Insider: Allan Domb’s Truly Awful Idea

Ruben: Councilman Domb has a plan to incentivize development in struggling neighborhoods. Too bad it won't work.

Photo by Jared Piper/Courtesy of City Council's Flickr

Councilman Allan Domb | Photo by Jared Piper/Courtesy of City Council’s Flickr

(Editor’s note: This is an opinion column from a Citified insider.) 

Many Philadelphians cheered real estate developer Allan Domb’s election to City Council last year. Finally, they said, a real businessman who could bring innovative, market-savvy solutions to our city’s economic problems.

But those lofty hopes fell to earth with a dull thud when Domb introduced his first major piece of legislation: a bill to double the 10-year residential tax abatement to 20 years for houses worth $250,000 or less. It seems great on the surface, but it’s actuality a terrible idea.

Domb claims this expanded tax break on new home construction and major rehabs will encourage developers to build houses in struggling neighborhoods, and lead owners of blighted properties to fix them up.

It’s a laudable goal, one we all should support. But his proposal won’t actually further that goal, and will cost us precious tax dollars to boot. Domb’s plan will fail because it’s based on a misunderstanding about how the abatement works — a misunderstanding that’s shocking given his reputation as a real estate mogul.

How the Abatement Really Works

For the first 10 years after someone builds a new house on vacant land, the house is taxed only on the old, lower value of the property when it was still just an empty lot. (The same goes for an abandoned or run-down house that gets rehabbed.) The evidence, including a 2014 study Domb likes to cite, suggests this policy has indeed spurred new construction in many neighborhoods.

But Domb is mistaken when he asserts that lengthening the abatement period for less expensive homes will have the same effect in more challenging, lower-value areas.

The PR on the abatement says it’s a financial subsidy to home buyers: the promise of 10 years of low property taxes is a major draw, and therefore increases demand for new housing.

But in reality, the abatement is a subsidy to developers and banks. Why? Because almost all buyers have to finance their purchase with a mortgage loan, and the size of the loan is keyed to how big a monthly payment the buyer can afford. As anyone with a mortgage knows, the monthly payment includes both the cost of the house and the property taxes.

So the abatement doesn’t make homeownership cheaper by lowering the monthly payment. Instead, it lowers the tax portion of the monthly payment, which allows the house portion of the monthly payment to be higher. It enables the buyer to qualify for a bigger mortgage, which lets the developer charge more for the house.

Let’s say you can afford to pay $2,000 a month. Without a tax abatement, you might be able to buy a $350,000 house, with a monthly payment of $1,600 for the mortgage and $400 for the taxes. With an abatement, you’re still paying $2,000 a month — but now the tax portion is only $100, so $1,900 can go towards the mortgage. So now, with the same income, you can magically afford to pay $425,000 for the house instead of $350,000. You don’t save any money, and you may or may not get any more tangible amenities. But the developer gets more profit (and the bank gets more interest). It’s a transfer of money from the city to the developer.

This is not necessarily a bad thing: That extra $75,000 might be the make-or-break profit the developer needs to be able to build the house at all. In fact, all the evidence suggests this is exactly why the abatement has jump-started redevelopment: It’s made it possible for developers to build.

Of course, if you can only afford $2,000 a month, something’s gotta give after 10 years, when your abatement runs out and the taxes go up. But the flood of abatement-fueled new construction proves that banks aren’t concerned about that. And that’s the key point: As long as the abatement term is long enough to satisfy a bank, making it even longer won’t have any effect on the construction, financing or sale of houses.

Why a 20-Year Abatement Won’t Help – and Why It Will Hurt

Making the abatement last 10 years longer would of course be nice for buyers of new houses, because it would keep their taxes lower for 10 extra years. But lengthening the abatement period doesn’t affect whether or not the buyer can afford to buy the house in the first place — and that’s the key point. If developers can’t (or won’t) build houses in challenged neighborhoods with a 10-year abatement, they won’t be able to build them with a 20-year abatement either.

A longer abatement does not increase how much a buyer can afford to pay each month, nor does it change the monthly payment. So it doesn’t increase how much the bank will loan a buyer to purchase the house. And that, in turn, means lengthening the abatement period will give a developer exactly zero added incentive to build a house, and exactly zero extra ability to sell it. Similarly, if a homeowner wants to renovate a house but can’t qualify for a loan, extending the abatement from 10 to 20 years will give them exactly zero added ability to get that loan.

Bottom line: Extending the abatement will not — simply cannot — create new housing as Domb claims.

While its chances of helping us are virtually nil, Domb’s bill is guaranteed to hurt us. If it became law, then every $200,000 house built under the expanded 20-year abatement would cost our city $28,000 more in lost tax revenue. I would gladly support such a cost if it had a good chance — or even a 50-50 chance — of working. But it doesn’t.

What to Do Instead

Domb should withdraw the bill and focus on reforming our business tax structure, increasing job-creation incentives, finding new revenue for public schools and mass transit, lobbying Harrisburg to let us raise commercial property taxes while lowering residential taxes, or any other policy with a real chance of helping working people and vulnerable communities.

In fact, we’d be better off economically if Domb introduced a bill directing the city to grab wads of cash from the treasury and throw them into the middle of Market Street. I’m not kidding. At least that way we could be confident that people would take the money and spend it in the local economy, which is a lot more than Domb can say for the money the city would lose from extending the tax abatement.

Matt Ruben ran unsuccessfully in the Democratic City Council At-large primary in 2007. He is president of Northern Liberties Neighbors Association. The views expressed here are his alone.