Since 2000, tax abatements on Philadelphia real estate have been available to owners or developers of commercial or residential real estate who make improvements to real property in Philadelphia. Many abatements permit an applicant to exempt the tax otherwise due on the improvements for up to ten years. When an abatement is in place, the owner or developer pays taxes only on the original value of the property, and not the value of the property as improved. Tax abatement has been a controversial issue, but studies examining Philadelphia’s tax abatements have mainly shown it to positively affect the City’s finances. So, how do abatements benefit Philadelphia?
- Abatements incentivize development. Construction costs in Philadelphia are relatively high, but returns on costs are relatively low. Consequently, real estate investors are less likely to choose Philadelphia over more competitive – and nearby – markets. A tax abatement alleviates the discrepancy and helps to make Philadelphia an attractive option for investment and development. In fact, a recent report estimated that, if not for the ten year tax abatement, nearly half of all recent developments in Philadelphia would never have occurred.
- Abatements create jobs. One study estimated that over 2,000 construction jobs exist in the City due to abatements – and this number doesn’t include architects, engineers, or other construction-related jobs.
- Abatements attract new homeowners. Newly-built homes are sold with abatements, making Philadelphia an increasingly attractive city for homeowners. Those homeowners pay City wage taxes, contributing to the tax base. And new home sales generate transfer taxes, which go into City coffers.
- Abatements benefit owners of existing properties. A homeowner may be able to show that improvements to an existing home qualify for an abatement. In that instance, for the duration of the abatement, the homeowner will pay taxes on the property as though the improvement had not been made. This encourages homeowners to make substantial improvements to their properties.
- Abatements return abandoned real estate into active and tax-productive use. If a property is abandoned, vacant, or empty, it generates no tax revenue at all, and is a drain on the City’s resources. A developer who purchases the property and demolishes the existing structure will pay taxes on the value of the land (if not the improvements), and a subsequent buyer will continue to pay taxes on that land. The buyer will also presumably maintain the property, so the City need not waste money on doing so.
So, why is there a debate? Because abatements underfund Philadelphia’s schools.Philadelphia’s public schools, which are largely funded by property taxes, remain in near-crisis mode, with no real plan to close the budget gap. As of the date of this post, is a councilmanic bill in process which would require owners to pay taxes to the School District that would otherwise be abated. However, Kevin Gillen and John Westrum, in their case-study of the Brewerytown Square development, calculate that implementation of the bill will generate less than 1% of the School District’s budget deficit. They also calculate that this amount is far less than estimated taxes generated by the abatements, such as increased wage taxes, sales taxes, real estate transfer taxes, and taxes associated with new construction projects.
The benefits of Philadelphia’s tax abatements outweigh the burdens. The tax incentives to develop real estate were greater than the relative high costs to develop, which in turn led to an increase in Philadelphia jobs, Philadelphia homeowners, and Philadelphia taxes. It also led to a decrease of abandoned, blighted, and tax-delinquent Philadelphia land. And even existing homeowners could take advantage of abatements to improve their homes. In short, the abatements helped businesses, families, and the City bloom.