Development

10-year Tax Abatement Bill Approved, But a New Battle is Brewing

December 13, 2019 | by Kimberly Haas

There has been a recent uptick in row house demolition for new, single-family home construction due to the incentives provided by the 10-year residential tax abatement. | Photo: Michael Bixler

On the very last day of the fourth and last year of the current City Council term, the long-debated fate of the 10-year residential tax abatement has been decided. For now.

After months of debate and objections from advocates and opponents alike, culminating in a back and forth between Council president Darrell Clarke and the usually Council-amenable Mayor Jim Kenney, a compromise reform bill was approved on Thursday, December 12. If an accord hadn’t been reached, future efforts would need to start over, as all old legislation dies at the start of a new Council term.  

The 10-year tax abatement, devised during a time of shrinking population and retreating industry in Philadelphia, aimed to attract development and add to the local economy. Enacted in the late 1990s, it originally was a tax break on existing buildings. Within a few years it was extended to new construction as well.

The owner of an abated, newly-constructed building pays taxes only on the assessed value of the parcel’s land for 10 years, with the value of the building tax-exempt for that period. In the case of rehabilitated properties, the owners do not pay taxes on the value of the improvements for that same 10 year period.

According to a report by the Philadelphia Inquirer, currently more than 15,000 properties have the abatement, representing a collective $11.6 billion of untaxed value. If those properties were taxed and paid in full, the City and School District, which share the property tax revenue, together would net about an additional $162 million annually.

Widely credited with revitalizing Center City’s residential population in the 1990s and 2000s, opponents of the program now criticize it as a tax break for wealthy residents that spurs neighborhood gentrification. “We no longer need to subsidize market-rate construction,” said Beth McConnell, policy director of the Philadelphia Association of Community Development Corporations (PACDC).

In those neighborhoods feeling the pressure of gentrification, like Fishtown, Kensington, Northern Liberties, and Graduate Hospital, long-time residents resent newcomers in larger houses getting such a big break on real estate taxes. Education advocates also oppose the abatement, saying the public schools need the revenue more than luxury condo owners.

Developers, on the other hand, say the abatement is the only way new construction is feasible in Philadelphia’s high-cost, union-friendly building environment.

Whether you consider the abatement a huge gift to the wealthy at the expense of school kids and the city overall, or an incentive that, while deferring revenue for a period of time, leads to an increase in tax-paying properties, the numbers can serve both opinions. In 2018, City Controller Rebecca Rhynhart released an analysis of the 10-year tax abatement. Opponents point to the $1.05 billion tax benefit reaped by the abated properties between 2000 and 2017, instead of going to the City and School District. Supporters, on the other hand, can refer to the 12,477 properties with expired abatements that were billed $83 million in real estate taxes in 2017 and quote where the report notes, “This is revenue that may not have been generated had these properties not been built or improved.”

There have also been concerns that the abatement is an incentive to demolish existing properties. In testimony before City Council, Paul Steinke, executive director of the Preservation Alliance for Greater Philadelphia, called the current abatement “a catalyst for the destruction of historic buildings in pursuit of larger, taller, denser, and fully abated new construction projects.”

For years, modifications or outright repeal of the abatement have been bandied about, with the effort picking up steam as the end of a four-year Council term approached. According to McConnell, PACDC originally advocated to keep the abatement for affordable housing, but a review by the City’s law department said that awarding it to some properties but not others would violate state law under Pennsylvania’s Uniform Code (a bill by the Pennsylvania legislature waived that law for the current abatement).

Affordable housing advocates also supported another alternative plan to cap the abatement on a portion of the sales price–around $300,000–but it received heavy opposition from developers.

On Tuesday, December 3, a four-hour Council hearing yielded a final bill. New residential construction projects could receive a tax abatement that would gradually phase out by 10 percent each year. The first year would be 100% abated, year two would be 90%, and so on until year 11 when the full real-estate tax would be paid.

However, the bill retains the full 10-year 100% abatement on improvements to residential properties.  Steinke applauded that portion of the plan, saying it will create a new incentive for historic preservation in Philadelphia. “Lack of incentives was a core focus of the Historic Preservation Task Force,” he noted.

Also supportive of the change is Ken Weinstein, president of Philly Office Retail, which specializes in adaptive reuse of buildings, primarily in the northwest neighborhoods of the city. “It makes our renovation and restoration projects more competitive compared to new residential construction projects,” he said, adding, “Real estate development projects that reuse buildings should always be prioritized over projects that knock down and build new.”

Point Breeze in South Philadelphia has seen a surge of real estate investment in the last five years. The income divide between newcomers and longtime residents is skyrocketing. The neighborhood’s growing disparity of wealth is punctuated on nearly every block by new, tax-abated construction projects.

Not all preservationists favor the reform, however. Earlier this week, the pro-preservation PAC RePoint Philadelphia had sent a letter to ten Council members, warning that the proposed bill could serve to incentivize demolition. “There’s ambiguous language as to what constitutes ‘vacant land,’” said Aaron Wunsch, president of RePoint Philadelphia and associate professor of historic preservation at the University of Pennsylvania. The political action committee’s letter cites a hypothetical example where a property owner could substantially demolish a residential structure, perhaps 90 percent, and rebuild it as an improvement rather than the de facto new construction it actually is and receive the full 10-year abatement. In the letter Wunsch urged Council members to postpone their final vote. “Why are we rushing this thing?” he asked.

In addition to historic preservation, Councilmember Allan Domb felt that areas beyond Center City would benefit from maintaining the full abatement for rehabilitation. “In neighborhoods where some homes have become blighted, we would rather see them rehabbed in order to maintain the community fabric.”

The bill does not affect commercial property development, which has its own, separate abatement program.

With the terms of the new abatement agreed upon, the final sticking point of an enactment schedule came next. Thursday, December 5 brought a series of letters between Mayor Kenney and Council president Clarke, with the former pushing for an effective date of July 1, 2021 and the latter aiming for a year earlier. Mayor Kenney said he would refuse to sign a bill with the earlier date and, while legislation is often be enacted without the mayor’s signature, in this case, with the end of the Council term looming, this bill would have then died upon the start of the next Council session.

They settled on December 31, 2020 as a compromise and Bill 190944-A was added to the December 12 agenda for final approval.

By cutting the abatement on new construction by nearly half, Beth McConnell says developers might be reluctant to partner with non-profit organizations to build affordable rental units. In addition to the abatement, these projects depend upon the federal government’s low-income housing tax credit (LIHTC) program. If developers back away from building affordable rental units, she said, “We could be forfeiting millions of federal dollars. So it’s in the best interest for the city to close the gap” created by the abatement reform by increasing the Philadelphia Housing Trust Fund, created in 2005 to help fund the construction of low income housing.

In September 2018, Mayor Kenney and Council passed a bill to increase the housing trust fund each year for five years by committing from the general fund an amount equivalent to the tax revenue received from properties that abatements were expiring that year. To date, the fund has received about $70 million. Noting that this arrangement ends in 2023, McConnell says the City needs to make a permanent commitment to the housing trust fund. “If there’s new revenue coming into the general fund as a result of the abatement reform, we need to earmark some of it for affordable housing.”

Four hours into the December 12 meeting, Council voted unanimously to pass the bill.

With a reformed 10-year residential tax abatement signed into law that reduces the amount of waived tax revenue to please opponents, delays its implementation to appease developers, and keeps the full amount for rehabilitation to encourage preservation and neighborhood stability, it would seem like Council could close out its four-year term on a pretty high note, with a compromise that seems to give everyone concerned some of what they wanted. Case closed, right? Maybe not.

At that meeting, the Council chambers were standing room only. Although many were present to speak out against two other bills, one for the creation of a Fishtown-Kensington Business Improvement District and the other which modified the proposed plastic bag ban, the majority—or at least the most vocal, sign-carrying attendees—were there to protest the 10-year tax abatement. Most were still holding out for a total repeal, citing the urgent needs of the School District.

Just before the vote, Councilmember Helen Gym, a strong advocate for public education, addressed the crowd. “Today is the first step,” she promised. “People are right to be here to demand more for the schools. This is not over.”

And with two of the four newly-elected incoming Council members having said they agree with Gym and support the elimination of the tax abatement altogether, a fresh fight might not be too far off in the future. “I’m optimistic we’ll have that opportunity,” said Wunsch.

Meanwhile, unless and until that happens, all eyes will be on the development community to see whether they abandon Philadelphia as unprofitable, as they had threatened, or if there will be a rush of applications for abatements before the new program goes into effect in 12 months.

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About the Author

Kimberly Haas Kimberly Haas is a staff writer for Hidden City Daily. She is a long time radio journalist, both nationally and locally with WHYY and WXPN. In particular, she enjoys covering Philadelphia’s neighborhoods, culture and history, as well as urban sustainability and public policy, in both print and audio.

2 Comments:

  1. Philaoutsider says:

    Many people incorrectly believe that buyers who purchased abated properties are not paying property taxes.

    That is not entirely true.

    The abatement is a subsidy to developers – not home buyers.

    When a buyer purchases an abated property, a portion of the home’s purchase price is directly attributed to the value of the forgone property taxes. The buyer still pays the value of the tax, however that payment is channeled to the developer – instead of the city.

    This is roughly equivalent to a scenario in which the city receives the tax revenue, then passes the money over to developers as an incentive to build.

    In many cases the abatement ends up being more costly for the buyer. If they bought the property via mortgage, they will now be paying interest on top of the value of the forgone property taxes.

    1. Ed Duffy says:

      That has not been my experience renovating homes for rental or re-sale. I qualified for the abatement and when I sold the houses the new buyers got the remaining years of the abatement as deducts on their real estate taxes. When I rented out the houses I got the full advantage of the abatement off my annual real estate tax bill, but the rents charged were market rate, so I enjoyed the additional benefit of the abatement either for as long as I owned it or until the 10 years ran out.

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