Penn economist pens report on Philly’s 10-year tax abatement

Philadelphia

A new report by Kevin C. Gillen, a senior research consultant at the Fels Institute of Government, adds to the debate over the future of Philadelphia’s 10-year tax abatement program.

The City of Philadelphia’s 10-year tax abatement program—among the most generous of its kind in the country—has been highly praised by proponents for creating the building boom in Center City over the last decade.

At the same time, the abatement is vilified by its critics who call it a tax giveaway to developers and wealthy condo owners who don’t do enough to promote the development of affordable housing in low-income neighborhoods. 

A new report by Kevin C. Gillen, a senior research consultant at the Fels Institute of Government and 2005 graduate of the Wharton School, adds to the debate over the future of the tax abatement program.

His study, “Philadelphia’s Ten-Year Property Tax Abatement: Updated Statistics on the Size and Distribution of Tax Abated Properties in Philadelphia,” comes as the city moves to reform its property tax system through new property assessments, known as the Actual Value Initiative, or AVI. 

Some local elected officials charge that the tax abatement primarily helps wealthy homeowners and developers. A bill currently before Philadelphia City Council would severely limit the real estate tax reduction. 

Gillen says there are two general criticisms. The first, which he calls “baseless,” is that the abatement is simply a tax giveaway that has had no effect on all the new development that has occurred in Center City since the program was implemented. The second criticism, which he says has merit, is that the abatement doesn’t promote a substantial amount of new housing for low or moderate income households.

The report shows that after the abatement was implemented in the early 2000s, there was an immediate surge in new construction in Philadelphia County—an uptick of 263 percent—followed by a 417 percent increase between 2002-2004.

Gillen, who serves on the board of the Building Industry Association of Philadelphia, contends that the abatement is necessary because of the city’s sky-high construction costs.

Tax Abatement

Gillen calls on the city to extend the length of the abatement from 10 to 20 years, and says the abatement is necessary because of the Philadelphia's New York City-like construction costs.

“Philadelphia has New York City construction costs, and Baltimore real estate prices,” he says.   

According to the report, the city has the fourth-highest construction costs of any city in the country—25 percent above the national average—with average house prices and rents in Philadelphia well below average prices and rents in other high-cost cities.

“The abatement helps Philadelphia bridge the gap between its high construction costs and low sales prices,” he says. “It raises the price a buyer is willing and able to pay for a home.”

The abatement has been credited with fueling construction and reviving areas of the city such as Fairmount, Graduate Hospital, and other neighborhoods surrounding Center City where new construction property owners pay taxes only on the land.

Gillen calls on the city to extend the length of the abatement from 10 to 20 years, and include the value of the land in the abated amount to encourage development of more low to moderate-income housing.

On Tuesday, June 18, Gillen will present his research at Penn’s hour-long Lightbulb Café lecture series at World Cafe Live, 3025 Walnut St.

The talk, which begins at 6 p.m., will be followed by an audience Q&A.

Originally published on June 6, 2013