PlanPhilly

Changes to Philly construction tax break under review

With the spring City Council session coming to an end, reform of Philadelphia’s controversial 10-year property tax abatement emerged as a live issue on Thursday. The 18-year-old development incentive waives property taxes on increased real-estate values generated through new construction or renovations. Critics say the break unfairly benefits the wealthy while greatly reducing the public benefit of the city's building boom. 

In the morning, City Councilwoman Helen Gym introduced a bill that would end the break for real estate taxes owed to the School District of Philadelphia, effectively halving the abatement. She said the Council isn't seeking an end to the development incentive but rather, reform.

“I don’t think there is any question that the abatement should be revised,” said Gym in an interview. “How it is revised and who benefits from the revisions are the conversations we are going to have…[But] No one is talking about eliminating the abatement.”

Gym said she wants her bill to kickstart the conversation about abatement reform, and increasing school funding. But she isn’t married to her proposal, saying she would also be open to gradually winding down the School District portion of the abatement, or limiting the whole program to certain neighborhoods in the city. Gym also introduced a resolution today calling for hearings on the tax pass's geographic impact. The majority of abated properties are located in Greater Center City, according to a report released in April by City Controller Rebecca Rhynhart.

Gym’s bills came on the same day that the Kenney administration released a new study of the abatement and possibilities for reform. The city-commissioned study, conducted by the real estate firm Jones Lang LaSalle, explores policy changes ranging from elimination of the abatement to limiting it to certain sections of the city, capping it on individual residential properties or gradually phasing it out. The option proposed by Gym — limiting the abatement so that the break doesn't waive the portion of property taxes that go to the school district — was studied as well. 

Philadelphia's Director of Finance Rob Dubow said the administration has no position on the best path forward. The study is just meant to analyze the different cases and how painful each would be to the real estate market and the jobs that depend on it.

“The gradual phase-out cases appear to offer the least level of risk and the highest level of practicality to the city,” said Reginald Ross, research manager with JLL. “But in the end, the biggest conclusion is that doing something, eliminating it or whatever you do, has a cost. And it’s up to the city to decide what level of risk to assume.”

The study found that the abatement helps Philadelphia stay competitive with its peer cities in the Northeastern United States. The abatement boosts the profitability of real estate in the city by an additional one to two percent, narrowing the gap between Philadelphia and the region’s hotter urban real estate markets.  

That kind of support is less important than it used to be, due to the city’s healthier real estate market in and around Center City. When JLL conducted a similar study in 2014, as the city was still struggling with the aftermath of the Great Recession, the policy was far more essential in propping up the market.

Nonetheless, the study found if the abatement hadn’t been in place during the recovery from the recession, between 30 percent and 40 percent of development in the city would either have been lost or forestalled—especially outside the Center City core.

The study found that eliminating the tax abatement would be revenue positive for the school district in the short term, but projected that it would be revenue negative over the long haul because less development would occur overall.

Representatives of the Kenney administration said that both capping the abatement and targeting it to neighborhoods with cooler real estate markets both presented substantial administrative hurdles.

Marissa Waxman of the Revenue Department said that capping the abatement at a certain property value would involve home-by-home analysis, which would be labor intensive and difficult to track. Costs would be higher for the city and for the applicant, who would have to submit a lot more paperwork.  Limiting the abatement to certain parts neighborhoods would offer similar administrative hurdles, including recurring analysis of which areas should be covered.

There were other complications with the geographic targeting model. In many of the cooler markets in the city, JLL predicted that the abatement at its present value would not be enough to attract investors. To have the intended effect, the abatement would have to be both extended over a longer period of time and geographically targeted.

But that would have potential political and social hazards of its own.

“We explored geographic targeting of the abatement, which we think could be very interesting,” said JLL’s Ross. “But the downside is that we think it could drive capital, and therefore gentrification, into areas where it doesn’t exist now. If the geographic component was considered it would have to be very carefully calibrated to ensure that didn’t happen.”

Gym says JLL’s estimates are conservative because the firm assumes that city leaders would eliminate or cut back the abatement without taking other steps to cushion the blow to development.

But she also says it shows that times have changed. In her view, the study reinforces the idea that reform is needed. The city is no longer struggling with a recession and now is the time to craft development incentives that better reflect the city's needs, Gym argues.

“We should not continue to use the tax abatement as a crutch, because we could find something more refined and honed for what we need right now,” said Gym. “I believe we need new incentive tools that fit the needs of both growth and equity. We have to put those things together. It can’t just be growth at any cost.”

About the author

Jake Blumgart, Reporter

Jake Blumgart is PlanPhilly's planning, development, and housing reporter. He covers the city's built environment and the people who live and work there. He lives in Cedar Park and has also contributed to Slate, CityLab, Next City, The Philadelphia Inquirer, Philadelphia Magazine, and the American Planning Association's magazine. Follow him on Twitter @jblumgart and email him at jblumgart@whyy.org.

 


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