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.
Your article on the Philadelphia ten-year real estate tax abatement provides a comprehensive overview of a crucial issue in the city’s recent elections. The debate surrounding this abatement, with its potential benefits and drawbacks, is an insightful exploration of the intersection between development incentives and municipal revenue needs.
Your clear explanation of the tax abatement mechanism and its historical context sets the stage for understanding the perspectives on both sides of the debate. The rationale behind the abatement as a development incentive, especially in a city with high construction costs and stringent building codes, is well-articulated.
The contrasting views presented by proponents and opponents of the tax abatement offer a balanced perspective. The statistics on the distribution of tax benefits among different property values and neighborhoods add a layer of depth to the discussion. The concern about underfunded schools and the disproportionate impact on poorer neighborhoods adds a critical dimension to the conversation.
The mention of Councilwoman Gym’s call for reform and the various proposals put forward, from complete elimination to percentage reduction, highlights the complexity of finding a middle ground. The fact that tax abatement reform became a focal point in the City Council primary elections emphasizes its significance in local governance.
Your anticipation of tax abatement reform becoming a top priority in the upcoming City Council session creates a sense of urgency for readers. The article effectively raises questions about the potential impact of changes on property values, development dynamics, and the overall urban landscape.
In conclusion, your article successfully unpacks a complex issue, providing readers with the necessary context and insights to understand the Philadelphia ten-year real estate tax abatement debate. Your expertise on the subject shines through, contributing significantly to the public discourse on urban development and fiscal policy.