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Philly is set to create a new construction tax and make changes to a big property tax break in a win for Council President Darrell Clarke

The deal would be a major victory for City Council President Darrell L. Clarke, who has proposed using the revenue to finance an ambitious anti-poverty and affordable housing program.

City Council President Darrell L. Clarke is hoping to use new tax revenue from construction to fund a $400 million anti-poverty and affordable housing program.
City Council President Darrell L. Clarke is hoping to use new tax revenue from construction to fund a $400 million anti-poverty and affordable housing program.Read moreHEATHER KHALIFA / Staff Photographer

Philadelphia is poised to enact a new tax on residential construction and to make major changes to the city’s controversial property tax abatement program under a deal struck by City Council President Darrell L. Clarke and Mayor Jim Kenney’s administration that paved the way for three bills to win approval from a Council committee late Tuesday night.

The legislation would be a major victory for Clarke, who has proposed using the revenue from the new construction tax and future reductions in the real estate tax break to finance $400 million in bonds for an ambitious antipoverty and affordable-housing plan he is calling the Neighborhood Preservation Initiative.

For city homeowners, it could mean a new tax equal to 1% of the value of new construction or any major extensions they make to their houses. For commercial property owners, it would mean a 10% reduction in the value of the 10-year real estate tax-break program.

The development industry, Kenney, and his political backers in the building trades unions were initially skeptical of the changes, which they feared would slow economic growth in the city. But the administration on Tuesday testified in support of the legislative package after reaching a compromise with Clarke that will exempt commercial properties from the construction tax and delay the implementation of reductions in the tax abatement, according to a City Hall source with knowledge of the deal who was not authorized to discuss it publicly.

“The administration appreciates the dialogue we’ve had with City Council on these bills,” Kenney’s deputy mayor for planning and development, Anne Fadullon, told lawmakers. “We believe it’s a good balance of bills.”

Amendments to the legislation were negotiated in private for hours Tuesday night, and the Committee of the Whole voted to advance the bills around 11 p.m. With approval from the committee, which includes all members of Council, the bills have a clear path to final passage.

The bills now head to the Council floor, where they could come up for final votes as soon as Dec. 10, at Council’s last meeting before its holiday vacation.

The new construction impact tax, which was introduced by Councilmember Cherelle Parker on behalf of Clarke, would take effect in January 2022.

Finance Director Rob Dubow said the tax is projected to generate about $15 million in revenue by its second year, and would eventually rise to about $30 million per year. But if the new tax or other factors lead to a 25% slowdown in residential construction, the tax would only produce $11 million in its second year, before rising to about $22 million in its fourth year, he said.

Four Council members — Republicans Brian O’Neill and David Oh, as well as business-friendly Democrats Derek Green and Allan Domb — voted against the tax.

The two other bills aim to amend the city’s tax abatement program, which since the 1990s has incentivized development by allowing property owners to pay no real estate taxes on the value of new construction or renovations on commercial or residential buildings for 10 years.

Last year, amid calls from progressives and school-funding advocates to end the tax break, which disproportionately benefits wealthy property owners, Council cut the value of the residential tax abatement by roughly half, while leaving the abatement for commercial properties untouched. Those changes were to take effect at the end of 2020.

» READ MORE: How Philadelphia finally changed the loved and loathed 10-year tax abatement

One of the bills, authored by Councilmember Bobby Henon, would delay the implementation of those changes for one year, and was approved by the committee in a narrow 10-7 vote. Domb and Green were joined in opposing the bill by the more liberal wing of Council, which includes all four freshmen — Jamie Gauthier, Kendra Brooks, Isaiah Thomas, and Katherine Gilmore Richardson — as well as progressive stalwart Helen Gym.

The other bill, by Clarke, would reduce by 10% the value of the tax abatement on commercial properties and will also take effect in January 2022. If adopted, the bill would initially produce about $1.3 million in annual revenue, before rising up to $5 million to $7 million per year, Dubow said. The committee approved that bill unanimously.

Tuesday’s hearing offered the strongest sign yet that the legislation is headed toward passage. But the bills will still face opposition and could be changed again as they make their way through the legislative process.

Jerry Jordan, head of the Philadelphia Federation of Teachers union, testified that the coronavirus pandemic has already wreaked havoc with the School District’s budget and delaying cuts to the residential tax abatement, as Henon proposed, will cost the district even more tax revenue.

The bill, he said, “demonstrates that our city is once again prioritizing wealthy developers over our school children.”

On the other side of the debate, developers who begrudgingly accepted the compromise version of the legislation nonetheless warned that it could end Philadelphia’s recent development boom.

Mo Rushdy, treasurer of the Building Industry Association, said his group supported the construction tax bill because it recognizes “an urgent need for affordable housing.” But, he said, “we do not do so with any enthusiasm whatsoever. Many projects will no longer be feasible because of the increased costs.”