Michael Nutter’s Back-Door Tax Increase

In preparation to release the city’s Fiscal Year 2013 budget, Mayor Nutter’s press secretary proudly declared that after four straight years of raising taxes, the Mayor would not be reaching into our wallets this year. “The mayor’s view is that he has no intention of requesting any kind of a tax increase in support of the fiscal 2013 budget that will be part of his budget address next week,” he pronounced. But, the “no-tax-increase” pledge is baloney. What is worse, the Mayor’s proposed back-door tax increase could generate such opposition that it will undermine the critical efforts to make Philadelphia real estate taxation fair and accurate.

Philadelphians—who already pay an excessively high tax burden—have seen taxes increase in each of the past four years. In 2008, an increase to the Parking Tax generated revenues that were supposed to go toward spending on parks and street repairs. (To be fair, the city also reduced the Wage and Business Privilege Tax rates that year as part of the long-lost tax-reduction program initiated more than a decade before.) In 2009, after the economic collapse, the city enacted a “temporary” Sales Tax increase (and also suspended that tax-reduction program). In 2010, the city enacted a “temporary” increase to the Real Estate Tax. In 2011, after declaring that the budget situation had stabilized and that there would be no need for tax increases or spending cuts, Mayor Nutter pushed for another “temporary” increase to the Real Estate Tax to plug gaping holes in the School District’s budget.

Now it is 2012 and (at least according to current law) those “temporary” Real Estate Tax increases should go away at the end of our fiscal year in June. This has forced the city’s number crunchers to look to the effort to generate accurate real estate assessments as a way to preserve those tax revenues. Yet the city plans to not only generate the same revenue those “temporary” taxes brought, Mayor Nutter wants about $100 million more in Real Estate Tax revenues for next year. That’s a tax increase on top of those “temporary” tax increases made permanent.

Still, the system of real estate assessment is broken and must be fixed and the Nutter Administration has been pushing to complete what it calls the “Actual Value Initiative” to get values right and make the system fair. That is good because Philadelphia’s system of property assessment for real estate taxation is totally fraudulent. Some property owners are overvalued and pay too much in taxes while others are undervalued and do not pay their fair share.

For years, the city failed to apply accurate and fair values to properties in large part because of political opposition to the fact that, some will see substantial increases to their tax bills. There are policies which could protect vulnerable homeowners and prevent Philadelphians from being “taxed out of their homes,” but there is no way around the fact that fixing the system means telling many that they will have to pay substantially more.

Unfortunately, the Nutter Administration has painted itself into a budget corner. Its need for increased revenues has changed the focus of the effort to establish accurate property values. What was once a much-needed program to promote fairness has become a revenue generator.

Making the system fair can be done in a way that brings in the same amount of revenue as before, which would make the fix “revenue-neutral” and all about fairness. It can be done in a way that would reduce Real Estate Tax revenues, which would help our already-overburdened taxpayers. Or, it can be done in a way that would increase Real Estate Tax revenues, which would be a tax increase.

As a candidate for mayor, Michael Nutter declared he would “support a revenue-neutral move toward Full Value Assessment by the BRT for the purposes of the Real Property Tax matched by a proportional reduction in the millage rate by City Council.” He wanted the move to fix real estate tax values to be about fairness then. Now, it’s much more about generating more revenues.

Whatever happened to “no intention of requesting any kind of a tax increase in support of the fiscal 2013 budget?” Humbug. Balderdash. Baloney.

But, my fear is not that Philadelphians might see this tax increase and lose faith in their ability to ever trust their elected officials again. My bigger fear is that reaching to collect extra revenues, the Nutter Administration might generate enough opposition to defeat the effort to properly value Philadelphia real estate.

Back when he was the head of the Pennsylvania Intergovernmental Cooperation Authority, Nutter’s current Finance Director agreed with this view and wrote: “The city should not use the increase in assessed values to increase property tax revenues unless those increased revenues are used to reduce other taxes. Any attempt to use the reassessment to increase the overall amount of taxes collected by the city would likely increase opposition to an essential change to how property taxes are levied in Philadelphia.”

Unfortunately, the Finance Director either forgot his own wise counsel or the city’s need for revenue has convinced him that the revenue was more important than the risk to the program to implement fair assessments.

It is important to reset values to establish an accurate base that could then grow into the future as the value of city property increases. Other jurisdictions that have done this successfully have established honest values first before discussing tax rates. If we do the same here, we can set accurate values and then have a full and robust debate about what tax rate to apply to those values and which policies we must enact to protect vulnerable homeowners from being taxed out of their homes. It is completely illegitimate to set revenue goals and tax rates before values are established.

If you agree, you should call on City Council members to ensure that we set values for tax purposes first before we talk about tax rates and tax policies. We need to trust that the Actual Value Initiative will be about fairness because if we cannot, we may never fix this broken system and be stuck with nothing but baloney from City Hall.