Updating Philadelphia’s property tax abatement program will be a major focus when the city council reconvenes this fall. The abatement allows owners to avoid property taxes for 10 years on new construction or the value of renovation. Several abatement reform bills have been proposed, but none have received so much as a hearing before the council.
The abatement program was established in the late 1990s to serve as a stimulant to development. The conversation about the abatement began to change last year during debates over affordable housing. Critics began asking why the city is giving away such a lucrative tax incentive for so little in return.
Many options are up for consideration, including:
Totally eliminating the subsidy
Reducing it to an eight-and-a-half-year abatement, rather than 10 years
Eliminating the abatement on 55% of every tax dollar that goes to the school district
Capping the eligibility for the subsidy to exclude higher-end projects
Phasing the abatement out by reducing the exemption 10% each year
Limiting the abatement geographically to exclude rapidly growing areas
A city-commissioned study conducted by Jones Lang LaSalle points out that the abatement remains a significant tool in helping Philadelphia stay competitive with other cities in the Northeast.
For example, the abatement can reduce build costs on new construction by 12% -14% on a present-value basis. This translates into a 1.4% - 1.6% increase in potential yield in the ratio of a project’s costs to its income.
The study says different reform scenarios and their relative fiscal impacts can be summarized by the following:
Eliminate or shorten the abatement
Pro – Could raise short term tax revenue, shake out projects with questionable business cases, and avoid funding projects that would be developed without the abatement benefit.
Con – Highest risks are losing some portion of future development volume and recently-acquired sources of liquidity, limiting developer appetite to take on projects in riskier areas of the city, as well as losing tax revenue from reduced development volume in the intermediate and long term.
Phase out the abatement over time
Pro – Could have lower risk of development loss as the cost of incentive reductions could be offset by future improvements in rents, interest rates, income demographics, etc.
Con – Less short-term capital increase to the city. Would also have to be calibrated precisely so that financial underwriters don’t perceive the adjustment as a simple elimination and remove the incentive as a capital source to fund against.
Cap the abatement benefit
Pro – Could increase short-term tax revenue and help target the abatement towards projects with the highest likely need, while allowing developers and homeowners to adjust capital decisions to maximize the abatement’s value, thus limiting risk of development volume loss.
Con – Could be administratively difficult and costly for the city, while reducing Philadelphia’s ability to attract higher end office-using employees and, indirectly, the business that need to attract and retain them.
Geographic modifications to the abatement
Pro – Offers city decision makers the potential for an objective and precise method of targeting incentive dollars to areas of most need, then reallocate funds elsewhere as conditions change.
Con – If not properly managed, may spur rapidly accelerated prices in targeted areas. Less predictable, more complicated for developers and homeowners. May discourage investment by some property owners in some neighborhoods that are eligible today.
The full report on the Economic Impact Analysis of Proposed 10 Year Tax Abatement Adjustments published last year is available at this link.