The Inquirer recently published a story by Caitlin McCabe about a set of 10 new townhomes at South Broad and Fitzwater Streets expected to be completed late this summer. Reportedly, they will sell for around $2 million per unit. These units, as they are new construction, will receive a substantial financial benefit because they won't be subject to full real-estate property tax for 10 years.
Philadelphia's 10-year tax abatement is fundamentally a tax expenditure: not the benign concept of "money we never had" but more like writing a check from the city to the developers or buyers of new or substantially rehabilitated properties. Extreme cases such as abating $2 million townhouses prompt us to ask: Is this a wise expenditure for the city or school district?
Assume an average price for these townhouses of $2 million per unit and that 20 percent of the $2 million is the value of the land for which tax will be owed; $1.6 million per unit will be exempt from the Philadelphia real-estate tax.
The city's annual tax expenditure per unit will be $23,315 per unit (with the proposed 2019 tax rate of 1.4572).
With 10 units, that is a $233,152 tax expenditure from the city and school district. For perspective, that expenditure is the equivalent of the annual salary of five entry-level school teachers.
Because the abatement is 10 years, the city and school district tax expenditure will amount to $2,331,520, assuming that the assessed value of those homes remains constant over the 10-year period.
Is this a wise expenditure on the part of the city and school district? You have to ask: (1) Do you believe that those houses would have been built even if the city did not offer a real-estate tax abatement? (2) Do you believe that people who could buy a home for $2 million could also afford to pay the full complement of taxes? A 10 percent down payment means these home buyers likely need at least $200,000 cash and the ability to support monthly payments commensurate with an annual income of more than $700,000. (3) Would the Brooklyn, N.Y.-based developers have simply charged a bit less, reducing what is undoubtedly a substantial per-unit profit on a home selling for $2 million? If you answered "yes" to these questions, ask yourself this: Qui bono (who benefits)?
If one of the key reasons for the real-estate tax abatement is to stimulate real-estate markets that are not performing well, then there is no good reason to abate these properties because the market in this area is already performing well. The same can be said of many other areas of Philadelphia where these tax expenditures flow. If the other reason that we incur these expenditures is because the cost of construction is high in Philadelphia, then tackle those costs directly. Don't add to the costs on the one hand and then abate them on the other. And certainly, don't create a disincentive to construction cost-efficiency with public subsidy.
If another argument for the abatement is that it amounts to a 10-year investment by the city and school district that yields more revenue upon expiration, then it's also worth asking whether there are other short-term investments that yield more equitable results now and in the longer term. For example, the University of Pennsylvania's investment in a neighborhood elementary school raised property values (and tax revenue) in West Philadelphia and benefited homeowners and renters, old and new residents alike.
Capping the tax abatement at some reasonable level preserves the stimulatory impact of the abatement while not providing a windfall either to real-estate developers or to new homeowners at the expense of their neighbors. A reasonable tax-expenditure cap could be pegged to the FHA mortgage limit which, today, stands at about $385,000. Using this mortgage limit as the abatement cap takes away the complexity and political wrangling of other strategies proposed over the years to address reasonable concerns over the tax abatement.
Most importantly though, with a cap, the tax expenditure by the city and school district is limited to approximately $5,600 per unit. If a unit is built or rehabbed and valued under this amount, it is fully abated, but if a unit is built or rehabbed for more, the city's expenditure is limited. Since most neighborhoods in Philadelphia have homes priced under this cap, the intended purposes of the property abatement are preserved, and equity enhanced. It is easy to portray the tax abatement as money the city and its taxpayers never had, but in reality, the abatement is an expenditure. If our elected and appointed officials and residents of Philadelphia began thinking about the abatement as tantamount to writing a check to luxury market developers (or their buyers) for $233,000 a year for 10 years, there might be motivation to constructively address this very expensive city policy.
Ira Goldstein is president of Policy Solutions. Emily Dowdall is chief of development and policy implementation at the Reinvestment Fund.