Is the Nutter tax plan a windfall for businesses?

Philadelphia City Councilman Bill Green has run up some numbers, and come up with a disturbing hypothesis about Mayor Michael Nutter’s proposed property tax overall: It would give businesses in Philadelphia big reductions in property tax bills, and as much as a couple hundred million dollars of that tax burden would shift to city homeowners.

At a Council hearing Monday, Green proposed to partially counter that effect by nearly doubling a relatively obscure business levy called the use and occupancy tax, which is based on the square footage of properties used for business activities.

U&O tax revenues go to the Philadelphia school system, so Green would use this increase to cover the $94 million Nutter wants to fund the finacially desperate school system.

“We will collect $94 million more from commercial and industrial property owners than the mayor has proposed, while still collecting the same amount of revenue the mayor has proposed,” Green said.

Confused?

If you aren’t, you are hereby dubbed a Wonkus Maximus.

If you are, I’ll try to help.

Essentially, the city’s property tax system has been screwed up for years, and the mayor wants to go to a system in which a simple tax rate is levied on a property’s market value. (I put up a pretty good basic explanation of how this differs from the current system in this post a couple months back.)

Pretty much everybody agrees this is the right thing to do, but the transition involves a lot of moving parts. Reassessments will give properties very different values and the property tax rates will be drastically lowered, since the new rate will be applied to much higher, more accurate values.

And if it’s true that residential properties’ assessed values under the current system are way below market values, and commerical and industrial properties’ values are closer, then when you go through the transition, Green’s prognosis comes true: Business owners, in the aggregate, get lower tax bills and homeowners get bigger ones.

Green says the numbers could be very big.

“The collections will shift by at least a hundred million dollars from commercial to residential,” Green said. “The public has no concept that the actual tax burden that is being imposed on them is not the $94 million that has been reported, but in excess of $194 million, and probably more like $250 million of additional taxes that will be borne by residential property owners, which, based on what they pay today, is a 29 or 30 percent increase in the aggregate.”

I found this hard to believe until I sat down and did my own explain-it-like-I’m-a-6-year-old calculation.  I imagined a city where there are only 10 taxpayers, seven residential, three commercial. And indeed, if you assume the commercial properties have been assessed at 75 percent of their values and the residential ones at 25 percent, when you go to full value assessment, you find the commercial taxpayers get a windfall.

Green said his estimates of the size of the effect comes from “back of the envelope calculations” based on rough aggregate data.

You could look at the whole thing another way, of course — that it’s entirely fair for business taxes to fall. That as residential property assessments have fallen further and further below market values over the years, businesses were paying increasingly more than than their share of the burden, and the transition to the new system will swing things in the other direction.

After Green explained his view of the impact of the Nutter plan, I and other reporters asked city Finance Director Rob Dubow what he made of it.

He agreed commercial and industrial property owners’ taxes would fall in the new system if — and it’s a very big if — it’s true their current assessed values are more up to date, and residential assessments are much lower. He said the data isn’t yet in to demonstrate that’s the case, though he acknowledged it’s a widely held perception.

When the hearing got under way, there was this exchange between Green and Dubow:

Green: But, as a policy matter, through this shift, do you think it makes sense, to shift, if that’s the case a couple hundred million dollars of taxes that are currently being paid by commercial and industrial property owners to residential property owners?

Dubow: Uh, I don’t think that would be a good policy.

It will be interesting to see where the debate goes next. Council is supposed to enact a budget by 30 days before the end of the fiscal year on June 30.