Philly City Council to consider delaying tax abatement changes until 2024 and adding a new construction tax

Philadelphia City Council will consider delaying reductions to the 10-year tax abatement for three years, as well as adding a 1% tax on new construction that would fund antipoverty initiatives, according to sources familiar with the legislative proposals.

The moves would set up a renewed fight over whether Philadelphia should focus more on stimulating development or increasing its own revenue. Proponents of the controversial 10-year abatement say it creates jobs and helps long-term growth of the city’s tax base, while opponents say it costs the city millions of dollars per year in revenue and accelerates gentrification. And while advocates for a construction tax say it would fund affordable housing and other initiatives, developers warn it would stifle their industry.

Both bills have the support of Council President Darrell L. Clarke and are expected to be introduced Thursday. They are likely to set off a flurry of lobbying and negotiations as City Council continues to meet virtually during the coronavirus pandemic.

A source familiar with both bills said they will be introduced together in an effort to appease developers and the building trades unions, who oppose a tax on construction but have advocated for delaying the abatement changes since the pandemic throttled the industry.

Joe Grace, a spokesperson for Clarke, declined to comment on the legislation Wednesday but acknowledged that there would be “a significant announcement tomorrow concerning measures designed to enhance and improve the lives of a large number of Philadelphia residents.”

The tax, levied on the cost of construction, would generate at least $20 million per year, according to a source with knowledge of the plan. The city would then issue a $400 million bond to support programs such as affordable housing, rental assistance, workforce development, and investments in commercial corridors.

The construction industry successfully lobbied against a 2018 effort to implement a 1% tax on construction. The bill narrowly passed City Council and was then withdrawn in favor of a compromise with Mayor Jim Kenney, who is an ally of the building trades unions.

The new plan is similar to the 2018 bill and would take effect in July, according to a copy of the legislation obtained by The Inquirer.

The Kenney administration did not take a stance on the legislation Wednesday. “We look forward to reviewing the proposals, and to further conversations with the Council President and all members,” a spokesperson said in an email.

The mayor is close with John “Johnny Doc” Dougherty, who wrote a fiery letter to City Council in 2018 as it considered the construction tax. The tax ultimately passed, 9-8, and the compromise was reached as Kenney threatened to veto the bill. That deal involved contributing tax revenue from expiring tax abatements into the city’s Housing Trust Fund to pay for affordable housing initiatives.

But Council has since gained new members and become more progressive, making it more difficult for developers and the building trades to exert their influence.

Nonetheless, the construction industry began to speak out against the proposed tax Wednesday before the bills were even officially introduced. Ben Connors, president and CEO of the General Building Contractors Association, called it a “shortsighted” proposal given the economic impact of COVID-19.

“Hotels, retail, and offices are not guaranteed to come back to the city, but it is guaranteed that if we tax new construction and renovation in those sectors when they are already suffering that it will only further delay their recovery," Connors said. “What the city needs most to maintain services for our residents is for the commercial tax base to come back.”

City Council has made antipoverty efforts a top priority. But new programs would be difficult to implement without additional tax revenue, especially after the coronavirus pandemic left the city with a $750 million budget hole.

A reduction in the controversial 10-year tax abatement for new residential construction, approved last year, is set to take effect in January. The legislation set to be introduced Thursday by Councilmember Bobby Henon would delay its implementation date until the start of 2024.

» READ MORE: Philly developers propose thousands of new apartments in a rush to beat the tax abatement change

Developers have been rushing to propose construction projects ahead of the changes, which would exempt 100% of the value of new construction from property taxes the first year after it is complete, followed by a 10% reduction in the tax break every year after that.

As of Oct. 1, the city had received only 500 applications for new residential construction, city spokesperson Mike Dunn said, compared with 2,800 applications processed last year.

Despite objections from progressive activists last year, the tax abatement for commercial development remains intact, exempting 100% of new value from taxes for a full decade.

Delaying changes to the residential abatement could face opposition from those activists as well as progressive City Council members who have advocated for its total elimination. Councilmember Kendra Brooks introduced a bill in June that would entirely eliminate the 10-year abatement for both residential and commercial construction.

Brooks spoke out against the abatement Wednesday, and said it prioritizes developers “over the needs of Black and brown working families.”

”As we fight against economic uncertainty and the COVID-19 pandemic, ending the abatement isn’t radical," she added. “It’s simply asking everyone to pay their fair share at a time when Philly needs it the most.”