How to prevent Philly's property-tax abatement from becoming a subsidy for the rich
Philadelphia could use its abatement to achieve a variety of goals, from funding the schools to protecting historic buildings.
The Philadelphia officials who crafted the 10-year property tax abatement in 2000 could hardly have imagined a building such as 500 Walnut. All smooth glass and white metal, the 26-story condo tower angles toward Independence Hall like the prow of a racing yacht. The smallest units are selling for more than $3 million, while the raw, unfinished penthouse commanded $17.85 million, making it the most expensive condo in the city.
Developed by Tom Scannapieco, who has spent his career building luxury condos, this 50-foot-wide sliver tower was designed by Cecil Baker & Partners to top anything that exists in Philadelphia. Thanks to some fancy engineering, the units are free of annoying columns, ensuring unobstructed views of the Delaware River and the historic area. Amenities include a heated lap pool, conference room, hotel-style guest suite, and a furnished terrace the size of a suburban backyard. Should you ever want to leave this luxury aerie, you need only tap a screen to summon your car from its berth in the automated underground garage. Within two minutes, the vehicle will be spun onto a platform, lifted to the surface, and rolled into a spacious tiled waiting room.
But of all the perks offered by 500 Walnut, the most coveted is the city's tax abatement. Based on calculations provided by the city's Office of Property Assessment, the building's 36 owners will collectively save — and the Philadelphia treasury will forgo — a total of $2.2 million in taxes annually for the next decade. (One Riverside, another luxury condo tower, will earn a similarly large abatement, as will a multitude of high-rise rental buildings.)
That's a big chunk of change for a city that had to resort to a special tax on sugary drinks to start a pre-K program and pay for decades of deferred maintenance at its rec centers and libraries. While the residents of 500 Walnut have every right to claim the incentive, just like anyone who buys a new or renovated home in Philadelphia, the staggering size of the tax break raises a larger policy question: Is it time to update the abatement?
Philadelphia is not the same place it was 17 years ago when City Council introduced the abatement. Back then, the city was still hemorrhaging population and jobs. The abatement was envisioned as a come-on to get urban pioneers to invest in fringe neighborhoods in the hope that they would put down roots, pay the wage tax, and spend their salaries in the city's restaurants and shops.
The program succeeded beyond anyone's wildest dreams, setting off a revival that has transformed Philadelphia across its midsection, from the Temple University area south to the sports complex. Over the years, the abatement has assumed almost magical powers in the minds of policymakers. Merely suggesting that the law could be tweaked to account for the changed landscape provokes incredulity: "Why change what works?" responded John Grady, who runs the Philadelphia Industrial Development Corp.
Lots of reasons. As the city's bid for Amazon's new second corporate home has demonstrated, Philadelphia is a city on the rebound. Its population has expanded by more than 50,000 over the last decade. The rate of job growth exceeds New York's. Wages and home prices are up. Even tax revenues are creeping up. In the late 1990s, the city struggled as it tried to woo a DisneyQuest store to Market Street; today it is a strong contender for Amazon's tech campus.
Yet Philadelphia remains a cash-poor city that can barely provide the basics for its schoolchildren. Since the School District receives 55 percent of all property tax revenue, it takes the biggest hit from the abatement.
The abatement increasingly is costing Philadelphia its history. Because of the way it skews the economics of construction, the subsidy encourages developers to demolish rather than renovate, dispensing with less-efficient, but often charming, older buildings. "Historic preservation used to be about stemming demolition by neglect. Now it's all about demolition by intent," Paul Steinke, the head of the Preservation Alliance, observed at a recent hearing.
Meanwhile, the abatement is creating have and have-not neighborhoods and intensifying inequality: It has spurred gentrification in the ring of neighborhoods surrounding Center City, while doing little for the struggling neighborhoods beyond that core.
That is vividly illustrated in a recent report from the Building Industry Association, which represents developers and, ironically, has been the staunchest defender of the current abatement. A BIA map of the 15,000 currently abated homes shows a striking concentration in the center, in thriving neighborhoods like Society Hill and Northern Liberties. Should the city really be subsidizing construction in its wealthiest, most successful neighborhoods?
The report also reveals the scale of the abatement's financial impact on the city. In granting abatements to those 15,000 properties, which include both rental units and private homes, the city gives up almost $88 million a year in taxes. The abated properties equal 11 percent of the city's tax base, the BIA found.
Despite the inequities, Philadelphia probably still needs to maintain some form of tax abatement. Virtually every big northeastern city uses abatements to spur housing construction and offset high labor union costs. It also true that, once the 10-year subsidy is over, the abated properties become good tax producers.
Still, few cities offer the kind of one-size-fits-all style abatement that Philadelphia does. "A blanket abatement is a really bad idea," argues George W. McCarthy, head of the Lincoln Institute of Land Policy in Cambridge, Mass.
He prefers to see abatements structured to encourage targeted policy goals. Take Pittsburgh. Instead of one abatement for the whole city, Pittsburgh created special districts. To encourage investment in the neediest areas, the abatement runs 15 years — something Philadelphia Councilman Allan Domb has proposed for homes under $250,000. Baltimore has devised an abatement to encourage preservation. Now that million-dollar sales are routine in Philadelphia, what's to stop Philadelphia from putting limits on the amount that can be abated? Or using abatements to encourage affordable housing?
One way that Philadelphia has changed since 2000 is that we now rely on data to inform policy decisions and evaluate the results. The city can revamp the abatement to make it more targeted and more fair. All we need is the will to act.