Ask Mark

Philadelphia's Director of Sustainability, Mark Alan Hughes, answers our readers

Q: The tax abatement costs the city millions in revenue, and discourages the renewal of existing buildings, thus causing the waste of huge amounts of energy and new construction material, while not requiring any more labor (that is, it doesn’t create jobs compared to restoring existing buildings). It also encourages private automobile ownership in the city, since all new houses are required to have garages. With rising energy costs encouraging people to move back to the city, this unfair subsidy is completely unnecessary. Will you advocate to eliminate the 10-year property tax abatement for new construction in the city?
—Jerry Silberman

A: Thanks for your question, Jerry. The 10-year real estate tax abatement is one of the most contentious issues in the city. While it has simmered for years, our current budget crisis has brought the issue to a full boil. Many people feel that their own real estate tax payments are subsidizing the people whose real estate taxes are being abated for 10 years. That is a reasonable but mistaken conclusion.

Let me give you two short answers to your question and then provide a slightly extended explanation.

First short answer: The mayor has recently established a Task Force on Tax Policy and Economic Competitiveness, and that is the proper forum to work out changes to the abatement. Their recommendations are due in just five months.

Second short answer: The real estate tax abatement more than pays for itself. The business, wage and sales taxes paid by the developers and occupants of the abated properties are worth more than the “lost” real estate taxes, and these real estate taxes aren’t really “lost” if you believe, as I do, that most—if not all—of the abated real estate would have never been built in the first place without the abatement. And if we count not just the other tax revenues, but also the total private economic activity associated with the new residents living in abated property (two-thirds moved from outside the city), then the abatement is an even better deal for the city.

These are pretty complicated issues and I’d like to address a couple of points you bring up in your question. The abatement has done the exact opposite of discouraging the renewal of existing buildings! Two of the three specific abatements (the conversion of commercial properties into residential, and the rehabilitation of existing residential property) are designed specifically to encourage the renewal of existing buildings. You raise our zoning code’s deficiencies with parking requirements, and I agree. But this is a more general issue than just as it relates to the abatement. And finally, with the double challenge of the international recession and our local budget crisis, the abatement is more necessary than ever. As new development has come to a standstill in the city, the abatement provides a certain and well-known incentive to help finance new projects.

But this is all just a little too rational. Long-time residents absolutely feel screwed when they think about paying their real estate taxes knowing that new arrivals in abated properties are paying nothing. And when appreciation (not the abatement!) increases those tax bills, it’s even easier to feel screwed rather than wealthier.

So I hope the Task Force will consider some important improvements to the abatement. Ability to pay (not just willingness; no one has that when it comes to taxes!) is an important consideration. We should consider ways to help low-income homeowners, either through a “homestead exemption” that rebates some of the tax bill or a “circuit breaker” that limits the effects of appreciation on tax bills. We should also consider getting more “public policy” for our abatement, such as extending the length of the abatement for development in neighborhoods outside Center City or development with higher energy performance.

But now we’re back to my short answer: the mayor has created a forum to discuss and resolve these and other ideas about the Abatement and other taxes. The Task Force will make recommendations in September, and now is the time to make your voices heard. There will be at least two public hearings.