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Why BIA Supported the Abatement Bills AND the 1% Tax on Residential Development

Philadelphia City Council passed important legislation on Dec. 10, including a 1% Development Impact Tax (DIT) on residential construction (Bill No. 200556). The DIT proceeds will be used to fund the development of much needed affordable housing in our city, as well as other programs in the Neighborhood Preservation Initiative. Along with this 1% tax, City Council also delayed the implementation of previously passed legislation that cut in half the value of the 10-year tax abatement for residential development (Bill No. 200366) and passed additional legislation cutting the value of the 10-year tax abatement on commercial developments by 10% (Bill No. 200653). All three bills take effect on Jan. 1, 2022.

The BIA did not come to support these bills without careful analysis. Opponents suggest the negative impact of the DIT on the supply and cost of housing will outweigh its intended benefit to fund the development of more affordable housing. By our math for a typical residential development project, the 1% DIT will represent closer to a half-percent increase in total project cost, which we believe will be offset by a needed adjustment to the cost of land that the market will provide. Land values have risen in Philadelphia far beyond any economic equilibrium and a meager 3% reduction would offset the cost of the tax.

Council President Clarke did not need the BIA to get the DIT passed, although he asked for our support. We believe the tax would have passed without any extension to the 100% 10-year tax abatement since most City Council members were opposed to providing such relief. Throughout the spring and summer, we pushed for a 6-month extension to the abatement deadline in response to pandemic-related delays. But legislation to fund affordable housing was already on City Council’s agenda. The DIT and abatement extension was the least bad proposal. While some Council members voted against the extension because they didn’t like the tax, others would have voted against any extension to the abatement if not for the tax.

The bill extending the current abatement for 12 months passed because of BIA’s relationships with Council and the Council President. We have built trust and a reputation for participating in the process with thoughtful and reasonable discourse. In our view, the extension of the tax abatement to residential developers for the time lost during this pandemic before implementing a tax on their projects, while also slightly reducing the property tax benefit for commercial developers is a fair and balanced approach. The BIA stands by its decision to support this legislation.

The 10-year tax abatement remains a critical incentive for residential and commercial real estate developers to shoulder the risks associated with real estate development and to continue to generate city revenue and jobs, as wells as housing – both market-rate and affordable. While many have called for its repeal, no credible analysis can refute the very positive net economic benefit that the tax abatement has brought to Philadelphia over the past 20 years. Even after the abatement is curtailed starting in January 2022, it will provide a meaningful and needed tax incentive benefiting residents citywide and the BIA will continue to fight for its long-term preservation.

Although it is not ideal to accept a new tax during a severe economic downturn such as the one currently upon us, the deficit of quality affordable housing in Philadelphia is real and extreme. The Philadelphia Housing Authority alone has more than 40,000 households on its waiting list, which is not surprising in a city that suffers from a persistently high poverty rate of around 25%. Other previously proposed policy interventions that are meant to help solve this shortage, such as mandatory inclusionary zoning, will have a greater economic cost on the BIA and its members and generate less affordable housing. Inclusionary zoning remains an option for City Council and our support of the DIT gives us a seat at the table if or when such measures are discussed.

We acknowledge it is unusual for developers to step forward and ask to pay more, and we did not do so with enthusiasm. But it is only through thoughtful and balanced policies that the power of the free market can be paired up with government intervention to try and tackle the housing problem in Philadelphia. The BIA is sincere in its desire to be part of the solution. The DIT, along with the continuance of the tax abatement for residential construction, is a better option than other alternatives and will have a huge impact where it is needed the most.

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