Tax abatement's benefits
By Kenyatta Johnson As we seek solutions to our school funding crisis, we must remain focused on finding a long-term fix and avoid knee-jerk policy decisions. We all want a quality, fully funded public education system in Philadelphia. Harrisburg's move to cut state funding, coupled with rising pension and health-care costs, has contributed to a budget gap of about $300 million, which Mayor Nutter and City Council are scrambling to close.
By Kenyatta Johnson
As we seek solutions to our school funding crisis, we must remain focused on finding a long-term fix and avoid knee-jerk policy decisions. We all want a quality, fully funded public education system in Philadelphia. Harrisburg's move to cut state funding, coupled with rising pension and health-care costs, has contributed to a budget gap of about $300 million, which Mayor Nutter and City Council are scrambling to close.
We must formulate comprehensive reform so that we don't find ourselves scrambling for new short-term revenue sources year after year. This year, we have considered many proposals, including extending the sales-tax increase, increasing taxes on cigarettes and alcohol, and reforming the use-and-occupancy tax, but we have yet to find a long-term solution.
Some say we need to consider scaling back the 10-year property-tax abatement. They argue that the abatement benefits wealthy new residents at the expense of our public schools. The abatement, they say, subsidizes market-rate housing for a population that doesn't need a subsidy, and although it may have been pivotal in spurring Philadelphia's recent development resurgence, it has outlived its usefulness. Critics reason that people will continue to flock to Philadelphia, reflecting a national trend of young professionals moving to urban centers. Thus, shouldn't everyone pay his fair share, especially those who can afford it?
However, before we consider altering the 10-year tax abatement, we need hard data regarding its benefits and the expected outcomes of any proposed reform. Would the city increase its revenue by scaling back the abatement? How much revenue would it raise per year? Would the increased revenue put a dent in the School District funding gap? Would development slow down as a result? If development slows, how many jobs and how much ancillary tax revenue will we lose?
We must have the answers to these questions and many others before we move to scale back a policy that has coincided with Philadelphia's biggest real-estate boom in many of our lifetimes.
Hard data is especially important given the apparent positive impact of the tax abatement. Available information suggests that the abatement has ushered in a level of realestate construction growth that many consider miraculous.
According to a report prepared by economist Kevin Gillen, a senior research consultant with the University of Pennsylvania's Fels Institute of Government, immediately following the creation of the abatement, construction increased by 263 percent, with Philadelphia experiencing more housing starts than the suburbs each year since the early 2000s. Between 2009 and 2011, during troubled economic times, Philadelphia enjoyed a 64 percent increase in housing development, while the suburbs saw a decrease.
Correlation does not prove causation, but these numbers certainly suggest that the tax abatement contributed to the construction boom, and that we should carefully examine the potential negative effects of any proposed reform.
Some see this issue as a matter of equity. They ask why wealthy homebuyers get a tax break while working-class Philadelphians are paying their fair share.
However, it's important to keep in mind that everyone benefits when new development generates revenue that the city needs to provide much-needed services to all Philadelphians. Developers pay business-privilege taxes, while workers and new residents pay wage and sales taxes. New residents shop in the city, supporting local businesses, which in turn create tax-paying jobs. Development projects create employment and business opportunities for existing residents, as developers hire skilled workers, contractors, architects, lawyers, Realtors, and other professional service providers.
The abatement's fiscal impact, direct and indirect, approaches tens of millions of dollars per year. This revenue funds city services and our public schools. Scaling back the tax abatement is unlikely to raise more than a few million dollars per year, which suggests that the costs of the proposed reform would far outweigh the benefits of the abatement.
Remember also that affordable-housing units are eligible for the 10-year tax abatement as well. In the Second Council District, I am working on three mixed-income home ownership initiatives, and I am supporting several proposals for large-scale development projects that will offer affordable rental options for senior citizens. These projects will receive, and heavily rely upon, the 10-year tax abatement.
When it comes to the city budget, we must make an informed decision, especially when the stakes are this high. The available information suggests that the risks outweigh the potential benefits when it comes to scaling back the 10-year tax abatement.