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Tax break for new Philadelphia construction comes under financial watchdog's sights

City Controller Rebecca Rhynhart is examining the 10-year abatement amid mounting skepticism toward the program, as Mayor Kenney pushes to raise property taxes for school funding and other priorities.

Owners of the 2116 Chestnut high-rise apartment building are among the investors who have directly benefited the most from the 10-year-tax abatement program.
Owners of the 2116 Chestnut high-rise apartment building are among the investors who have directly benefited the most from the 10-year-tax abatement program.Read moreELIZABETH ROBERTSON / Staff Photographer

Philadelphia's financial watchdog is exploring whether to recommend changes to a much-used tax break for new construction that backers credit with sustaining the city's building boom but that critics say has starved public coffers to disproportionately aid the wealthy.

City Controller Rebecca Rhynhart said that she is analyzing the impact of adjusting or ending the city's 10-year property tax abatement, which waives city taxes on increased real-estate values generated through new construction or renovations.

The move comes amid mounting skepticism of the 18-year-old abatement program, as Mayor Kenney pushes to raise property taxes for school funding and other priorities. Some officials are questioning the wisdom and fairness of continuing to exempt new construction from the real estate levy while other properties get a tax hike.

"When the tax abatement was created, Philadelphia needed it. We needed development and to attract new residents to the city," Rhynhart, who hopes next month to release her report on the program, said in an email Wednesday. "But the city isn't in the same place as it was when the policy was created."

Rhynhart said her study would consider options such as limiting the tax break to improvements valued at $500,000 or lower, or continuing it only in neighborhoods most in need of investment.

Since starting in 2000 with the aim of reversing a decades-long slide in the city's population and economic fortunes, the abatement has been claimed by owners of 20,000 properties, 15,607 of which continued to qualify for the break as of March 2017, when the Building Industry Association of Philadelphia released a report promoting the program.

The report, compiled by Kevin Gillen, senior research fellow at Drexel University's Lindy Institute for Urban Innovation, credited the abatement for a 376 percent increase in home building within Philadelphia, compared with an average decline of 11.3 percent in the city's suburbs.

Taxes on properties with abatements that have elapsed were contributing about $48.1 million a year to public coffers at the time of the study, with the city due to realize a total of $169.4 million in annual real estate taxes when all abatements then in effect expired, the report said.

Leo Addimando, managing partner of developer Alterra Property Group and vice president of the BIA's Philadelphia chapter, said the program has brought the city fiscal benefits beyond property tax revenue, such as increased sales tax receipts from purchases by residents living in abated properties who might otherwise have settled elsewhere.

"We believe that the vast majority of projects built under the abatement over the last 20 years or so would not have gotten built, but for the abatement," he said. "If there's any substantial change to the real estate tax abatement that isn't looked at in the context of the total cost of development in the city of Philadelphia, and the fact that that cost has increased substantially, you risk killing the golden goose."

Others, however. say the abatement might be getting credit for encouraging development that would have happened without it and point to cases where wealthy buyers of new multimillion-dollar properties have been able to keep taxes that would have gone toward city schools and services.

According to a survey released last month by a research group at the University of Pennsylvania's Urban Studies Department, the 12 residential properties receiving the highest abatement amounts in the real estate tax year starting April 1, 2017, had an aggregate property value of nearly $1 billion, amounting to more than $13 million in forgone city property taxes.

Most of those properties are in Center City and University City, with the biggest break — worth $1.68 million — going to the owners of the 2116 Chestnut high-rise apartment building, according to the Penn researchers.

"At some point in time you have to say, we don't need the incentive because the market is carrying itself," said Phil Goldsmith, a now-retired former Philadelphia official who has served as city manager and as an interim chief executive for the city's public schools. "The tax abatement merely eats into the finances of the school district, and I don't think the school district should be subsidizing development."

In a January opinion piece published by the Inquirer, City Council President Darrell L. Clarke also cast the program as a drain on vital city revenue. "It is time to revisit the 100 percent, 10-year tax abatement in its current form as part of a broader conversation about equitable growth," he wrote.

In addition to Rhynhart's coming study, Philadelphia's Finance Department is refreshing a 2014 market analysis that predicted a phase-out of the abatement would result over time in a 30 percent decline in development, city spokesman Paul Chrystie said. The new analysis, which will be updated to reflect recent growth in the city's real estate market, is to be released by late April "so that it can inform this year's budget discussions," he said.

Rhynhart said the point of her study was to answer whether "we still need the abatement in the same way we did and does keeping it intact prevent much needed funding from flowing to the school district. … We can't know any of this without a fair, independent analysis."