The Construction Tax And The Deep Divide Over Development And Affordability In Philadelphia

The question of how to fund more affordable housing in Philadelphia has vexed the City Council for years, and the closest it has come to a solution may wind up as a mere reminder of the warring forces at work.

After a bill to add a new tax to developers narrowly passed in the council's final legislative session of the spring, discussion has persisted in the months since to highlight that the issue is far from settled.

The bill may not even be signed into law and the business community has been railing against it since it was announced. It is yet another chapter in the saga of Philadelphia's journey from struggling afterthought to a new level of affluence.

Growth and its challenges

Philadelphia is a city at a crossroads. For decades, it stood as a declining metropolis positioned between two cities on decades-long upswings in New York and Washington, D.C. It was cheaper to live here, but its deep poverty was among the most prominent parts of a national reputation that was less than stellar.

Around the turn of the 21st century, Philly’s fortunes started to improve. Development increased considerably, which multiple executives in the industry directly correlate with the institution of a 10-year tax abatement on all new construction or renovations of a certain significance. The turnaround only accelerated in the years after the Great Recession, when Philly had less ground to make up due to its relative lack of growth beforehand.

Now the city attracts capital from New York, across the country and even the world, was named to the 20-city shortlist for Amazon HQ2 and has built more apartments in the past two years than it has over any two-year period in decades. The success has turned Center City and University City into thriving hubs, with the lavish residences and record-high rents to match.

But that deep poverty has not gone away, or even improved significantly. A large percentage of that progress has been concentrated in areas that the vast majority of Philadelphians could never have afforded even before prices went through the roof. And the ceiling for all this growth remains lower than for true economic powerhouses.

Scores of citizens, organizations and politicians recognize the need to keep housing affordable for less wealthy Philadelphians, but many in the real estate community have publicly worried about the potential chilling effects any additional taxes to fund affordable housing could have on investment in the city.

“I have been [supportive of the abatement] for a long time, because it’s been the single-most important policy prescription ever in Philadelphia in terms of increasing the ability to develop,” JLL Research Director Lauren Gilchrist said. “I think eliminating or curtailing it sends a message to the market that Philadelphia is not open to business or to development.”

Problems, solutions and compromise

City Councilwoman Maria Quiñones-Sanchez has been working on this problem for three years, enlisting other members of the council, the mayor’s office, neighborhood leaders and the business community in discussions that have produced an affordable housing bill that has morphed several times.

At first, it mandated a percentage of affordable units in every new apartment building. Then, it awarded height bonuses to developers that included affordable units. Finally, it changed structure entirely — a 1% tax on all new construction in the city, as well as redevelopments above a certain threshold of cost, something Sanchez calls “a compromise of a compromise of a compromise.”

It passed in council at the end of its spring session by a 9-8 margin, less than the 12 votes needed to protect it from a veto by Mayor Jim Kenney.

“The Mayor has serious concerns about this particular piece of legislation,” Department of Planning and Development spokesman Paul Chrystie wrote in an email to Bisnow. “Philadelphia is already considered by many to have a pretty onerous tax system, and it is certainly not clear that adding another tax is the best way to address our housing crisis.”

Kenney has been critical of the bill, fueling speculation that he will veto it when Council resumes business Sept. 13. His concerns echo those voiced by Gilchrist and the larger business community, as well as the dissension in City Council, led most vocally by At-Large Member Allan Domb.

Domb said adding a new tax would be counterproductive for the confusion it would add.

“What we’re doing is taxing an abatement,” he told Bisnow. “On one hand, we have a 10-year tax abatement, and now we say that all abated properties will get taxed.”

His alternate proposal is to smooth the end of the tax abatement so that taxes are partially added in the eighth, ninth and 10th years after a development is completed, effectively creating an “8.5-year abatement,” as he called it.

“[Smoothing the abatement] generates more revenue, and costs zero dollars to monitor,” Domb said. “The abatement was a phenomenal tool to get us back on track. If the 8.5-year abatement proves successful, I would be open to reducing the abatement every few years and weaning off of it so we don’t affect [development].”

Sanchez expressed support for reducing the abatement in addition to the construction tax, but said Domb’s proposal as an alternative is “assuming it’s an ‘either/or’ conversation, when it’s an ‘and.’”

Reconciling the issues of funding affordable housing and appeasing the business community has been fundamental to the drawn-out debate, and has produced many ideas from within and without the government.

Gilchrist advised Brandywine Realty Trust CEO Jerry Sweeney in the release of a proposal earlier this year to increase real estate taxes in the city in favor of reduced wage taxes and a simpler tax system, with the idea that uncertainty and complication, rather than raw numbers, would be the biggest negative effect of the construction tax.

“Markets function best under conditions of certainty, and the construction impact tax and the noise around the abatement has really caused the capital market to step back,” Gilchrist said. “Basically, capital sources are wondering how to underwrite the abatement or the construction environment.”

Dissension and discord

Others in the business community are less amenable to compromise, and serve as the counterweight to neighborhood leaders and advocates crying out for large funding boosts to affordable housing subsidized by the city’s richest residents and companies.

“Nobody wants to pay more taxes, period,” Tower Investments CEO Bart Blatstein told Bisnow when asked if he would support higher taxes in exchange for a simpler tax structure. “I’m for new revenue from job creation, and lowering the barrier of entry to business, not raising it.”

As Domb and others advocate for their own solutions, the construction tax still sits on the mayor’s desk.

“With all due respect to folks who want to come in and play ‘Monday morning quarterback,’ we’ve been discussing affordable housing in the city for years,” Sanchez told Bisnow. “The construction tax was a compromise to get 9 votes, and it’s a blunt instrument. But so was the 10-year, 100% tax abatement, and we’re the only major city that has something like that.”

Fueling the dissent was a financial impact study released by the mayor’s office finding that implementing the construction tax would cost $31.8M in additional infrastructure, outweighing the $25M it promises to put into the city’s Housing Trust Fund. Domb, who championed mandating financial impact studies on all city laws, held it up as the chief argument against the tax.

“When legislators put taxes in place, we underestimate the burden we place on the revenue department to administer the tax,” Domb said. “We distributed the analysis to all the members, we circled the numbers, and eight members voted against the tax. It did pass council, and it’s my opinion that members of council [who voted in favor] are focused on the programs and would be happy with any alternative to fund them.”

Sanchez freely admits that she is working to find any way possible to fund affordable housing, but accused the financial impact study of bias.

“As one person who supported Councilman Domb’s call for financial impact statements, I can say that this impact study is so flawed,” Sanchez said. “We’re talking about a 1% construction tax paid 50% when you get your permit and 50% when you get your certificate of occupancy, so I fail to see how this would cost so much to implement.

“It’s a shame, because [financial impact statements] are an important tool, and this was just released to favor the opinions of the people who called for it,” she said.

Where do we go from here?

Sanchez told Bisnow she is hoping to get a chance to defend the bill against a veto in future discussions with the mayor’s office. She anticipates that if Kenney does indeed veto the bill, he could propose an alternate source of funding for affordable housing in the interim. Any option that would put less than $25M into the Housing Trust Fund, however, would be unacceptable in her eyes.

“I’m going to continue to fight for affordable housing,” Sanchez said. “If he vetoes [the bill], I’m prepared to do what I can to convince three more council members to vote for it so the majority becomes veto-proof. But again, his administration has been part of the conversation [all along], and to come in at the eleventh hour after a half a year of this conversation, anything short of offering $25M a year with the veto is irresponsible.”

Blatstein, Gilchrist and Domb all consider Philly’s growth as a recent development that needs to be nurtured, not treated as a given. Sanchez and neighborhood organizations like the Philadelphia Coalition for Affordable Communities see the trajectory of growth as an indicator that Philadelphia is joining the ranks of other cities in becoming inhospitable to the working class.

“We’re going to lose the opportunity to build an equitable city if we don’t do something bold and do it now,” Sanchez said.