Philadelphia City Council advances bill to reduce controversial 10-year tax abatement

City Council took a step Tuesday toward changing Philadelphia’s controversial 10-year tax abatement policy for the first time since its enactment two decades ago, with a vote to advance a bill that would reduce the tax break for new residential construction.

The legislation will now await a final vote before Council, which has just two meetings scheduled before the end of the year. Changes could still be made to the bill, as lobbying efforts inside City Hall will continue, but a unanimous vote Tuesday evening showed that Council is likely to pass the legislation in its current form.

The vote capped a nearly four-hour hearing, during which nearly two dozen people testified about the legislation. Many urged Council to be more bold and curtail the abatement even further, arguing that two decades is long enough for the tax break. Others warned that scaling it back could dampen development, putting the local economy at risk at a time when a slowdown in the real estate market is expected soon.

The wide-ranging viewpoints underscored how much of a lightning rod the abatement has become. Proponents have argued that it’s been largely responsible for the renaissance that parts of Philadelphia have experienced, saying it has attracted residents and made it financially possible for builders to get projects off the ground. People who oppose the abatement say it accelerates gentrification and comes at the expense of public schools, which rely on property tax dollars for parts of their budget.

At times during the hearing, residents who testified became emotional while speaking about the need for funding to repair Philadelphia’s public schools. Attendees who crowded Council’s chambers hoisted signs and cheered and booed during testimony.

At least one person testified that they would push for greater reform to the abatement when a new Council begins its sessions in January.

Council President Darrell L. Clarke said after the vote that Council will “continue to [have] conversations” about the abatement. Clarke acknowledged during testimony Tuesday that some people “don’t think we’re going far enough,” but emphasized the need to find “a reasonable approach.”

“We’ve got to have equity,” Clarke said. “This has to change.”

The bill would reduce the tax break for residential construction by 10 percentage points each year it is in effect, offering a 100% tax break on construction for the first year and 90% in the second year, reducing to 10% in the 10th and final year.

“The current bill, while perhaps better than nothing, is woefully inadequate as a means of addressing the problem,” Lawncrest resident Ron Whitehorne told Council. “We want an end to the abatement.”

For the last two weeks, members of Philadelphia’s development industry took meetings with Council members and circulated amendments that would phase the abatement down more slowly and delay any changes from taking effect until 2021.

But their lobbying efforts did not sway Council members Tuesday.

“It’s a sad day,” Jim Maransky, president of the Building Industry Association, said after the hearing.

“So much [of this] is misconception,” he said. “No one really understands how much this affects projects and how many projects will get built.”

Maransky, who warned Council during Tuesday’s hearing that the legislation “could have a major effect on the market and spin real estate into a recession,” said the development industry will try to push for amendments to the bill before the full Council vote. He emphasized that if the legislation’s implementation is not delayed, it could “kill a bunch of projects in the pipeline.”

Mayor Jim Kenney has been a supporter of the abatement but has said he would sign a bill to change it if Council passed one.

Kenney’s chief of staff, Jim Engler, told Council Tuesday that the administration remains concerned about long-term revenue loss due to a drop in construction projects if the abatement is changed. But, he added, “we understand the concerns of residents that view the current abatement structure as unfair.”

The tax abatement was adopted nearly 20 years ago to spur growth in Philadelphia after decades of decline. In its current form, the abatement eliminates all real estate taxes on the value of new construction or improvements for 10 years.

Property owners still pay taxes on the value of the land underneath their buildings.

» READ MORE: Philly City Council is about to see some big changes

After the vote, Clarke said that the legislation he proposed grew out of previous efforts to amend the abatement, including bills introduced this year by three of his colleagues.

“There was a meeting earlier in the year when we talked about those bills, and the hope was that we could get a consensus bill that would be supported by nine members of Council,” he said.

Clarke’s proposed legislation would have no impact on the abatement for rehabilitation of residences or commercial construction; those projects would continue to receive 100% tax breaks on the value of new buildings or improvements to existing buildings for a decade.

Despite overwhelming opposition by many developers, Clarke’s bill was supported by some in the real estate community. Both the Women’s Community Revitalization Project and the Philadelphia Association of Community Development Corporations testified in support of the legislation.

“We know it’s time for Philadelphia to address the harsh impacts that development — specifically, market-rate development — has had on neighborhood affordability,” said Christi Clark, organizing director for the Women’s Community Revitalization Project. “And [to] talk about displacement that’s affecting too many families, specifically black and brown families.”

Council also voted Tuesday to advance a bill increasing the city’s homestead exemption, which offers a tax break on owner-occupied homes. That bill would increase the amount of value that can be exempt from taxes from $45,000 to $50,000, which would increase homeowners’ annual tax breaks from $630 to $700 under the city’s current real estate tax rate.

The Kenney administration asked Council to hold off on passing the bill so it could be considered as part of next year’s budget negotiations. But Council members said an increase was needed in the homestead exemption to relieve homeowners from rising property assessments.