Fixing a Hole Where the Rain Gets In
On an individual house-by-house basis, the City will provide: 1. Homebuyer Incentives, 2. Purchase and Renovation, 3. Gap-Financing for Market-Catalyzing Anchor Developments Our Common Wealth’s Big Concern: the Taxes. The firms that do the work will pay the same high business privilege taxes. The materials to build the houses will pay an 8% sales tax (assuming the contractors buy in Philadelphia instead of Delaware). Presuming that these homes will be on the tax rolls, does this not consign each and every rescued home to a higher assessment, and therefore a higher tax bill?
In many American cities, the scramble for Federal Stimulus dollars proceeds. Our home base of Philadelphia is no different, and it scored a pretty good haul with $44 Million[1]. What’s the plan to spend it? Well, housing and neighborhood revitalization is at the top of the list. On an individual house-by-house basis, the City will provide:
1. Homebuyer Incentives - Financial incentives will be offered to owner-occupant buyers of foreclosed homes.
Incentives to buy are fine, but it is the kind of artificial inflation of a buyers’ capacity to purchase that – in part – led to the foreclosure crisis in the first place. If the incentive is a “no strings attached” then other taxpayers are footing the bill, and they are over-burdened as it is. If strings are attached, ability-to-pay the mortgage pops up again. The cycle continues
2. Purchase and Renovation – Philadelphia’s first NSP program will be expanded to purchase, renovate, and sell additional foreclosed and long-term vacant houses.
Purchase and renovation sounds great yet, the bear in the woods are this: when the house is sold to a working person, and the house has been renovated, the improvement is on the tax rolls, and the assessment authorities hike the building portion of the value. That leads to high taxes, expensive litigation and appeals (a specialty of the house here in Philadelphia). If the city wins the appeal, the property owner will be hard-pressed, just like the original owners of the long abandoned properties. If the property owner wins, that’s less revenue to a city that needs it. Isn’t that a good argument for not taxing buildings at all?
3. Gap-Financing for Market-Catalyzing Anchor Developments-Gap financing for affordable new construction housing on blighted, vacant land and for the redevelopment of key occupied or vacant foreclosed, multifamily structures. This activity will be used in eligible areas where selective reinvestment can affect neighborhood value.
Most people agree that government can play a role in securing loans and credit, especially when it has an advantage, say by a quid pro quo when doing business with the city government. Yet, gap financing for “Market Catalyzing” begs the question: if the market is not there in the first place, why? More gap-financing seems to be an attempt to “force” a market, rather than permit a market to thrive by fixing infrastructure, improving schools, making streets safe, lowering corrosive taxes on work and investment, etc. Much of the work will being Zip Code 19149, where there are 194 single-family homes on the market; that’s as much as a more stressed area Olney, (Zip code 19120) which has 222 homes on the market right now[2].
4. Demolition - Selective demolition of blighted structures, especially old industrial or commercial buildings in neighborhoods that are now residential.
Demolition may work, but the Philadelphia experience with the Neighborhood Transformation Initiative (or urban renewal of decades back), shows that the plan can’t work if builders see no viable economic reason or – more importantly – a demographic model that encourages building. As the recent Task Force on Tax Policy asserted, the cost of building a house in Philadelphia is far above the actual price that could be garnered in an arm’s length transaction. Tax policy can play a vital role in changing that script.
Targeting areas or neighborhoods seems surgical, but this is a city-wide problem. A blight house or vacant lot can be found in West Mount Airy, Bella Vista or Even Center City. There are concentrations of blight of course, but a systemic problem needs a systemic answer.
A 2004 report by noted land value scholar Susan Wachter, of the Wharton School at the University of Pennsylvania[1] indicates that modeling research indicates that the issue of where investment dollars go is best directed towards bigger, perhaps more diffuse goals, but ones with measurable increases in the desirability of neighborhoods determined to be at risk. Essentially, the report is clear that improving vacant lots or blighted areas in and of itself improves land values (they say property values, but that is incorrect) by as much as 30% for surrounding parcels.
Improved land values make the market wake up and take notice. The market can be in this case not just big developers, but the traditional “sweat equity” rehabbers that all communities wish for.
This intellectual gist of this phenomenon is called the “Henry George Theorem” a phrase coined by Nobel Prize Winner Joseph Stiglitz[2]. Essentially it works like as stated by our friend David Robinson Department of Economics, Laurentian University, Ontario[3]:
“Never OK a project unless it increases the value of the land and future taxes by more than it costs. Always OK a project if it increases the value of the land and future taxes by more than it costs.”
So, of the four criteria the city lists, we can benefit two options at most. Anything that smacks of Band-Aid-ism or creating a fake market is bound to fail as it always has before.
Our Common Wealth’s Big Concern: the Taxes
The crux of the house-by-house campaign from our perspective is this: The $44 Million that Philadelphia receives form the Stimulus program will, as Mayor Nutter says:
“These funds will enable us to build new affordable homes and to put more Philadelphians back to work.”
Well, yay. We need more and better homes that are decent. We need more jobs. But the new buildings will pay higher taxes; the new jobs will pay the same high wage taxes. The firms that do the work will pay the same high business privilege taxes. The materials to build the houses will pay an 8% sales tax (assuming the contractors buy in Philadelphia instead of Delaware). Those tax levels may make the heavy lifting required too much even with taxpayers’ money paying for the plan. The new buyers (and the sellers will have to deal with a real estate transfer tax that is high by any national standard.
Assuming that these homes will be on the tax rolls, does this not consign each and every rescued home to a higher assessment, and therefore a higher tax bill? Will the taxes be abated for a year? Five years? Ten years? If the new rehab and building value is abated will the neighbors that don’t get the aid keep their homes and spirits up, or will they perhaps jump to the new homes leaving the unfavored ones to rot in the rain?
Our idea
All is not gloom, and all is not lost in the myriad of extra expenses that will make this plan hard to work. We need, as a city, to stop slotting and categorizing neighborhoods, people and businesses. We need to stop conceiving recovery of our city as a project, to be completed with X amount of dollars in X amount of time. We need to change the system overall so that government may receive revenue, but that the market sees an opportunity to thrive. We must think about what lies beneath our feet, already created and with an opportunity to be augmented, as the Penn paper says has already happened. What lies beneath is land value, created by infrastructural improvements to land that are broad-based and benefit no one preferred individual or group.
As a community, Philadelphia and its government can and have created land values in a measurable way. Those land values can fund our city, and the dreams of those who live in the city. These dreams may be shared by those people who want to be in a place where they can make a living, help their families, hire people and create and build things.
Collect those land values and make Philadelphia – and its government – work again.
[2] http://www.pruhomesaleservices.com/l search for single-family homes by Philadelphia Zip Code
