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Time to Think Big

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City Hall.jpgAs Ryan Briggs' piece on City Council makes clear, that body tends to think small.  It is also better at reacting than acting. That's about par for the course when it comes to the legislative branch. In America, big and bold ideas tend to emanate from the executive branch.

(As an example, please name the governors of New York, New Jersey and Pennsylvania.  Now name the Speakers of the House in those states.)

Council has a chance to change that dynamic this year with the debate over the Actual Value Initiative (AVI), the city's program to reassess all taxable property that is currently underway.

It has a chance to take the lead on a major realignment of taxes in this city.  It can use AVI as a means of making a significant reform in our tax structure -- one that could make Philadelphia competitive again in its search for new people and jobs.

First, some background:

The Office of Property Assessment is due to release data on the overall value of property this fall. That will be one big number.  In February, we are told, we will get a letter from the city that informs us of the new value on our home. Soon after, Council will debate how to implement the reassessment, a discussion that will include the tax rate.  (It currently is 9.432 percent on each $1,000 of adjusted assessed value.  It will have to come down once property is assessed at or close to its market value.)

Last spring, when Council debated AVI and decided -- wisely -- to punt on the issue until  next year most of the talk consisted of fretting over the impact of AVI on homeowners, especially those who have seen a rapid rise in the value of their property.

If your house is assessed at $100,000 now, you pay about $3,000 a year in property taxes.

But if it really is worth $350,000, your tax bill could come close to doubling under AVI.  Gulp.

So, that's why we have been hearing about homestead exemptions or phasing in the tax or giving breaks to seniors. These are all schemes to cushion the blow of a sudden, sharp increase in real estate taxes.

My reaction is: Why focus narrowly on ways to lessen the impact of property taxes, when you can seize the moment and use AVI to lower wage and business taxes in the city?

Here is how it could work:

Assuming the big number OPA arrives at on the total value of taxable property in the city is $100 billion. In order to raise about $1.1 billion from the property tax (the same as this year), the tax rate would have to be around 1.10 percent.

But, if you start adding exemptions -- a $30,000 homestead 'discount' on the value of your home is favored by the Nutter administration -- the rate will have to be readjusted in order to hit the $1.1 billion figure. That's why we hear rates ranging from 1.25 percent to 1.75 percent -- they vary depending on the range of breaks given.

But, suppose you shuck all of those 'soften the blow' schemes and instead make the rate a flat 1.5 percent? This would raise an additional $400 million. Now, suppose you apply the additional $400 million it would raise to cutting wage and business taxes? My math tells me that with $400 million, the city could lower the wage tax from 4 percent to 3 percent and reduce business taxes by 25 percent.

Under this scheme, you likely would be paying more in property taxes, but it would be partly or perhaps wholly offset by a reduction in your wage tax.

This is not a radical idea. It follows the recommendations of the last Tax Reform Commission (created by Mayor Nutter in 2009) that called for the city to shift away from taxes on wages and profits towards taxes on land. The reasoning was: why set such high taxes on workers and businesses, who can simply pull up stakes and leave town to escape them? It's long been predicted that lower taxes will produce more jobs and bring in new residents, which in turn will increase the city's tax base. It will create a virtuous cycle.

Who loses under this scenario? People who own valuable homes but do not have taxable wages -- in other words, elderly Philadelphians who live on pensions. Pensions are exempt from the wage tax (because they are not wages).

They could get hit by a much higher property tax bill without a compensatory break in wage taxes.

One way to ease their pain would be to also pass a means tested (i.e. not for rich people) homestead exemption only for those 65 and older. It would cost money -- that would have to be found by adjusting the property tax rate -- but it would be far less costly than giving a homestead exemption to all Philadelphians.

A footnote: Since the city splits the proceeds of the property tax with the school district (60 percent for the schools, 40 percent for the city), Council would have to pass legislation earmarking all of the increase for the city. It would not lower the amount of money given to the schools, but it would not increase it.)

-- Tom Ferrick

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