Council is trying to modernize Philly’s tax abatement. Here are five better ways. | Inga Saffron
As City Council rushes to pass a bill modifying the incentive, it risks losing a golden opportunity to get the policy right for today's Philadelphia.
If your memories of ‘90s Philadelphia are hazy or nonexistent, it may be hard to appreciate why the 10-year property tax abatement was once considered a progressive tax policy. So, let’s go back to 1997, the year that City Council passed an early version of the abatement: Thousands were fleeing Philadelphia for the suburbs. A dozen downtown skyscrapers stood empty, including the burned-out hulk of One Meridian across the street from City Hall. Some urban planners argued that Philadelphia’s only hope for survival was to start acting more like a suburb and begin clearing land for stand-alone houses on big lots.
There’s little doubt that the abatement played a major role in reversing that narrative of decline. As the years went on, the tax incentive has helped stoke one of longest, most intense construction booms in Philadelphia’s history. It turned Center City into a glittering island of wealth. Humble working-class neighborhoods, such as Fishtown and Graduate Hospital, underwent fairy-tale transformations, becoming some of the hottest zip codes in the region. As prices shot up, and the economics of construction changed, a lot of fine old churches and houses were reduced to teardowns. The abatement also subjected Philadelphia to a powerful force that was unimaginable to anyone living here in 1997: gentrification.
The tax abatement was a good policy in its day, but no policy is good forever. City Council, which held a marathon debate this week for a bill that would effectively reduce the abatement to 5.5 years, deserves credit for finally taking on this sacred cow. But rather than spend the time necessary to fine-tune a new version that’s right for today’s Philadelphia, Council is rushing a flawed bill to a final vote. Introduced just days before Thanksgiving at the request of Council President Darrell L. Clarke, it could be approved by next Thursday.
The bill perpetuates the same crude approach to tax policy established in 1997. Even though the revised abatement would have two tiers — 10 years for commercial property, 5.5 years for residential — it is still essentially a one-size-fits-all incentive. That makes it an inherently regressive tax policy, not unlike Philadelphia’s one-size-fits-all wage tax. By fast-tracking the bill, Council is losing a golden opportunity to craft the abatement in a way that furthers important policy goals, such as affordable housing, historic preservation, and environment sustainability.
Several Council members complained about the lack of nuance, but in the end, they blamed what is known as the “uniformity clause.” That rule, enshrined in Pennsylvania’s constitution, obliges Philadelphia to tax all property owners equally. It’s the reason that the owner of the tiniest rowhouse is billed at the same tax rate as the owner of the Comcast tower, even as many American municipalities are moving on to a more progressive, “split-roll” system that imposes a higher burden on commercial owners.
Because the uniformity clause looms so large in the state, Philadelphia lawmakers tend to treat it as if it were one of the immutable laws of physics. After a group of business leaders failed to get the state legislature to approve a split-roll tax system, many gave up hope of unshackling the city from the clause.
But experts suggest that the law is less clear-cut when it comes to the tax abatement. They note that Pittsburgh has long had a targeted tax abatement. It’s a long shot, they acknowledge, but they still believe that Philadelphia might be able to craft a similar law if it pushed a little. You don’t know until you try.
Some at Tuesday’s hearing called for eliminating the abatement altogether, but that seems unrealistic. Most American cities — apart from booming Boston — offer tax incentives to encourage new construction, on the theory that building in older cities is more expensive than putting up a house in a cornfield. Philadelphia could learn a lot from those places. But, as city officials sheepishly conceded on Tuesday, they’ve never researched how other cities structure their abatements.
So, here are a few suggestions, culled from a sampling of other cities and a recent report by Philadelphia’s controller’s office.
Offer longer abatements to encourage policy goals
Philadelphia has been increasingly using its zoning code to encourage developers to build affordable housing, choose historic preservation over demolition, and embrace environmentally friendly construction. But the city doesn’t provide direct grants that would offset the cost of these public benefits.
The proposed abatement retains the 10-year exemption for renovations. But by offering certain projects an extended abatement, the city could further sweeten the pot. A 15-year abatement for faithfully restoring a historic building, for example, could make preservation more attractive than demolition. An extended abatement could also help developers pay for energy-saving features, like solar panels or heavy-duty insulation.
Limit the abatement to overlooked neighborhoods
If you look at a map of all the properties that have received the abatement over the last two decades, you’ll see that most of the dots are concentrated in greater Center City and the popular neighborhoods along the Market-Frankford Line — some of the city’s most expensive areas. Six percent of the city’s neighborhoods are home to 60 percent of the abatements. As a result, the abatement has become a subsidy to the wealthiest people in Philadelphia.
Meanwhile, middle neighborhoods like Mayfair and Tacony have experienced little new construction. Even worse, many homeowners have seen their property values fall — the reverse of gentrification. What if Council eliminated the abatement for Center City and kept a decadelong abatement for struggling neighborhoods?
There is no doubt that a neighborhood-specific abatement could accelerate gentrification. The good part? The city could always reconfigure the incentive if a local market starts to overheat.
Cap the abatement at $700,000
This recommendation was suggested in an analysis last year by City Controller Rebecca Rhynhart. The report came out after the developer of 500 Walnut announced that the building’s penthouse had sold for nearly $18 million. As a group, the tower’s 36 well-heeled owners are expected to save $22 million on their taxes over the next decade.
To determine what the threshold should be, the controller’s report crunched the numbers. It determined that $700,000 was high enough to ensure that the majority of new middle-class houses would still qualify for the abatement but would prevent the city from subsidizing the super-rich.
Use the abatement to subsidize affordable housing
This recommendation takes the opposite approach. The city could limit abatements to residences selling below $250,000. Virtually no homes are being built at that price (unless they’re subsidized), mainly because that figure barely covers the cost of construction. A dedicated abatement could give affordable housing developers the profit they need to construct much-needed workforce housing.
Eliminate the school district’s portion of the abatement
One of the most hated aspects of the abatement is that it takes money away from the Philadelphia School District. Although Philadelphians pay one property tax bill, the money goes into two pots: The school district gets 55 percent of the total, and the city gets the rest. But what’s the point of encouraging families to buy houses in the city if the district can’t afford to maintain its schools?
One solution would be to abate only the city portion of the tax bill. The abatement could run for whatever duration the city chooses — 10, 15, or the proposed 5.5 years.
Some worry that restructuring the abatement will kill the city’s building boom. They forget that the original abatement, adopted in 1997, ran for just three years and was considered a resounding success.
Whatever happens to the abatement bill next Thursday, there’s good news for skeptics. If the bill passes, the city is required to evaluate and update the abatement every three years. Given the speed at which Philadelphia changes, that seems about right.
Note: This column has been updated to correct information about the uniformity clause.