Jon Geeting is the editor of the Keystone Politics blog, and a regular contributor to Demos’ PolicyShop blog and the Patriot News op-ed page. He is a Lehigh Valley native. His writing focuses on the impact of state policy on Pennsylvania’s cities and older urban communities, and the role of transportation, land use, and tax policy in promoting equitable economic development.

AxisPhilly contributors Tom Ferrick and John Kromer have outlined some of the problems with rescinding Philadelphia’s 10-year tax abatement for new construction and major property improvements, but it is worth revisiting the reasons why the abatement has been necessary, so that we can see whether there isn’t some cheaper, more efficient, or more politically durable approach.

The broad problem the city is trying to address is that housing costs in Philadelphia are out of step with area wages. The Center for Neighborhood Technology recently found that in some neighborhoods, housing and transportation costs eat up as much as 90% of residents’ incomes. The 10-year tax abatement is meant to address one cause of this problem, which is that developers can’t afford to build and sell housing at the prices many people can afford to pay. And it isn’t that the raw materials needed to make an apartment are unaffordable. Philadelphia’s land use, tax and competition policies are driving up the prices.

Start with John Kromer’s list of the obstacles that developers named as working against new construction in Philadelphia when the tax abatement policy was first debated 15 years ago:

• struggling public schools
• the city wage tax
• the cost of labor relative to the suburbs
• delays in the permitting and regulatory approval process

Mr. Kromer is correct that all of these obstacles still exist, but conditions in 2013 are different in one important respect — population growth has begun to return.

Since the 2010 Census, Philadelphia’s population has grown by about 21,000 people, with 9,040 new residents in 2012 alone. Fifteen years ago population decline seemed likely to continue, but today the forecast portends more growth. The reason this is important is that the demand for land has been increasing in the areas closest to Center City, and neighborhoods with nice public and private amenities like parks, restaurants, and retail, and that’s caused land values to increase in those parts of the city.

One sign that demand for land has been increasing is that rental vacancies are very tight. Vacancy rates for quality rentals in Center City were down to 1.5% back in 2011, and total vacancies were 5.5% citywide. The supply of new housing has been growing this year, with lots of new units in the pipeline, but in many of the nicest areas, the housing supply has not been keeping pace with demand. Some of the city’s amenity-rich neighborhoods are facing housing shortage conditions, even as other parts of the city struggle with an epidemic of vacant land and buildings.

How does recent population growth and demand for land impact new construction?

Fifteen years ago, the lack of growth was a key argument for the tax abatement. The population wasn’t growing, and bad schools and high wage taxes were said to be deterring more mobile middle-class households from living in Philadelphia. Higher earners didn’t want to send their kids to the public schools, and the high wage tax presented two disincentives for new construction. People wanted to avoid paying such a high percentage of their wages to the government in taxes, so they chose to live in Philadelphia’s suburbs where taxes were lower. That depressed the demand for housing. And employers responded to the outflow of the professional labor pool by buying less office space in the city, which depressed the demand for new office construction.

The situation is now somewhat different, if only in some parts of the city. Though one can still argue persuasively that the reputation for bad schools and high wage taxes are depressing Philadelphia’s population growth relative to nearby communities with great schools and low wage taxes, the fact is that some areas of the city are growing in spite of these obstacles. This population growth is causing land prices in some of the most popular areas to appreciate, sometimes wildly so, and rising land prices are creating a profit opportunity for developers to build more new housing.

It is likely that further improvements in school quality and public and private amenities, and decreases in crime rates, will continue to put upward pressure on land prices. How should this impact the debate over the 10-year tax abatement? At what point can we say that there is enough organic demand for new housing and office space that an explicit subsidy is no longer required?

Messrs. Ferrick and Kromer argue that this day has not yet arrived, and I am inclined to agree. However, it is becoming clear that the 10-year tax abatement as currently structured is politically unsustainable. The political opportunity to stoke long-time property owners’ resentment over low tax bills for people in new modern buildings is too great for many politicians to resist. The abatement will be perpetually on the defensive in City Council, and it is probably only a matter of time before it is rescinded. So an urgent need exists to finally address the root causes of excessively high housing costs for consumers, and reform the abatement in a way that does not raise overhead costs for developers.

Mr. Ferrick argues persuasively that Philadelphia’s labor costs — one input in the cost of housing — are unusually high, and the 10-year tax exemption is essentially underwriting high wages for the building trades. But political reality suggests that competition-increasing reforms will attract little support on City Council, as the political economy sustaining high construction labor costs is very robust and likely to remain so.

If high construction labor costs are here to stay, this makes it all the more imperative to reduce the costs of the other inputs that determine housing prices — land costs, regulatory approval costs, and the cost of zoning mandates.

Increases in population should, in theory, lead to more new housing construction and renovation of older structures in the neighborhoods where people most want to live. While it takes longer to construct a multi-family residential building than a single-family home, apartments can be built relatively quickly, so there’s no reason that the housing stock shouldn’t be able to grow roughly in tandem with the demand for housing. But in many neighborhoods this hasn’t been happening because of Philadelphia’s notoriously politicized approval process for new construction. Many neighborhoods have not been building as much housing as people want.

Everybody knows that supply constraints lead to price inflation in other markets, and housing is no different. Slowing the approval of new housing construction inflates land prices, driving up rents and asking prices. The city’s new zoning code, adopted last year, made a solid effort to reform the approval process, and allow more common building types to be built “by-right” — meaning that they can be built without political interference from City Council members and neighborhood groups. Under the old code, special approvals and variances were required to build many common types of buildings, and the Zoning Board of Adjustment became a veto point for NIMBY activists to pressure ZBA officials to reject variances and block new construction.

The new zoning code goes a long way toward depoliticizing the approval process, which should lower housing construction costs, and ultimately costs for home buyers and renters. But the streamlined process is already under attack from some City Council members who want to retain their power to veto new construction in their districts. If the goal is to reduce housing construction costs though, and obviate the need for the 10-year tax abatement, further reforms will need to move in the opposite direction — allowing even more building types to be built by-right, and removing even more regulatory mandates.

One such regulatory mandate that drives up the cost of housing construction, and prices for home-buyers and renters, is minimum parking requirements. A large body of research shows that requiring off-street parking spaces to be bundled with housing makes housing less affordable. If developers are required to build a parking garage along with any new housing units, unsurprisingly they will build fewer housing units. If they are allowed to build only the housing units, they build more housing and less parking.

The new zoning code reduces or eliminates parking minimums in some areas, but they are still inexplicably left intact in many growing neighborhoods that are well served by transit. There is an opportunity to reduce construction costs for developers and increase housing affordability for residents by further reducing or eliminating minimum parking requirements, but some members of City Council are already trying to increase them.

Further streamlining the approval process for new construction and reducing regulatory mandates like parking requirements could achieve substantial cost reductions for developers and consumers, but ultimately the greatest opportunity to obviate the need for the 10-year tax abatement is to change Philadelphia’s tax treatment of land.

Isaiah Thompson has done excellent work for AxisPhilly illustrating the negative consequences of underassessing land values in expensive areas. In the recent reassessment, many land parcels have sold for well above their assessed value. If the new values are used to determine property tax bills, land will be under-taxed relative to buildings. As Mr. Thompson has been pointing out, this will make it even cheaper for speculators to hold land off the market in growing areas, not building anything as they wait for ever-higher rents. This preferential tax treatment of land over buildings rewards blight and vacancy, and is a key contributor to rent inflation in gentrifying areas of the city.

What if this tax preference was reversed? What if Philadelphia taxed vacant land at a higher rate than buildings?

The effect would be to extend the building tax abatement to all buildings, new and old alike. And not just for 10 years, but forever. On the flip side, a greater share of the tax burden would be shifted onto vacant and unimproved land in the areas where land is in highest demand.

Taxing land instead of buildings would achieve exactly the same goal as the 10-year tax abatement – lowering overhead for new construction and improvements to existing buildings – but without the stench of unfairness dogging the current approach.

The higher tax on land would also reign in land price inflation in gentrifying neighborhoods by raising the cost of holding properties vacant, especially in areas closest to center city and public amenities like transit stations. Vacant property owners would face increased financial pressure to reduce their asking prices and find tenants quickly. This would put downward pressure on land prices and rents – the key input in housing costs. According to a pre-AVI analysis by the Center for the Study of Economics, shifting the property tax burden onto land would also reduce the property tax burden for majorities of residents in every Councilmanic district.

As economist Dean Baker has pointed out, the impact of falling land prices is distributionally progressive. While many of the people who would be impacted by falling land prices aren’t wealthy, property owners as a group are better off than people who don’t own property, and the reduction in rents and property tax bills would translate into a real wage increase for most Philadelphians. A reduction in housing costs, and the cost of rent as an input for the production of goods and services, would leave most people with more disposable income to spend or save as they please.

As City Council considers the future of the 10-year tax abatement, they should take care not to raise overhead costs for developers or land costs for renters and future housing buyers. Any change to the abatement should be paired with policy changes that lower land prices, raise the cost of holding vacant property, and reduce the time and money costs of improving land. The cleanest and most equitable path forward is to extend the abatement on improvements to all, and make up the difference with higher taxes on vacant land.

Folks don’t like the fact that while they pay real estate taxes on their home, the owners of that fancy new house down the street is exempt from paying a large portion their taxes. (The land is taxed, but improvements are not.)

Now, with the citywide reassessment know as AVI, the debate over the tax abatements is joined again.  In a city with 579,000 properties, why should 15,000 owners enjoy a generous, 10-year tax holiday? The abatement is given citywide, and the aggregate market value for the abated properties is $8 billion.  It includes residential and commercial construction.

Kevin Gillen, economist at the Fels Institute, recently stepped into the fray with a report that seeks to justify the abatement using facts and figures (see below).

According to Gillen’s analysis, the tax abatement has played a major role in Philadelphia’s revival.  In the 10 years before the tax abatement, the city issued building permits for 6,405 housing units; since then it has issued 17,700.

Most economists and public policy people I know agree with Gillen’s analysis: The abatement did its job.  It was a tax incentive that spurred development.  While it was not the only factor, it was a significant one and an overall plus for the city.

Whether we need to continue it in its present form — on all new construction and major renovations — will be a matter of debate, probably in City Council.

But, let’s take a step back and ask a more fundamental question: Why do we need to give any tax abatements?  Why did new construction in the city lag behind regional and national averages for so long?

Gillen’s analysis is helpful in answering those questions.  In Philadelphia, there is a fundamental imbalance between the cost of new construction and the prices that project will yield.

In his analysis, Gillen said he looked at building costs and found that Philadelphia ranks fourth in the nation in cost per square foot.  It is $128 per square foot here, compared to a national average of $102 per square foot. Only New York, San Francisco and Boston have higher costs, so we are in heady company.

The problem is we cannot get New York, Boston or San Francisco prices for our homes. We don’t have the wealth.  Our median household income is lower — a lot lower — than that of those cities.  At $37,000 a year, we are far below the U.S. income average of $50,000 per household.

Why are construction costs so much higher in Philadelphia?  High labor costs.  The building and construction trades unions enjoy a virtual monopoly on construction in the city and the hourly rates their workers charge are high. Using an all-union workforce can add 30 percent to the cost of a project.  (You can fly under the radar and use non-union help on small projects, but watch out if you try that with larger ones. The Ratmobile will soon be parked outside.)

Developers know how to use spreadsheets.  On any given project, they will add in all of their costs, and then estimate the price they can get for the properties.  The difference is their profit.  If that bottom line is too small — or a negative number — they won’t proceed.

Paul Levy, head of the Center City District, learned this through experience in the mid-1990s.  At the time, the city’s office center had migrated west to new office towers on the west side of Market Street.  Older retail establishments were exiting the city.

The District commissioned a study to develop a strategy to combat vacancies.  The result was “Turning the Lights on Upstairs.”  Released in 1996, it recommended strategies for converting old office and retail space into residential uses.  The study made a lot of sense.  It even gave specific examples of buildings ripe for conversion.  But no developers bit.

What could be done to push this project along?  New York had offered tax abatements to spur development on Wall Street.  Levy and others went to City Councilman Frank DiCicco to see if the same could be done here.  In 1997, a law was passed allowing a five-year tax abatement, but only for projects involving conversions of commercial/retail properties into residential ones in Center City.

The bottom lines on the developers’ spreadsheets suddenly jumped in an upward direction.  They were able to charge higher prices to buyers who would get some of that money back through tax abatements.  The conversion boom began.

In 2000, at the urging of Mayor John Street, City Council increased the abatement to 10 years, made it for major renovations and new construction for all types of properties and applied it citywide.  A citywide building boom commenced.

People tend to view the abatement as a subsidy for developers and home buyers. In reality, it is a taxpayer-financed subsidy for the building trades unions.  It allows unions to maintain wages that are higher than the average in the region and in most other cities.

In the post-AVI frenzy, Council could choose to do away with the abatement. Several Council people say it is no longer needed to sustain development.

They are kidding themselves if they believe that. Do away with the abatement if you wish.  But unless something is done at the same time to lower construction costs, you can kiss the building boom goodbye.

PHILADELPHIA’S TEN-YEAR PROPERTY TAX ABATEMENT

Participants in the heated debate over the future of the city’s 10-year tax abatement haven’t figured out how to deal with a fundamental contradiction: if we reduce the abatement term, the abatement amount, or the citywide scope of this incentive, then we’ll weaken the city’s potential to attract investors and developers. But if we agree to maintain this incentive in its current form, then we’ll be recommitting to its inequitable structure, through which property owners and buyers with the most capital to invest in the most marketable areas of the city will continue to profit most from the program.

This contradiction is resolvable, and it should be resolved before Mayor Michael Nutter’s budget proposal is approved by City Council. Here’s what to do.

We need to recognize that the biggest beneficiaries of the abatement — wealthy investors and higher-income homebuyers — are rewarded twice under the current program. They enjoy a decade’s worth of lower property taxes, and they also get to keep all resale proceeds when they’re ready to sell. In the strongest real estate markets where the biggest abatements can be found, resale proceeds are likely to be significant. Absent another Great Recession, housing prices downtown and in newly trendy neighborhoods are likely to appreciate substantially during the coming years.

The sales price appreciation associated with these higher-end properties is attributable in large part to the existence of the tax abatement. Many of these big-ticket properties — luxury condominiums and townhouses — would never have been developed but for this incentive, as documented in Kevin Gillen’s most recent analysis (see below). So, when the time comes to sell, why aren’t these fortunate property owners sharing the resale proceeds with their business partner, the City of Philadelphia?

We’ll need to continue to offer a big incentive on the front end — the existing tax abatement — in order to make Philadelphia competitive in the regional real estate market. Fifteen years ago, in the dialogue that led to the approval of the first 10-year abatement, developers cited four barriers to doing business in Philadelphia: struggling public schools, the city wage tax, the cost of labor relative to the suburbs, and delays in the permitting and regulatory approval process. These barriers remain. When they’re eliminated, we can talk about reducing or doing away with the 10-year abatement, but not before then.

In the meantime, however, there’s no reason to reward wealthy property owners on the back end by letting them keep all the resale proceeds associated with a valued asset that the public sector helped create.

For higher-end properties that receive the tax abatement in the future, why not require that any resale proceeds exceeding the original purchase price be shared dollar for dollar with the city? One example: a tax-abated Penthouse in the Murano building in Center City West was purchased for $3.8 million late last year. If this property were later to be sold for $4.6 million, then the City would have been able to collect $400,000 if this requirement had been in effect. A tax-abated property in the Rittenhouse Square area was sold for $3.7 million in 2010. If that property subsequently sold for $4.7 million, the City would have collected $500,000 if this requirement had been in place.

Properties initially purchased for less than $750,000 and properties with existing tax abatements would be exempt from this requirement. Wealthy property owners could prepare for the eventual payoff that would occur at resale by depositing an amount equal to half the abated taxes into an interest-bearing account. Or they could choose not to take the abatement at all—but that would be unlikely.

What if we experienced a Great Recession encore, or what if, for some other reason, the resale amount turned out to be less than the original purchase price? In the event of no price appreciation there would be no requirement to share sales proceeds with the City.

Would the City be capable of administering a program with a payoff requirement of this kind? The City already does something similar with respect to tax increment financing, in which a portion of the increased tax revenues associated with a completed development project are used to pay debt service on project financing.  With millions of dollars in new revenue to be earned, the City could find a way to handle related administrative tasks.

We should celebrate the benefits that Philadelphia has experienced as a result of the ten-year tax abatement. But we should also start getting our share of the rewards, in order to make sure that these benefits are shared with all Philadelphia taxpayers.

PHILADELPHIA’S TEN-YEAR PROPERTY TAX ABATEMENT

Below the report are highlights of news coverage.

Daily News:

Butkovitz said yesterday that the administration “has not performed a credible job of improving assessment accuracy, uniformity and fairness” in executing AVI. …

Nutter spokesman Mark McDonald said … Butkovitz’s findings … “have to be seen for what they are – a $27,000 report that comes out a few weeks before a city controller runs for re-election.”

Inquirer:

Butkovitz said Wednesday that “if it were up to me,” he would scrap the Actual Value Initiative (AVI) for a second year in a row, and urged Nutter to “invest heavily in getting the assessment right.”

“When you’re trying to do something this important with such ramifications, there’s no excuse for not doing what is required to get it right,” he said.

Daily News editorial:

Almost very week, it seems, someone releases a study designed to refute the city’s new Actual Value Initiative. The latest is from Controller Alan Butkovitz’s office, and his says that not only are the new property assessments more inaccurate than the current system, but they’re maybe racist, too.

NewsWorks:

Carnegie Mellon professor Robert Strauss says his research shows Philadelphia’s new assessments range from 30 percent to 800 percent inaccurate. He says problems are especially bad in minority and low-income neighborhoods.

City Paper:

The analysis also noted that the Office of Property Assessment’s data was lacking or incorrect in many cases when it came to residential properties’ attributes, such as number of stories or rooms.

The documents were obtained by Kenneth Lee Metzner, a Philadelphia lawyer and self-described “concerned taxpayer” who, more than a month ago, submitted a Right-To-Know request asking for data supporting the administration’s claims as to the accuracy of its new assessments.

After invoking the right to ask for 30 additional days to review his request, the city finally responded — though by “asking me to pay for hard copies when they clearly downloaded it from an electronic database, and could have easily put it on a disk, as they have in the past,” Metzner says. At 25 cents per page, the request cost Metzner $234.

(The copies posted here are scanned from paper copies of a digital presentation, and are, unfortunately, of poor quality. We’ll post originals as soon as possible.)

The documents reveal details of the reassessment that haven’t been made public before now, including new geographically specific data and show how the OPA evaluated its work internally.

And that internal analysis offers a mixed report: On the one hand, the documents support the administration’s claim to have achieved the (relatively accurate) number of 13% for its “coefficient of dispersion” — essentially, the margin of error — for the new assessments. The numbers show the extent to which the city’s new assessments have corrected some of the most poorly assessed parts of the city.

But the documents also show that while the goal of a 15% or better CoD may have been achieved citywide, the margin of error was significantly higher in some neighborhoods — even according to the administration’s own numbers. (View/download the full slideshow below)

A slide showing how coefficients of dispersion (margins of error) between assessments and recent sales have changed under AVI. A low CoD means a more accurate assessment. (Click on the image to enlarge; full download below)

For example: GMA Zone “H,” which encompasses Brewerytown and Strawberry Mansion, was found to have a CoD of 24%.

The picture seems to get more complicated the closer you zoom in: a (low-quality) color-coded map showing individual GMAs (as opposed to “zones”) indicates that while most of the city was indeed at or below a CoD of 15%, significant chunks of the city (particularly in North Philly, Germantown, West Philly, and near Center City) remain outside the comfort zone of 15% to greater and lesser degrees.

First District Councilman Mark Squilla, who became aware of the new figures when Metzner testified at a neighborhood budget hearing Wednesday night, still hadn’t reviewed the figures when AxisPhilly contacted him, but said they appear to represent some of the information Council has been trying to get from the administration for months, if not weeks.

“They were deflecting concentration onto what taxes would be in a certain area,” Squilla said, “and not giving us proof that the assessments are actually accurate.”

“When you do your own analysis of your own work, your numbers tend to be better,” Squilla added. “It’s scary to think that in their own analysis they have areas that are 25 percent off.”

Chief Assessor Ritchie McKeithen, who spoke to AxisPhilly on Thursday afternoon, acknowledged that some GMAs fell outside the 15% comfort zone but pointed out that “What you want to focus on is what [the assessments were] when we started … you’re not going to get every area below a certain [CoD] in one year.”

“That,” McKeithen added, would be “what our industry would call ‘something fishy.’”

McKeithen points out that some of the areas that have a CoD above 15% also had some of the most inaccurate assessments in the first place.

“What happens now is that we’ll focus on areas that are still above a certain standard, and deal with those,” McKeithen said.

As to why Council members, some of of whom claim to have been asking for just this kind of information from the administration for weeks, hadn’t seen these figures, Finance Director Rob Dubow said that “That’s a conversation we’ll have with them” — and not, that is, with a reporter.

But add in the so-called “homestead exemption,” which if approved would let homeowners subtract a fixed and as yet undecided amount from the total assessment on their primary residence, and many of these property owners will enjoy a triple dip tax break.

In fact, more than half of all tax-abated properties in the city will have final taxable values of zero – in other words, their owners would pay no real estate tax at all.

Council passed a $30,000 homestead exemption last year in order to try to protect homeowners, especially owners of lower-valued real estate, from steep increases in their tax bills as a result of AVI.

The law specifies that the exemption would apply to “the assessed value of taxable real property” — taxable being the key word here. For a property under tax abatement, the only “taxable” assessment is the value of its land; and land values, even for homes worth nearly half a million dollars, can be lower than the entire deduction.

The result? A home with a land value of $30,000 or less would owe nothing in taxes with a homestead exemption. Likewise, if Council adopts Mayor Michael Nutter’s proposed $15,000 homestead exemption, exemption-eligible homes with land values of $15,000 or less would pay nothing.

It appears that this quirk of the law could extend to many taxpayers.

While we don’t know how many tax-abated properties are owner-occupied, we do know that of the just under 20,000 residential properties currently under abatement, more than 13,000 have a land value of less than $30,000. And more than 8,700 properties have land values of less than $15,000. Any of those properties eligible for the homestead exemption would pay nothing in real estate taxes.

It’s a loophole that’s got at least some community leaders — even ones who don’t object to tax abatements per se — feeling jilted.

“This is the stupidest way to implement homestead exemption and abatement,” says Matt Ruben, president of the Northern Liberties Neighborhood Association. “If there’s a way to apply the homestead exemption to the total assessment, and not the taxable assessment, that’s the smart thing to do. This adds insult to injury, and I think you’d be hard-pressed to find an owner of an abated property who would object to doing it that way.”

Penny Giles, executive director and president of the Francisville Community Development Corporation, feels much the same way.

“We understood that to save our neighborhood we needed to embrace development and economic diversity,” says Giles. “But we’ve seen four, five hundred percent increases in our property values … and then you’ve got these folks who’ve moved in here who are obviously more affluent, and have the abatement. It’s not fair.”

Philadelphia’s 10-year tax abatement program, implemented in 2000, was designed to foster development in a city hampered by relatively high construction costs and low selling prices. It’s had its proponents — who argue that it’s responsible for much of the growth that’s occurred — and its detractors, who argue that it’s a subsidy for gentrification.

AVI seems to be complicating the conversation around who should, and should not be protected from tax increases. With low land values in the first place, and an exemption on top of that, it’s created a triple subsidy for a lucky, lucky few.

On the one hand, it’s been widely credited by various studies and reports as having fostered growth in the city, whose population had been declining for decades until the most recent census. On the other, it poses a distasteful situation: Why should some residents pay more in taxes than residents living in newer and usually relatively expensive homes?

And now many of those property owners are about to pay even less.

Under the shift in property assessments known as the Actual Value Initiative, tax-abated property owners in some up-and-coming neighborhoods will see the taxes they do pay go down further, even as their neighbors’ taxes go up.

It’s certainly true in Northern Liberties, where roughly a third of all taxable properties enjoy a tax abatement. With the new assessments, taxes will rise by about half in this neighborhood. But the tax bills for the abated properties will actually fall, also by about half.

So how can taxes go down, abatement or no, in a neighborhood where values have clearly gone way, way up?

One answer, says Northern Liberties Neighbors president Matt Ruben, is fairly straightforward: The properties with abatements were built more recently and their valuations are just closer to the actual value,” says Ruben. Because the overall tax rate has been lowered to accommodate higher values citywide, he said, those properties effectively get a tax break, just as did commercial properties in Center City.

But the second explanation is more troubling.

“The city has valued the land portion of the assessment,” Ruben says, referring to the only portion of a property assessment on which the owner of an abated property pays taxes, “way, way too low. It’s inexcusable.”

Ruben’s assertion echoes AxisPhilly findings that land, at least in gentrifying neighborhoods, has been valued by the city at far, far below what it would actually sell for. Put another way, the city says land has gotten cheaper even as market prices have obviously gone way up.

Typically, city land should account for about 20 percent of a property overall assessment, according to city consultant and Fels Institute of Government researcher Kevin Gillen. But in many neighborhoods, land values have fallen far below that figure.

Northern Liberties is a case in point.

While the assessed value of all taxable properties in Northern Liberties will double under the new assessments, the land portion of that amount will actually drop, from about 20% to about 13%.

Put together, Northern Liberties residents who own tax-abated properties, and only pay taxes on the value of the land, will pay a total of $800,000 less annually.

These are new findings, and they may inform a debate long underway within City Council, and reignited this week, when Council President Darrell Clarke began a line of questioning during departmental budget hearings about whether or not the current property tax abatement system is fair. Clarke has suggested tweaking the abatement program in the past, as well as introducing potential incentives for would-be homeowners to buy existing properties rather than new ones.

It’s a position that will face challenges from the real estate lobby. Alan Domb, president of the Greater Philadelphia Association of Realtors, defended the abatement this week as good policy.

“In Philadelphia, your cost of labor and materials is the same as in New York,” says Domb, “and your price is one-third. The abatement is needed because of this competitive situation of labor and materials being so expensive … and because there isn’t enough demand to drive prices up.”

Ruben, who thinks tax-abated properties are getting off too easy under AVI, doesn’t disagree that the abatement may have had a positive impact on Philadelphia, but agrees with Clarke that the time has come to re-evaluate its usefulness.

“Do we need to abate 100% of value, do we need to do it for 10 years, would it make more sense to have a gradual fade-out? It’s worth asking,” Ruben says. “But do we really still need it in neighborhoods like Graduate Hospital and Northern Liberties? Come on.”

Shirley Peterson talked about her family’s history in Graduate Hospital. Both her mother and brother owned homes on Saint Albans Street.

Shirley Peterson, for instance, was born and raised in Philadelphia’s Graduate Hospital neighborhood. She attended the Thomas Durham School at 16th and Lombard streets, which is now Independence Charter, and Chester A. Arthur School at 20th and Catherine streets. In 1971, when she bought her house on Saint Albans Street, she paid $6,300 for it. Now, despite the fact that she hasn’t made any improvements to her home, it’s newly assessed value for 2014 is $292,600. Which means that her tax bill will likely go from $946.40 to $3,414.

“Who can afford it?” asked Peterson. “I’m retired. I only get one check a month.”

Her neighbor, Thurman Scott, has other complaints. He says the city’s Office of Property Assessment’s records show that he paid $1 for his house in 2012. But “I purchased the house in 1985,” said Scott. “I paid $32,000.”

A neighboring house, which has had a third story on it since about 2007, is described as still being a two-story property in OPA records, and is valued the same as Scott’s two-story home.

All of these discrepancies are leading some residents in this rapidly gentrifying neighborhood to suspect that the city is really using AVI as a way to raise taxes — though the total revenue raised will be set by Council after it completes budgeting.

Avi Lazar has lived in Graduate Hospital since 2004.

“They’re trying to hide it with the adjustment of the value of the houses,” said Avi Lazar.

Lazar has lived in Graduate Hospital since 2004. He moved to Saint Albans Street from the 2100 block of South Street in November.

“It would be nice that a $500,000 home was listed for $500,000 as opposed to $30,000. But they’re also increasing the taxes. It’s OK to go up by a little but it should be a reasonable amount. It shouldn’t be going up by 60-70 percent in a year. That’s a nice pay raise that nobody else is seeing.”

Kristen Albee, a neighbor who is also a board member for the South of South Neighborhood Association (SOSNA), agreed. She says residents have worked hard to improve the neighborhood, and it doesn’t feel quite fair that now, they’re paying a price for the fact that the work has paid off.

“It’s discouraging,” she said, adding later that was speaking personally, and not officially representing SOSNA. “We’re kind of getting hit because the neighborhood is getting better.”

Another problem, she said, is that the assessments – which they were expecting to be a “fair and accurate” representation of what various properties would actually sell for, appear in many cases to be way off the mark.

“It’s crazy. The numbers are all over the place,” she said. For instance, she and Francis Rainey live on the 2100 block of Saint Albans. When they bought their home in 2009 for $310,000, their property taxes were under $900.

“That was very affordable for us, especially with the wage tax. We both work in Center City. It’s about a 4 percent wage tax that you’re paying. Having lower real estate taxes, it was kind of a good compromise,” said Albee.

Their property’s reassessed market value for 2014 is $335,800. With the proposed 1.3 percent tax rate, Albee and Rainey’s taxes will increase 343 percent to $3,975. It’s particularly galling that a neighboring property, which is a similar type of home, is assessed at much less: $231,000.

Francis Rainey and Kristen Albee discussed AVI at Saint Albans Street’s Spring block party.

“It’s not fair or accurate in any sense of the word,” said Albee.

The value of property, whether undervalued or overvalued, has many residents concerned.

“The properties that have been renovated, it seems they don’t pay enough taxes,” said Harold Thompson. “I don’t know how they get the assessments.”

Many refurbished properties are receiving tax abatements. Owners of tax-abated properties pay taxes only on the land value, which has decreased in proportion to the overall value.

Thompson inherited his Saint Albans Street property in 1988. His taxes are now just under $1,000. But the property’s proposed market value for 2014 is $341,000. He was approved for the $30,000 homestead exemption, but at the proposed 1.3 percent tax rate, his taxes for 2014 will still increase 327 percent to $4,043.

“I’m a senior citizen. I can’t afford to pay $4,000 in taxes.”

And it’s not just the residents on fixed incomes.

Kate Avitabile purchased her home on Saint Albans Street for $314,900 in 2010, and was paying $947.40 in taxes on its assessed value of $30,300. Now? Her property’s new assessment is $232,200, and she expects her taxes to go up 219 percent to $3,019.

“They’re going to push out a lot of young families,” she said.

Residents are weighing the pros and cons of Graduate Hospital. Schools are struggling and, while it is a safer neighborhood, crime is still prevalent.

“There are still a lot of quality-of-life issues that we deal with,” said Albee.

Will residents leave the neighborhood because of increased taxes?

“There are other options,” said Avitabile. “We came from New York. We thought this was incredibly affordable. But, at the same time, we could go to the suburbs. I’m still finishing up my training in medicine so I’m here through June 2014. But after that point, we’ll have to see.”

Longtime residents are doing everything they can to reduce the negative impact of AVI so they are not forced to leave.

Shirley Peterson has applied and was approved for the homestead exemption. She also filed for the senior tax freeze program and sent her first-level review request to the Office of Property Assessment.

“I’m going to stay as long as I can.”

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Published in partnership with Philadelphia Neighborhoods

And city officials have heard. Just before a damning Inquirer/PlanPhilly series revealed the extent of tax delinquency in Philadelphia, Mayor Michael Nutter announced a new, multimillion-dollar plan to better the city’s ability to go after tax deadbeats. On Tuesday, a Philadelphia City Council committee heard the first of two days’ worth of testimony on delinquent taxes.

But the truth is that in many cases the city may also need to do the opposite of cracking down ― and just give up, already.

While many of the city’s delinquent taxes are indeed owed by speculators with the means to pay off their debts, a lot of properties have been so behind on their taxes, for so long, and often without obvious ownership, that the idea of ever getting those taxes back seems, well, crazy.

Take the vacant lot at 1719 S. 4th Street, last purchased in 1967 for the tidy sum of $1, and which has been overdue on its roughly $250 real estate tax since 1978. With interest penalties, and the inexorable march of time, the property carries an unpaid tax debt of about $20,000 ― more than the $16,500 the city says the property is worth.

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The city can foreclose on the property more or less whenever it wants to, and indeed the property went twice to sheriff sale, in January and February of 2011. Both times, the opening bid was set at $34,400 ― high enough to cover most or all of the real estate debt tied to the property. But it was too high, apparently, for anyone to actually buy it. The lot sold neither time, and the city did not choose to acquire it.

But there doesn’t seem to be a clear policy about how to treat ancient tax debts, or tax debts worth more than the property itself. Mayor spokesman Mark McDonald told AxisPhilly that while the city stops “reporting” debts that are 10 years old or older for accounting purposes, it still considers the debt real if the property goes to sheriff sale.

And while the city has “written off” $60 million worth of old debt on some 22,000 properties — that same debt is in fact still there, in the form of liens. So while the city wants property to be put into productive use, sometimes its insistence on collecting debt makes that unlikely.

It’s a situation that 7th District Councilwoman Maria Quinones-Sanchez says doesn’t make sense.

“The way we put penalties and serve lawsuits is not going to activate people to pay, because the [debt] number gets so outrageous,”  Sanchez told AxisPhilly on Tuesday, just before Council’s Committee of the Whole convened to hear testimony on a slew of delinquency-related issues. “Being proactive is better than being reactive.”

For Sanchez, “being proactive” chiefly means creating a land bank – something she is seeking to do through legislation. The land bank would, among other things, have the power to wipe properties clean of municipal debt. And that could be a game-changer for some of the city’s most troubled properties.

“The fact that [the city] hasn’t been willing to waive municipal debt when it’s worth more than the property is the flawed policy,” says Councilman Bill Green, a vocal co-sponsor of the land bank bill. With a land bank, “we can sell the property for a dollar if we want to.”

During Tuesday’s hearing, Council President Darrell Clarke repeatedly pressed administration representatives on the issue. Clarke, who has introduced a suite of bills for dealing with vacant land and tax delinquency, made repeated references on Tuesday to something he’s apparently about to announce, which he described as “something up our sleeve.”

And apparently it hinges on discounting blighted property.

Asked by Clarke if the city could discount property and take a loss, for some greater good, Revenue Department Chief Counsel Francis Beckley replied, “Yes, we could compromise on that,”

 ”You told me exactly what I need to know,” Clarke announced and, shortly thereafter, got up from his seat at the dais and walked out.

The Rev. Terrence D. Griffith preached before parishioners who gathered for worship services at the First African Baptist Church.

But those questions are particularly heated in the Graduate Hospital neighborhood, where redevelopment has been fast and furious, and residents are seeing some of the steepest increases in their values — and thus in their upcoming tax bills.

“The gentrification of the area — you owe that to Kenny Gamble [founder of Universal Companies],” said Terrence D. Griffith, pastor of the First African Baptist Church and the recently reappointed president of the Black Clergy of Philadelphia and Vicinity. “I think it’s really for the betterment of the community. The downside is that you find a lot of the African-American folks moving away. Yet even with that migration of people you still have a good mix of African-Americans, Caucasians, Asians. It’s sort of a quilt in the area, and I think that’s good for development.”

The demographics of Graduate Hospital have changed significantly over the years. Beginning in 1900, the population changed from 82 percent Caucasian to 80 percent African-American within 40 years. In the past decade, the demographics appear to be reversing yet again, with the African-American population dropping from 73 percent in 2000 to 54 percent at the latest count, according to the U.S. Census Bureau.

There’s no shortage of development in this neighborhood. And because of the city’s policy of allowing new construction to be exempted from taxes for a period of ten years, many of the people who own the new properties will not be paying the steep increases in their tax bills right away.

This policy of tax abatement adds up. Citywide, tax-abated and exempt properties would generate nearly $280 million in additional revenue if they were being fully taxed.  (That figure is based on the proposed 1.34 percent tax rate, which won’t officially be determined by city council and the mayor until May 31.)

But it’s not just the tax abatements that add up. A number of non-profits are located in this neighborhood. And if a qualifying nonprofit property is used for its tax-exempt purpose, it is eligible for a real estate tax exemption because it performs activities and provides valuable services that benefit all residents, according to the Office of Property Assessment.

The Black Clergy of Philadelphia and Vicinity is one such nonprofit. It was created to unify African-American clergy from various denominations to promote equality, brotherhood, community improvement, economic development, job fairness, housing and education to enhance the welfare of African Americans throughout the area.

“We’ve been actively involved in advocating against the school closings,” said Griffith.

The clergy formed as a result of a school strike in 1981, which lasted about 50 days. Churches responded by opening up their facilities to children in need of tutoring and day care because teachers stopped providing education and parents had to work. African-American ministers from various denominations organized a plan to end the strike. The clergy blocked the intersection of Broad and Vine streets and worked with the teachers’ union and the School Board to resolve the dispute.

First African Baptist is another nonprofit. Created in 1816, the church receives a tax exemption for its property, which was built on land at 16th and Christian streets for approximately $100,000 in 1906. Its reassessed value for 2014 is $2.1 million, an increase of almost 1,000 percent from its 2013 value of $227,500. If the church lost its tax exemption, it would pay $27,340 at a 1.3 percent tax rate.

And according to Griffith, that money goes a long way toward fulfilling the church’s basic mission.

“We feed 125 homeless people every single Saturday,” Griffith said.

Parishioners worshipped at the First African Baptist Church.

“A lot of churches are now forced to sell because they can’t afford to maintain,” he added. “I would like to see some initiative to ensure that the historic African-American churches are kept in the communities. We certainly do not plan to leave.”

Most parishioners of the First African Baptist Church come from within a one-mile radius and a majority of them belong to the dwindling African-American population.

Others, who have moved out of the neighborhood, still have strong ties to the church. “I joined the church when I was 15 years old,” said Pearl Davis, a 74-year-old retired teacher. “I take two buses to get here.”

Davis found it difficult to maintain and heat her longtime Graduate Hospital home after her mother, who had been a member of the church since 1940, died. So she had to move. Now she travels to the church by bus three times a week to participate in the feeding ministry, the choir and prayer services.

“If we do move,” said Griffith, “then we do want to preserve the history of this place [and] we will consider making the church a museum.”

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For further reading on this topic:

Newsworks: Nonprofits flagged by IRS still get property-tax pass in Philly