OLR Research Report

January 20, 2004




By: John Rappa, Principal Analyst

You asked how states have reduced the extent to which large, fiscally distressed cities depend on property tax revenues. You specifically wanted to know about Pittsburgh and Harrisburg's split rate property tax and the Minneapolis-St. Paul regional revenue sharing program.


Some critics of the property tax claim that it forces large, fiscally distressed cities to continually squeeze more tax dollars out of stagnant and, in some cases, depreciating tax bases. This problem is particularly acute in regions where cities are geographically small and land locked, meaning they cannot expand their tax bases by annexing unincorporated areas (i.e., Connecticut). To solve this problem, critics recommend strategies that:

1. stimulate the redevelopment of abandoned lots and blighted buildings by taxing improvements at a lower rate than land (e.g., Pennsylvania split rate tax),

2. reduce the fiscal disparities between adjacent municipalities by requiring them to share the tax revenue generated by new commercial and industrial developments (e.g., Minnesota Municipal Fiscal Disparities Program and Allegheny County Regional Asset District), and

3. ease the pressure on urban tax bases by (a) shifting the costs for municipal services from local to state tax bases (e.g., Wisconsin and Michigan education funding programs) or (b) allowing cities to levy other types of taxes (e.g., Missouri local sales taxes).


A 1997 Connecticut legislative task force discussed how post-World War Two social and economic changes have limited the extent to which municipalities can tap the property tax to cover increasing municipal costs:

As urban real estate values declined, the cities had few options for repairing or strengthening their tax bases. Compared to the suburbs, the central cities covered relatively small areas and contained little or no undeveloped land that could be put to a higher, more valuable use. Attempts to assemble and clear developed land for redevelopment take many years and are costly. Cities find themselves in the Catch 22 situation of trying to squeeze more tax dollars of out of depreciating properties, a practice which only encourages more businesses and residents to leave and undermines sound planning (Report of the State of Connecticut Task Force to Study Alternative Tax Policies to Benefit Urban Center, January, 1997, p.13 (Attachment 1)).

We used this analysis to distinguish those property tax reform options designed help city governments fund services without straining their tax bases from those intended to lightened the burden on homeowners and businesses.


Pennsylvania law allows Pittsburgh, Harrisburg, and 14 other municipalities to tax land, regardless of how it is used, at a higher rate than buildings, a practice often referred to as the “split rate” tax. This option does not necessarily reduce the extent to which cities rely on the property tax but manipulates it in a way that stimulates development. In cities with many vacant lots and blighted or abandoned buildings, the split rate tax encourages owners to develop or improve the property in order to offset the higher tax on land, its proponents claim. Attachment 2 is an OLR report that further explains how the split rate tax does this (2003-R-0419).

Pennsylvania is unique in authorizing the split rate tax; Connecticut and most other states require municipalities to tax land and buildings as one unit at the same rate. The Alternative Tax Policy Task Force recommended allowing Connecticut's five largest cities to adopt a split rate tax (p. 9). From 1999-2003, the legislature considered bills authorizing the split rate tax, but most died in committee.


Twin Cities

Municipalities in Minnesota's Twin Cities (Minneapolis-St. Paul) region share property tax revenue as a way to reduce the fiscal disparity between large cities and their surrounding suburbs. The disparity arises from the fact that the Twin Cities have little or no undeveloped land with which to attract new, taxable development, while their outlying suburbs and rural areas have vast tracks of undeveloped land.

Since 1971, municipalities within the Twin Cities region have been contributing 40% of the growth in their commercial and industrial tax base to an areawide pool. This pool is then apportioned to each municipality based on its population and relative fiscal capacity, which is the ratio between its equalized net grand list and the average equalized grand list for all towns. A municipality's share equals its population multiplied by its relative fiscal capacity. As a result, municipalities whose fiscal capacity is below the average receive a greater share than those whose capacity is above the average (Minn. 473F.001 et seq.).

While Minnesota law requires the municipalities to share revenue, Connecticut law allows them to. PA 00-85 lays out a process through which towns can negotiate an agreement to share property tax revenue, but no towns appear to have done so. The 2002 legislature considered but did not enact a bill allowing towns to impose a higher mill rate on nonresidential property if they agreed to share of the tax revenue with a neighboring, fiscally distressed town (Attachment 3, sHB 5583, File 229).

Allegheny County

Pennsylvania allows Allegheny County to levy a 1% sales tax to support regional recreational and cultural attractions. The county must split the tax between itself and the regional asset district charged with supporting these attractions. It must use its share to reduce county property taxes.

The Connecticut legislature considered but did not enact bills authorizing regional asset districts. During the 2002 session, for example, sHB 5064 would have allowed regional councils of governments to form these districts and fund them by taxing any income, item, or transaction that the state can tax (File 244, Attachment 4).


Some states try to relieve the pressure on local property tax bases by shifting the source for funding certain municipal services from a local to a state tax base. For example, Wisconsin capped annual increases in school tax revenues in 1993 and committed the state to fund two-thirds of school spending by FY 1996-97. In 1994, Michigan disconnected school funding from the property tax and gave voters the choice of replacing that revenue source with sales or income taxes. Voters chose the former.

Vermont took a different tack: it eliminated the local school district property tax, replaced it with an income-adjusted statewide tax property, and set a statewide minimum per pupil spending requirement. It also provided tax credits against the statewide tax, allowed towns to impose certain sales taxes, and extended state payments in lieu of taxes (PILOTs) to more types of state-owned property.

The Connecticut legislature has considered many proposals to have the state assume a bigger share of local government costs. These include the perennial full PILOTs for state owned property and hospitals and private colleges and universities and new PILOTs for public housing projects.


Another way states have tried to ease the pressure on local property taxes bases is to allow municipalities to levy sales and income taxes, a move that shifts some of the tax burden to nonresidents who work or shop in the municipality. Several states allow municipalities to levy various taxes, but require them to use the revenue for specified purposes. For example, Missouri allows municipalities to levy a .5% sales tax to fund parks and storm water control projects.

The 1997 Alternative Tax Policy Task Force recommended that the state share specific tax revenues with the five largest cities. It recommended reducing the sales tax in specified areas from 6% to 3%, but also recommended that the state return 1% of the reduced revenue to the city for property tax relief. It also recommended that each of the five largest cities receive all of the 12% room occupancy tax generated in those cities.

In 2003, the legislature considered but did not enact a bill allowing towns to tax the gross receipts generated by large retail facilities. The bill would have allowed towns to levy the tax if they agreed to share some of the revenue with towns and use the rest to provide tax relief for at least three years after imposing the tax. (HB 393, Attachment 5).