Philadelphia moves toward creating a new construction tax and delaying abatement change

Updated 2:19 p.m. Wednesday 

In a win for Council President Darrell Clarke, City Council passed his legislative package that includes a 1% construction tax and a reduction of the commercial abatement by 10%. Both reforms are set to go into effect Jan. 1, 2022.

Both of these reforms are supposed to fund the planned $400 million package for affordable housing and other community development programs that Clarke has dubbed as the Neighborhood Preservation Initiative.

The residential tax abatement reduction that passed last year is supposed to go into effect in January. But in a win for Councilmember Bobby Henon, who was the prime sponsor for the bill, that will be delayed for another year.

Rob Dubow, the director of finance for the city, said the 1% construction tax could generate $15 million by the second year and eventually get to $30 million if there are no changes to permits. If there are changes to the permits — like a potential 25% drop in residential construction, that tax would generate only about $11 million by the second year.

Dubow said he focused on year two because when Portland did a similar tax, that city didn’t make much the first year because of developers rushing to get things done before the change went into effect. In anticipation of the abatement reduction, Philadelphia saw a similar rush in 2020.

For the commercial abatement reduction, Dubow said it could generate $1.3 million the first year and then eventually begin generating $5 to $7 million per year.

The Building Industry Association said it supported City Council President Darrell Clarke’s package while asking for the abatement change to be postponed.

“The BIA does support Council President Clarke’s legislative package and we ask that the rest of Council support the legislation as well,” Mo Rushdy, the treasurer of the Building Industry Association of Philadelphia, said. “There can be no argument that the renaissance our city has seen over the last 20 years has not helped many of its least fortunate citizens, 25% who remain in poverty.”

Rushdy warned that many projects may no longer be feasible with the construction tax. While Philadelphia is seeing an unprecedented amount of building right now, he said, he doesn’t expect that to last. Meanwhile, the need for affordable housing continues to grow.

“There has been a dramatic shift in our premier cities that have lower costs of construction and higher demand for housing” Rushdy said.

The support represents a break from past positions and from industry peers like the General Building Contractors Association, which voiced opposition to the construction tax and wants any changes to the abatement to be delayed because of the pandemic.

“Our city needs its offices, hotels and stores to come back and taxing investment in commercial construction will only dissuade future investment in these areas,” Ben Connors, the association’s president, said.

Council President Clarke sparred briefly with Connors. He asked him to acknowledge that his office spoke with the contractors group at length about the legislation and a commercial abatement reduction bill Clarke introduced as an alternative funding source for the city’s anti-poverty agenda. He said Connors’ testimony didn’t reflect the conversation.

When other testifiers began using the pandemic as a reason to delay taxing development, Clarke pushed back on them as well, arguing that the development industry is not suffering like other businesses.

“This particular industry is not existing businesses, it’s not businesses that are suffering as a result of the pandemic,” Clarke said.

Henon was more sympathetic.

“City Council has extended deadlines for a variety of taxes, fees and city programs in response to the COVID-19 pandemic,” Henon said. “The shift to a new residential abatement program should be delayed to give the development industry time to stabilize in light of the pandemic.”

Teachers and other education advocates showed up and called in droves to testify against Henon’s bill.

The residential abatement reductions are supposed to provide $264 million over the next decade, according to City Council estimates.

Stephanie King, the president of Kearny Friend, a community organization supporting the Gen. Philip Kearny School in Northern Liberties, plainly told the Council to “let the abatement die.”

“Our schools continue to be drastically underfunded and constantly under threat of teacher cuts,” King said. “You are giving away millions of dollars that our schools need to developers. You say developers need those incentives to go ahead with these projects that contribute to the city’s economy but what’s going to happen to our economy when you fail an entire generation of school children?”

Henon said the construction impact tax is a backdoor way of taxing the abatement and believes the commercial abatement reduction would be more effective.

“I agree with the funding objectives associated with the tax, but feel strongly that we will accomplish the same goals through the reduction of commercial abatement to 90% without creating unnecessary bureaucracy and a new tax program to administer,” Henon said.

Councilmember Kendra Brooks who previously introduced a bill to eliminate the abatement altogether that has yet to see a committee hearing said the commercial tax abatement is a “step in the right direction,” but she doesn’t consider it a win.

“…There is a more straightforward way to achieve equitable funding for our public schools, and that is by simply eliminating the abatement,” Brooks said.

Councilmember Jamie Gauthier is also critical of the abatement and voted for the construction tax and the abatement reduction but against Henon’s delay.

“…I see the negative impacts of the abatements in the neighborhoods I represent, and in schools in the district,” she said. “I have a responsibility to my constituents not to support the continuation of this program.”

WHYY is one of over 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push towards economic justice. Follow us at @BrokeInPhilly.