Philadelphia’s office vacancy rate has remained stubbornly high in the wake of the pandemic.
Now, the city’s Tax Reform Commission is exploring how a 20-year tax abatement for the conversion of struggling office buildings might help revitalize Center City.
Philadelphia's Tax Reform Commission recommended that the city explore a 20-year tax abatement for office conversion projects amid high vacancy in Center City.
“The impact of Covid and the rise of remote work have created a structural decline in the need for commercial office space and the value of commercial office buildings,” the commission’s co-Chair Matt Stitt said during a press conference on Tuesday.
A report from the commission released Tuesday floats expanding an existing abatement program, doubling the number of years owners can claim tax breaks on some of the city's most troubled buildings.
“The 10-year tax abatement is simply not a sufficient incentive,” the document says. “We can alleviate this crisis and restore vibrancy to our city if, for the next five years, we create a 20-year tax abatement for the conversion of hardship buildings.”
The report adds that the initiative should be paired with grants and low-interest loans for office buildings that won’t or can't be converted.
Office-to-residential conversions are often prohibitively expensive, and it’s not clear if doubling the timeline of the current abatement program would be enough to spur more of these projects.
“It may not be, but I think it’s a start,” said Brandywine Realty Trust CEO Jerry Sweeney, another member of the committee.
“We’re living in a city that has more than 42M SF of office space. About 10M SF are vacant,” he added. “What we really need are people to fill those office buildings up with jobs. To do that, we need employers.”
Creating a more competitive overall tax structure would help bring more companies to Philadelphia, Sweeney said.
The report found that 46% of residents with private sector jobs commute to work outside the city, prompting the commission to recommend phasing out Philadelphia's business income and receipts tax. The committee hopes that will bring large businesses out of the suburbs and back within city limits.
It also wants to see Philadelphia lower its wage tax to 3% or less as a way to attract new residents. The rate is currently 3.75% for residents and 3.44% for nonresidents.
Council President Kenyatta Johnson reconvened the tax reform commission last year. Its recommendations come as Mayor Cherelle Parker is set to deliver her budget address next month.
The report’s nonbinding conclusions were supported by several prominent trade groups, including the greater Philadelphia chapter of commercial real estate organization NAIOP.
“We are particularly pleased to see recommendations for the eventual elimination of the BIRT and reductions to the wage tax, which could jumpstart inclusive growth in Philadelphia, including in the commercial real estate sector,” Executive Director Sarah Maginnis said in a statement.
“With this report, there is little doubt that lower tax rates create business growth, growth leads to more jobs, and job growth will reduce the cycle of poverty and income inequality in the city and region.”
Chamber of Commerce for Greater Philadelphia CEO Chellie Cameron had a similar take.
“Today, Philadelphia’s economy underperforms its peers. We have the highest poverty rate among the 10 largest cities and among the slowest rates of job growth,” she said in a statement. “We owe it to ourselves, our residents, and our region, to embrace pro-growth policies now.”
But the proposed tax cuts were panned by members of a rival group called the Tax Reform Advisory Committee. It was created via the same law Johnson used to revive the Tax Reform Commission, which was chartered in the early 2000s.
“This is not a serious proposal for the future of Philadelphia,” Tax Reform Advisory Committee member Erme Maula said in a statement.
“The only thing certain with cuts to the business tax is that big businesses will get more money,” he said. “As we’ve just seen with the proposed Sixers arena, when giant corporations get involved, a lot is uncertain.”
