and the tax on land was increased high enough, some landowners might abandon their land. This likely would mean that the city would have to take over that land, making development more difficult in Hartford. So a split tax may be a happy medium, encouraging development with lower taxes on buildings and making land taxes higher but not too high.

There might be other drawbacks to a split tax. Since Hartford will need to collect at least as much in tax revenues as it does now, some property owners will pay higher taxes than they do now, and some will pay less. People living in the homes with big yards near Elizabeth Park might pay higher total tax bills, if that area were in the split-tax zone, and the future residents of the high-rise condos planned for downtown may see much lower tax bills. Is that what city officials want?

It is possible that lowering building taxes too much could lead to overdevelopment and increased traffic congestion, unless carefully proscribed by zoning. And, doesn't the city need some surface parking lots and open spaces?

The split tax is a promising idea whose effects cannot be accurately be predicted without some experience. So perhaps the answer for the legislature is a limited experiment or a pilot program, to see how it works. It certainly is worth a try.

Dr. Jeffrey P. Cohen is an associate professor of economics at the Barney School of Business, University of Hartford.

Reprinted with permission of the Hartford Courant. To view other stories on this topic, search the Hartford Courant Archives at http://www.courant.com/archives.
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