Will Council Stop Nutter's Planned Real Estate Tax Hike?

(April 2011)

The recent admissions by Nutter Administration officials that they intend to make the "temporary" 10-percent Real Estate Tax rate increase permanent should be no surprise to readers of my missives. I "broke" this story months ago (see here and here) and am gratified that the media has exposed it to all of our friends and neighbors. But some were surprised to learn that the Mayor actually wants to double down on the tax increase and turn it into a 20-percent increase which could jeopardize the desperately needed citywide revaluation to make Real Estate Taxation fair, accurate, and legal.

When the Mayor put forth the city's Five-Year Financial Plan last year, one revenue assumption stuck out like a sore thumb. Despite the fact that, by law, the recent Sales Tax and Real Estate Tax hikes are scheduled to go away in the future, the Plan only forecasted that the Sales Tax revenues would return to a reduced level. Oddly, it seemed the Mayor projected that Real Estate Tax revenues would continue to be collected at the tax-increase-elevated rate even in the years after the rate slated for reduction. I said that the Mayor planned to use the effort to properly value city properties as a way to implement a back-door tax increase to maintain the city's revenue collections from the 10-percent "temporary" tax increase. It turns out it was even worse than I imagined -- the Mayor plans to use the pending citywide reassessment to make the "temporary" 10-percent tax-rate increase permanent AND then add an additional tax increase to generate a 20-percent revenue increase for the school district.

The bottom line is that Philadelphia taxpayers were paying a total of about $1 billion last year in city and school district Real Estate Taxes; this year, we are paying a total of about $1.1 billion; and after the Mayor's legerdemain, we could be paying a total of $1.2 billion. A permanent increase of $200 million in revenues from a "temporary" rate increase -- how's that for a tax trick?

Here's how that works. Philadelphia Real Estate Tax collections are actually split between the city and the school district. Before the recent tax increase, the city retained 40 percent of collections and the school district received 60 percent. The way that is achieved is by applying two separate tax rates to the value of real estate. So while you and I only see one tax bill, it is really a bill generated by the city Real Estate Tax combined with a bill for the school district Real Estate Tax.

When the city enacted the 10-percent tax-rate increase, only the city's portion of the Real Estate Tax was raised and only city collections increased. So, while the city's tax rate increased from 3.305 percent to 4.123, the combined tax rate increased by only a total of 10 percent (from 8.264 percent to 9.082 percent). That's how a 10-percent rate increase results in a more-than-20-percent revenue increase for the city. (In Fiscal Year 2010, the city collected about $402 million in Real Estate Tax revenue but plans to collect about $489 million in 2011.)

Looking to the future, the Nutter Administration sees the Actual Value Initiative -- the effort to accurately value city properties and end decades of unfair and illegal valuation of properties for tax purposes -- as a way to sneak in a tax increase while everybody is confused about new property values and new tax rates.

The fundamental understanding about the effort to fix this system has always been that it be accomplished in a way that is revenue-neutral for the city -- not as a way to generate more or less money for the city and school district, but exclusively in an effort to guarantee that real estate is valued fairly, accurately, and legally. Nobody understands this better than our Mayor who articulated this idea quite clearly on the campaign trail, saying: "I will support a revenue-neutral move toward Full Value Assessment...matched by a proportional reduction in the millage rate by City Council." (See video highlights of campaign promises made and broken.)

That came from a policy paper that candidate Nutter put forth titled "An Honest Budget Now." But, now, as part of his less-than-honest budget, he has abandoned that principle and articulated a strategy to re-set the millage rate (the tax rate) in a way that will maintain the city's revenue collections at the level achieved by the "temporary" tax increase AND increase revenues for the school district by about another $120 million.

Not only does this scheme violate the Mayor's campaign promise, pick Philadelphians' pockets when they can least afford it, and undermine our ability to trust the Mayor and his team; it threatens to undermine the effort to fix our unfair, inaccurate, and illegal assessment system.

It has always been clear that to fix what is wrong with real estate taxation in Philadelphia without generating a windfall or deficit for the city, some -- who have been undervalued for years -- would have to pay a higher tax bill, while others -- who have been overvalued for years -- would see a reduced tax bill. Those who see a reduction may be pleased, but there is no question that higher tax bills across the board will result in angry taxpayers no matter how compelling the need to make the system accurate and legal and reverse decades of unfairness.

To reduce some of the backlash and ensure that this potentially frustrating and confusing (but absolutely essential) policy move forward, it has always been stressed that the Actual Value Initiative must be implemented in a way that does not increase revenues for the city and school district. Everyone has understood that if that were to happen, taxpayers would (understandably) see the move not as an effort to make real estate taxation fair, but as a stealth tax increase.  

Happily, there is something we can do to stop this madness. City Council, not the Mayor, will ultimately set Real Estate Tax rates and this year, we will elect all the members of City Council. So, when they appear in your neighborhood or at your door to ask for your vote, ask the candidates whether they will commit to making the coming citywide reassessment revenue neutral. If they refuse, hesitate, or waffle -- vote for someone else who will commit to making this fix all about fairness and not about cleaning up the Mayor's budget mess.

We, the people, can stop this backdoor tax increase, and ensure that real estate values will be made fair and legal.