It is no secret that Baltimore’s property tax needs reform. Mayor Sheila Dixon herself acknowledged that fact when she created the Blue Ribbon Committee on Property Tax Reform. As I see it, there are three objectives tax reform needs to accomplish: reduced property tax bills for most Baltimoreans, promotion of economic development and maintenance of Baltimore’s public revenue.
What Baltimore needs to do to accomplish its objective is reduce all building assessments by 20 percent and make up the difference with an increase in the property tax rate.
Sound ridiculous? It’s really quite simple.
For most taxpayers, the 20 percent building assessment reduction would be more than what the property tax rate increase would cost them. If, by chance, a property owner has the same building-to-land ratio as the citywide average, that property owner would break even with this proposal. That way all the homeowners exceeding the citywide building-to-land average (and that’s most of them) would save money. The pay-mores generally wouldn’t pay much more.
But in addition, every Baltimorean who leases and doesn’t own any land at all would not suffer from as many rent increases.
Landlords might try to pass the land tax increase on to their tenants, and they may even succeed in doing so — but only in the short run. Land is fixed in supply the tax can’t possibly decrease it, so over time the land tax can’t possibly be increased or passed on to the tenants.
The building part of the property tax can be passed on to tenants in the form of rent increases because it gradually reduces the supply of buildings, thereby increasing rent. My proposal would lessen the property tax on buildings, thereby benefiting tenants and, by extension, Baltimore’s economy.
What about the few renters (or condo owners) who own land elsewhere in town? Only a very few of them would pay more with this 20 percent building assessment credit.
With this proposal, you wouldn’t have to worry about landlords either. Most of them would save money because they generally have a huge building on moderately priced residential land, so their building tax reduction would far exceed their land tax increase.
Construction and renovation would be promoted because they would be taxed less under this plan. Can’t Baltimore use new construction and renovation?
Because an increase in the property tax rate would exactly pay for the 20 percent building assessment credit, the city government’s revenue would be totally unaffected.
The city can lower its property tax rate, but then some other harmful tax would likely be raised. Baltimore needs real property tax reform, not just a cosmetic property tax change.
In a nutshell, land tax is good, building tax is bad.
“Instead of having to pay $10,000 for land with a $600 rental value, the buyer would pay nothing, invest the $10,000 in securities, and use the dividends to pay the $600 tax,” writes Lawrence Abbott in his economics textbook “Economics and the Modern World.”
But wait! There’s more. Many other cities throughout the country have already prospered by putting similar proposals in place.
Mayor Stephen Reed of Harrisburg, Pa., writes that the equivalent of this proposal (used since 1974) “has specifically encouraged vertical development as opposed to low-rise or horizontal development.” He further noted that “nine out of 10 property owners gain from the system.”
A peer-reviewed study fully confirms all the benefits of the exact equivalent of this proposal as practiced in one Pennsylvania town. Since then, this proposal has been adopted elsewhere in Pennsylvania. There’s nothing about the Mason-Dixon Line that prevents Baltimore from having the same experience.
The mayor’s committee should take note — this is how we can make Baltimore a real Charm City.
