Essay on the Political Economy of Two-Rate Property Taxation

This paper surveys the various economic arguments in favor of taxing land values more heavily than building values and then explores why two-rate property taxation has not yet been adopted in the United States outside several Pennsylvania cities. An important obstacle to property tax reform is that shifting from a uniform tax rate to dual tax rates tends to confer tax cuts on some property owners and impose tax hikes on other property owners. The prospective losers are likely to coalesce in opposition to introduction of two-rate property taxation. Simulations using tax parcel data from a small city in New Hampshire suggest that this political opposition to tax reform can be blunted if the introduction of two tax rates is accompanied by a generous credit on each property tax bill.