The potential costs of implementing split-rate property taxes are two-fold: the costs for local governments and the costs for taxpayers.

Costs for local governments. The split-rate property tax concept can be designed to be revenue neutral in the short-term, so that reductions in tax revenue from buildings are offset by increases in tax revenues from land. In the long-term, split-rate property taxation increases municipal tax revenues and decreases the municipal service costs due to more efficient use of urban infrastructure: because land values are largely created by public infrastructure investments, a higher tax on land ‘recaptures’ the public’s investment in infrastructure. It also reduces the temptation of local governments to fund new public infrastructure in far-flung locations (resulting in land speculation and urban sprawl) in the ongoing quest to open up as much land as possible for development in order to increase the jurisdictions’ tax revenues. Thus, split-rate property taxation can reduce the costs for new infrastructure that is needed to service a given population by promoting more efficient use of existing infrastructure in already developed areas.

A split-rate property tax also provides economic incentives for more compact development. This type of land use is often thought to reduce automobile use (by making walking, cycling, transit, and car pooling more feasible) and thereby reduces traffic congestion and air pollution. Reduced traffic and pollution would ultimately result in lower program costs for government efforts to mitigate the harmful effects of auto use. Proponents of split-rate property tax therefore claim that the reduced spending on these mitigation programs, in conjunction with reduced infrastructure costs discussed above, allows for lower per capita tax burdens.

Finally, depending on the complexity of the local government’s existing assessment system, administrative costs for tax assessment, collection, and enforcement can be reduced using a simple split-rate property tax.

Costs for taxpayers. With split-rate property taxation, taxes for most homeowners and business owners will go down: analysis of several jurisdictions suggest that approximately three-fourths of taxpayers’ property bills were reduced under a system of split-rate property taxes. On the other hand, some property owners’ taxes would increase, including absentee landlords, real estate speculators, properties with extremely large parking lots, and business owners with land-intensive activities such as large car dealerships. For example, Allentown (PA) adopted a land-value system tax system in 1996, and since then 76 percent of homeowners experienced a drop in their property taxes, while owners of large open lots, including car dealers and parking-lot operators, saw tax increases.

To understand how split-rate property taxation results in tax shifts rather than tax increases, consider the table (below) which illustrates the estimated impact of implementing a split-rate property tax on a typical Fairfax, Virginia property: 10300 Eaton Place, a modern office complex.

Row 1 of this table shows the assessed value of the land and the buildings.

Row 2 shows the property owners tax liability with a conventional single-rate property tax which, in this example, is .001 mil (or $1 of tax for every $1,000 of assessed value).

Row 3 shows the property owners tax liability with a split-rate property tax system that lowers the tax rate on the assessed value of the buildings by just 10% and simultaneously increases the tax rate on the assessed value of the land by 17%.

In this example, split-rate property tax would provide an annual tax saving of $2,775. A tax cut on building assessments of 25% would provide an annual saving of $9,611.

Source: The Center for the Study of Economics