This story is from our partners at Axis Philly.
Philadelphia’s 10-year tax abatement program has always been something of a lightning rod in city politics.
On the one hand, it’s been widely credited by various studies and reports as having fostered growth in the city, whose population had been declining for decades until the most recent census. On the other, it poses a distasteful situation: Why should some residents pay more in taxes than residents living in newer and usually relatively expensive homes?
And now many of those property owners are about to pay even less.
Under the shift in property assessments known as the Actual Value Initiative, tax-abated property owners in some up-and-coming neighborhoods will see the taxes they do pay go down further, even as their neighbors’ taxes go up.
It’s certainly true in Northern Liberties, where roughly a third of all taxable properties enjoy a tax abatement. With the new assessments, taxes will rise by about half in this neighborhood. But the tax bills for the abated properties will actually fall, also by about half.
So how can taxes go down, abatement or no, in a neighborhood where values have clearly gone way, way up?
One answer, says Northern Liberties Neighbors president Matt Ruben, is fairly straightforward: The properties with abatements were built more recently and their valuations are just closer to the actual value,” says Ruben. Because the overall tax rate has been lowered to accommodate higher values citywide, he said, those properties effectively get a tax break, just as did commercial properties in Center City.
But the second explanation is more troubling.
“The city has valued the land portion of the assessment,” Ruben says, referring to the only portion of a property assessment on which the owner of an abated property pays taxes, “way, way too low. It’s inexcusable.”
Ruben’s assertion echoes AxisPhilly findings that land, at least in gentrifying neighborhoods, has been valued by the city at far, far below what it would actually sell for. Put another way, the city says land has gotten cheaper even as market prices have obviously gone way up.
Typically, city land should account for about 20 percent of a property overall assessment, according to city consultant and Fels Institute of Government researcher Kevin Gillen. But in many neighborhoods, land values have fallen far below that figure.
Northern Liberties is a case in point.
While the assessed value of all taxable properties in Northern Liberties will double under the new assessments, the land portion of that amount will actually drop, from about 20% to about 13%.
Put together, Northern Liberties residents who own tax-abated properties, and only pay taxes on the value of the land, will pay a total of $800,000 less annually.
These are new findings, and they may inform a debate long underway within City Council, and reignited this week, when Council President Darrell Clarke began a line of questioning during departmental budget hearings about whether or not the current property tax abatement system is fair. Clarke has suggested tweaking the abatement program in the past, as well as introducing potential incentives for would-be homeowners to buy existing properties rather than new ones.
It’s a position that will face challenges from the real estate lobby. Alan Domb, president of the Greater Philadelphia Association of Realtors, defended the abatement this week as good policy.
“In Philadelphia, your cost of labor and materials is the same as in New York,” says Domb, “and your price is one-third. The abatement is needed because of this competitive situation of labor and materials being so expensive … and because there isn’t enough demand to drive prices up.”
Ruben, who thinks tax-abated properties are getting off too easy under AVI, doesn’t disagree that the abatement may have had a positive impact on Philadelphia, but agrees with Clarke that the time has come to re-evaluate its usefulness.
“Do we need to abate 100% of value, do we need to do it for 10 years, would it make more sense to have a gradual fade-out? It’s worth asking,” Ruben says. “But do we really still need it in neighborhoods like Graduate Hospital and Northern Liberties? Come on.”
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