Latest Anti Gentrification Rallying Cry? Tax the Flippers

An array of community groups is asking Council to dramatically hike the tax on properties sold twice in two years.

Fear of gentrification is one of the most potent political forces in Philadelphia today. That much, most can agree on. But is that fear broadly valid, or generally misplaced? That’s a harder question, and you’ll hear a lot of different answers to it. And, it seems, some very different policy ideas about how to manage housing in a city that is growing again (a little, at least).

A lot of the anti-gentrification forces have coalesced into a group called Philadelphia Coalition for Affordable Communities, which includes a host of politically potent labor and neighborhood organizations. In recent months, they’ve begun pressuring Council to enact a simply huge “anti-speculation tax” that would only apply to properties that are sold twice within two years. They’re going after house flippers and some market-rate new construction, basically.

It’s an interesting, controversial proposal.

How would it work?

  1. Whenever a property is bought or sold in the city, the purchaser and seller typically split what is called the “transfer tax,” which is a 4 percent tax on the total sales price of the property. It’s a pretty big expense, as anyone who has bought a home knows. The transfer tax on a $300,000 home, for instance, is $12,000.
  2. The PCAC plan would increase the 4 percent tax rate to 5.5 percent. Instead of a $12,000 tax, it would be an $16,500 tax, leaving the buyer and seller on the hook for $8,250 apiece.
  3. This would apply only in cases where the property sold more than once within two years. I haven’t checked their numbers, but PCAC estimates that condition applied to about 6,000 properties in 2013.
  4. If the flipper tax were in place in 2013, PCAC calculates that it would have generated about $12 million.
  5. PCAC wants to put that revenue into the city’s Housing Trust Fund, which helps low income families secure housing by building new homes, renovating and repairing old ones, and by offering mortgage assistance to families on the verge of eviction. An infusion of about $12 million annually would just about double the fund’s current budget.

What are the potential upsides?

  1. A lot more cash for low-income housing support and development. True, even at double the funding, the Housing Trust Fund is a piker compared to the Philadelphia Housing Authority (PHA’s annual budget is $371 million), But the fund has more flexibility in how it spends it spends its money, it’s directly controlled by the city, and the actual development work the fund subsidizes is usually managed by Community Development Corporations. CDCs are a mixed bag, but some, such as Sister Mary Scullion’s Project Home, or APM, have awfully strong track records at both providing housing and redeveloping communities.
  2. The tax just might discourage house flipping. If you’re worried about gentrification, that’s a good thing.

And the downsides?

  1. The tax just might discourage house flipping. Obviously a lot of anti-gentrification activists consider that a feature, not a bug. But there’s a good argument to be made that flippers help stimulate investment, which raises property values, which grows the tax base, which enables the city to more easily raise money to spend on all kinds of things, including, yes, support for low-income housing. And in a good number of cases, flippers are turning vacant shells into livable, occupied homes. Is that really activity the city wants to discourage?
  2. Philadelphia already has one of the highest transfer taxes in the nation. The statewide base rate in Pennsylvania is 1 percent, which is higher than most. On top of that, Philadelphia adds an additional 3 percentage points. I couldn’t locate a big city in another state or a local suburb with a rate anywhere near the cumulative Philadelphia/Pennsylvania total of 4 percent, much less the 5.5 percent PCAC proposes for “speculative” sales. For context on just how out of whack Philadelphia’s rate already is, check out these transfer tax rates from elsewhere:
    • New York: Up to 2.6 percent, depending on the value of property.
    • Baltimore: 2 percent.
    • Los Angeles: .56 percent.
    • Boston: .45 percent
    • Chicago: 1.2 percent
    • Washington D.C.: 1.1 percent.
    • Chester/Delaware/Bucks/Montgomery Counties: 2 percent, with exceptions in some towns.
    • Interestingly, the only municipalities I could find that meet or exceed Philadelphia’s rate were other Pennsylvania cities, like Pittsburgh (also at 4 percent overall) and Scranton (4.3 percent).
  3. It’s not just flippers and speculators who would be caught up in this tax. People get new jobs. They move unexpectedly. Life happens. If PCAC has its way, a lot of non-flippers are going to get punished as well.
  4. Generally, it’s considered good policy to tax a lot of properties (or businesses, or transactions, or people) at a lower rate than it is to tax just a few properties at a higher rate. This proposal is in direct opposition to that principle, taxing a very narrow base at a very high rate.
  5. There are other anti-displacement programs already in place that are underused, such as the Longtime Owner-Occupant tax relief Program (LOOP).

Can it actually pass?

Perhaps. It’s certainly the sort of proposal that could get a serious hearing. This coalition has some real political juice, and Council has shown itself to be acutely sensitive to concerns about gentrification. On the other hand, the arguments against the tax are strong, and realtors and developers are sure to oppose it. And they’ve got more than enough money to make sure their arguments are heard.