Speakers Advocate Major Shifts in City Tax Policies

The Mayor’s Task Force on Tax Policy and Economic Competitiveness held its final public meeting at City Hall August 13, with a deadline of making official recommendations on changes to the city’s tax policy by mid-September. It was notable that at an event meant to collect input from the public – in three-minute spurts – most of the first hour was taken up by comments from City Council members Bill Green (D., at- large) and Maria Quiñones-Sánchez (D., 7th).

“I will be significantly longer than three minutes,” Green warned the Task Force.

And he was, in his presentation of a plan for fixing the city that stretched far beyond taxes.

“Even if taxes were zeroed out the city wouldn’t grow as it needs to,” he claimed.

According to the Task Force’s numbers, Philadelphia has lost 500,000 residents since 1970 and shed 200,000 private sector jobs in the same time. And based on its preliminary findings, both the level of taxation and the number of taxes are simply too high for Philadelphia to remain economically competitive in the region. So Mayor Michael Nutter assembled the Task Force in March to help figure out how to make the city more attractive to businesses and high and middle-income residents.

For Green and Quiñones-Sánchez, one shared desire beyond taxes was to totally revamp the city’s schools as a means of providing a more qualified local workforce. According to Quiñones-Sánchez, graduates of Philadelphia public schools are 44 percent less likely to attain a bachelor’s degree than students from the rest of the state.

From “mobile” to “fixed”?

The two Council members also joined in support for the Task Force recommendation of shifting the majority of Philadelphia’s taxation from assets that are “mobile” like people and businesses, to assets that are “fixed” like land and property.

An assumption that seemed to form the core of the Task Force’s preliminary findings was that some “mobile” taxes like the Business Privilege and wage taxes are just too high, and  that other “fixed” revenue streams, like property taxes are simply not fair.

As an example, just 27 percent of assessed real estate taxes in 2008 came from commercial properties, while 53.6 percent came from single-family residential properties, according to the Task Force. The group appears to feel that reducing wage and Business Privilege taxes, while increasing the commercial tax burden and equalizing residential assessments, is an important recipe for achieving economic competitiveness.

But Quiñones-Sánchez wanted the Task Force to be careful about how it recommended shifting taxes to supposedly immobile property.

“While a house can’t move, the owner who pays the taxes can,” she said. “Simply shifting will not provide an incentive to stay.”

Land value taxation

Her preference was a land value taxation system, something representatives from the Henry George Foundation also recommended heartily at the meeting. It based this opinion partially on the success of 10-year tax abatement programs in encouraging new development.

“We believe in applying a universal permanent tax abatement automatically,” said Joshua Vincent, executive director of the Henry George Foundation in a separate interview.

The current property tax system applies an equal tax rate to land and buildings, so that a vacant lot next door to a lot of the same size with a house on it will pay roughly half as much in taxes. According to Vincent this creates a disincentive to build, or significantly improve on property.

If the city shifted all of its property taxes to the land and not the “improvements” on the land, Vincent thinks there would be a strong incentive to build on vacant lots because the tax liability would not increase with a new building, while the potential for income through rental, sales or business uses would. And in a city where the average age of the housing stock is pushing 100 years, it would also create an incentive to maintain properties at a higher level, Vincent said.

“Our program doesn’t reward just future development,” he said. “It rewards development that occurred in the past. So in that sense it tries to preserve existing neighborhoods.”

Vincent presented two proposals to the Task Force – one, a Land Value Tax (LVT) as described above, and the other a flat-rate permanent cash value tax exemption for all buildings on taxable property. The second was a land weighted tax, with taxes on improvements collected only if the building’s assessed value is greater than the tax exemption amount.

Shifting the burden?

In both cases, using the current scheme for assessing the market value for different sections of the city, the Henry George studies showed a major reduction in the tax burden on residential property owners, with large commercial property owners, owners of vacant land and residents in high-end residential sections making up for the difference.

According to Vincent’s figures, the LVT shift would save East Mount Airy residents an average of $137 per year and East Germantown residents an average $32. And it would cost Germantown residents about $2 and West Mt. Airy residents about $20 per year, while in Chestnut Hill the tax bill would jump about $428 on average.

For the second proposal (called Assessed Exemption for Improvements or AXI) the results would be even more dramatic: an average savings of $473 per year for East Germantown, $464 per year for Germantown and $229 for East Mt. Airy, and an average tax increase of $285 in West Mt. Airy and $1,528 in Chestnut Hill.

While the Task Force seemed quite interested in the LVT and AXI proposal, many at the meeting felt that other priorities should trump any tax changes.

First Deputy City Controller Harvey Rice estimated that the city was owed a total of $1.2 billion in back taxes and it should collect those before making any changes.

“We should first focus on collecting as much of our outstanding taxes as possible,” he said.

Two proposals contained in the Task Force’s preliminary recommendations that spoke to Rice’s point included reducing the tax delinquency penalty, which at 12 percent currently discourages back payment, according to the Task Force, and creating a Tax Ombudsman to work with troubled taxpayers.

Speaking about another side of the economic picture, several representatives from some of the city’s largest development firms weighed in with a unified message: economic competitiveness in Philadelphia will be impossible, they said, until significant controls can be placed on overall building costs in the city.

High construction costs

Because of the high cost of construction (which some suggested is related to union rules, the zoning process, the building code, and dealing with the Board of Revision of Taxes), very few developers build anything in Philadelphia if it is not publically subsidized. This causes what Sam Sherman, president of the Philadelphia Builders Industry Association, called a “bifurcated housing market that essentially serves the very poor or the wealthy.”

John Westrum, chief executive officer of Westrum Development Company agreed.

“The city of Philadelphia is the highest cost of construction of anywhere that we do work,” he said, estimating it was 50 percent more expensive than building in the suburbs.

Yet, according to Westrum, there is a strong demand for new middle-income homes in the $200,000 to $600,000 range if developers can afford to build them. His company’s 78-home Spring Lane Meadows development in Upper Roxborough sold out in just 3 months, he said. But because of the “gigantic gap” in Philadelphia construction costs, he said, “we really haven’t made any money.”

Other suggestions that came up at the meeting included possibly asking large non-profits that own large amounts of land to pay some taxes. And Cathy Scott, president of AFSME District Council 47 did not think it was appropriate for the city to consider reducing any taxes until it fist paid back a $235 million deferred payment to city workers’ pension funds. She called it a “loan” that the city had to take precisely because it did not have enough in tax revenue to begin with.