Tax ruling may cost Philadelphia, schools $41 million

Right in the middle of budget season, a state board dealt the city and its school district a blow Tuesday that could cost them as much as $41 million in combined revenue.

The ruling from the State Tax Equalization Board (STEB) comes amid a long saga surrounding efforts to fix the city's broken property-assessment system.

For decades, Philadelphia has assessed properties purportedly at 32 percent of value, meaning a house worth $100,000 was supposed to be assessed at $32,000 for tax purposes.

STEB has been charged with checking the city's numbers to ensure fairness, by looking at submitted sales figures each year and calculating whether properties are being taxed at close to 32 percent of their worth.

In July, the board said the city was nowhere near that. STEB said the number was more like 18.1 percent - and that might have been generous.

That figure, set by STEB, is known as the "common level ratio."

STEB's July pronouncement opened the door for appeals from property owners saying, for example, that a $100,000 house should be assessed at $18,100 for tax purposes.

About 2,000 of those appeals were filed and remain pending. The city, meanwhile, supplied STEB with more data in the hope of a more favorable finding.

At 18.1, the 2,000 appeals - if successful - would have cost the city and school district a total of $80 million in lost tax revenue, said city Finance Director Rob Dubow.

STEB notified the city Tuesday that the ratio had been reset at 24.8. At that level, the appeals could cost the city $18 million and the schools $23 million, Dubow said, or a combined $41 million.

The Nutter administration, however, has filed cross appeals in each of the 2,000 cases. Last month, Budget Director Rebecca Rhynhart asked City Council to appropriate $1.8 million to hire an army of private assessors to help fight the appeals. That request is pending.

The private assessors would take another look at each of the 2,000 properties that are the subject of appeals, Dubow said, in the belief that most are under-assessed.

If the city's Board of Revision of Taxes, which hears appeals on assessments, finds that the property values are higher than what's now on the books, that would lower the amount the city and schools have to return.

If the appeals and cross appeals are finally decided in this fiscal year, which ends June 30, victorious property owners could request a rebate or a credit on the next fiscal year's taxes.

Dubow said he could not predict how long it would be before all the cases were concluded or how much the city and schools ultimately would have to pay back.

"But this will be a significant hit," he said.

He also could not say where the city and the school district, which is battling a budget shortfall and predicting another for the next fiscal year, would find the money.

"We just got this today," he said. "That's something we'll have to figure out before the end of the budget process."

The complicated mess of appeals and cross appeals is part of a property-tax system long derided as wildly inaccurate and inequitable.

Based on 2008 analyses by The Inquirer and experts at Carnegie Mellon University and the University of Pennsylvania's Wharton School, the 24.8 figure would be generous.

Using standard statistical analysis, The Inquirer computed a ratio of 12.2 percent, and the Wharton and Carnegie results were similar. Kevin Gillen, who performed the Wharton study and is now an executive at Econsult Corp., noted that even taking into account a drop in home values since 2008, the ratio still would be under 15 percent.

The city is planning to abandon the current system this year, moving to one that assesses and taxes properties based on their actual value - the Actual Value Initiative.

City assessors for months have been walking neighborhoods, knocking on doors, and checking public records in an attempt to affix a true market value to each property.

Council seems poised to accept AVI as the best, fairest way to fix the system, though there are rumblings about how much money should be collected in the changeover.

If Council approves AVI, it would end the current battle over the common level ratio.

"Once we implement AVI, this become a one-time issue," Dubow said. "It's more evidence that we need AVI in place as quickly as possible."