The Blind Leading The Blind

(May 2012)

"We'll see." That pretty much sums up Mayor Nutter's proposal to implement the much-needed Actual Value Initiative (AVI) BEFORE we examine how the move to fair and accurate property values will affect Philadelphia property owners. This lack of vision calls to mind and pretty much proves every common sight-related cliche. 

We are literally flying blind here, embarking on an unprecedented policy change that will lock in place policies to raise or lower our tax bills without understanding how these changes will affect us.  This leap-before-we-look approach is not only frustrating, it could be disastrous. As we learn more about who will pay more under the Mayor's plans to generate close to $100 million in new tax revenues through AVI, maybe we can understand why the Mayor wants to implement his policy BEFORE we realize how it will change our tax bills.

Nearly all Philadelphia properties are undervalued for tax purposes, but, in general, commercial and industrial properties tend to be valued much closer to their actual market values than homes. Therefore, the move to AVI could result in a reduction in taxes of millions of dollars for a landmark Center City tower and a 300-percent increase for the owner of a modest neighborhood row-house.

See here:

The Bell Atlantic Tower sold for $129 million in 2010 and is valued for tax purposes at $127 million.  This Class-A skyscraper is valued at just about 100% of its true worth (based on the 2010 sales price) today.  

A modest row-house in South Philadelphia that was purchased for $8,000 in 1996 is valued for tax purposes at $22,100.  This home is valued at about 10% of its true worth (according to today.

If the post-AVI tax rate will be about 1.25% of true market value, these two properties will see dramatic changes in their tax bills. 

Bell Atlantic Tower 
Current tax bill - $3.83 million per year 
Potential post-AVI tax bill - $1.61 million per year 
Increase/decrease in dollars - $2.22 million per year decrease (58% reduction)

South Philadelphia Row House 
Current tax bill - $667 
Potential post-AVI tax bill - $2,711 
Increase/decrease in dollars - $2,044 per year increase (306% increase)

To properly make this important move to tax fairness, we must have insight.  This is why the Tax Reform Commission recommended, "creating a system of budget-based property taxation by legislatively obligating the Mayor and City Council to determine all annual Real Estate Tax rates after setting the budget and reviewing assessments."  

Seeing that the move to Real Estate Tax fairness was likely to trigger a shift of taxation away from commercial and industrial properties and onto residential properties, the Commission also recommended a menu of policies to protect vulnerable homeowners including adopting Land-Value Taxation, which would tax land more and structures less to encourage development and discourage speculation; all the while shifting tax burden away from homes onto commercial properties.

Obviously, we did not foresee that the City would approach this policy shift with blinders on and we certainly did not imagine that the Mayor would use this effort to increase taxes – and could never have envisioned that the Mayor would be working with Republicans in Harrisburg to use this policy to increase taxes on Philadelphians to make up for Republican cuts in education funding.

Out of our sight, Mayor Nutter has met behind closed doors in Harrisburg with the Republican legislators who control both houses of the General Assembly. Incredibly, instead of demanding that they reverse years of funding reductions for Philadelphia schools, the Mayor has been asking for their help to alter state legislation to allow him to use AVI to increase taxes on his own citizens to clean up the mess the Republican legislators made with their harsh education-funding cuts.

Happily, Philadelphia legislators including State Senators Larry Farnese, Shirley Kitchen, and Michael Stack; State Representatives Brendan Boyle, Mike O’Brien, and Rosita Youngblood; and City Councilmembers Bill Green and Mark Squilla have stepped forward to lead the charge to make the move to actual value revenue-neutral and to separate the discussion about Real Estate Tax fairness from the discussion about whether to raise a tax to provide additional funding for schools.  

Mayor Nutter wants to move forward with the Actual Value Initiative as a back-door tax increase that could force homeowners in row-house Philadelphia to pay thousands more each year while trophy office buildings see million-dollar decreases – all the while his school-funding scheme would reward Harrisburg Republicans and their slash-and-burn approach to school funding.  But by insisting that we move forward without the proper information with which to make smart tax policy, he is placing a stumbling block before the blind.  That is a transgression of biblical proportions and one we must stop.

We must wait to see how actual values will affect all taxpayers and only then bring tax rates and tax policies into focus.  The legislation to do this right and to do this well is now pending in the General Assembly and in City Council.  See? We don’t have to move forward as the blind leading the blind.  We can make smart policy with vision.