As development booms, Philadelphia asks if tax abatements are still needed

Philadelphia’s rising property values have prompted city officials to revisit a tax incentive policy implemented at the turn of the 21^st century.

In an effort to spur real estate development, Philadelphia enacted a 10-year tax abatement program in 2000 that provides a 100% benefit -- exempting the value of all improvements and new construction on residential and most commercial real estate from taxation for 10 years following completion of the improvements.

The Philadelphia City Council is now considering revising the tax abatement program, though it coincides with significantly higher construction activity compared to neighboring suburbs.

Victor J. Blue/Bloomberg

A 2017 Building Industry Association of Philadelphia report said construction activity in the city jumped 376% since the tax abatement program was put in place, compared to a drop of 11% in the suburbs. The analysis said that in 2016 Philadelphia received $48.1 million in real estate taxes from properties with expired abatements, with that number expected to rise to $169.4 million by 2026 after all currently abated properties are no longer tax-exempt.

Philadelphia City Controller Rebecca Rhynhart released an analysis of the tax abatement policy on April 20 that said properties placed on the tax rolls after the expiration of their 10-year abatements produced roughly $83 million in tax revenues for the 2017 fiscal year. She stressed that the revenues, which included 55% for the Philadelphia School District and 45% for the city, may not have been existed without the not for the abatement policy to encourage the properties' development.

“It’s been nearly two decades since the tax abatement’s inception and it has created a good amount of development, but at the same time there is frustration from a good amount of people who feel that the wealthy are benefiting more from it," said Rhynhart. “There are still a lot of obstacles in the way toward developing in a good part of the city, but we need to also tackle the fairness issue.”

Philadelphia exploring the future of its tax abatement policy on new construction arrives at a time when it is gearing up to inject nearly $1 billion of new revenue into the city’s cash-strapped school district. Long-term concerns about whether Pennsylvania’s largest city can generate sufficient revenues to meet spending demands for the Philadelphia School District led S&P Global Ratings to downgrade the city one notch to A in March.

Philadelphia Mayor Jim Kenney proposed new taxes in his March 1 budget address to help the city’s junk-rated school district tackle a projected $900 million deficit estimated by 2023. The Democratic mayor has also focused on ramping up pension payments since taking office in January 2016, budgeting $3.4 billion in pension funding in a five-year plan unveiled last year. The city's GO bonds are rated A2 by Moody’s Investors Service and A-minus by Fitch Ratings.

Rhynhart, who was elected in November after ousting incumbent Alan Butkoviz in a Democratic primary, outlined in her report six different scenarios for adjusting the tax abatement policy, including eliminating it completely, amortizing it over a 10-year period, removing the benefit in the most profitable ZIP codes and removing the abatement of the 55% share of tax collections that goes to the school district.

She noted that the 14,345 properties with active abatements have received cumulative tax benefits of $442 million, and $93 million for 2017. The city’s 12,477 properties with expired abatements received a cumulative total tax benefit of $609 million, according to Rhynhart. Since 2000, abated properties have received a $1.05 billion cumulative tax benefit, her report said.

“My goal in looking at the ten-year tax abatement was to provide the Mayor and City Council with the information needed to make a data-driven decision as to keeping, ending or changing the policy,” said Rhynhart, a former Philadelphia city treasurer and budget director. “Incentivizing growth is important for the entire city, but it must be done in a fair and inclusive way.”

Villanova University School of Business professor David Fiorenza said he supports modifying the tax abatement policy since it was last revisited at a time the city was lowering the wage tax on residents and non-residents. He said lowering multiple taxes created long-term budgeting challenges and he urged the city to try and more aggressively collect various delinquent taxes as another tool to increase revenue.

“There is a lot of money left on the table not collected and this would make the process fairer for those who pay on time,” said Fiorenza of how the city could benefit from focusing on delinquent taxes in addition to revisiting the tax abatement program for new construction. “Tax abatement does help all parties involved, but does put more stress on city services for the new residents and businesses that have moved into the City due to the program.”

Philadelphia City Council president Darrell Clarke has previously introduced legislation to revise the tax abatement policy that lacked support from colleagues. Clarke's spokeswoman, Jane Roh, said property tax increases proposed in Mayor Kenney’s budget have renewed calls from other members to revisit the policy, but a construction impact tax measure Clarke recently introduced to fund affordable housing may complicate efforts.

“There is some opposition from the industry, so strategically we would like to get that over the hill before taking additional concrete steps on revising the abatement program,” said Roh.

City spokesman Mike Dunn said the mayor’s office hired an outside expert to look at the impact of the 10-year abatement on development, jobs and tax revenue as a way to guide the budget process. He noted that a previous study around four years ago found that an elimination or modification of the abatement would have a negative effect on city and school district revenues despite a slight short-term increase.

“Obviously economic conditions have changed since then, as the city emerged from the Great Recession, making it particularly important to revisit the impacts of this tax incentive,” said Dunn of the need for a new analysis. “The goal of the new study is to examine how recent growth in the local real estate market may impact the last such analysis.”