The Potential Impacts of a Split-Rate Property Tax in the City of Erie

Kerry A. KingKerry A. KingTodd M. NesbitTodd M. Nesbit

The Sixth Annual ERIE Economic ConferenceThe Sixth Annual ERIE Economic ConferenceTuesday, August 14, 2007Tuesday, August 14, 2007

The Economic Research Institute of ErieThe Economic Research Institute of ErieThe Sam and Irene Black School of BusinessThe Sam and Irene Black School of Business

Penn State EriePenn State Erie

What is a Split-Rate Tax?What is a Split-Rate Tax?

Split-Rate TaxSplit-Rate Tax– Tax the assessed value of land at a higher Tax the assessed value of land at a higher

raterate

Example of Split-Rate TaxValueValue Tax Rate Tax Rate

(mills)(mills)Tax LiabilityTax Liability

Single-Rate TaxSingle-Rate Tax

Land Land

BuildingBuilding

TotalTotal

$50,000$50,000

$200,000$200,000

1010

1010

$500$500

$2,000$2,000

$2,500$2,500

Split-Rate TaxSplit-Rate Tax

Land Land

BuildingBuilding

TotalTotal

$50,000$50,000

$200,000$200,000

2020

7.57.5

$1,000$1,000

$1,500$1,500

$2,500$2,500

Panel A:Market

For Land

Panel B:Market For Buildings

SBSL

DB0

DB1

DL0

DL1

QB1 QB0QL0

PL0

PL1

PB0

PB1

PB1+T

= QL1

=PL1 + T

AdvantagesAdvantages

Revitalization of dilapidated areasRevitalization of dilapidated areas

Infill developmentInfill development

Discourages speculationDiscourages speculation

More commercial developmentMore commercial development

Creates jobsCreates jobs

Larger quantity and better quality of Larger quantity and better quality of housinghousing

DisadvantagesDisadvantages

Less incentive to preserve green spaceLess incentive to preserve green space

Balancing efficiency and equity Balancing efficiency and equity

Regressive in nature Regressive in nature

Administrative costsAdministrative costs

Effects are gradualEffects are gradual

Current Conditions in Erie (2006)Current Conditions in Erie (2006)

36,246 parcels36,246 parcels

Total value $2.57 billionTotal value $2.57 billion

Buildings: 76% (Land 24%)Buildings: 76% (Land 24%)

3,397 vacant properties3,397 vacant properties

10.21 millage rate (1.021%) = $26 million10.21 millage rate (1.021%) = $26 million

$20 million from buildings, $6 million from land$20 million from buildings, $6 million from land

Average tax liability $723 per parcelAverage tax liability $723 per parcel

Average B/L ratio: 3.18Average B/L ratio: 3.18

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

Apartment4%Commercial

24%

Industrial4%

Residential68%

Current Conditions in Erie (2006)Current Conditions in Erie (2006)

ApartmentApartment– 668668– LAND: Total Property = 15.16%LAND: Total Property = 15.16%– BUILDINGS: Total Property = 84.84%BUILDINGS: Total Property = 84.84%– B/L ratio = 5.60B/L ratio = 5.60– Total Tax Revenue = 3.60%Total Tax Revenue = 3.60%

Current Conditions in Erie (2006)Current Conditions in Erie (2006)

CommercialCommercial– 3,4103,410– LAND: Total Property = 22.95%LAND: Total Property = 22.95%– BUILDINGS: Total Property = 77.05%BUILDINGS: Total Property = 77.05%– B/L ratio = 3.36B/L ratio = 3.36– Total Tax Revenue = 23.59%Total Tax Revenue = 23.59%

Current Conditions in Erie (2006)Current Conditions in Erie (2006)

Industrial Industrial – 185185– LAND: Total Property = 20.42%LAND: Total Property = 20.42%– BUILDINGS: Total Property = 79.58%BUILDINGS: Total Property = 79.58%– B/L ratio = 3.90B/L ratio = 3.90– Total Tax Revenue = 3.98%Total Tax Revenue = 3.98%

Current Conditions in Erie (2006)Current Conditions in Erie (2006)

ResidentialResidential– 31,98331,983– LAND: Total Property = 24.88%LAND: Total Property = 24.88%– BUILDINGS: Total Property = 75.12%BUILDINGS: Total Property = 75.12%– B/L ratio = 3.02B/L ratio = 3.02– Total Tax Revenue = 68.83%Total Tax Revenue = 68.83%

Tax Ratios and Revenue Neutral Tax Ratios and Revenue Neutral Tax RatesTax Rates

Tax Ratio Tax Ratio (Land/Building)(Land/Building)

Land Millage Land Millage RateRate

Building Millage Building Millage RateRate

1.00:11.00:1 10.2110.21 10.2110.21

3.64:13.64:1 22.7922.79 6.266.26

7.78:17.78:1 30.3230.32 3.893.89

11.93:111.93:1 33.7233.72 2.832.83

16.07:116.07:1 35.6635.66 2.222.22

20.21:120.21:1 36.9136.91 1.831.83

24.35:124.35:1 37.7837.78 1.551.55

Percentage Point Change in Tax Percentage Point Change in Tax Liability Using 3.64:1Liability Using 3.64:1

CommercialIndustrial

Apartment

Residential

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Percentage Point ChangePercentage Point Change

3.64:13.64:1 7.78:17.78:1 24.35:124.35:1

ApartmentApartment -0.51-0.51 -0.81-0.81 -1.12-1.12

CommercialCommercial -0.36-0.36 -0.58-0.58 -0.79-0.79

IndustrialIndustrial -0.22-0.22 -0.36-0.36 -0.49-0.49

ResidentialResidential +1.09+1.09 +1.75+1.75 +2.40+2.40

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

Apartment

Residential

Commercial

Industrial-$350.00

-$300.00

-$250.00

-$200.00

-$150.00

-$100.00

-$50.00

$0.00

$50.00

Change in Average Tax BillChange in Average Tax Bill

3.64:13.64:1 7.78:17.78:1 24.35:124.35:1

ApartmentApartment -$200.44-$200.44 -$319.66-$319.66 -$438.28-$438.28

CommercialCommercial -$27.77-$27.77 -$44.37-$44.37 -$60.83-$60.83

IndustrialIndustrial -$317.76-$317.76 -$507.36-$507.36 -$696.17-$696.17

ResidentialResidential +$8.96+$8.96 +$14.31+$14.31 +$19.62+$19.62

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

2

3

45

6

8

910

1

7

-$20

-$10

$0

$10

$20

$30

$40

$50

Property Value Decile

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

2 3 4

5

1

-$900

-$800

-$700

-$600

-$500

-$400

-$300

-$200

-$100

$0

Property Value Quintile

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

12

3 4

5-$600

-$500

-$400

-$300

-$200

-$100

$0

$100

$200

Property Value Quintile

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

12 3

4

5-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

Property Value Quintile

Transition from Single-Rate to Split-Transition from Single-Rate to Split-Rate Property TaxRate Property Tax

Tax Ratio Tax Ratio (Land/Building)(Land/Building)

Years for Years for TransitionTransition

Decrease in Decrease in Building TaxBuilding Tax

Ending Building Ending Building Tax RateTax Rate

3.64:13.64:1 22 1.981.98 6.266.26

7.78:17.78:1 44 1.581.58 3.893.89

11.93:111.93:1 44 1.851.85 2.832.83

16.07:116.07:1 44 2.002.00 2.222.22

20.21:120.21:1 55 1.681.68 1.831.83

24.35:124.35:1 55 1.731.73 1.551.55

Final Word of CautionFinal Word of Caution

Implementing a split-rate tax with a Implementing a split-rate tax with a simultaneous tax increase is strongly simultaneous tax increase is strongly discouraged. discouraged.