A dramatic change to Philadelphia’s controversial 10-year property tax abatement advanced through a marathon committee hearing on Tuesday afternoon. The bill, which will halve the tax break’s value, passed unanimously and without amendment, despite a lobbying blitz by the real estate industry.
The bill is expected to be approved by the full Council next Thursday, during the last meeting of 2019. Mayor Jim Kenney has until January 6th to sign the legislation, which means it would become law early next year.
Industry opponents argued fiercely that a reduction in the tax break’s value would kill Philadelphia’s building boom and cause a recession in their industry. But Council ignored their pleas.
“The doom and gloom that we always hear will happen if we take away the 10-year tax abatement, I just don’t believe it to be so,” said Councilmember Cindy Bass.
The bill passed after hours of debate and even received the grudging support of Kenney’s administration.
“While we remain concerned about the loss of long-term revenue, and the possible negative impacts a change would have on development, we understand the concerns of residents that view the current abatement as unfair,” said Jim Engler, chief of staff to Mayor Jim Kenney.
The abatement reform bill, written by Council President Darrell Clarke’s office, would reduce the property tax break on new residential construction by 10% each year over the subsidy’s decade-long span. Only in the abatement’s first year would real estate taxes on a new building be fully zeroed out. (The abatement does not apply to land value, only the building.) The following year, the owner would owe 10% of the assessed taxes, then 20% until in the final year that would be paying 90% of the taxes owed.
The proposal essentially halves the value of the property tax abatement for new homes. It does not touch the abatement for commercial and industrial properties. The reform also leaves the tax break on residential rehabs intact.
An intensive lobbying effort has raged around the bill. For weeks, the abatement has dominated behind-the-scenes strategy sessions between a variety of interest groups, including city politicians, affordable housing developers, real estate brokers and their representatives, and for-profit residential developers.
The real estate industry cautions against dramatic change, arguing that Philadelphia’s high-cost, low-rent market needs public assistance to remain in business.
“Philadelphia real estate development is in a Goldilocks Zone,” said Jim Maransky, president of the influential Building Industry Association (BIA).
“If demand evaporates a little bit, or if the incentives lever is pushed to increase costs even in the slightest,” Maransky told Councilmembers, “the construction-favorable financial conditions we see will disappear, and the cranes we all enjoy watching today will slowly fade from the skyline.”.
Development industry groups, including affordable housing builders, tried to delay implementation for a full year.
Real estate groups argue that development projects unfold on a lengthy timeline, with larger projects lasting as many as two years between a proposal’s announcement and when the developer actually files for a tax abatement. The BIA says that many of its members have projects in the pipeline whose financing assumes a full 10-year tax abatement.
“If in six months the value of the abatement is cut in half, these projects will not pencil out,” said Gary Jonas, the Treasurer of the BIA and the president of the HOW Group.
Pushing back the implementation date would allow those plans to come to fruition before the new abatement kicks in, Jonas says.
But Council refused to bend and the implementation will begin in mid-2020.
Both the BIA and the Greater Philadelphia Association of Realtors (GPAR) proposed amendments that would have back-loaded the phase-down of the abatement. But neither amendment gained any traction.
“There has not been any substantive change to this tax subsidy program in two decades,” said Councilmember Helen Gym, in the midst of pointed questioning of Kenney administration officials.
Community development corporations (CDCs) and other affordable housing groups support alterations to the abatement overall, but they argue that the incentive is essential for affordable housing’s fragile financing needs.
The CDCs came to Council with a proposal to exempt properties with deed-restricted affordability requirements from being subjected to the abatement reform proposal. This would mean that an apartment project funded by, say, Low-Income Housing Tax Credits would still be eligible for the full 10-year tax abatement.
That idea got shot down by the city’s Law Department because it would violate Pennsylvania’s uniformity clause.
Instead, the CDCs have been assured that they have the support of the Kenney administration and the City Council, and that municipal resources will be found to fill whatever financing gaps are created by abatement reform.
“We support modifying the abatement as long as council and the administration can work with us to survive in a post-modified abatement universe,” said Beth McConnell, policy director of the Philadelphia Association of Community Development Corporations. “We believe there is interest and intention in using other resources to replace the lost tax abatement funds.”