How Philadelphia finally changed the loved and loathed 10-year tax abatement

Colorful signs filled the gallery in Philadelphia City Council chambers this month, held up by longtime residents worried their neighborhoods are gentrifying too quickly and parents pleading for more money for schools.

“END IT," one sign said as lawmakers debated an almost two-decades-old tax break for new construction that has become a lightning rod for critics who say it contributes to economic inequality.

Developers also crowded the room, making their own argument: Changing Philadelphia’s 10-year tax abatement could plunge the city’s real estate market into a recession.

The debate wasn’t new. But for the first time since the 10-year abatement took effect, business interests were unable to keep calls for reform at bay. City Council unanimously gave final passage Thursday to legislation that will cut the value of the tax break roughly in half.

After years of failed attempts at change, the moment grew from a combination of political will, public pressure, rising property taxes, calls for more school funding, and an election in which many candidates voiced support for changing or eliminating the abatement.

“It’s the most momentum we’ve had in years, and I think we’ve been clear and united on the need for change that works for everybody,” said Councilwoman Helen Gym, a critic of the abatement.

The abatement eliminates taxes on the value of new construction and rehabilitation projects for a decade after they are built. The bill Council passed reduces the tax break for new residential construction by 10 percentage points each year. Mayor Jim Kenney has said he will sign the bill, which will take effect Dec. 31, 2020.

The real estate industry credits the abatement with revitalizing the city by incentivizing development and expanding the tax base over time. Opponents decry it as a tax break for the wealthy that accelerates gentrification and takes sorely needed money from city schools.

And while Kenney supports the abatement and is an ally of developers and building trade unions, his administration stayed in close touch with City Council about the issue as change seemed inevitable.

City Council President Darrell L. Clarke proposed one of the first changes to the abatement in 2008, before he was leading Council.

“Council members have heard complaints for years, but they are louder now," Clarke told The Inquirer at the time. “Everybody knows it’s not fair.”

But that bill, and others floated since, all failed to gain sufficient support.

The dynamics shifted as progressives gained influence in Philadelphia and Democratic politics generally took on a more populist tone.

Both the Kenney administration and City Controller Rebecca Rhynhart released studies about the abatement last year. And when City Council passed a 1% tax on all new construction — and then withdrew it in favor of a compromise with Kenney — Clarke signaled lawmakers would change the abatement instead.

Kenney said in March that he would prefer the abatement be left alone, but also that he would cooperate as Council worked toward changes. “There’s no sense in having that fight,” he said.

An Inquirer poll in April found 57% of voters said the abatement is bad for the city, while 25% called it good. And a majority of candidates in the crowded primary race for City Council said they would like to eliminate or change it.

The city’s Office of Property Assessment released new values for all properties in April, under which assessments — and therefore property taxes — would again increase for hundreds of thousands of homeowners.

Residents and Council members have said the abatement drives up home prices, resulting in assessment increases and tax hikes for long-term residents while owners of new homes enjoy tax breaks. Councilwoman María Quiñones-Sánchez said recently that the system creates an unfair dynamic of “new vs. long-term residents."

Seven bills were proposed during this City Council session to change or eliminate the abatement; Council took its summer recess without acting on any.

For a bill to be successful, Clarke said in an interview, members needed consensus “prior to us approaching the mayor about his support." So Clarke sat down with Gym, Councilman Allan Domb, and Councilwoman Cindy Bass, who had each separately proposed the seven bills. Clarke also commissioned a study by Econsult Solutions Inc. on the potential impact of various changes.

By August, Clarke was meeting with developers and other groups on both sides of the issue. He also talked with Kenney, and the administration’s finance and revenue departments worked with Council staff members throughout the fall.

As conversations continued behind the scenes, four newcomers won City Council seats in the November election, including Kendra Brooks of the Working Families Party, who campaigned on eliminating the abatement.

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

Two weeks after the election, Council was ready to introduce two bills that would change the abatement.

The real estate industry and the city’s building trade unions scrambled to kill one proposal, which would have capped the total property value that could be tax-exempt, hours before it was set to be introduced.

But the other bill had overwhelming support: 15 of the 17 Council members signed on as cosponsors.

“This day and this bill is long overdue,” Bass said as she introduced it.

Developers still said that the legislation seemed rushed — but also that they would prefer to compromise with the current City Council rather than wait until January, when a more liberal Council could push for more significant changes.

The real estate industry kept pushing to delay and reduce the impact of the abatement changes. The Kenney administration supported some of developers’ calls, asking Council to delay the legislation’s start date from July 2020 to July 2021.

And residents packed the room to urge Council to abolish the tax break entirely.

Council members met in small groups behind closed doors for about an hour between the hearing and vote. They returned and voted unanimously to advance the bill without any changes.

Clarke said Council simply needed to advance the legislation. With amendments, he said, “I’m not sure that would have happened.”

Developers and the building trades weren’t happy. Kenney administration officials had agreed internally that the abatement reduction itself was fair, an administration source said, but they had concerns about the implementation date.

Beyond potentially derailing projects that developers had planned for 2020, the city’s Department of Licenses and Inspections would have to prepare for an onslaught of building permits before July. And the Office of Property Assessment and Department of Revenue would need to plan for reducing exemptions each year and communicating the changes to taxpayers and mortgage lenders.

Officials feared six months was too short a timeline to prepare for the changes.

The outcome was still up in the air Thursday morning — the final day to amend legislation this year — when Kenney issued a threat to block it. He asked Council to delay the change at least six months, or he would block the legislation through a maneuver known as a “pocket veto,” in which the mayor allows legislation to expire before a newly elected Council takes office.

A few hours later, Council gave into the mayor’s demands, voting to amend the bill so it would take effect Dec. 31, 2020. Only Gym voted no on the amendment, calling it “embarrassing for our Mayor and City to freak out about tax subsidy reform while residents are being displaced and schools crumble.”

Residents who oppose the abatement again took signs to Thursday’s Council meeting and urged members to vote against the bill. They wanted the abatement eliminated entirely.

But after the unanimous vote for passage, change is now on the way. And more may follow: The new legislation requires the city to review the abatement every three years.

“This is significant, something that a lot of people want to see happen," Clarke said. "And a lot of people would have liked us to be more aggressive. Will the conversation end when the mayor signs this bill? Probably not.”

Staff writer Caitlin McCabe contributed to this article.