BY JOSHUA VINCENT/ After years of false starts and extended deadlines, new real-estate values are in the mail. Hundreds of thousands of Philadelphians are slitting open that mail. Hundreds of thousands of Philadelphians are screaming.
Council now has the responsibility of grappling with the real meaning of these numbers, by implementing a fairer and more-accurate tax system, while minimizing the impact on those city residents who can least afford to pay more.
Unfortunately, while AVI will make our property taxes fairer, it has had a few unintended consequences that are troubling residents and Council Members. First, because large commercial properties have been reassessed more frequently than residential properties, the new property assessments will result in an overall reduction in taxes paid by businesses and an increase in the taxes paid by residents.
Second, residents in some neighborhoods, especially those that have been gentrifying, are seeing very-large increases in their taxes. In some cases these increases fall on people with low incomes – or whose incomes now look low compared to their new taxes.
Several ideas have so far been floated to mitigate both problems. Some are much better than others.
First things first: We need to take more time to look at the actual values and support citizens and businesses who want to challenge the values they’ve been issued. For the most part, the values look good, but there are several obvious outliers that will be fixed by the Office of Property Assessment as the appeals move forward. The information that is publicly available leaves out many blocks of homes and businesses.
We still don’t have the entire picture. It may take a couple of years before these numbers settle down.
After the appeals process plays out, Council will turn its attention to debating various tax-relief proposals. Let’s round them up:
The Homestead Exemption would reduce the taxable value of an owner-occupied house. If your property is valued at $200,000, the homestead exemption would lop $30,000 off, and you’d be taxed as if the property were worth $170,000. The amount of relief would likely be fairly minimal, but would be very important for low-income or fixed-income homeowners. And because the homestead exemption is available to residential but not commercial property, to some extent it would mitigate the shift in the tax burden onto residential properties.
Marc Stier, a long-time progressive leader in Mount Airy, observed, “There are two main problems with this approach. One is that people have to apply to get it. The Nutter administration has said they expect 96% of eligible homeowners to apply – an obvious overestimate. The other problem is that every dime lost in revenue will be made up not only by commercial but rental properties, including the tens of thousands of rowhomes that are the only shelter for low-income renters.”
In addition, Councilman Bill Green, who chairs the Finance Committee, has expressed skepticism about this tool, saying, “The best tax reform we can get is the lowest tax rate we can get.” Green has earned his colleagues’ respect in matters financial and he has introduced a measure to abolish the Homestead Exeption before it is ever applied.
Gentrification Relief works on the proposition that longtime homeowners in appreciating neighborhoods would get an “ability to pay” tax reduction. As with the homestead exemption, the owner-occupier would have to actively apply for relief, and participation rates tend to be low. The other drawback of this approach is it applies only to residential properties. The owner of the corner barbershop with a fairly fixed income flow can also fall victim to rent hikes. The small business owner is just as important as the small homeowner.
A better approach might be a Gentrification Dividend. Jon Geeting of the liberal blog Keystone Politics has proposed giving a portion of the tax increment the City collects from new neighborhood developments back to the neighbors via checks in the mail. Notes Geeting, “Instead of framing neighborhood growth as something neighbors need ‘relief’ from, it would establish the idea that everyone should benefit when neighborhoods attract more people and investment. I see it as a kind of appreciation to those who have stuck with the neighborhood during the lean times.”
The amount might not be much. But it could help residents in these neighborhoods to buy into the change. Nobody in Philly wants the residents in its hottest neighborhoods to jump up and flee the city en masse; that would mean fewer jobs for those who remain.
The Property Tax Deferral proposed by Councilman Kenyatta Johnson has much to recommend it if implemented correctly. In fact, a good deferral program would defer all or most of the tax bill until sale or death.
The Nutter Administration appears skeptical for two reasons. First, it worries about losing tax revenue the City needs now. However a clever investment banker can devise a way for the City to issue bonds in anticipation of future revenues. With rates so low, interest can easily be passed on to homeowners. So the City will ultimately lose no revenue.
Second, the administration is concerned about the impact on heirs. But once we’re talking about heirs, are we really even talking about low-income and fixed-income residents anymore? Heirs generally make their own way in this world, and are unlikely to be counting on 100% of the proceeds of a small rowhome.
Increasing the Use & Occupancy Tax has been floated as a way to reverse the shift in assessed value from commercial to residential properties. In a thriving economy, this could work.
However in Philadelphia, raising the U & O Tax would perversely benefit those commercial property owners who are already mothballing nonresidential properties. They don’t pay it. Politicians likely imagine white-collar Center City businesses paying a higher tax, but the small businesses in the neighborhoods would also be hit.
To make sense, as Councilwoman Maria Quiñones Sánchez observes, the tax would have to be adjusted to exempt small businesses and in a way that does not run up against the uniformity clause of the Pennsylvania Constitution.
The Land Value Tax has been recommended by economists, civic groups and many Council members and tax reform commissions over the years. Under LVT, buildings and property improvements would be taxed at a much lower rate than land values, shifting a greater share of the tax burden onto vacant and blighted parcels. This would create an incentive to development, and make the effective but frequently maligned tax abatement program unnecessary. It would reduce the shift of the tax burden from commercial to residential properties, particularly outside the radius of Center City. It would also send the message that a citywide abatement program is available for any citizen, builder, or investor on land made valuable by the investments in infrastructure and services by the city of Philadelphia.
One charm of the LVT is that it does not run afoul of the Constitution. In fact, it is long-established in many Pennsylvania cities. Twenty-five cities base their property tax on it, among them Allentown, Altoona, Harrisburg, New Castle and Scranton. Furthermore, it is not a brand-new invention. It already works. There’s a roadmap to follow – handy when a June deadline is staring at you.
No politicians have mentioned this idea yet in the context of the debate over AVI and tax relief, but an early look at the new proposed assessments suggests a land-value tax could be just the answer Council is looking for.
Of the 530,000 properties which the new figures indicate are “complete,” 77% of residential properties would pay less under LVT than under the current property tax using the new values.
Many decreases would be quite significant. Around 67% of apartment buildings and 85% of mixed-use buildings, with ground-floor retail and apartments on top, would also see substantial savings. Commercial and industrial properties would pay more under LVT than the property tax using current values, but they would pay less than they did under the old assessments.
So a shift to LTV could mean major changes to the scary numbers on many property-owners’ letters. Good changes. They could take a load of Council Members’ phone lines.
While there are advantages to moving to a complete land-value tax, the City could also move part way this year and take further steps in the future as taxes on land go up and structures go down.
The following table demonstrates what would happen to all taxable parcels if, instead of a flat tax of 1.25%, the City shifted at least some tax burden from buildings to land values:
AVI should be seen not as a tax increase, but as a necessary correction to existing taxes that will provide a more-sustainable base of funding for critical city services, and a down payment on tax reform that will decrease Philly’s reliance on taxes that are notorious for driving away wage-earners and business investment.
The ball is now in the court of 17 players: our City Council Members. Sometime between now and July, they must come up with ways to sand down the rough edges of AVI. There is probably no one single bullet; a blend of three or four allied ideas will work better. But all this legislation must be crafted in one short season.
It’s a daunting challenge for Council Members – but one they are stuck with. Every one of them is being hammered by hundreds of thousands of screams now.
“Every option should be on the table for consideration,” insisted Councilman Wilson Goode, Jr. “But our action should provide some relief to the majority of homeowners, with a focus on the economically disadvantaged with the least ability to pay.”
Joshua Vincent is executive director of the Henry George Association of America.