Philly Tax Reform: Homestead Exemption Now, Land Value Tax Next Year

With the new Philly assessment numbers coming out today, I wanted to make a quick point about the homestead exemption before it gets lost in the noise.

The property tax base turned out to be more valuable than expected – $98 billion, not $85 billion – meaning that the millage rate can be lower. Last year Council thought they would need a 1.8% rate to keep revenue neutral, but now the revenue neutral rate is going to be something like 1.2%.

What this means is that many of the people who Council thought should get a homestead exemption under the 1.8% scenario will actually end up paying lower taxes now, even without the homestead exemption.

Because Philly is a Democratic city, many politicians are still interested in lowering tax bills for low-income homeowners even more, with a $30,000 homestead exemption. So if your property is worth $200,000, then you’d only be taxed on $170,000 of that.

Trouble is, giving a homestead exemption to some people would mean other people have to pay more. It is expected to push the revenue-neutral millage rate up to about 1.4%.

Council’s wonk king Bill Green is pushing back against this with the totally sensible argument that if Council keeps the rate at 1.2%, then there will be some room to do the switcheroo that every blue ribbon commission and report on Philadelphia’s tax system has been urging for decades.

Right now Philly’s wage and business taxes are really high as a percentage of the city’s tax mix, and property taxes are really low. The result is a huge gift to places like Conshohocken which end up poaching higher paying professional jobs from Philadelphia. Over-reliance on taxing stuff that can move to Conshohocken (work and sales), and under-reliance on taxing stuff that can’t move (land and property), has predictably led to too many professional businesses setting up shop in the suburbs and not enough in Philadelphia.

Bill Green’s point is that by keeping the millage rate at 1.2% now, there’ll be some room to swap a wage and business tax cut for a somewhat higher property tax later, while still keeping the absolute property tax burden low.

I think this is dead on. Many liberals find the idea of taxing businesses appealing, but I think populist self-indulgence has got to be a secondary concern to actually growing the number of jobs and the tax base in the city.

The really important political battle is the fight for jobs and population growth between Philly and the suburbs. In reality, this shouldn’t be a zero-sum fight, but since there are different political jurisdictions fighting for tax base in Southeast PA, there is a competitive element to this. And as much as folks on the left like the idea of taxing rich guys, I think the more important progressive agenda for Philly involves trying to steal most of the professional jobs and high-skill labor in the region by having more pro-growth policies than the suburbs. Not arbitrary hand-outs to specific companies, but uniformly low taxes on wages and investment.

Investment is really the key point, and that’s where this ties back into AVI. As Sandy Smith points out, shifting the tax burden away from wages and also away from buildings onto land value would soften the blow of accurate tax assessments on growing neighborhoods:

The moment is also right for another move that could strengthen those virtuous trends: shifting the bulk of the property tax burden from buildings to land. Most of the appreciation in property values in those gentrifying neighborhoods comes from improvements on the land – new houses and office buildings, renovations and expansions. Were Council to adopt a split property tax rate, taxing land more heavily than improvements, the blow to homeowners in places like Northern Liberties and Point Breeze could be softened while maintaining the current revenue-generating effort – especially since undervalued vacant land in such areas would then be taxed even more heavily, encouraging land owners to develop it in order to cover the tab.

Indeed, in every Councilmanic district, shifting the property tax onto land, and off of buildings, would decrease the tax burden for most property owners:

The best way forward, in my view, is to do the homestead exemption now and do the 1.4% millage rate for a year or two. Then when it’s time to do the switcheroo and lower the wage and business taxes, Council should also lower the millage rate on buildings and raise the millage rate on land.

That would fulfill Bill Green’s goal of keeping the tax rate on new buildings low, encouraging investment and development, while also fulfilling the goal of softening the tax impact on poor people in gentrifying neighborhoods.