Philly Needs Tax Plan to Encourage Entrepreneurs, Homeowners

I will testify before City Council next week on Mayor Nutter’s proposed legislation to implement a back-door tax increase by setting real estate tax rates before we understand how property values will change under the Actual Value Initiative. Here’s what I plan to tell them.

We need to be doing all we can to establish fairness, legitimacy and legality in real estate taxation. Instead, Mayor Nutter’s proposed legislation would make permanent two years of “temporary” tax increases, raise another $90 million in taxes for the school district, and do it all without us understanding how these changes will affect Philadelphia’s homeowners. This backward approach could be devastating to your constituents.

It is important to put these proposed changes into context and understand how the need for additional tax revenues and the need for real estate tax fairness fit into larger issues of taxation in Philadelphia.

In 2003, I served on the voter-established Tax Reform Commission, where I chaired the “Real Estate Tax Working Group.” The Commission firmly established three major themes of tax reform in Philadelphia: Philadelphia taxes too much, we tax the wrong stuff, and we tax unfairly. Compared to other cities and surrounding jurisdictions, our tax burden is higher, which encourages some firms and some families to choose to locate elsewhere. While most other local governments generate most of their revenues from taxes on the value of real estate, Philadelphia’s high taxes on those earning wages and operating businesses puts the City at a competitive disadvantage. Finally, when it comes to real estate taxation, similar properties are not being treated similarly, so some pay too much while others do not pay their fair share.

The Tax Reform Commission recommended that Philadelphia reduce the wage tax, phase out the business privilege tax, and make real estate taxation fair and understandable.

Those recommendations fit together to preserve and expand city revenue. If high and unproductive taxes are harming our economy, then reduced and reformed taxes should help attract and retain neighbors and employers, which should generate the tax dollars necessary to keep our budget whole.

Most specifically, if we can reduce the cost of doing business in the city, we can increase the value of commercial properties—and if our system of real estate taxation works in a fair way, then the City will capture that increased value with increased real estate tax revenues. If our system of real estate taxation works—fairly and legally—then reducing and reforming our taxes on business and wage earners makes great economic sense. More important, such a plan generates the budgetary resources necessary to preserve and expand city services.

The Tax Reform Commission determined that fixing real estate taxation must be about resetting base values and working to ensure that there is a smooth transition from the unfair system to the fair system. We established that values should be set first, before tax rates are determined, to ensure that City Council affirmatively votes to establish tax rates after they understand how those tax rates would affect their constituents. Doing it any other way will result in confusion and could unnecessarily and unintentionally result in certain homeowners enduring increases in their tax bills by hundreds of percent.

As to the idea that the City missed out on growth in real estate values and that we must somehow make up for lost revenue in implementing the Actual Value Initiative, that is preposterous. Real estate tax revenue has increased consistently in recent years. Haphazard and spot assessments as well as what insiders describe to me as “fundraiser” assessments have increased real estate tax revenues. When this Council determined that such growth was insufficient, it increased the real estate tax rates to generate even more revenues. The City has not missed out on revenues, it has increased revenues when it wanted them. Of course, while it did so, owners of over-assessed properties were victimized, having to pay much too much compared to under-assessed property owners.

As to the notion that we cannot implement a revenue-neutral reassessment because the School District requires additional revenues, this is a case that the District must make to the public. Even if we agree that more money is necessary, there is no imperative that it must come from the real estate tax. Council must determine what the District should receive and how those funds should be generated. Clearly, the City could change other spending priorities, increase other revenue streams, or more aggressively collect what is owed from current tax levies.

Council may get one chance in this generation to fix decades of inequity in real estate taxation. I urge you to do it right. Reject the cart-before-the-horse approach proposed by the administration. Instead, begin the process to educate property owners about the coming transition to a fair system, carefully scrutinize the actual values put forth by the assessment bureaucracy to be sure they are legitimate, and consider which policies are necessary to ensure a smooth transition to “actual value.” Only then should Council consider a new and revenue-neutral tax rate.

If Council takes these steps, then not only will we establish a fair system of real estate taxation, we will have a legitimate system to capture the growth in property values that should occur when tax reforms are implemented in future years.

We’ll see what City Council has to say next week.