Effect of an Expiring Tax Abatement

[Pinkham]

Here is a specific example of the change in taxes when a tax abatement on new construction expires. (This example is from the current tax system, and does not involve any reassessments related to the Actual Value Initiative.)

A friend purchased a new construction home in SWCC for a purchase price of $397K in July 2003. Tax on the land in 2003 was about $650. In the past two years, tax on the land increased to about $740. There was a ten-year tax abatement on the house itself.

Year: 2012
Market Value: $300,000
Assessed Land (taxable): $7,840
Assessed Improvement (taxable): $0
Assessed Improvement (exempt): $88,160
Total Assessment: $96,000
Gross Tax: $739.47

Year: 2013 -- Proposed Values
Market Value: $300,000
Assessed Land (taxable): $7,840
Assessed Improvement (taxable): $88,160
Assessed Improvement (exempt): $0
Total Assessment: $96,000
Gross Tax: $9,380.16

Notes:
--In 2010, the Market Value was listed as $24,500 instead of $300K. The abated value wasn't included in the table until 2011.
--This is my understanding of the current system
1. The Market Value was set at approximately 75% of what the property would actually sell for.
2. The Assessment was set at approximately 32% of the designated Market Value.
3. The Tax was computed this way: Tax = Assessment X Millage Rate

To arrive at the amount of the taxes, this is the entire formula:
Taxes Owed = Actual Value of the Property X 75% X 32% X Millage Rate

The focus of this thread is the effect of an expiring property tax abatement. Because there will inevitably be comments and worries about the Actual Value Initiative, here is a summary of how AVI fits into the picture:

In theory, the Actual Value Initiative is supposed to simplify the formula to:
Taxes Owed = Actual Value of the Property X New Millage Rate
In theory, AVI is supposed to be revenue neutral -- so the new millage rate should be somewhere between 1 and 2 percent, instead of somewhere around 8 or 9 percent)

[raider.adam]

Correct. So if the AVI was at 2%, your friend would reasonably expect to pay about $8K in property taxes.

[EJW]

Correct. So if the AVI was at 2%, your friend would reasonably expect to pay about $8K in property taxes.

I think I've asked this before, but is 1-2% for city taxes in line with other major cities, and is it reasonable when considering the wage tax? Does anyone know?

I ask because I'm concerned about two things:

1) the new tax rate will be comparatively high
2) the new tax rate will actually not yield a neutral revenue

Regarding(2), is there any way we are able to determine if the new projected revenues will match old revenues? For some reason I don't really trust the city. Not to mention it is difficult for me to believe that there are enough people right now paying many times more each year than their market rate would allow to compensate for a rate like 2%.

[eldondre]

how can the value of a home be the same if the property taxes are 12 times higher?
b) a tax rate of 2% would be crippling

[newphil]

2% is sky high. Would be highest anywhere in the country by a country mile. Highest in the country currently is around 1.8%

I could live with a rate around 1.65% Still very high but manageable. So about $5000 per year.

[eldondre]

2% is sky high. Would be highest anywhere in the country by a country mile. Highest in the country currently is around 1.8%

I could live with a rate around 1.65% Still very high but manageable. So about $5000 per year.

there's a real risk that I'd taxes are high enough to keep prices low that you can't make a profit building new construction (in thay sense low property taxes have been benefitting city construction). If its revenue neutral what would the rate be?

[raider.adam]

If its revenue neutral what would the rate be?

We don't know since the city doesn't have the assessment numbers ready. for awhile it was estimated it would be around 1.8%. But of course we don't know how accurate those assessment numbers are either.

[the mule]

how can the value of a home be the same if the property taxes are 12 times higher?
b) a tax rate of 2% would be crippling

The value in the marketplace definitely won't be the same. Two identical houses, one with an expired abatement and one with some number of years left on the abatement would be expected to differ in price by some amount reflective of the additional tax burden on the unabated house. Of course OPA won't take that into account because they lack the sophistication.

It will be interesting to see how this affects values throughout SWCC down to Point Breeze. Is this going to be the start of a mass exodus of people who can no longer afford their homes? Where will they move? There are already quite a few people who have moved south to Point Breeze/Newbold to get more house for less money without a major geographical move. I wouldn't be surprised if expiring abatements add more fuel to the development boom there while new homes in SWCC continue to hover in the 600k plus range.

[Lolly]

The value in the marketplace definitely won't be the same. Two identical houses, one with an expired abatement and one with some number of years left on the abatement would be expected to differ in price by some amount reflective of the additional tax burden on the unabated house. Of course OPA won't take that into account because they lack the sophistication.

It will be interesting to see how this affects values throughout SWCC down to Point Breeze. Is this going to be the start of a mass exodus of people who can no longer afford their homes? Where will they move? There are already quite a few people who have moved south to Point Breeze/Newbold to get more house for less money without a major geographical move. I wouldn't be surprised if expiring abatements add more fuel to the development boom there while new homes in SWCC continue to hover in the 600k plus range.

Personally, if the hike's high enough, it would more likely cause us to sell (if we can), then up and leave Philly entirely - not that we'd want to.

[2happy4u]

Many people will leave Philly, why would they stay????

[Gladys]

Many people will leave Philly, why would they stay????

even the rents would go sky high and then the CCPB and the like would be thrilled cause it would go back to the way it was 40 yrs ago.

[Eastcoast]

As discussed before...if taxes go up on average up to say $8000 a year on a typical rowhouse I think many people will consider moving.

BUT! Once the math is done, where are they going to move that costs less? Camden?

Surrounding nice burbs will cost just as much tax wise if not more, plus the need for one or two cars, car insurance, gas. Suburban homes cost more to heat and cool than a row, yard maintenance...etc.

[Lolly]

For those of us who telecommute, there are many, many more possibilities.

[El Sharko]

I love living in this city. It's been my home for a long time and I really wouldn't ever want to leave. That being said, I'm afraid that a tax increases of the magnitude being discussed on this thread would cause a lot of people to reevaluate their housing options.

Where would they go? One thing is for sure is that people in G-ho who feel as if they've been slammed by the city on taxes probably won't be looking for a cheaper property in Point Breeze only to let the city pull the same nonsense again. They will move out of the city. And when they do, they'll probably find that they can afford to buy in walkable suburban towns such as New Hope, Media, Phoenixville or Newtown for about $350,000-$400,000 while paying that same $6000-$7,000 in property taxes and 0% in wage tax. Only there for their property taxes they'll get low crime and a functional school system. I'm not sure what the tipping point would be but I'm guessing it would be somewhere in the 1.4-1.5% range--wherever it is that makes folks with younger children start making economic comparisons. So yes, the city does risk once again driving the middle class back to the suburbs if it doesn't get this tax thing right and, in turn, sending us back to the dark ages. If it does choose to go nuclear with the AVI, the one hook that the city has over the short term is that a massive property tax increase would have such a drastic effect on property values that it would make it difficult for younger folks and other recent buyers of non-abated homes to sell without doing so at a major loss. Of course that opens up a whole other host of issues.

[Teddy215]

Personally, if the hike's high enough, it would more likely cause us to sell (if we can), then up and leave Philly entirely - not that we'd want to.

Same here, and it's such a shame because I know many other young families in the neighborhood who would do the same. We're actually thinking of selling now - much earlier than we ever anticipated - because we're so concerned about this issue.

[Eastcoast]

Well, we'll see how this plays out but all I can say is that I hope people really do their homework about the cost of ownership outside of the city. Especially those who have never owned a single family home in the burbs...

[Eastcoast]

For those of us who telecommute, there are many, many more possibilities.

Well, yeah.

C'mon out to TX!

[billy ross]

As discussed before...if taxes go up on average up to say $8000 a year on a typical rowhouse I think many people will consider moving.

BUT! Once the math is done, where are they going to move that costs less? Camden?

Surrounding nice burbs will cost just as much tax wise if not more, plus the need for one or two cars, car insurance, gas. Suburban homes cost more to heat and cool than a row, yard maintenance...etc.

You people are out of your minds. The tax abatement was set up to fix the tax inequities where owners of new construction were taxed so unfairly that noone in their right mind would buy new construction in Philly and volunteer for those taxes. The abatement bought 10 years to fix this problem. Properties that come off of abatement need to have their taxes appealed, because the taxes of houses coming off of abatement are still out of whack, because the system is still very much uneven, overtaxing and undertaxing different properties, sometimes wildly so. AVI is meant to fix that. It's not a huge grab for new tax money - overall taxes citywide won't change much with AVI, since Council needs to set a new millage rate in order to be able to put AVI into effect, and Council will set that millage rate once they know what the tax base will be after AVI. The overall taxes collected after AVI is implemented will be either marginally higher than or the same as what was collected before AVI, with the unevenness greatly reduced. AVI will help any overtaxed property, most especially houses coming off of abatement.

The effective rate will most definitely not be anywhere close to 2%. Properties still won't be valued at 100% under AVI, and there will be an exemption to boot; these will conspire to dramatically lower the amount subject to tax, which will reduce the effective tax rate. It is clear that the assessors have been using lowball estimates of property values, very easily defendable values in case of challenges. You need to understand that when people toss around a 2% number, it isn't 2% of 100%, for one, and for another, it's just a high limit that they're speculating about in the absence of real numbers from the assessors; it's a case of 'let's plug in this number and see how it works out.' I can tell you how it would work out once the numbers are in; property tax revenues would skyrocket in that scenario and it would cause great disruption. That's why it's not going to happen.

[El Sharko]

Thanks, BillyRoss. There's lots of information coming from all directions on this issue and it seems as if you have a handle on it. It would be nice if the city could provide something to affirm your view to cool the fires. I think that the neighborhood is exceedingly affordable right now and that most folks probably can afford to pay a bit more. The mystery behind the process and anecdotal stories such as the one that began this thread, however, are what is fueling all of this speculation. So in that context, I can understand people worrying that they'll suddenly be paying anywhere between $5,000-$7,000 on their recently purchased $300,000-$400,000 unabated rowhomes. It's money that they haven't budgeted for in the midst of a terrible economy.

With respect to how the AVI gets implemented on a citywide level, I'm not sure people in neighborhoods like g-ho really sympathize with fairness argument (Not that you were making it) when people talk about the AVI being revenue neutral. They understand that making it revenue neutral necessarily sets boundaries on the level of taxation but a lot of this boils down to simple home economics. The bottom line is that people care about their own home budgets and their own home values. No-one is going to look at a suddenly massive tax bill and think, "Well I guess I can live with this because my increase was offset by a decrease in Olney where folks were overpaying for years so I guess that's fair." They'll respond rationally in regards to their own circumstances.

[clonechemist]

Honest question, to anyone in this situation: what were you thinking when you bought a house with an abatement?

Did you simply neglect to think about the fact that it would actually expire at some point?

Did you decide to buy a house that you could only afford as long as the tax bill was still at zero?

If you were planning to sell as the abatement expired this whole time, then by god I hope you do suffer from decreased re-sale value.