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On February 10, 1999, the D.C. City Council’s Committee on Consumer & Regulatory Affairs held a hearing to explore solutions for eliminating nuisance properties in the District. On March 11, the Ward 5 Leadership Coalition sponsored a town meeting with the mayor at which residents expressed a need in the community for housing and commercial development. What do these two events have in common? The community revitalization goals of these and other groups could benefit from the District’s adoption of a split-rate property tax.

D.C.’s current property tax system is upside-down. It penalizes property owners who maintain or improve their properties by raising their taxes, and rewards those who allow their properties to deteriorate with lower taxes. This raises the cost of construction and maintenance and discourages community development of housing and jobs.

The alternative is a split-rate property tax, which reverses this backward form of taxation by allowing the District to tax building values at lower rates than land values. The tax divides a piece of property into two parts: value of the land and value of the buildings on that land. It then reduces the tax on buildings and increases the tax on land. If implemented correctly, the split-rate tax will not change the amount of revenue the District collects from property taxes; rather, it redistributes the tax burden to ensure that those who maintain their properties pay less tax than those who do not.

A study by the Pro-Housing Property Tax Coalition in 1991 applied to District properties a hypothetical split-rate tax in which buildings were taxed at half the rate of land. In this scenario, owners of improved property (which includes homeowners and businesses) saw tax reductions of 3-19%, while owners of vacant property experienced tax increases of 23-53%.

Split-rate Tax Helps Eliminate Nuisance Properties

According to the latest available data, there are approximately 8,000 boarded-up housing units and 10,000 vacant lots in the District. These properties attract rats, trash, and drug dealers, posing health and safety threats to neighborhoods. In most cases land speculators own and hold onto these nuisance properties because they believe they will increase in value someday. They do not care if the property presents hazards to neighborhoods, as long as they can retain it for future sale. Land speculators have an incentive to do this because their property taxes are so low; the gains they expect to make on a future sale outweigh the small cost of keeping them vacant.

A split-rate tax changes the economic incentives of nuisance property owners by making it more expensive to keep land vacant. In the District, where most homeowners and businesses have a higher proportion of building to land value, most taxpayers would see a decrease in their tax bills. But land speculators who are holding on to the vacant lots and abandoned buildings will see a rise in their tax bills, because more of the value of their property is in land. This tax increase provides a powerful incentive to either develop the property to obtain a return that justifies keeping it, or sell to someone else who will.

Better than D.C.’s Current Efforts

In 1991, the District created the Class 5 property tax rate that applied a higher tax rate to vacant land (and later to vacant buildings as well). However, District officials found the new rate to be very difficult and highly expensive to collect on and enforce. Class 5 requires defining vacant buildings, determining how long the building has been vacant for designation, determining eligibility for numerous exemptions, and maintaining an inventory of Class 5 properties. This complexity combined with numerous loopholes results in fewer than 3,000 properties subject to Class 5.

Class 5 is not only an administrative headache; it actually encourages even greater neighborhood blight and safety hazards. Evidence strongly suggests that Class 5’s exemption for fire damage prompted a 100% increase in arson incidents within four years of its implementation, as shown in the city’s Fire Department records of structure fires. Owners of these empty buildings realized they would pay lower taxes if their buildings burned.

The major difference between the District’s nuisance property programs and the split-rate tax is the difference between reliance on regulation and use of economic incentives. D.C.’s experience with Class 5 and “clean it or lien it” programs reveals the heavy administrative burdens that enforcement and regulation impose on city services. District agencies invest enormous amounts of time, labor, and our tax dollars inspecting sites, notifying owners, monitoring compliance, sending out work crews to board up buildings in the case of non-compliance, and re-securing sites as the inevitable break-ins and break-downs occur. In short, these traditional remedies are expensive, “band-aid” solutions for a long-term economic problem rooted in large part in the perverse incentives of our present property tax system. The split-rate tax, on the other hand, puts the property tax to work for the benefit of the community.

Encouraging Community Development

More housing. An abundance of boarded-up housing units in D.C. neighborhoods reminds us that land speculators are keeping property vacant that was once used for housing. That means there is less housing in the District than there could be which also means housing is more expensive in the District than it could be. The split-rate tax increases the incentive to renovate boarded-up buildings and build new housing. Increasing the supply of housing in our community in turn lowers the cost of housing, which makes living in the District more affordable.

More jobs. Land is expensive in D.C. in part because land speculators create an artificial shortage of land by refusing to develop it until they get the price they want. As a result, businesses that would otherwise locate in the District decide to establish in the suburbs, where land is cheaper. But that means a loss of possible jobs for District residents. The split-rate tax discourages land speculation and instead promotes economic development in neighborhood commercial corridors and business districts to provide residents with more convenient, locally-based services and the job opportunities associated with increased economic activity which in turn generates more revenue sources for the District, including sales, income, and franchise taxes.

No Threat to Open Space

Despite the benefits of the split-rate tax, some within the community may have concerns about the effects of the tax on open space—the grassy areas or otherwise undeveloped yards that provide playgrounds for children, host community gardens, or create pleasant scenery for neighborhoods residents. Some believe that the split-rate tax, which lowers the tax on buildings but raises the tax on land, would encourage the owners of such property to develop that land and destroy valuable open space enjoyed by the community. However, there are several points to remember: Many institutional owners (schools, embassies, churches, non-profits, government, etc.) are exempt from property taxes, so a split-rate tax would not affect the preservation of lawns and landscaping on these properties.

Under a hypothetical split-rate tax applied to actual D.C. assessments, the average tax payments were reduced in all residential neighborhoods, including those characterized by large yards. Thus, a split-rate tax would not create economic pressure to convert lawns into buildings. Some affluent owners of large estates may pay somewhat higher taxes, but they are already paying high taxes to maintain large estates. They don’t live on large estates to minimize costs or maximize income, but because they desire that lifestyle. An increase in property taxes is unlikely to change that perspective.

Under present law, certain historic buildings are assessed below market value in order to maintain their current use and protect them from pressures to develop. The District can apply a similar provision for urban gardens.

Support for Split-Rate in D.C. Grows
The split-rate tax, supported by seven winners of the Nobel Prize for economics, has been implemented successfully in 16 Pennsylvania cities, including Harrisburg and Pittsburgh. These cities cite numerous benefits from their use of a split-rate tax: lower property taxes for low-income residents, reductions in vacant or boarded-up properties, attraction of new businesses and households, increased rate of building improvements, increased employment, and reductions in crime. This experience demonstrates the potential of a split-rate tax to contribute to revitalization in the District.

Recognizing its potential benefits, a number of local membership organizations have endorsed the split-rate tax, including the Washington Regional Network for Livable Communities, the Sierra Club Restore the Core Campaign, the D.C. Environmental Network’s Environmental Agenda, and Citizens for Socially Responsible Tax Reform & Center City Community Development. Please join us in supporting a split-rate tax—a better property tax for a better community.

Jennifer Thangavelu is Co-Coordinator of the Split-Rate Property Tax Campaign of the Washington Regional Network for Livable Communities. For more information or to submit your endorsement of the split-rate property tax, contact the Washington Regional Network at 202/667-5445. Members of the campaign are available for presentations on the split-rate tax.

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