A Look at How a ‘Vacancy Tax’ Could Benefit Lansdale

In the game Monopoly, after acquiring property groups, you are allowed to begin developing your properties by placing houses and hotels on them. This increases the rents, which increases your wealth, which helps you win the game. As a player, you are incentivized to develop your land because it will allow you win the game at an accelerated rate.

But what if there was no incentive to develop your land? Would you still do it? Worse yet, what if the system you were operating under allowed you hold land undeveloped or underdeveloped and make more money by leaving it empty or in disarray? Would you take action?

I am sure some of you said you would maintain and improve the property. That you value the look and appeal of your land, and that you would want to develop property to have pride in your ownership and to ensure it is well taken care of. Obviously, not everyone adheres to that opinion.

Some people will sit on undeveloped or underdeveloped land until they are forced to make a change. Why? Well, there is little incentive to develop property or take on a tenant. This is especially true for commercial and rental properties. For commercial underdevelopment, the building owner can let the property sit vacant for as long as they want without any repercussion for underutilizing the space. It is, after all, their building. No one can make them take on a tenant. For rental units and rental housing, landlords can refuse to upgrade their property while still raising rents. After all, property values continue to go up throughout most of the area.

So, what do we do? How do we, as a community, incentive landowners in commercial and rental space to improve or further develop their land? Simple: we split rate their taxes.

In most states, and in most communities, taxes are developed in fairly simple way. Each property has an assessed value. That assessed value is based on the land it sits on and the building that resides on it. A millage or tax rate is then applied to that assessed value giving each landowner their yearly tax burden. Simple and uniform. However, in Pennsylvania, Virginia, and Connecticut, communities have the option to create two separate tax rates. One for land and one for property (development). Pennsylvania has 16 communities that currently split rate their taxes in this manner. The intent is to incentive people to develop their land or to fill vacant space.

“The split rate tax system treats land and any buildings on it as separate units and taxes them at different rates. In doing so, it shifts the tax burden onto the land by taxing it at a much higher rate. If the owner wants to reduce that burden, he or she must develop the land to its highest and best use. The owner will pay more taxes, but that will be offset by the increase in the property's market value.” – A handy little example can be found here to help explain this concept.

Essentially, building owners are encouraged to make improvements/develop their property and/or fill vacancies because they can attain a lower effective tax burden if they do so. Split rate taxes ultimately discourage land hoarding, promote efficient use of urban infrastructure, decrease urban sprawl and assure that property in the community doesn’t sit empty or vacant for years.

Lansdale, like many communities in the area, have landowners who are sitting on undeveloped or underdeveloped/under-utilized land that we all would like to see filled with new businesses to help our community grow. However, they are not incentivized to do so. For commercial zoned buildings, it makes all the sense in the world to split rate taxes and encourage new development. Application of these rules would be easy, an assessment for the land valuation of each commercial property would be completed first to find the land tax value. Then a second building or development tax could be utilized to limit the tax exposure any development would incur. However, they would only receive that benefit so long as the property is rented within a reasonable amount of time after development is completed and they meet all code department rules and regulations for occupancy.

The occupancy rule is extremely important. It helps set the stage for landowners to be an active part of the community and find businesses to rent to while maintaining their property and keeping it from becoming a blight on the community. If a commercially zoned property is developed but remains unoccupied or does not meet code restrictions, the owner would incur tax penalties that would increase their total tax burden and cannot be written off elsewhere in tax filings.

Make no mistakes, this is complicated stuff and would need to be discussed in depth before ever being implemented locally. However, unlike many communities outside of our state, we can help incentive our growth and development if we are willing to commit to it by exploring new and different approaches to taxation. Our current system might be simple, but that doesn’t make it the most logical system for a modern community. Shifting to a split rate system is something we would need to think hard about and the impacts it might have in our community. However, it does represent one substantive option to help encourage development while deterring commercial vacancies and blight.