Philly passes first-ever development impact tax, delays abatement reductions for another year

In a move intended to send millions of dollars toward new affordable housing projects, City Council passed Philadelphia’s first residential development impact tax. Related bills to delay a reduction in the city’s 10-year tax abatement and reduce its value for commercial properties also passed.

The new tax passed with a vote of 14-3. Councilmembers Allan Domb, David Oh, and Brian O’Neill voted against it. While developers and builders pay multiple other taxes and city fees, this is the first direct levy of its kind. The bill goes into effect in January 2022.

Legislation pushing back a planned reduction in the value of the city’s residential tax abatement, until 2022, passed 11-6. The one-year delay was regarded as a political tradeoff for the new tax.

Councilmembers Kendra Brooks, Jamie Gauthier, Helen Gym, Isaiah Thomas  and Katherine Gillmore-Richardson voted against the delay bill, introduced by Councilmember Bobby Henon, a longtime ally of the building trades.

The development impact tax imposes a 1% tax on new residential construction. Developers will pay half of the tax when given a building permit and the other half will be due when it’s time for a final inspection. Council projects that the new tax will boost the city budget by $9 million to $11.7 million per year.

The change to the commercial tax abatement reduces it to a 90% tax exemption over 10 years, instead of the current 100% break over that period. Council projects that this change will bring in $83 million for the city. It will kick in on Jan. 1, 2022.

Both are designed to help fund a $400 million bond package called the “Neighborhood Preservation Initiative,” which is supposed to primarily support the construction of affordable housing.

The reduction to the commercial abatement was originally introduced as a replacement to the development impact tax, but both passed the Committee of the Whole last week.

Council President Darrell Clarke unsuccessfully pushed for a construction tax in 2018, but received pushback from developers’ groups, who actively lobbied against the bills. In October, Councilmember Cherelle Parker reintroduced the legislation on behalf of Clarke.

Bills aiming to reduce the city’s 10-year tax abatement, which has long been criticized by progressive groups, passed last year. Developers had sought to delay implementation of that reduction for another year — saying the abatement helps fuel the city’s booming real estate market — a move that was ultimately offered as a tradeoff to make the construction tax a reality.

Prior to the vote, the Building Industry Association said it supported the entire package of bills: the construction tax, the commercial abatement reduction, and the delays.

BIA President Leo Addimando said he is in support of the continuation of the 10-year tax abatement and fears the impact of the coming reduction in its value. Yet, he said, the city needs more revenue to support the creation of affordable housing and for that reason, the group supports the residential impact tax.

“The shortage of affordable housing is a seminal issue that this country is facing right now,” Addimando said. “Philadelphia is perhaps an extreme example of that with more than 25% of the city being in poverty.”

He also rejected the idea that the new tax will deter new housing starts.

“It is our belief that the 1% tax gets absorbed almost entirely in the form of a small reduction in the underlying land prices that residential developers will pay,” said Addimando, a developer who has built a number of large mixed-use projects over the last five years. “We do not believe there will be a material reduction … in the number of market-rate housing that will be built. In fact, we think that there will be more affordable housing units because of this.”

Other industry groups remain opposed to the tax, which still needs the mayor’s signature.

The General Building Contractors Association said the group still opposes the construction tax, arguing that upping taxes on development during a pandemic that has rocked the global economy was misguided.

“We must find another way to fund the affordable housing problems of today without sacrificing the employment base of tomorrow,” President Ben Connors said. “Exempting commercial projects from the tax is an important first step to dissuading employers from returning, but we believe all options that could secure the same level of funding without creating a new tax should be explored.”

Henon introduced legislation for the delay because he said he wanted to give a break to developers who were financially impacted because of the economic fallout of the pandemic. But multiple education and housing advocates spoke in support of the construction tax and the abatement reductions — but against the delay of the reductions.

The same groups have long sought to abolish the abatement altogether, saying the break diverts revenue from public schools. Before last week, the residential reduction of the abatement was supposed to go into effect in the new year.

“This is the government’s wrongheaded priorities which have subsidized developers at the expense of schools that serve mostly Black and brown families,” said Ron White, who taught students in the city’s Fairhill neighborhood.

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.