Philly Council delays tax abatement bill as lawmakers call for 1% construction impact tax

By Michael D’Onofrio

PHILADELPHIA — City legislators have proposed delaying reforms to the 10-year tax abatement passed and a new construction impact tax.

As Philadelphia faces a massive revenue crunch due to economic devastation caused by the novel coronavirus, City Council introduced a bill Thursday to push back the start date of a reduction to the tax abatement for new residential construction developments — effectively cutting it in half — from 2021 to 2024, according to a source with knowledge of the legislation.

Legislators also pitched a bill that would put in place a 1% construction impact tax that would be imposed to build any structure, according to the legislation. The legislation would go into effect July 2021. The proposal would carve out some exemptions, such as for improvements associated with preparing an existing residential unit for a new tenant.

The construction tax bill was introduced by a member of council on behalf of Council President Darrell Clarke; Councilman Bobby Henon introduced the tax abatement bill.

Yet after the bills were publicly introduced, Henon did not respond to requests for the legislation.

The construction impact tax could raise between $20 and $26 million in new revenue per year, according to the source.

The legislation would be leveraged to fund affordable housing and neighborhood through a $400 million bond issuance.

The legislation would require Mayor Jim Kenney’s signature.

The proposals drew skepticism from developer Anthony Fullard, a principal for the development group AJR Endeavors.

Fullard said the construction impact tax would hurt developers more than any gains made by delaying the tax abatement reforms. Although he did not know the full details of the legislation, Fullard said the developers would pass the added costs from the construction impact tax onto homebuyers and tenants, and raise the cost of affordable housing.

Philly Council passes tax abatement reforms; Kenney expected to sign

“That definitely hurts the smaller developer,” Fullard said about the construction impact tax. “It’s going to make everything go up. That cost has to be covered somewhere. At the end of the day, where does the developer pull the money from? It doesn’t come out of thin air.”

The city faced a nearly $750 million budget hole in this year’s budget due to the economic impact from the coronavirus pandemic. The city passed a $4.8 billion spending plan for the current 2021 budget with deep cuts to departments and hundreds of layoffs.

At the end of 2019 City Council passed the first reforms to the 10-year abatement tax program for the first time in decades. It’s passage was a victory for affordable housing advocates, who have characterized the tax as a give-away to developers and fueling gentrification.

The changes were expected to go into effect in January 2021 and generate $270 million in city revenue over a decade. It is uncertain how the economic fallout from the coronavirus pandemic and proposed changes to the tax abatement program would affect its long-term revenues.

Under the reforms passed last year, owners of new residential construction projects will pay no property taxes on the added value in the first year, 10% in the second year, 20% in the third year and so on until they are paying the full tax assessed on the property. Abatement recipients pay taxes on the value of the land.

Legislators left in place the full 10-year tax break for commercial properties and the rehabilitation of residential homes.

In 2018, Clarke introduced legislation that would have imposed a 1% construction impact tax on all properties that qualify for the 10-year tax abatement. The construction industry voiced strong opposition to the tax at the time.

The 2018 construction tax proposal was scuttled under a veto threat from Kenney. But the Kenney administration and legislators hatched a deal on other affordable housing initiatives rather than impose the tax.

Michael D’Onofrio is a reporter for the Philadelphia Tribune, where this story first appeared