Changing Skyline: With soda tax done, let's move on to retooling the property abatement

No one, least of all those battle-hardened skeptics known as Philadelphians, believed City Council had the stomach to pass Mayor Kenney's tax on sugary drinks. America's powerful soda lobby has knocked the fizz out of 45 similar proposals since 2008. Yet Council showed its mettle Thursday by approving the nation's second, and highest, levy on sweetened drinks.

Two 19th-century townhouses near 40th and Chestnut were replaced by developers benefiting from the cities’ property-tax abatement. What is lost: the 1850s character of the neighborhood.

Slideshow icon Slideshow

Changing Skyline: With soda tax done, let's move on to retooling the property abatement

So, how about taking on a really sacred cow? The 10-year property-tax abatement.

The current version of the abatement was introduced in 2000 - a generation ago in the life of the city - as a Hail Mary effort to stanch Philadelphia's population exodus. The measure exempted all new and renovated homes from taxes on improvements for a decade. Officials hoped the incentive might persuade a few brave developers to convert Center City's aging Class B office buildings into apartments and to renovate its old rowhouses. Some thought new homes might even sprout on empty lots downtown.

It's safe to say that no one imagined the abatement would lead to today's construction frenzy. At the moment, there are about 15,000 exempted homes. The real estate market is so hopped-up that developers are writing $800,000 checks for teardowns in Center City, and a penthouse on a dull stretch of Walnut Street just sold for almost $18 million. Personal story: The other day, a real estate agent knocked on my door in Fitler Square and asked to buy my less-than-pristine house.

While the abatement is an undeniable success, that doesn't mean it should be untouchable. Champions point to the transformed landscapes of Northern Liberties and Graduate Hospital as proof of the abatement's magical powers. But the city has changed since 2000. Maybe the abatement should, too.

I'm not suggesting the abatement should be eliminated. Building in urban areas is more expensive than in a suburban cornfield. That's why almost every big city cuts developers a break for new construction. But few municipalities offer the citywide, no-strings-attached, free ride that Philadelphia does. Pittsburgh doesn't. Baltimore doesn't.

Those cities target their abatements to promote specific goals. Instead of tax breaks to encourage construction in already desirable neighborhoods, they limit incentives to overlooked sections of the city. They've crafted abatements to make renovation and affordable housing more attractive options. In Philadelphia, because every new building gets a tax break, the city can't fine-tune its abatement to incentivize policies like historic preservation.

Just the opposite. Our abatement effectively encourages developers to tear down intact, older buildings where rents tend to be lower. A recent example is the Wallace Storage building on 21st Street, the first home of the Please Touch Museum. The handsome warehouse will soon be replaced by multimillion-dollar townhouses. That will cost Logan Square some much-needed architectural and economic diversity.

Over in West Philadelphia, a row of 19th-century houses are being replaced - mowed down, actually - by apartments aimed at students. Not only are these new buildings cheaper to operate, but they also dramatically reduce the developer's tax burden and carrying costs. The public, meanwhile, loses the 1850s character that made the neighborhood attractive in the first place.

Cities, of course, need to replenish their housing stock with modern buildings. While there will be trade-offs, the blanket nature of Philadelphia's abatement makes the choices more stark.

The hardest one involves the schools. The abatement has attracted thousands of millennials, who will help grow the city's tax base, first by their wage and sales tax contributions, and later by paying property taxes.

Ideally, they will also raise their families here. The problem is, the abatement diverts millions from the struggling school district, making it harder for the system to deliver a level of education that will persuade these homeowners to stay here. Since 55 percent of the property tax is earmarked for schools, the abatement hits the district harder.

Lance Haver, a policy adviser to Council, described Philadelphia's Catch-22 perfectly: "If we don't fund the schools, will the city have a future? If we don't have an abatement, will young people buy houses?"

Since 2014, three special-interest groups have financed economic studies on the impact of the abatement. Not surprising, each reached a different conclusion.

The Building Industry Association asserted that the city earns $2 for every dollar abated and that the schools lose a mere $3 million annually.

Yet the study for the Philadelphia Coalition Advocating for Public Schools contends that the annual loss of revenue to the schools from all tax abatements, including those on commercial and industrial properties, is more like $50 million a year.

To put that figure in perspective, Kenney's soda tax will raise just $40 million for pre-K. Eliminating the 55 percent of the abatement that goes to the schools - or just a fraction of it - would be a huge boost for education.

With a new administration, there may be a new willingness to reexamine the abatement. The city's new commerce director, Harold T. Epps, a former corporate executive, told me he was open to creating a tiered abatement similar to Pittsburgh's. That might include caps on very expensive houses, or extended abatements in neighborhoods where there has been little investment.

Such changes would be radical. Ever since the abatement was created, the only goal has been to grow the tax base. Using the tool strategically to achieve other aims has never been part of the city's mind-set.

Recently, Councilman Allan Domb, a Realtor who specializes in luxury condos, introduced a bill that would extend the abatement to 15 years for houses priced at $250,000 or below. It's an interesting idea that could increase the supply of moderately priced homes. Domb also went against type to vote in favor of the soda tax. In exchange, he told me, Mayor Kenney has agreed to aggressively pursue $500 million in unpaid sewer and water bills.

At Domb's urging, the city is now recalculating the value of the land on its 15,000 abated homes. Although the abatement is only for "improvements," homeowners have gotten away with paying little or no property tax on the land under their homes.

Those increased tax collections are long overdue. Together with a more targeted abatement, those measures could make the soda tax look like peanuts.

Source: Philly.com