Pew's Property Tax Report and the Politics of Tax Reform

(Image: Pew)

The City’s Office of Property Assessment has started mailing out official property assessments to property owners last week, after releasing initial estimates of the changes on Atlas a few months ago. 

This is the first citywide property reassessment OPA has conducted in three years, so the new assessed values reflect three years of real estate appreciation during a period when available home inventory has tightened across the city and region, and average home prices have risen in tandem by quite a lot. This is part of a national trend of tightening home inventory, which Philadelphia has outperformed in some ways, but it's still taken a toll here, especially in the broader region.

While Philadelphia builders pulled record numbers of housing permits in 2020 and 2021 in anticipation of the 10-year tax abatement being scaled down, most of these were for rental units, and there were actually relatively few single-family homes permitted throughout the city. In 2021, the rate of single-family home permitting averaged out to about 12 homes per Council District per month—far from the amount needed to match inventory to housing demand.

In a narrow sense, the tight supply of housing has been a benefit to property owners by increasing their net worth, but in a broader sense, it’s reduced people’s ability to move and sell their homes when they want to, and the shortage has sent assessed values soaring from a real estate tax perspective.

This is a tricky problem for city policymakers because the general trend of more net new development and appreciating home values could lead to a positive outcome where real estate tax revenue makes up a permanently larger share of the city’s budget, and thereby opens up the fiscal headroom to shrink the share of city revenues coming from the wage tax and Business Income and Receipts Taxes (BIRT). 

Pew notes that Philadelphia has seen property tax revenues growing at a faster rate than others, and making up a larger share of the budget since 2010, partly as a result of appreciating assets, and partly as a result of the growing base of properties from which to collect taxes, thanks to all the new building construction. This is cold comfort to owners experiencing sticker shock from the new assessments, but without all of those new buildings, their tax bills could've gone up by more.

Pew also observes Philadelphia homeowners have it better in this regard than residents in other big cities do. Philadelphia actually raises a much lower share of city revenue from property taxes than most of our peer cities do, making homeownership more of a relative bargain here. 

That doesn’t make property taxes more politically palatable though, according to a January 2022 survey by Pew, finding that raising the property tax rate is horrendously unpopular, most of all with key voting constituencies like seniors and homeowners. Voters consider it less fair than other kinds of taxes as well.

Part of the unpopularity though derives from the fact that the overall tax burden on city residents is among the highest of our peer cities, which is extra problematic considering an increase in housing wealth doesn't automatically mean property owners have the increased earnings or liquidity to pay more. Philadelphia has an unusually high wage tax, with a flat rate structure required under the Pennsylvania Constitution, and the city also levies myriad other taxes that, all together, take a larger bite out of the average person’s income than is the case in many other big U.S. cities, or nearby cities and towns in the region that people might choose to live in instead.

Even if that were not the case, the property tax would probably still be pretty unpopular with voters. But state and local policymakers have taken some effective actions that have successfully softened the impact of rising assessments on low-income residents, seniors, and long-time owner occupants that are worth acknowledging and building on.

At the same time, it is possible to have too much of a good thing, and as the Pew report notes, the liberal application of these various exemptions has been to greatly increase the amount of untaxed property value out there. According to Pew, about 32% of the city's property value, worth about $54.5 billion is exempt from property taxes for various reasons. Showcasing the power of anti-property-tax politics, City Council passed some large expansions of the exemptions on the books, costing the city and school district a combined total of about $105 million a year, with almost no discussion about the pricetag. 

(Source: School District of Philadelphia)

In future years, the share of city revenue from property taxes should continue to grow as more properties’ 10-year tax abatements expire, especially when the buildings built during the relative construction boom over the last 5 years eventually join the city’s tax rolls. With any luck, this should give the next few city administrations some more latitude to pursue a shift in the tax mix away from the excessive reliance on wage taxes and BIRT to fund the government, and toward land and property without having to increase the property tax rate on residential homeowners.

It requires the next Mayor, however, to continue to carry the torch for Actual Value reassessment as a concept, and not give in to the various ways that Councilmembers have proposed in the recent past to try and make real estate assessments less accurate

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  • Jon Geeting
    published this page in Blog 2022-09-15 17:30:31 -0400