This post is part of a series.

This is the second post in my research on taxes. In the last post, I covered income taxes, and now I’ll take a closer look at property taxes.

On the surface, property taxes in Philadelphia are quite simple. Anybody who owns a taxable property in Philadelphia must pay 1.3998% of the assessed value every year. The most common case is for homeownership. However, there are lots of caveats that have a large impact for different populations.

One of the biggest complications is what to value a property at (A report from the Pew Charitable Trusts in late-2012 on property tax overhaul sums up this issue very well). Reports have found that many of Philadelphia’s properties have not been reassessed in decades, since Pennsylvania is one of three states that do not require regular reassessments. The Office of Property Assessment is responsible for assessing the value of properties in the city for taxation. As of 2013, it has been tasked with enacting Philadelphia’s Actual Value Initiative, which aims to bring assessed property values in line with market values. This initiative began after a long history of dissatisfaction with Philadelphia’s property tax process. The OPA replaced the Board of Revision of Taxes, which was similarly tasked with adjusting property tax assessments beginning in 1983, but was dissolved in 2010 after being mired in mismanagement and corruption claims.

Before 2013, Philadelphia’s properties had the following assessment process:

  1. The City determines the “certified market value” of a property, which is typically far below the market value.
  2. The assessed value is determined by taking 32% of the certified market value.
  3. The tax rate is applied to the assessed value.

Under the new system, the certified market value is supposed to reflect the real market value, and the assessed value is 100% of the certified market value, rather than 32%. Since this would greatly increase tax burdens for most people, City Council agreed to lower the property tax rate simultaneously, from 9.771% to 1.34%, and then to its current rate.

However, this leads to the second issue. Many people have been critical of the accuracy of the City’s new assessments—so much so, that the City has issued a moratorium on new assessments until problems with the assessment and appeal process are sorted out. Apparently, the City has attempted to use large-scale appraisal software, which has produced some odd results for many people. Additionally, the appraisal process has been shifting tax burden to the land that homes occupy, which raises tax burdens on homes that have various forms of abatements.

A third issue is that property values can and have been changing dramatically, particularly in gentrifying neighborhoods adjacent to Center City. Many people’s homes went from an assessed value of just $40,000 to over $300,000 in one fell swoop. This has obvious implications for the affordability of a neighborhood for long-time homeowners who have lower incomes, since their property taxes would spike. Here is a map of median home value in 2009 and in 2017 (well, the five-year average of median values at those points). I have split it into equal chunks of $50,000 until $300,000 to make the two timeframes comparable.

Clearly, the darker regions have expanded. A subtler change on these maps that has a big impact on people’s lives is the increase from the lowest value categories to higher ones. For instance, notice that many homes in North Philadelphia went from the category under $50,000 to the $50,000-$150,000 ranges. So, yes, gentrifying areas of extreme property values have expanded—but it is also critical to note the much larger areas of the city where property values doubled or even tripled from previously very low values.

Finally, there are the various forms of discounts and abatements. First, here are the discounts:

  • Tax payers receive a whopping 1% discount on the 1.3998% tax rate if they pay at least a month early, presumably in an effort to encourage people to actually pay their taxes.
  • Long-time Owner Occupants Program (LOOP)
    • A tax abatement for homeowners whose homes have an assessed value that at least tripled in one year.
    • The assessed value of the home is locked in at the value of the tripled assessment from one year to the next.
    • Homeowners must have lived in their home for at least 10 years.
    • Homeowners must be current on their tax obligations or have an established payment agreement.
    • Homeowners cannot participate in the Homestead Exemption program simultaneously.
    • The household must fall within income guidelines.
  • Homestead Exemption
    • A tax abatement for homeowners who occupy their home (there are no other requirements).
    • This program reduces the assessed value of the home by $40,000 before applying the tax rate.
  • Disabled Veteran Real Estate Tax Exemption
    • This program is for veterans or their surviving spouses who have a 100% service-connected disability.
    • The household must meet income guidelines.
    • If eligible, the household is exempt from 100% of real estate taxes.
  • Catastrophic Loss Reassessment
    • Property owners whose property has suffered a natural catastrophe that reduces the value of the property by 50% or more can apply to have their property reassessed.
  • Nonprofit Tax Exemption
    • If the owner of a property is a registered nonprofit organization, it can apply to be 100% exempt from property taxes.

Next, here are the abatements. These are the more controversial tax breaks intended to encourage private development:

  • Development Abatement for New or Improved Residential Properties
    • This is a state law that gives a 100% tax abatement for up to 30 months (or until the property is sold or leased).
    • This applies to new construction for residential purposes, improvements to existing unoccupied residential dwellings, or improvements to existing structures for conversion to residential dwellings.
  • Rehab Construction for Residential Properties
    • This is a city law that gives a 100% tax abatement for  ten years.
    • This applies to improvements to existing residential properties.
  • Rehab and New Construction for Commercial and Industrial Properties
    • This is a city law that gives a 100% tax abatement for  ten years.
    • This applies to new construction or improvements to deteriorated industrial, commercial, or other business properties.
  • New Construction for Residential Properties
    • This is a city law that gives a 100% tax abatement for ten years.
    • This applies to new construction of residential properties.

Finally, there are the Real Estate Non-utilization and Real Estate Transfer taxes. The first is 5% of the assessed value of vacant real estate, and the second is 3.278% of the value of real estate transferred (i.e. when you buy or sell property). The state also has a real estate transfer tax of 1%, so Philadelphians will pay a total of 4.278% on the value of real estate bought or sold.

This is all not even considering the generous federal income tax deductions available for homeowners. Individual homeowners can deduct 100% of mortgage interest paid for mortgages up to $750,000. Also, property owners can deduct property taxes paid to local governments, which contributes to the up to $10,000 deduction available for local and state taxes paid. However, if a household claims the standard deduction, instead of itemized deductions, this wouldn’t have an effect. I cover this in my prior post on income taxes.

Conclusion

Philadelphia’s property taxes are more complicated than they seem. Through the various tax relief programs, and because of the relatively low tax rate, Philadelphia’s public policy heavily favors homeowners—especially lower-income, elderly, or veteran, and long-time homeowners who meet income guidelines. Perhaps this is why Philadelphia’s homeownership rate remains above 50%, which is one of the highest in the country, and this is despite Philadelphia’s high poverty rate of more than 25% (see earlier posts in this series for this data). These programs seem to be a strong framework for protecting these long-time homeowners who could otherwise not afford tax increases, and they are likely a major force keeping homeownership affordable.

However, Philadelphia’s tax policy is also generous to just about everybody. The various tax abatements do not differentiate what type of housing is being built, or for which income groups. Likewise, the tax abatements for commercial purposes don’t take into account what types or sizes of businesses will occupy those spaces. So, while this is great for your mom-and-pop team of small-time developers seeking to renovate and flip a single property, it also greatly benefits large developers of any size, and large businesses of any size. Think of Comcast’s latest skyscraper, the million-dollar homes being built in and near Center City, or the large-scale developers like Ori Feibush, who are effectively redeveloping entire neighborhoods. None of these groups are paying a dime in property taxes for these projects, nor are the homeowners moving into their luxury homes.

Another thing to consider is that non-profits are tax-exempt. This is great for small nonprofits most of us would think of, but what about the universities? The University of Pennsylvania, for instance, is a registered nonprofit (which, by the way, recorded a net profit of $644 million in 2017). It is the largest private employer in the city. Almost all of the city’s educational institutions, like Temple and Drexel, are also not paying property taxes. Neither are most hospitals. Altogether, the Pew report referenced earlier mentions that 30% of the city’s property value is fully tax-exempt (as of 2011).

Many people would contend that tax breaks to encourage development and business operations in Philadelphia are always a good thing. Surely there is a reasonable argument to be made about using tax rates to encourage more economic activity in Philadelphia—but to what degree? We have to ask: who are these new homes being built for, and who are the new skyscrapers being built for? This wholesale system of tax abatements, in my opinion, clearly crosses that line, which is one major cause of a lack of revenue for city programs. This, in turn, exacerbates inequality and poverty.

Next, I will cover business taxes.