A major Philadelphia real estate tax break is close to seeing its first changes in the almost 20 years since it became law.
City Council is considering changes to the controversial 10-year tax abatement. A flurry of negotiations and lobbying is underway in City Hall to influence legislation that could pass before the end of 2019. Council President Darrell L. Clarke hopes to see enacted a bill that would effectively halve the exemption for new construction of residential properties.
Here’s what you need to know about the abatement.
What does the 10-year tax abatement do?
The 10-year tax abatement began in the late 1990s as a program for tax breaks on existing buildings. It was expanded to its current form in 2000 to include all new construction and rehabilitation projects. Officials wanted to encourage development, expand the city’s housing stock, and boost the local economy.
Under the abatement, owners of new construction pay taxes only on the value of the land underneath their buildings for 10 years, not on the value of the buildings themselves. And owners of rehabilitated properties are exempt from taxes on the value of the improvements.
For example, a rowhouse near Frankford Avenue and Palmer Street in Fishtown that was built in 2012 has a market value of $498,600, according to the Office of Property Assessment. But the owner only pays taxes on the assigned land value of $135,942, so the annual tax bill is about $1,900 instead of almost $7,000.
And a $1.8 million condo overlooking Rittenhouse Square has a tax bill of about $2,200 under the abatement, instead of $25,000.
How much tax money does Philadelphia give up under the abatement?
More than 15,000 properties currently have the abatement. The total value that is exempt from taxes under the abatement is $11.6 billion, according to property records. The city and School District would net about $162 million in annual revenue if those properties were taxed in full.
Proponents of the abatement, including Mayor Jim Kenney, say it pays for itself because it acts as a development incentive that brings more money into Philadelphia over time. Opponents say Philadelphia has changed in 20 years, and the abatement has become a tax break for wealthy residents as well as fuel for the gentrification of neighborhoods.
What are the proposed changes to the abatement?
City Council is considering a bill that would change the abatement only for construction of new residential properties.
Under the proposal, the owner of a new home would be exempt from paying taxes on the value of the building in the first year, the same as under current law. But then that exemption would decrease by increments of 10% annually, reaching 10% by the 10th and final year. The result would essentially halve the value of the current abatement for newly constructed homes.
The changes would take effect in July 2020. . But that date could change as the legislation moves through Council.
What would stay the same under the proposed legislation?
The new legislation would not change the tax break for properties already benefiting from the 10-year abatement.
It also would not change the tax exemptions available for commercial and industrial properties, like hotels and office buildings. Lawmakers have said leaving the commercial and industrial incentives intact is important because those projects create jobs both during and after construction.
Rehabilitation projects of existing homes would still be eligible for the full abatement.
What impact could proposed tax abatement changes have?
Officials expect a decline in residential construction in the city if the proposal becomes law. A City Council study projected a 25% drop in residential construction in the first year after it takes effect.
But because owners of new homes would begin paying some taxes on their houses in the first 10 years, the city could take in about $265 million in tax revenue over the next decade that it otherwise wouldn’t have, the study found.
Who supports the reforms?
Clarke says he’s worked with City Council members to form a consensus. Several Council members — including some who have previously called for eliminating the abatement and some who have opposed any changes to it — have voiced support for the bill. Of the 17 Council members, 15 have signed on in support.
“The whole structure of our real estate market and our economy has changed dramatically,” Clarke said. “It’s time to move the needle forward.”
Who is opposed to the proposed legislation?
Developers and the building trades unions already defeated a proposed cap on the total value that could be exempt from taxes, which they feared would end construction of high-end condos and luxury housing. They may still push against the proposal being considered or fight for changes, such as a later enactment date.
Kenney has said he thinks the abatement works, but he’s willing to sign a reform bill passed by Council.
Some advocates for eliminating the abatement may also criticize the legislation for not going far enough.
“If people feel like this is the only thing we will do on this issue … I could understand some of the pushback,” said Councilwoman Helen Gym, who has long sought changes. “But this is a first step, and there’ll be more that we need to do.”
What comes next?
Negotiations are likely to continue in City Hall until mid-December, when Council holds its last meeting of the year. To pass a bill this year, the final vote must be held on or before Dec. 12.
Council is scheduled to hold a hearing on the bill next week.
And even if the new bill passes, reform advocates may still push for more action next year, when Working Families Party candidate Kendra Brooks and other new members join Council.