4.03.2009

Give Me Liberty


I was asked by a client of ours to provide testimony in support of Philadelphia's ten-year property tax abatement on new construction and major renovations at a City Council hearing. Here are my written comments. [Note: the picture is of the Pradera Homes complex in North Philadelphia - yes, North Philadelphia - built as a result of the abatement program.]

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Green considerations are public considerations. So it makes sense to incentivize environmentally positive development. My perspective is that the City’s current property tax abatement is good policy on its own, and therefore a green abatement should augment and not replace the existing 10-year abatement. Of course, one need only read today’s paper to know that not everyone agrees with me about the existing abatement, Two Liberty Place being a particularly controversial example.

As my colleague Kevin Gillen has shown, thousands of homeowners outside of Center City have benefited from the City’s 10-year property tax abatement on new construction and major renovations, and two-thirds of units would not have otherwise been built but for the abatement. For now, let’s just consider Two Liberty Place, and see if the abatement was or was not a net positive for the City. Yes, the City does forgo ten year’s worth of tax revenue when a high-end unit is built and bought. But between real estate transfer taxes, wage taxes, and sales taxes – all of which kick in immediately – as well as property taxes that are collected after the abatement expires, the City more than makes up for those upfront foregone tax revenues, both immediately and over the long term.

Let’s use some actual numbers to illustrate this. Consider the gentleman in Unit 4309 who bought his unit in June 2008 for $1.1 million. (There are about as many in the building who paid more than this as there are those who paid less.) Let’s call him Mr. Liberty. Mr. Liberty’s property tax bill will eventually be about $18,000; but for the first ten years, he’ll only owe $3,000, which represents the land portion of the tax bill –the $15,000 difference represents the enhancement in the property that actually qualifies for the abatement. So Mr. Liberty would pay the City about $3,000 a year in property tax revenues, and the City would forego about $15,000 a year in property tax revenues during those first ten years. Mr. Liberty would also pay about $15,000 a year, as a low estimate, in wage taxes and sales taxes. Finally, he paid about $33,000 once, upfront, in real estate transfer taxes. So during the ten-year abatement period, the City would forego a total of $150,000 in tax revenues but receive a total of $210,000 in tax revenues from Mr. Liberty; so the City will be plus $60,000 during those first ten years as a result of Mr. Liberty. And then, every year after that, Mr. Liberty will pay about $36,000 in taxes to the City; so over 30 years, the City will be plus almost $800,000 or more as a result of Mr. Liberty. And, notice in these charts that Mr. Liberty’s contribution to the City’s coffers is always greater than what the City foregoes in property tax revenues, starting from Day 1. Multiplied by thousands of Mr. Liberty’s, you can see how this would be very good for the City.

But let’s look at this another way. Recall our estimate that the property tax abatement induced two-thirds of new and renovated units. So out of every three units, two would not have been built but for the abatement. So we can imagine two scenarios: one in which the abatement exists and three Mr. Liberty’s move in – they get their property taxes abated in the first ten years but pay other taxes – and one in which the abatement doesn’t exist and only Mr. Liberty moves in – but he has to pay full freight on his property taxes right away, as well as on all of his other taxes. Using conservative assumptions, we estimated that the abatement scenario brings in a total of $270,000 more in tax revenues in the first ten years, and a total of $1.7 million more in tax revenues over thirty years. Again, notice in these charts that the abatement’s contribution to the City’s coffers is always net positive, starting from Day 1. And again, multiplied over thousands of units, this is very good for the City.

In conclusion, in an environment in which every dollar counts, the property tax abatement program brings net new cash into the City’s coffers from Day One, and continues to be a positive contributor over the long haul.
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