• Philadelphia Tax Abatement

    Help keep this abatement in effect as it is available to EVERYONE. It promotes new construction, jobs, and an expanded tax base.

    How Can I Help?

What is the 10 Year Tax Abatement?

Simply put: if you make physical improvements to a piece of real estate in Philadelphia, you don’t have to pay additional taxes on the value of those improvements for ten years. For example, if you remodel your kitchen, and the City’s assessors determine that this remodel increases the value of your home by $25,000, you don’t pay taxes on that $25,000 until after ten years.

For new construction, the benefit can be quite substantial. Since a structure typically represents 80-90% of the property’s total value (with land representing the remaining 10-20%), the entire structure represents an improvement to the property. As such, the owner of a newly built and abated property only pays taxes on the value of the land for the first ten years after the property has been developed. Consequently, their tax bill is only 10-20% of what it would be otherwise; a significant break.

While critics of the Abatement like to portray this break as unfair, they ignore the fact that the Abatement encourages new construction and rehabilitation of properties in many Philadelphia neighborhoods. The Abatement has worked to revitalize communities, provide well-paying construction jobs, attract and retain residents, attract home- and business-owners to the city of Philadelphia, and reduce development costs for commercial and residential projects.

What? I’m confused.
Can you explain how this affects regular people?

Sure, let’s use our aforementioned example of a household that remodels their kitchen:
A couple in Philadelphia owns a home currently assessed as being worth $150,000. They do an extensive remodel of their kitchen. The City’s assessors determine that this remodel increased the value of their home by $25,000. So, their home is now assessed at $175,000.

However, with an Abatement, that additional $25,000 is not taxed for ten years after the reassessment. So, they are still taxed as if their home is only worth $150,000 and their tax bill remains the same. Over the ten-year life of the Abatement, their tax bill can still increase if other components of their property are determined to have increased in value; e.g. their neighborhood becomes more desirable so their land value goes up1. But, even if the value of their remodeled kitchen goes up, they still will not pay taxes on the value of that remodel until after ten years.

1 It's also possible that their tax bill goes up if the City increases the property tax rate during the life of the Abatement, but the Abated value of their improvements would still remain untaxed.

Who is eligible for the Tax Abatement?

All property owners in Philadelphia are eligible for the Tax Abatement. There are three criteria you must meet to obtain an Abatement:

  1. Complete an application for an Abatement on the website of the City’s Office of Property Assessment.

  2. Present an approved building permit to OPA that has been verified by L&I2.

  3. Be current on your property taxes; i.e. not delinquent.

Unfortunately, there is a widespread mis-perception that the Abatement is some specially targeted tax break that applies only to 100% new construction, and/or only to Center City condos and wealthy developers. THIS IS COMPLETELY FALSE. Any property owner who makes improvements is eligible for an Abatement, provided they meet the three criteria enumerated above.

2 Note that this implies that minor or cosmetic improvements are not eligible for an Abatement, since improvements that do not require a permit are not eligible; e.g. painting your house.

Has the Abatement been a good thing for Philadelphia?

When the current Abatement was enacted in 2000, Philadelphia saw a near-tripling of new home construction in the years that immediately followed. And, new home construction actually declined in its suburban counties during the same period. Not only did this construction expand Philadelphia’s tax base, it supported many well-paying construction jobs and attracted new residents to the City. The most recent decennial Census in 2010 indicated that Philadelphia experienced a net gain in population for the first time since 1950, and that these gains occurred disproportionately in neighborhoods that have a lot of Abated properties.

A new report by Fels Senior Consultant Kevin C. Gillen and Westrum Development CEO John A. Westrum uses a newly constructed development in the City of Philadelphia as a case study to analyze the impact of Philadelphia's 10-year tax abatement.

To read the report, Fiscal Analysis of Philadelphia's Ten-Year Property Tax Abatement: A Case Study, please go to bit.ly/1kHBlNs [PDF]. To read an article about the study in the Philadelphia Business Journal, please go to bit.ly/LrSzir.

What is the current state of the abatement?

In September 2013 the Philadelphia City Council introduced legislation to significantly curtail the Abatement. Although the details of the legislation are a bit complicated, if it is implemented, it would effectively cut the benefits of the Abatement in slightly more than half3. The Philadelphia School District receives 55% of property tax revenues, which are generated from the Abatement, and Councilman W. Wilson Goode, Jr. and several other council members believe modifying or eliminating the abatement will allow for more money to go to the suffering school district.

Councilman Goode, Jr.’s newest abatement bill would limit the real estate taxes to be based on the actual cost of improvements made to a home which equates to the homeowner paying higher taxes.

3The legislation gives the Philadelphia School District the authority to exempt their share of property taxes from being abated. Since property tax revenues in Philadelphia are split roughly 55/45 between the School District and City, the total dollar amount of any Abatement would be reduced by 55%. So, for example, in the case of our couple who remodeled their kitchen, they would pay taxes on 55% of the $25,000 increase in their home’s value.

What could the effect of this legislation be?

While proponents of this legislation believe that it will result in additional tax revenues to the City, they have ignored two critical points:

  1. While the Abatement may result in a relative decrease in property tax revenues, it also works to generate tax revenues from many other sources. For example, a developer has to pay the Transfer Tax when he acquires a site to develop, his contractors and vendors have to pay Wage and Business Taxes while the project is being developed, the buyers of these residents pay the Transfer Tax when they purchase the finished units, the developer has to pay Business taxes on the sale of the units, the residents have to pay Wage and Sales taxes now that they live in Philadelphia, etc. etc. Since reducing the Abatement will lead to less new construction and improvements, these tax revenues will go down.

  2. The legislation can only apply to future abated properties and not existing ones. Critics of the Abatement often point to the millions of dollars that currently abated properties are not paying, and imply that this legislation could obtain that money. However, such a confiscation would be illegal and would almost certainly be challenged and defeated in court, as it would be a retroactive “taking” by the government. Buyers and occupants of abated properties bought their homes with the understanding that the Abatement would last for ten years and at full value. For the government to retroactively change that would amount to a violation of contract. Philadelphia can no more do that than it could retroactively increase the Wage Tax rate for previous tax years and then try to collect back taxes. So, this legislation can only apply to future abated properties. But, since Philadelphia is still struggling to recover from the recession and housing bust, actual construction activity in Philadelphia is still well-below what it was during the boom4. Hence, if there are relatively few abated properties being developed, this legislation will likely result in much less revenue than its proponents are hoping for.

Bottom line: if this legislation is passed, not only will it result in less property tax revenues than what it hopes to achieve, but it will also result in less tax revenues from other revenue sources as well. And, If Philadelphia residents will make fewer improvements to their homes, there will be a decrease in real estate development, there will be fewer jobs and new residents, and our overall economy and tax base will be smaller than what it would be otherwise by leaving the Abatement untouched.

4Although, admittedly, certain neighborhoods in the City are experiencing a boomlet in new development at the time of this writing.

What can I do to help?

To eliminate/modify this abatement would be detrimental to the City of Philadelphia. Because of this we ask that you reach out to your local city council member and urge them to keep the current tax abatement in effect.

Proposed suggestions to allocate more money to the Philadelphia School District

  • Extend the sales tax increase
  • Increase taxes on cigarettes and alcohol
  • Reform the use-and-occupancy tax (a tax on business, trade or other commercial use and occupancy of real estate)
  • Extend to the Abatement to 15 or 20 years in the case of development of affordable housing in low-income and/or distressed neighborhoods.

A few helpful facts:

  • The Abatement is not limited to high priced housing in high income neighborhoods
  • Approximately 40% of Abatements are for improvements to existing properties in neighborhoods across the City, rather than new construction.
  • Eliminating or restricting the Abatement will result in less development, fewer jobs and a weaker tax base going forward
  • The Abatement is essential to bringing capital to the City for development projects
  • All the for-sale housing produced by the City's Office of Housing and Community Development and neighborhood based non-profits benefit from the abatement are key to making "affordable" housing affordable for low-income families

Keep Up to Date With the Latest News

Economic Impact Analysis of Proposed 10 Year Tax Abatement Adjustment
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New report examines controversial 10 year tax abatement
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University of Pennsylvania: A Tax Abatement Case Study
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Can Improved Tax Collections Solve the City's Financial Crisis?
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City tax abatement: The facts matter
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Councilman Goode's Newest Tax Abatement
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