Op-Ed: Why Philly Should Expand the Property Tax Abatement

Domb: Critics of my proposal to extend the 10-year tax abatement say it will encourage developers to charge homeowners more. That's a fundamental misunderstanding of basic economics.

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

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

(Editor’s note: This is an opinion column from guest writer Allan Domb. Domb is a City Councilman as well as a longtime realtor and developer in Philadelphia.)

Earlier this month, a surprisingly critical op-ed was written about my proposal to extend the current property tax abatement from 10 years to 20 years for properties valued at $250,000 and under. The criticism was surprising because it failed to mention how successful the current abatement program has been for Philadelphia’s economy, both from a development and revenue-generating standpoint — for every $1 abated, the city receives $2 from other revenue sources over the life of the abatement.

Perhaps this criticism was so strong because I have not fully explained the proposal, which I intend to do through a variety of outreach efforts. In fact, I have already started doing this by meeting with interested parties to address all concerns. With that said, let me explain it.

The 10-year tax abatement has been one of the most successful programs pushed forward by city government in recent history. It is an economic incentive that has spurred development, leading to economic growth and the reduction of poverty. It has also made Philadelphia more competitive with peer cities. Between the 1990s and the 2000s, the average level of new housing construction in Philly went up 177 percent compared to the surrounding counties, which saw an average decrease of 28 percent. (These figures are adjusted for inflation.) The abatement has also expanded our tax base, bringing in more revenue to deal with important issues facing the city. Further, we cannot discount the fact that the 10-year abatement is one of the main reasons Philadelphia has the largest percentage gain of millennials of the country’s 20 largest cities. 

Unfortunately, not every neighborhood has benefited equally from the abatement, and that’s what my proposal is designed to do — expand the benefits of the abatement program so that more homeowners, especially those in low- to moderate-income neighborhoods, can add value to their homes and neighborhoods. Additionally, this legislation will increase the value and the speed of sale of the soon-to-be thousands of properties eventually sold through Philadelphia’s land bank.

Under my proposal, which I introduced in March along with my colleague Councilman Curtis Jones, Jr., a residential property would be eligible for the additional 10-year tax abatement if it has a total assessed value equal to $250,000 or less at the time any improvements to the property have been completed. This means that if you have a residential property and you make improvements (such as add an addition or a porch) to the property, you are eligible. We also plan to introduce an amendment to abate improvements to industrial properties, as well as an amendment that would reduce the percentage of the property being abated or made exempt by 10 percent per year after the 11th year of the abatement. This sliding scale would not only help taxpayers better handle the increase in property taxes coming off the abatement, but it would also start to provide revenue to the school district from the abated properties beginning after the 11th year.

The extended abatement creates an incentive for people to improve their properties without worrying about an immediate increase to their property taxes as a result of the improvement. It also incentivizes investment into blighted neighborhoods and will help to increase the value of these neighborhoods. In particular, it will help areas with many vacant properties, as studies have shown that proximity to a vacant or abandoned property can lower the sales price of nearby homes by more than $8,000.

This will help clear out the 1,800 properties in the land bank (with an additional 2,300 being added), 95 percent of which qualify for the abatement. And that will be especially helpful for neighborhoods that have not enjoyed the potential of this legislation — areas in North, Northwest, West, South, Southwest and Northeast Philadelphia.

Critics of my proposal say that it will only encourage developers to charge more because buyers will be able to afford more expensive properties. That is a fundamental misunderstanding of basic economics and a serious confusion about which properties receive — and will benefit from — the abatement. After more than 36 years of working as a realtor and developer in Philadelphia, I can attest to the fact that the only thing that encourages developers to build is the ability to sell the property. People buy homes — the most important investment they’ll make in their lifetimes — because they want good places to live, work and raise a family. As such, developers can only charge what the market will bear.

Critics may argue that neither the city nor the school district will benefit from the current abatement, let alone an expansion. However, this is simply not the case. Land values are not exempt from the abatement; only the portion of the improvements to the property can be abated or exempted. Thus, for existing properties taking advantage of the tax abatement, residents would still be required to pay taxes on the non-abated portion of the property. Further, after the life of the abatement, the increased value of the property will lead to more taxes owed to the city and school district.

I recognize that no piece of legislation is perfect and any plan would need to be fully and fairly debated. Additionally, if City Council were to pass this legislation, it would require approval from the General Assembly. Ultimately, the goal of this legislation is to provide economic incentives to help lift up areas of our city that need it most. And while this will not be the magical solution for all, it is a start in the right direction. This is a long-term investment in our current housing stock and a method to attract new interest to Philadelphia’s market.