Philadelphia and the School District may owe $48 million after losing a property-tax case

The city and the School District of Philadelphia may have to repay $48 million in taxes plus interest after Mayor Jim Kenney’s administration this week lost its appeal of a 2019 case in which the city was found to have illegally targeted commercial real estate owners in its 2018 property assessment.

A panel of Commonwealth Court judges on Thursday upheld a lower court ruling that the city violated the state constitution’s uniformity clause, which requires all commercial and residential properties to be assessed and taxed through the same process, by targeting commercial properties in its 2018 assessment.

The city has not yet said whether it will attempt to appeal the case to the Pennsylvania Supreme Court. It has 30 days after Thursday’s decision to decide.

“While we are disappointed in the ruling, we are reviewing and assessing next steps,” Kenney spokesperson Kevin Lessard said in a statement.

The case, which involves about 700 properties ranging from neighborhood businesses to 1 Liberty Place, was notable due to its size and because the plaintiffs were not disputing the assessments themselves, but the way in which the assessments were conducted.

“This one is pretty much unique, and I’ve been doing this a long time,” said Peter Kelsen, a Blank Rome attorney who represented the owners of more than 250 of the properties involved. “I have not seen a constitutional challenge of this magnitude brought against the city in decades.”

If the city does not appeal, the ruling could significantly strain the cash-strapped School District as well as the city, which is struggling to rebound from the economic downturn caused by the coronavirus pandemic. The $48 million in disputed tax payments includes $14 million in city real estate tax revenue and $34 million in real estate and business-use and occupancy taxes for the district. They would also have to pay several million dollars in interest.

The opinion written by Judge Ellen Ceisler, a Philadelphia Democrat, does not affect the city’s assessments of the affected properties in the years since 2018, although some property owners are separately disputing those valuations.

Pennsylvania’s uniformity clause states that “taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax.” Like similar provisions in other states, the clause has long been viewed as an impediment to making local government tax bases more progressive by preventing certain types of owners — such as people who own businesses or more valuable properties — from being taxed at higher rates than others.

It also applies to the city’s wage tax, which, unlike the federal income tax, is the same rate for low-income earners as it is for CEOs. That means that when the city and School District need more money, they must increase taxes on the poorest Philadelphians at the same rate as on the wealthiest.

The law around the clause’s impact on commercial and residential properties is well established, especially after a 2017 Pennsylvania Supreme Court case in which the justices ruled that the Upper Merion School District could not contest county assessments of properties expressly because they were commercial.

That’s why many in the real estate community were surprised when the Kenney administration just one year later pursued a reassessment targeting commercial properties in Philadelphia. The city argued that those parcels had been systemically undervalued and that it would soon be reassessing residential properties as well.

“Why Philadelphia thought it could do this, especially after [the 2017 case], is beyond me,” said Lawrence J. Arem, a Klehr Harrison attorney representing the owners of hundreds of properties in the case. “I have no idea what they were thinking.”

Arem said he and Kelsen, whose firms together represented more than half of the property owners, offered to negotiate with the city over a potential settlement that may have saved city taxpayers millions of dollars and avoided years of litigation. The city declined, he said.

Usually, owners who believe taxing authorities overvalued an entire category of properties must prove their claim through complicated assessment data and circumstantial evidence. But the Philadelphia case appeared cut and dry, Arem and Kelsen said, because the Kenney administration spelled out its intention to only reassess commercial properties in a news release at the time.

“If they hadn’t put out this press release, it would have been a much harder case for us,” Arem said.