Council supports Keystone Opportunity Zone expansions, called for greater transparency

Over the past week a bill to designate more than 80 properties as Keystone Opportunity Expansion Zones raced through City Council. Introduced last Thursday by City Council president Darrell Clarke and Majority Leader Bobby Henon—acting on behalf of the Kenney administration—the bill received a hearing before the Finance Committee on Wednesday afternoon.

The committee reported out the bill at the City Council session Thursday at its first reading. Councilwoman Jannie Blackwell pumped the breaks with an amendment to the legislation intended “to hold things up,” she told PlanPhilly, on the inclusion of three addresses related to Drexel’s redevelopment of the old University City High School site. Final approval at City Council for the rest of the expanded KOZ locations could occur as early as next Thursday’s session.

The bill represents the city’s latest utilization of the Keystone Opportunity Zone (KOZ) program, created by Republican governor Tom Ridge in 1998. The policy is meant to incentivize development in underperforming, often vacant, corners of the commonwealth. The program allows both state and local businesses taxes incurred at the site to be suspended for a set period of years, thus making the prospects of developing such a site more tempting.

Pennsylvania’s Fiscal Year 2017 budget, which passed in July, includes a provision for the expansion of the KOZ program. But the applications for the establishment of the new zones must be submitted by October 1, 2016, which is why the KOZ bill rose to the top of council’s agenda last week.  

There are currently almost 150 properties in Philadelphia designated as Keystone Opportunity Zones. The new proposed sites are scattered across the city, including locations in struggling areas like the long-vacant Logan Triangle in North Philadelphia and properties in neighborhoods that have been seeing a lot of development in recent years, like Fishtown and University City.

At hearing on Wednesday Councilwoman Helen Gym, who is not on the committee, told her colleagues she hoped to have a longer conversation about tax incentives and whether they actually deliver on their promise. She also questioned why KOZ-designations are required in neighborhoods that have been enjoying a substantial amount of market activity.

“I hope we…take a nuanced look at the idea that extensive and massive tax breaks are the only way we are going to provide incentives,” said Gym. “I would argue that in Center City and in these rapidly growing areas like the Naval Yard, we are rapidly developing already. Businesses actually do want to move to Philadelphia. There are investments in other areas that can be made.”

Director of Commerce Harold Epps testified in favor of the legislation. Like many defenders of the KOZ program, and other tax incentives, Epps argued Philadelphia needs to offer such tools to compete with neighboring counties in other states.

“To our east, across that bridge, we have a choice to participate in incentive battles to retain or recruit companies,” said Epps in a response to Gym’s concerns. “One of the most visible ones was our basketball team [in 2014 the ‘76ers agreed to move their backend operations to Camden for $82 in tax incentives.] That was a smart decision to let that go, but there are others where states will offer incentive packages and $15 or $10 million will make a difference.”

Programs like the KOZ have come under increasing fire across the country for sparking a race to the bottom among competing states or municipalities. Many critics say that the results of tax incentive programs of this nature are mixed or even entirely unclear, even as governments offer increasingly generous giveaways.  Nathan Jensen, professor of government at the University of Texas-Austin, is an expert on the programs and says that many studies have found that two-thirds to three-fourths of the incentives go to firms that were already going to make an investment.

In Philadelphia, the KOZ program itself received extensive scrutiny in recent years. A Pew report from earlier this year found that the effects of such initiatives were difficult to measure. In 2014, the city controller’s office found that the program cost taxpayers about $100,000 for every job created. But Jensen believes that estimate may be overly generous, as 70 percent of the recipients were already paying taxes in the city before being inducted into the program.  Thus the estimated $100,000 in tax credits per job is, in Jensen’s estimation, likely underestimating the cost.  

“This number, 70 percent, is very similar to other studies of the ‘redundancy’ of economic development incentives,” writes professor Jensen in an email to PlanPhilly. “Many studies find these types of programs have no ultimate impact on economic development, reducing tax revenues for essentially zero gain. This is not a cost effective job creation strategy and it is a net loss for taxpayers.”

The controller’s report primarily focused on the opacity of the KOZ program. It found that recipients self-reported the results and that little oversight was provided, making ironclad measurement exceedingly difficult. At the time, the Controller’s Office  even found that applications were shredded after three years and no electronic files kept. (These days with state government going paperless, that practice will no longer be a concern, according to Duane Bumb, senior deputy director of the Commerce Department.)

In an email to PlanPhilly, Controller Alan Butkovitz says that the concerns he raised were addressed by legislation, passed today and advanced by Councilwoman Gym and several colleagues that will require businesses to annually report the value of subsidies received and the number of jobs created.

Bumb says that other steps have been taken in recent years that would address some concerns about the program. In 2008, private property owners who wish to take advantage of a KOZ designation have to enter into a Payment in Lieu of Taxes (PILOT) Agreement with the city, which requires a yearly payment of 110 percent of the real estate taxes that would have been owed without the KZO.  

As for those perplexed about the use of the KOZ program in hot areas of the city, Bumb says that neighborhoods like Callowhill and Fishtown are seeing a lot of residential development but not the commercial and industrial uses the program is designed to encourage.

“Spring Garden may be a great place to put loft apartments but that doesn’t make it an easy sell for commercial office space or incubator space,” says Bumb. “Why wouldn’t they go to a better established location? That’s true in University City too. You go further west, the further you get from 30th Street station it’s not quite as rosy as if looking across the river to the city skyline.”

At the Wednesday hearing, Henon and others agreed that transparency would be essential. Before noting his approval of the bill, Councilman Alan Domb argued for sweeping tax reform. Epps agreed.

“Somewhere down the road we as a city need to look at our whole tax policy,” said Domb. “We need to level the playing field for everyone, not just those with KOZs. We need to build a better tax system.”