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Philly property-tax abatement comes under scrutiny as Council weighs how to fund schools

Just as City Council looks for options to fund city schools, the Kenney administration has released a study that essentially tries to dissuade Council from eliminating the 10-year tax abatement as an option.

Reginald Ross, director of Ecometrics at Jones Lang LaSalle, talks to reporters about his firm’s study on Philadelphia’s 10-year tax abatement program.
Reginald Ross, director of Ecometrics at Jones Lang LaSalle, talks to reporters about his firm’s study on Philadelphia’s 10-year tax abatement program.Read moreCLAUDIA VARGAS / Staff

Just as City Council looks for options to fund city schools, the Kenney administration has released a study stressing the economic benefits of the 10-year property-tax abatement, which some lawmakers have proposed eliminating or curtailing in order to generate new revenue.

Councilwoman Helen Gym has introduced bills to eliminate the school district portion of the abatement, and to examine whether it makes sense to prohibit its use in certain neighborhoods.

The city's report, released Thursday and conducted by Chicago-based real estate consulting firm Jones Lang LaSalle, found that the 1997 tax-abatement program is still spurring development and generating jobs in the city. The program allows owners of newly constructed or rehabilitated properties to pay no property tax on the improvements for 10 years (they do pay tax on land value).

The study looked at 10 scenarios that could alter or eliminate the abatement program on residential properties, which make up 98 percent of those with the tax breaks, and found that any change to the program comes at a cost.

The study comes as council enters the home stretch on Mayor Kenney's budget proposal, which calls for a 4.1 percent property-tax increase to fund the school district's looming deficit, and in a year in which property owners saw assessments soar and subsequent automatic property-tax jumps for many.

Authors of the study analyzed pros and cons of each scenario and estimated how much tax revenue could be generated but they didn't recommend what action to take.

"At the end of the day, I think the bigger conclusion is that doing something, eliminating it now or whatever has a cost, and it's up to the city to decide what level of risk they are willing to assume," said Reginald Ross, a director for JLL, which conducted the report.

City finance director Rob Dubow said the city doesn't have a position on the tax abatement.

A statement released Thursday by the mayor's office noted that changing the abatement would reduce development. "Over a 30-year period the current program is still projected to generate more development, jobs, and tax revenue than scenarios that modify or even eliminate the incentive," it said.

The study also comes on the heels of a similar report issued by the City Controller, which showed that most of the abated properties are concentrated in the greater Center City area and that as of 2017, there were 14,345 properties with active abatements that received a tax benefit of $93 million. The controller's report also studied various scenarios from eliminating or changing the abatement program.

The controller's conclusions were based on 2016 figures of 1,400 newly abated properties — both residential and commercial — and did not consider potential development loss. For example, it states that had the abatement not existed in 2016, the city would have received an additional $10.4 million in revenue, of which 55 percent would have gone to schools.

Yet, the administration-commissioned report predicted that if the abatement were eliminated, the city would see a 40-percent reduction in development over the next 10 years. With elimination of the break, it found, the city and schools would only see an additional $2.7 million in new revenue during the first year and $18.4 million in the first 10 years.

By contrast, the report shows that over a 30-year period, keeping the abatement program as is would generate $221 million in tax revenue, while eliminating it would bring in $115 million over that same time period.

Gym has proposed eliminating only the school-tax portion of the abatement (worth 55 percent of the total tax bill). The administration report predicted just $9.2 million in new revenue for the schools over the first five years and $96 million over 30 years.

"I think they have been conservative" with the numbers, Gym said. "They view the change to the [abatement] program as loss of development."

City Controller Rebecca Rhynhart agreed and said that the $9.2 million projection over five years "doesn't make sense. That seems extremely low."

"Our team couldn't even back into those numbers that low," she said.

Gym said that the city needs a new development-incentive program that fits the city's current status and not one from 20 years ago when the city was in desperate need of development.

"The tax abatement is from 20 years ago. It's a blunt instrument and it's used crudely," she said.

Two scenarios that the Jones Lang LaSalle analysis found to have potential benefits — capping the abatement at either $500,000 or at $150 per square foot, or having geographical limitations — were turned down by the administration as impractical.

"Capping the abatement, we think could have a lot of potential," Ross said in a briefing with reporters. "From what we understand from city officials, however, is that those cases, while mathematically superior, are probably impractical because of the cost of implementing them."

Marisa Waxman, deputy revenue commissioner, said that capping the abatement would require individual analysis of each property, plus additional paperwork for abatement applicants.

"That's just a very personally labor-intensive thing to do and more difficult to track as opposed to a standard thing," she said. Waxman said the administration didn't have a specific cost estimate.

With just a few weeks left until City Council is expected to decide on the mayor's proposed 4.1 percent property-tax rate increase, Gym said she wants to add tax abatement to those conversations. She said she would be open to a gradual phaseout.

"The mayor has come out with his proposal and we just need a wider array of what else could be offered," she said.