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 UPDATED PRIMER ON PHILADLPHIA REAL ESTATE TAXES

 

   The New World of Realty Taxes

 

At present, Philadelphia realty taxes are calculated as follows:

 

The current assessment, typically a fraction of actual market value, is multiplied by the “predetermined ratio” (32%) and multiplied again by the current tax rate of 9.771%, a calculation which results in an effective rate of 3.13%. Hence, a property currently assessed at $100,000 is taxed $3,130.

 

In February of 2013, under the Actual Value Initiative (the AVI) the Office of Property Assessment (OPA) issued new market value assessments for realty taxes due in 2014 which are intended to be calculated at:

 

The new AVI reassessment value multiplied by the AVI tax rate (to be determined by City Council and the Mayor this Spring and expected to be in the neighborhood of 1.2% to 1.5%. The Administration’s current suggested rate is 1.32%).[1]

 

Some upcoming deadlines in this new tax world are:

  • 1.   July 31, 2013 last day to file for a Homestead Exemption (see page 7 for an explanation of the exemption).
  • 2.   October 7, 2013 last day to file for an appeal before the Board  of Revision of Taxes. These appeals may be filed even by those who did not request an administrative review of their AVI reassessment by the April 1, 2013 deadline.

While any number of questions remain about AVI, four points seem relatively certain.

 

  • The current system is broken for the reasons detailed on page 4.Basically, assessments have not kept up with market changes and the result is a system that is unfair.
  •  The Mayor and Council seem committed to “revenue neutrality”, meaning that the total amount of taxes generated in AVI’s initial year should be no larger than the revenue total collected under the old system.
  • To maintain revenue neutrality, the current effective tax rate of 3.13% will be lowered so that, for the City as a whole, the lower rate, when multiplied by the higher assessment, will yield the same bottom line.
  • The AVI reassessments confirm the predictions of a Pew Report that there will “be a lot of owners who will see modest decreases – which means that they have been overtaxed in years past - and a smaller set of taxpayers facing increases, some of them steep”.[2]

   Troubling Preliminary Impressions of AVI

 

 Since the reassessments were mailed out in February, two clouds have appeared in the new world of realty taxes:

 

                        LACK OF TRANSPARENCY: Despite assurances that all AVI

data would be available in February, CCRA only received the field data collected by the AVI assessors on March 21, ten days before the expiration of the April 1 first level review date.  Further, there has been no public distribution of the formulas used to derive bottom line assessments.

 

QUESTIONS RE ASSESSMENT ACCURACY: Preliminary analyses of the available data by AXIS Philly, the Inquirer and the City Controller suggest that the margin of error between assessments and real world market values is not close to industry standards.. The Crosstown Coalition of Taxpayers, a band of 21 civic associations of which CCRA is a charter member, has hired a demographic statistician to work with volunteers on an exhaustive review of the available data. So far the Coalition’s team has only analyzed residential properties, but this partial survey confirms the earlier findings.  

 

    Real Estate Taxes and The City Budget

 

For fiscal year ending 2012, the real estate tax generated $1.134 billion, $501 million for the City (14.3% of $3.6 billion in total revenues) and $633 million for the School District (28% of $2.2 billion in receipts). On the City’s ledger, realty taxes ranked second only to the wage tax, which accounted for 34% of City receipts. In addition to its share of the real estate taxes, the School District receives 100% of the City’s Use and Occupancy Tax, which generated $108 million in 2011-12, so that real estate revenue from both sources amounted to approximately 33% of the District’s income.

 

    An Overview of City Taxes As A Whole

 

Philadelphia’s current real estate taxes are low when compared to other East Coast cities which obtain about twice as much of their tax revenue from real estate.[3]

 

While Philadelphia’s real estate taxes may be a bargain compared to other cities, the overall tax burden shouldered by Philadelphians is higher than the tax load carried by citizens in most cities.[4] The story is the same for the taxes levied on Philadelphia’s businesses which ranked in the top 20 most taxed in a national survey of 421 cities.[5]

 

To compensate for its relatively low realty taxes, levies on wages and profits account for 66% of Philadelphia’s tax intake. In New York the wage/profit portion is 34%; in Washington DC, 35%.[6] Critics note that lightly taxed real estate can’t leave the City, which is not the case for employees whose wages are taxed and businesses whose profits are taxed. In fact, employees and businesses have decamped with depressing regularity. Despite a 4% uptick in 2011, City employment over the long term has nosedived from 746,000 in 1990 to 656,000 in 2011, and City job losses from 2000 to 2010 were 250% higher than in the suburbs and five times the national average [7]. This trend bodes ill for the City’s largest revenue source, the wage tax, which accounts for about 34% of all City income, including revenue from the Federal and State governments. 

 

       The Current Real Estate Tax System

 

The current structure is both opaque and unfair. The system lacks transparency because even when owners have a handle on their property’s value, convoluted calculations are needed to convert a home’s market value into its tax bill.[8] In addition to being opaque, a history of spotty and unprofessional assessments has created a system which unfairly levies widely varying tax bills on substantially similar properties.

 

Because Pennsylvania’s uniformity clause has been interpreted as barring the taxation of property at different rates,[9] the City developed a work around in the form of a second real estate tax, the Use and Occupancy (U&O) Tax of 5.51% assessed on the commercial use of real estate, but calculated on the assessed value of the real estate being used.[10]

 

The real estate tax rate has increased 17.3% via three raises in as many years, the last of which, enacted in 2012, amounted to 3.6 %. U&O taxes assessed against commercial usages were increased 20% last year, from 4.62% to 5.51%.

 

In 2012 it was estimated that 18% of the realty parcels in the City were in default, owing a total of $515 million, a sum which had increased 9.4% in the preceding year.[11]

 

      AVI (Actual Value Initiative) Reassessment

 

In 2014, real estate taxes will be computed on AVI reassessments, delivered in February of this year, which purport to equal market value. According to press reports, 27,000 property owners filed requests for first level administrative reviews to be administered by the OPA. The deadline for review requests was April 1. All property owners, regardless of whether they filed for a first level review are entitled to appeal their bills to the Board  of Revision of Taxes where the filing deadline is October 7.  As matters stand now, no one can  calculate their 2013 taxes due in 2014 until City Council and the Mayor legislate the AVI tax rate, a process that will occur later this Spring, probably in late May or early June. 

 

       Revenue Neutrality And The AVI Tax Rate

 

The Administration and various City Council members have pledged that AVI should be “revenue neutral”, meaning that the total amount of taxes generated under AVI should be no larger than the amount collected under the old system.[12]  To achieve revenue neutrality, a lower tax rate will be applied to the higher assessments. But even if the total sum generated by the tax does not change, the amount paid by individual property owners in the new system will differ depending upon the differential between their current assessment and their property’s AVI assessed value.

 

In March, after the AVI reassessments were issued, the Mayor proposed a 1.32% rate with a $15,000 Homestead Exemption and set aside $30 million for unspecified “tax relief”. It is always difficult to predict tax yield but this package is certainly close to revenue neutral, although it appears to have some leeway built in for revenue shrinkage arising from appeals and collection difficulties.

 

      The Impact of A Homestead Exemption

 

Both Council members and the Administration have discussed implementing a Homestead Exemption for resident owners. Such an exemption would reduce assessments by the amount of the exemption. Discussions as to the dollar amount of the exemption have included figures ranging from $10,000 to $30,000. [13] If the Administration’s suggested $15,000 exemption were enacted, a house or condominium assessed at $100,000 would be taxed at $85,000 so that, at the Administration’s proposed 1.32% rate, the tax bill would decrease by $192 from $1,300 to $1,108. If each of the City’s 340,000 home owners obtained a $15,000 exemption, total taxable values would decrease by $5.1 billion which would decrease the taxable intake by $67.3 million assuming the suggested 1.32% rate was in effect. In a revenue neutral scheme, the inclusion of a $15,000 exemption raises the tax rate by about .7% from 1.25% to 1.32%.

 

While the Homestead Exemption does raise tax bills for higher value homes, the increases generated would significantly impact the carrying charges for homes in only a few corners of the City’s most affluent neighborhoods. The tax increase on a $625,000 property generated by a $15,000 Household Exemption in a 1.32% system would only be $435/year or about 1.3% of the likely financing charges for such a parcel.[14]  Few Philadelphia homes are worth more than $625,000.[15] The Homestead Exemption would not result in significant tax increases on homes in the City’s rapidly growing neighborhoods such as Graduate Hospital (av. sale price $296,308) or Northern Liberties (av. sales price $335,564).

 

      Realty Tax Sources: Homes/Businesses/Non Profits

 

Any discussion of adjusting tax rates to AVI should consider the relative share of real estate taxes shouldered by commercial and residential properties.  Currently, commercial properties account for 44% of the City’s real estate tax receipts, closer to 50% when the U&O receipts are considered. Philadelphia’s commercial properties pay more than those in Baltimore (38%) but less than commercial realty in Hartford (55%), Boston (61%) and Washington (64%).[16] Under the current assessment system, the largest commercial properties carry assessments that are closer to market value than the average residential assessments. Consequently, even though the 50 largest commercial properties all received increased assessments, those increased assessments are not large enough to offset the tax rate deductions . The upshot is that the 50 largest commercial properties collectively stand to reap realty tax savings of at least $25 million dollars. The conventional wisdom is that current assessments on smaller commercial properties have not kept up with market values, and, if this is correct, it is less likely that these properties will receive substantial tax savings. The Crosstown Coalition data team is examining these questions but, because the City dragged its feet on releasing data, has not reached conclusions as this Updated Primer is written.

 

Any discussion of tax rates also has to account for the large and growing percentage of land mass owned by the driving forces of Philadelphia’s economy - hospitals and universities which account for 36% of City employment[17]. All that employment is good for the wage tax, but, because “meds and eds” occupy tax exempt real estate, they diminish the intake for realty taxes.  In 1995, a PILOT (Payment in Lieu of Taxes) initiative gathered $9 million for the City from more than 40 nonprofits. That income dwindled over the years to $387,000 in 2011 after legislation limited the exposure of nonprofits to municipal challenges regarding their tax exempt status. However, in a decision characterized as a “game changer”, the Pennsylvania Supreme Court recently reinstated the former standards which led to the higher PILOT payments in the 90s. [18]

 

     Work Arounds: Subsidies, Deferrals, & Revenue Caps

 

Any time taxes are adjusted, there are protests, and AVI is not an exception to that rule. Particularly troubling are complaints of long time residents in gentrified areas whose home values have increased not because they have improved their properties, but because investments made by new neighbors have increased values in the surrounding area. The value of homes owned by old timers in these neighborhoods may be out of kilter with their income levels. The logical fix would be a means test targeting tax relief for longtime homeowners which would take into account their income and assets. [19]

 

There are only three remedies for outsize real estate tax increases: cash subsidies, deferrals, and caps/freezes – all of which add complexity to the system and call upon taxpayers not included in these programs to shoulder their costs.

 

There are tax relief programs currently in place which do not provide the measures of relief needed to address issues presented by AVI:

 

  • Cash subsidies – In 2011, 12.2% (41,858) of the City’s owner residents received Pennsylvania Lottery property tax rebates averaging $546 given to elderly/low income citizens, a sum which would pay for $42,000 of assessed value in a 1.3% system or $37,600 in a 1.45% system.[20]
  • Deferrals – A homeowner whose real estate taxes are increased by more than 15% in any given year may apply to the City seeking a deferral until the home is sold although the balance deferred carries above market rate interest at 6%. There appear to be no participants in this deferral program. [21] Also available for low income residents is an installment payment program.[22], [23]
  • Caps/freezes – A property tax freeze protects older low income residents against tax rate or assessment revisions for which 13,362 owners qualified in 2011.[24]

     Proposed Legislation Dealing with AVI’s Impact 

 

As of April 8, nine bills have been introduced in City Council, with three of particular interest.  Bill 130122 provides for the deferral of that portion of real estate taxes that exceeds 2.5 times the taxpayer’s 2013 tax bill, until the property is sold.  It is limited to taxpayers whose household annual income is under $130,000, and the deferral, which would be charged with simple interest at 1-year U.S. treasury bill rates, cannot be used to reduce the tax payment in any year to less than $1,000. Bill 130142, which applies to all taxpayers, phases in tax increases over four years:  for 2014, the tax due would be calculated by adding one’s 2013 tax bill (i.e., pre-AVI) to 25% of the difference between the 2013 bill and the 2014 tax bill; for 2015,  the tax due would be calculated by adding together the tax paid in 2014 and 33% of the difference between that number and the 2014 tax bill; for 2016, the tax due would be calculated by adding together the tax paid in 2015 and 50% of the difference between that number and the 2014 tax bill;  and for 2017, tax due would be the full amount of the 2014 tax bill. In a revenue neutral world, the enactment of either of these proposals would increase the tax rate to take account of the delayed/lost revenue. Bill 130081 eliminates the Homestead Exemption which would lower the tax rate for everyone. It is quite likely that, over the ensuing weeks, some of these 9 bills will be refined or withdrawn, and that additional legislation will be proposed.

 

     Carrying AVI Into the Future

 

Looking down the road, market based assessments will permanently eliminate one current problem:  the present system’s lack of transparency. Property owners will be able to easily calculate what they should pay and, perhaps more important, what their neighbors should pay. But as time passes, the current system’s second problem, fairness, will inevitably resurface unless assessments are regularly adjusted because future investments and urban trends will make some properties more valuable and depreciate values elsewhere, either on a comparative or absolute basis.  Accordingly, future budgets must designate sufficient funds to ensure that regular reassessments are conducted by a workforce which is well staffed, properly funded, and adequately trained.



[1] This simple formula could become complicated if modifications are inserted such as the Homestead Exemption (see page 6) or caps/deferrals/subsidies (see page 8).

[2]The Actual Value Initiative – Overhauling Property Taxes in Philadelphia”,  November 28, 2012 Pew Charitable Trusts Philadelphia Research Initiative, authored by Emily Dowdall and Susan Warner and edited by Larry Eichel, referred to hereafter as  “Pew Report”. Pg 13. This study is must reading for those interested in this topic and may be accessed on line at the following link. http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Philadelphia_Research_Initiative/Philadelphia-Property-Taxes.pdf

[3] Philadelphia obtained 17% of its tax revenue from real estate while comparable figures for New York and Washington DC were 41% and 36% respectively. Center City Reports, “Employment: Creating Opportunity for Philadelphia Residents” Sept 2012 pg. 3. Philadelphia real estate revenues per capita are only about a quarter of the amount generated in Washington and a third of what is collected in Boston and Hartford, all cities where commercial properties pay a higher percentage of real estate taxes than is the case in Philadelphia. Pew Report, pg. 8.

[4] While apples to apples comparisons of the tax burdens between cities are difficult to compile and should be taken with a grain of salt, it is still depressing to read a study of the burden of major taxes on families in the most populous cities in each of the 50 states and the District of Columbia. For families with incomes ranging from $25,000 to $100,000 in 2011, Philadelphia ranked either second or third most expensive. “Tax Rates and Tax Burdens in The District of Columbia: A Nationwide Comparison 2011”. Issued September 2012.

[5] 2011 Kosmont-Rose Institute Cost of Doing Business Survey. This survey is frequently used by businesses in relocation searches. In the area from Washington DC north, Newark and New York were the only east coast cities included in the top twenty most expensive list.

[6] Center City Reports, “Employment: Creating Opportunity for Philadelphia Residents” Sept 2012, pg. 3.

[7] Pew Charitable Trusts Philadelphia Research Initiative, “Philadelphia 2011 The State of the City”, pg. 14.

[8] Philadelphia uses a fractional assessment system that converts a property’s market value to an assessed value by multiplying the assessed value by the “predetermined ratio”, 32%. To calculate a tax bill, an owner must multiply the “predetermined ratio” (32%) by the assessed value and multiply that product again by the current tax rate (9.771%) to arrive at the 3.13% effective in 2012.

[9] Pa.Const. art. 8, s 1, P.S. (1969). In other jurisdictions such as Washington DC, Boston and Chicago, tax rates levied on commercial, industrial and/or vacant property are two to three times higher than the rates for residential property. Pew Report pg. 5.

[10] Wanamaker v. Phil. Sch. Dist., 441 Pa. 567, 274 A.2d 524 (1971).

[11] Plan Philly June 9, 2012, Patrick Kerkstra.

[12]  Pittsburgh, but not Philadelphia, is prohibited by state “anti windfall” legislation from gathering more than 105% of its previous year’s realty tax revenues via increased assessments, as distinguished from an increase in the tax rate.  16 P.S. 4980.2.

 

[13] This past Fall, City property owners received a Homestead Exemption application form accompanied by a cover letter which suggested that the homestead amount would be $30,000 but the letter also contained an asterisk noting that the figure was “subject to change” because Council has yet to pass a bill setting the exemption amount. The extended deadline for filing an exemption is July 31,2013.

[14] Assuming a $500,000, 30 year, 5% mortgage.

[15] The average 2012 sales price in the four Center City zip codes (02,03,06 and 07) covering Society Hill, Wash West, and the Rittenhouse Fitler neighborhoods was $546,703. Source Trend Multiple Listing Service.

[16] Pew Report pg. 6.

[17] Center City Reports, “Employment: Creating Opportunity for Philadelphia Residents” Sept. 2012, pg. 4.

[18] 10 P.S. 371 et seq.; Mesivtah Eitz v. Pike County Bd. 44 A3d 3 (Pa. 2012). Pittsburgh Post-Gazette, May 2, 2012, “Ruling ‘Game Changer’ for Non Profits”.

[19] A state statute permits gentrification relief for longtime residents but, for Philadelphia County only, bars financial need from being a determinant. 72 PS 4749.6.

[20] The program is available to owners over 65 or widowed owners over 50 with incomes of less than $35,000. 

[21] Sec. 19-1307 Philadelphia Code. The Revenue Department is directed to review the income, expenses and assets of the applicant in using its discretion to issue the deferral.  The Pew Report at pg 15 states that “the program has not had a single participant”.

[22] The Pew Report at pg 15 states that the 7 other cities surveyed did not restrict installment programs to low income residents.

[23] Part of the City’s tax delinquencies, albeit a relatively small part, may arise because 40% of the City’s homeowners have no mortgage so that their taxes are due in a lump sum rather than amortized through 12 monthly mortgage payments.

[24] Pew Report pg. 14. The program is available to owners 65 or older with incomes of less than $31,500 for a couple or $23,500 for single persons.

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