Exempt sites complicate tax fixes

The area around City Hall boasts many tax-paying enterprises, but nearly a third of the property throughout the city is exempt.
The area around City Hall boasts many tax-paying enterprises, but nearly a third of the property throughout the city is exempt. (RON TARVER / Staff)

In the last decade, the inventory of city properties on which no taxes are paid has nearly doubled.

Posted: September 17, 2012

Patrick Kerkstra

is a freelance journalist and former Inquirer staff writer

By now it's nearly the consensus view in City Hall: Philadelphia's wage and business taxes are too high, and should be reduced in order to create more jobs and lure more companies.

Doing that, though, is devilishly tricky. There are only two real options. The first is to cut spending, a politically unappealing choice in a city where public resources are already stretched thin.

The alternative - one that's been endorsed by a pair of tax commissions and a host of independent experts - is to change the tax mix. Charge less in business and wage taxes, and increase other taxes, principally the tax on real estate.

But there's a big and yet often overlooked problem with the approach: Nearly a third of the total value of property in Philadelphia is exempt from property taxes, a ratio that's been climbing in recent years and is among the highest of any big cities in the nation.

In the last decade, Philadelphia's inventory of tax-exempt property has nearly doubled, the explosive growth driven by the city's nonprofit sector and the popular 10-year real estate tax-abatement program.

There are now 41,074 parcels in the city that are fully or partially exempt from property taxes. The total value of this class of tax-exempt properties has grown by 54 percent over the same period, an Inquirer/PlanPhilly analysis of city property records has found.

How much do these tax-exempt properties cost the city and School District in potential revenue? A whopping $528 million in 2012.

On top of that total are the lost funds owed by Philadelphia's large class of long-term property-tax delinquents. There are more than 28,000 properties in Philadelphia that are a decade or more in arrears on their taxes, and there are few signs that those property owners will be making good on their debts in large numbers anytime soon.

Together, those facts raise some key questions. Can Philadelphia's tax-paying property owners realistically carry a dramatically larger share of the tax burden? Or will they buckle under the weight, and then bolt for the suburbs?

"We have to have that conversation," City Council President Darrell Clarke said in an interview. He worries that it won't be possible "without creating a significant challenge for our residential property owners. That's our problem."

Policy experts have good reasons for wanting to lower the city's wage and business taxes.

Philadelphia has lost about 28 percent of its jobs since 1970, according to federal labor statistics, and Wharton economist Robert Inman has shown conclusively that the city's high taxes on wage and business are responsible for many of those missing positions.

In 2009, a city task force on tax policy recommended a new tax mix "that relies less on mobile tax bases like jobs and businesses, and relies more on revenues from the City's assets that cannot be moved: its land and buildings."

"This is not simply a matter of lower taxes," said Paul Levy, executive director of the Center City District and a member of the task force. "It's shifting how we fund city government."

That shift is already under way, though perhaps not as fast as Levy and other business advocates would like.

Beginning in 2014, the city plans to resume planned wage-tax cuts that had been delayed when the recession hit. Last year, Council and Mayor Nutter enacted bills that will give tax breaks to small businesses beginning in 2013, and an across-the-board reduction on the gross-receipts tax that starts to phase in during 2015.

Meanwhile, Nutter and Council have raised property taxes three straight years. And in the five years since Nutter took office, the share of the city's total budget covered by real estate taxes has grown from 10.62 percent to 13.9 percent, a 31 percent increase.

Levy and a number of business leaders are now pressuring City Council and Nutter to do more, faster. In some ways, Philadelphia's abundance of tax-exempt property is evidence of what the city is doing well.

Philadelphia's thriving colleges, universities, and hospitals are creating jobs in large numbers and expanding their physical footprints. But these institutions, like all nonprofits, are exempt from property taxes. This is the case in every large city in America, but Philadelphia's nonprofit sector is the biggest in the country.

In 2006, nonprofits owned 10.8 percent of the total assessed value of property in Philadelphia. A survey of the 30 other largest cities that year by the Chronicle of Philanthropy found that Boston had the next-highest nonprofit exemption rate, with 8.4 percent.

And yet it's difficult to make the case that Philadelphia is actually worse off because of its abundance of big nonprofits.

Consider the eastern bank of the Schuylkill, where the University of Pennsylvania and Children's Hospital of Philadelphia have recently acquired tracts of land.

Before they were purchased by nonprofits, those underdeveloped parcels paid taxes totaling $112,307 a year. Now they pay nothing. And yet the economic activity Children's Hospital and Penn will create on these parcels seems more than worth the trade-off: construction jobs, research positions, shops and restaurants that will cater to these new facilities, and so on.

But the city and schools nonetheless feel the pinch. Citywide, property owned by hospitals and institutions of learning has an assessed value of $1.13 billion, enough to generate $107 million in annual property taxes. If, that is, the parcels were not exempt.

The city used to collect as much as $9 million a year from nonprofits such as Penn in the form of PILOTs, for Payment In Lieu of Taxes. But in 1997, state law changed, and cities like Philadelphia lost their leverage to demand PILOTs. Penn quit paying, and so did almost everyone else.

Their justification was simple enough. Universities like Penn make major contributions to the city through economic development, public services like a campus/community police force, subsidies to a local public school, and the redevelopment of huge swaths of property, some of which is leased to commercial enterprises that do pay taxes.

In these lean times, however, that may not be enough for City Hall.

In May, a new state Supreme Court ruling was issued that appears to put municipalities back into a strong position to demand that big nonprofits pay up, or face expensive litigation. The Nutter administration hasn't moved one way or the other yet, but is "examining its policy" in light of the ruling, administration spokesman Mark McDonald said.

But the most explosive growth in Philadelphia's inventory of tax-exempt property has been in the category of abatements: time-limited tax breaks designed to make it less expensive for developers to build.

Twelve years ago, abatements accounted for only a sliver of the total property value in the city - about $110 million. Today, tax-abated property is worth $1.19 billion, and the annual forfeited taxes on those parcels tops $112 million.

Advocates of the abatement program contend that without the tax break, there would have been far less development in Philadelphia during the last 12 years. Still, there's little doubt that, whatever their long-term benefits, abatements are a short-term blow to the property tax base. And indeed there are a number of signs that City Hall may soon scale the program back.

Clarke, who has tried and failed before to reduce the abatement benefit, is now Council president and better positioned to push his agenda. And Nutter, a longtime abatement advocate, appears to be having second thoughts.

"We are . . . looking at the city's experience with tax abatements in connection with a broader discussion of the current mix of taxes," McDonald wrote. "While it's clear that abatements have spurred economic development for more than a decade, adjustments to our current law may be considered when the real estate market gains strength."

Right now, however, Philadelphia has the nation's most generous property-tax abatement program, the weakest property-tax collection system, and an astronomically high rate of tax-exempt property.

One or more of those conditions will likely have to change if real estate is to be the foundation of Philadelphia's financial future.

"It's really hard to imagine shifting all or even most of the business- and wage-tax burden onto 60-something percent of the property owners," at-large City Councilman Bill Green said. "It's probably not politically possible."

About This Article

Patrick Kerkstra's article is part of a continuing partnership between The Inquirer and PlanPhilly. Since August 2011, that effort has produced a series of stories on the tax-delinquency crisis in Philadelphia. PlanPhilly.com is an independent news-gathering entity covering the "built environment." It is affiliated with Penn Praxis, the clinical arm of the School of Design at the University of Pennsylvania.

Chat live with Patrick Kerkstra at 1 p.m. Monday at www.philly.com .

E-mail Patrick Kerkstra at Patrick@PatrickKerkstra.com or follow him on Twitter @pkerkstra.

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