Property tax abatement: necessary incentive or giveaway to wealthy?

Philadelphia’s ten-year tax abatement is credited with spurring new developments in the city. But with the city facing a $1 billion budget gap over the next five years, some wonder if its worth it. Others say we can’t afford to let it go.

Philadelphia’s ten-year tax abatement is credited with spurring new developments in the city. But with the city facing a $1 billion budget gap over the next five years, some wonder if its worth it. Others say we can’t afford to let it go.

(Text has been corrected from the original recorded audio to reflect the correct spelling of Building Industry Association president Sam Sherman’s last name.)

Transcript:
The tax break allows any new construction, or residential conversions to keep their tax assessments at predevelopment levels. It applies to projects as small as a new kitchen, and as large as the Comcast Center.

A typical recipient is someone like Matt Egger, a financial analyst who works in the suburbs. He recently bought a brand new home in South Philadelphia.

Egger: “It just made the house I wanted more affordable.  I definitely wouldn’t have bought this house if it didn’t have the tax abatement.”

Egger saves about $250 a month with the abatement.

Both developers and economists say homes like Egger’s would not have been built without the tax abatement. The program began in 1999 and was expanded to include all new construction in 2000.

Sam Sherman is a developer and the president of the Builders Industry Association of Philadelphia.  Shepard says its an effective marketing tool.

Sherman: “It’s attractive to a home buyer to come to a project that is qualified and approved for the tax abatement because it allows them to free up more of their income to either apply to the purchase of the home, in most cases they’re saving two or three thousand dollars a year in property tax and that calculates into their decision of where and what to buy.”

Sherman says the abatements offer a solution to the problem of the city’s high construction costs, and low-median incomes.  If a buyer gets a break on their taxes, they may be willing to pay a higher price for the house and the developer makes a larger profit.

But critics say the tax breaks have focused development primarily on Center City.  Resentment over the abatements from longtime neighborhood residents came up at every budget forum. Gloria Gilman is chair of Neighborhood Networks, a community organization fighting the service cuts.

Gilman: “I went to those budget forums and people seemed universally very angry about those ten year tax abatements. It seemed to really strike a chord, and lots of people, that it was inequitable. And no matter what the numbers turned out it doesn’t feel right to benefit the upper class as opposed to the general public.”

About 10,000 properties across the city now enjoy a tax abatement. And more than half of those are new construction.  The abatements benefit two ends of the spectrum.  On one end, the Philadelphia Housing Authority is the largest recipient of the abatements.  On the other, are buyers of high-end Center City condos.

Kevin Gillen is an economist at the Wharton School and has studied the abatement. Gillen says resident’s resentment against the tax break doesn’t take into account the additional revenue in wage tax, sales tax and the real estate transfer tax that results from new home sales and an influx of new residents.

Gillen: “All they see is the sign that says for sale, ten year tax abatement, in Center City. And they don’t see them out in the neighborhoods. So I think there’s an incomplete understanding of the benefits versus the costs of the abatements.”

But Gillen says the abatements do not  benefit residents equally. He says the program has not spurred construction in the outlying neighborhoods.

Gillen: “The abatement is not extensive enough to cover the much bigger gap in areas like North Philadelphia, West Philadelphia, South Philadelphia and the Lower Northeast, where the gap between house prices and the cost of new housing is much bigger.”

Still, Gillen says when the first tax abatements expire next year, the city will gain about $1.4 million in additional tax revenue.  He says by 2017, the expiring abatements could bring in an additional $14 million.

Listen:
Click on the play button below or right click on this link and choose “Save Link As” to download. [audio: reports20090318tax.mp3]