Unpacking the Real Estate Tax Abatement Debate

If you followed the Philadelphia City Council primary elections this May, you likely heard much debate about the Philadelphia ten-year real estate tax abatement. The abatement can almost sound like a deal too good to be true – any new construction in Philadelphia can be real estate tax free for ten years. Proponents say that a tax break encourages development by incentivizing construction and counteracting the high cost of building in the City. But anti-abatement advocates argue that a tax break deprives the City from much-needed revenue, while not providing as much of a benefit as proponents claim. With City Council having tabled debate on the abatement until its fall session, and with the fall session fast approaching, this article aims to unpack the abatement debate, the positions on both sides, and why it matters.

The real estate tax abatement, as it exists in its current form, was adopted by City Council in 2000. Generally, real estate taxes are paid both on the value of any improvements on a property owner’s land (think: a house) and on the value of the land itself (think: the ground underneath the house). Under the tax abatement, the value of any new construction on a property is not included in the tax calculation. So, for example, if you purchase a vacant lot and build a house on it, the value of the house will be tax-free for ten years; you only pay taxes on the value of the land. To date, roughly $38.5 billion has been abated from new construction in the City.

At its inception, the tax abatement was seen as a way to incentivize development at a time when the City needed it. While Philadelphia may be the least affluent big city in the country, it has the fourth most expensive building market. The abatement was a way to encourage developers to construct new projects by offsetting the cost of that construction. To this day, between high construction costs and Philadelphia’s rigorous building and zoning code requirements, it remains difficult to earn a profit on new development in the City.

But opponents of the tax abatement are not so sure. Seventy percent of buyers paid more for an abated home than they saved in tax dollars. Opponents argue that every dollar abated is a dollar not spent on the City’s deeply underfunded schools, with schools in the poorest neighborhoods often feeling the brunt of the underfunding. Furthermore, the value of the abatement is not proportionately distributed throughout the City. Rather, it is skewed towards higher-value properties and more affluent neighborhoods. In 2017, properties valued over $700,000 made up only 7% of all abated properties, but accounted for 51% of the tax benefits from all abatements. In the same year, 59% of all tax benefits from the abatement were concentrated in just 6% of Philadelphia’s neighborhoods.

The first call to reform the real estate tax abatement came from Councilwoman Gym late last year. Since then, numerous proposals have been put forward, ranging from a complete elimination of the abatement to a reduction in the abatement percentage from 10% to 8%. Nearly all of the candidates in May’s primary election for City Council called for tax abatement reform, but when City Council’s spring session ended in June, none of the six proposals then pending had received a hearing in committee. For now, Councilmembers say they are meeting with stakeholders and working to build a consensus. With Council back in session September 12th, we can expect tax abatement reform to be a top priority. Yet, it remains to be seen how, and if, changes to the abatement will affect property values, development, and the landscape of the City.

Dina Bleckman (LAW ’18) is an associate in Ballard Spahr’s Philadelphia office. Her practice focuses on real estate law.

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