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As Felix Gillette pointed out in “The Florida Mile” (9/7), with D.C.’s current tax laws, owners who allow their buildings to deteriorate are rewarded with lower property tax payments, even though they deprive the District of housing and job opportunities and burden the community with crime, arson, and a sense of despair.
Vacant properties create an artificial scarcity of land, which is translated into real increases in rents and prices as residents and businesses compete against each other for a more limited supply of decent buildings. And D.C.’s current approach to property taxation means that owners who improve (or even maintain) their properties are taxed for years according to how much value their work adds to their buildings. If collapsed into a one-time payment, this would be equivalent to a 10 percent to 20 percent sales tax on the cost of building materials and labor, making it difficult for even middle-class owners to maintain their buildings.
Fortunately, a remedy exists for these perverse incentives that reward speculators and slumlords while punishing owners who maintain their buildings. It has been used successfully in the United States and other countries around the world. Reducing the tax rate on building values avoids penalizing owners who invest in their homes even though the building assessment will still increase. This technique is called a “split-rate” property tax.
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Studies indicate that reducing the property tax on buildings (and shifting the tax burden onto owners of vacant lots and boarded-up buildings) is progressive. The split-rate tax gets the incentives right: making it more affordable to fix up or maintain property while punishing owners who allow the value of their buildings to decline. In other words, a split-rate tax encourages owners to profit from work (building and maintaining houses and businesses) rather than from speculation.
In Harrisburg, Pa., a split-rate tax was introduced in the mid-’70s. According to local officials, the number of vacant buildings was reduced by more than 50 percent. Pittsburgh’s split-rate property tax encouraged the owners of closed factories to convert these properties to new uses, helping transform its economy from manufacturing to one dominated by corporate headquarters, hospitals, universities, and other service-sector enterprises. It remains one of the country’s most livable and affordable cities.
Citizens should encourage their D.C. Council representatives to eliminate the perversity in the current property tax by reducing the tax penalty on building values. Implementing a split-rate tax would reduce nuisance properties, eliminate subsidies for speculators who hold property out of use, and facilitate community development by increasing the number of affordable homes and businesses where vacant buildings and trash-strewn lots now exist.
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