Using Actual Values To Move Philadelphia Forward


(July 2013 - photo by Leon Smith)

The Actual Value Initiative is a reality for Philadelphia and it is not just good to have accurate values for real estate taxation, it is great to open up a world of possibilities to move Philadelphia forward.  The effort to achieve accurate property assessment will be an ongoing effort to assign true values each year. While some owners have legitimate reasons to appeal their newly assigned values, the achievement of basing real estate taxes on a real measure of property value -- for the first time in the lives of most Philadelphians -- is (as Vice President Biden might say) a big f*ing deal.  It is done. Now, we can put it to best use.

Fair's Fair

Accurate values should mean fairness, so properties with similar values should have similar assessments.  This has not been the case as a given row of nearly identical houses might have had values that varied substantially.  Much worse, many modest properties were valued substantially higher than more-expensive properties, which meant that many row-home owners were paying more than those in townhouses.  Kudos to Mayor Nutter and the Office of Property Assessment for taking on the challenge of fixing a problem that has endured through too many mayoral administrations.  Congratulations to City Council for coming up with a politically acceptable set of policies to protect property owners from unreasonable increases to enable this important change.  While some undoubtedly still have problems with the concept of taxing property, if we are going to tax property, it is crucial that we tax fairly.  Establishing actual values for properties is the only way that this can be possible.

Bank on Growth

With a system of taxation that accurately and regularly resets the values of city property, Philadelphia can bank on growth.  Tax Increment Financing (TIF) has been used in a limited way in Philadelphia to fund individual projects, but it works in other jurisdictions to make grand efforts happen.  By bonding or borrowing against anticipated increases in tax revenues, Philadelphia could make the remarkable a reality.  Want to make the Reading Viaduct into a High-Line-type park?  Issue bonds to fund the improvements to be paid off by the incremental increase in Real Estate Tax revenue that will come from the growth in value of properties located near the new park.  Want to invest more in Park and Recreation facilities across the city? Create a TIF district that captures value increases from all properties adjacent to park facilities across Philadelphia to fund today's improvements with tomorrow's growth in property values.

Virtuous Cycles

By establishing the proper feedback mechanism in property taxation through revaluing properties based on actual changes in the marketplace, Philadelphia can create virtuous cycles instead of the vicious cycles that have defined recent decades.  Philadelphia has historically relied on increasing taxes on wages and business activities to fund services, and then when firms and families moved out, the City was forced to increase tax rates to meet the demands for increased revenues (or decrease services, which makes the city less attractive), which caused more neighbors and employers to leave and increased pressure to raise tax rates on those who stayed.  We all know how that turned out.  But, because growth in the value of property can generate additional revenues WITHOUT an increase in tax rates, it is possible to create a virtuous cycle to make a better Philadelphia.  Witness what has happened in West Philadelphia surrounding the Penn Alexander School where the desirability of the university-supported, public school has dramatically increased the value of nearby homes.  The public and institutional investment in the school has increased demand for surrounding properties, which has increased neighborhood house values.  Because the City has not regularly reassessed property, we never captured this growth as increased tax revenue.  Now that the City will regularly and accurately revalue properties, such improvements can allow Philadelphia to invest in its neighborhoods in a way that will generate additional support for further improvements.  If we improve community safety, school quality, and overall quality of life, we increase neighborhood desirability and home values.  When values increase, the City can realize increased revenues without raising tax rates (or can realize the same revenue with decreased tax rates).  Now that's a virtuous cycle worth celebrating.

Reform Philadelphia Taxes

With property taxation finally rationalized in Philadelphia, we can finally realize the promise of the Tax Reform Commission's vision to make taxes more fair and less burdensome to attract and retain jobs and neighbors.  It is extremely rare to tax business activity at the local level and it has been demonstrated again and again that City business taxes continue to chase employers and their jobs from Philadelphia.  A fundamental premise of the vision of tax reform in Philadelphia is the reduction and even the elimination of the local taxes on business income and receipts.  But then how to keep the budget whole and how to increase revenues to compensate for the reduction in business-tax revenues?  By generating more revenues from the taxes on commercial real estate.  Business taxes are capitalized into commercial real estate values.   According to the Center City District, while City and suburban office rents are nearly identical, Philadelphia's business taxes add a 14-percent premium for office tenants -- a $12-15 per-square-foot cost for major financial-services firms and partnerships.  If business taxes go down, the value of commercial real estate goes up and with it, Real Estate Tax assessments. If we accurately and regularly revalue property, Philadelphia can reduce business tax rates and become a more welcoming place to create jobs, increase the value of commercial real estate, and generate the revenues necessary to fund the City budget.

So AVI is here and it is time to put it to good use.  Let's make sure that real estate assessments are fair and accurate and that they are regularly updated.  Then, let's bank on Philadelphia's future, create the virtuous cycles that can improve Philadelphia neighborhoods, and reform taxes to help attract and retain firms and families.  By making real estate taxation work, we can build a better Philadelphia.