A state bill moving forward in the state House could cut into Philadelphia’s ability to raise tax revenue for city services at a time when the city tax base is finally starting to hit its stride as a result of job growth and rising housing prices.
The bill (HB1569) would require countywide real estate tax reassessments to be revenue-neutral in Philadelphia, meaning that a reassessment would not be allowed to raise any net revenue. If the city raised any net revenue from a reassessment at the current tax rate, they would need to cut the property tax rate until the assessment raised as much money as the prior year.
If the Mayor and City Council then, in the course of the regular budget season, decided they wanted to raise more revenue from real estate taxes, they could simply increase the tax rate to the new higher amount.
Here’s the main section of the bill:
§ 8566. Limitation on tax increase after countywide reassessment in a city or county of the first class.
(a) General rule.-- In any year that IF a city of the first class or county of the first class conducts, respectively, a citywide or countywide revision of assessment by revaluing the properties and applies an established predetermined ratio or changes its assessment base by applying a change in the predetermined ratio, a taxing district levying its real estate taxes on the revised assessment roll FOR THE FIRST TIME shall reduce its tax rate, if necessary, so that the total amount of taxes levied for that year against the real properties contained in the duplicate does not exceed the total amount it levied on the properties in the preceding year. The tax rate shall be fixed at a figure that accomplishes this purpose.
(b) Final tax rate.--After fixing a tax rate under subsection (a), a taxing district may, by a separate and specific vote OF THE GOVERNING BODY , establish a final tax rate for the year in which the reassessment is conducted to levy its real estate taxes on the revised assessment. The tax rate under this subsection shall be fixed at a figure which limits the total amount of taxes levied for the year against the real properties contained in the duplicate for the preceding year to no more than 10% greater than the total amount it levied on the properties the preceding year, notwithstanding the increased valuations of the properties under the revised assessment.
One the one hand, there’s a certain appeal to this idea as a possible way to clarify to voters what is actually happening during reassessments, and build political support for regular and accurate real estate assessments—something that’s come under attack from a few different Council members in the last term, and is likely going to come up again. Revenue-neutrality is also the rule everywhere else in Pennsylvania.
At the moment, voters don’t really seem to appreciate the difference between an assessment increase (which happens because a property’s real value went up) and a tax increase (Council voted to increase the tax rate.) Currently it feels to people like there are just two instances of tax increase per year, and the politics of accurately assessments might be a little different if people could see that assessment is a revenue-neutral process, and different from the decision to raise tax rates or not.
At the same time, citywide revenue-neutrality does not mean that owners of real estate in appreciating areas won’t continue to see assessment increases every year. Those happen because some neighborhoods really are increasing in market value every year, as seen in sale prices. That won’t really change if the citywide assessed value is capped.
But there are also some big downsides to it.Currently the budget keeps growing all the time, mostly due to economic growth, more jobs, and rising property values. The City budget is seeing healthy revenue collections, and consequently, Mayor Kenney and City Council have been able to increase funding for schools, public safety, pensions, resident services, and more.
That’s mostly been driven by growth in the wage tax and BIRT collections, but real estate taxes have been growing quickly too, and because none of these taxes are required to be revenue neutral from year to year, we keep getting more money. From the most recent PICA report:
If reassessments were required to be revenue-neutral, the Mayor and City Council could still raise as much as 10% more in property taxes each year, according to the bill, but they would need to take a vote to do it. Raising property taxes is always politically unpopular and would shine a brighter light on the Mayor and City Council’s role in voting on it.
What happens now is that, because the city raises net revenue through assessments, the proposed rate increases during budget season can be lower, and seem less dramatic. The unpopularity of having to vote for rate increases more often in order to keep raising real estate tax revenue at the current clip could mean that it will happen less often, and increase pressure on Council to seek out revenue from other sources.
For decades, Mayoral administrations have talked about, and made progress toward, a long-term tax shift that will reduce our emphasis on revenue from wage and business income and receipts taxes, and raise more from taxes on land and property, ideally with higher rates on commercial property. Philadelphia’s growing economy has meant land here has grown in value, and it could become the basis for funding more of our public services.
Economists generally agree that land and property taxes are some of the least economically-harmful taxes around, and it’s better to tax land values than other useful economic activity like work and investment, which we want more of. There are lots of good reasons to support this shift, but it gets harder to achieve if the property tax share of the city budget isn’t allowed to keep floating upward, and eventually creating the budgetary headroom to replace revenue from other taxes.
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