The Effects of the Two-Rate Property Tax

This paper empirically investigates the effects of the two-rate (split-rate) property taxation on the capital intensity of land development in Pennsylvania. This study makes the first attempt to overcome the major data limitations in the existing literature and further enriches the dataset by including the most recent policy changes. Using the new dataset, the study improves estimation efficiency and controls for potential biases in the estimates. Consistent with previous studies, the results indicate that taxing land at a higher rate than structures on land increases the capital/land ratio. Further, this improvement effect comes from increased density of housing units rather than bigger houses. The estimates in this paper are bigger than the ones in the literature, suggesting a stronger impact of the two-rate property tax. The findings have important policy suggestions regarding the use of tax instruments to combat urban sprawl.