Philadelphia is currently debating what to do with the additional revenues generated by the increase in property assessments. One side wants to use those additional revenues to moderate the growth in property taxes by raising the Homestead Exemption amount and expanding the Longtime Owner Occupants Program or “LOOP” (a tax relief program for low- and moderate-income homeowners whose property assessments, increase by 50% or more over the prior year). The other side wants to use the additional revenues to cut business and wage taxes.
Our view at the PA Budget and Policy Center is that moderating the growth in property taxes is the right choice. That path will make our tax system fairer and is a better way to spur population and job growth than lowering business and wage taxes. The experiences of Boston and San Francisco, as well as Philadelphia’s experience with property tax abatement, shows us that Philadelphia’s mix of relatively lower property taxes and higher business and wage taxes works.
Of course, the Chamber of Commerce and other advocates for cutting business and wage taxes in Philadelphia see things differently because, well, that’s what they have been arguing for years. But as we recently demonstrated in a long and detailed paper, the research that supports their position is highly questionable. There is no evidence that making small cuts to the business tax accomplishes anything. And our estimates show that making large cuts to business taxes generates jobs—but only at enormous costs. Cutting the business tax in half would add approximately 50,000 jobs (only 20% of which would go to current Philadelphians), but the cost would be enormous: $3 billion over ten years. Investing that money in schools and holding down an increase in property taxes makes far more sense, both in the interest of fairness and as an economic development strategy.
The argument that Philadelphia’s business taxes are a terrible burden on businesses never made any sense because those taxes are no more than 2%-3% of business costs. Labor and transportation costs are much more important, which is why the best long-term economic development strategy for the city is to invest in education.
There is also increasing evidence that keeping property taxes low is a better growth strategy than the business and tax cuts championed by the Chamber of Commerce and its allies.
For twenty years business and wage tax cutters have said Philadelphia should become a more “normal” city and rely on higher property taxes and lower wage and business taxes to raise revenues.
Yet during those same twenty years there has been increasing evidence that the fastest growing cities in the country have actually become more like Philadelphia and are relying less on property taxes and more on other taxes. An article in The Wall Street Journal written by economists from the CATO institute—neither of which are known for promulgating radical socialist ideas—says that a major reason Boston and San Francisco have grown so fast is that they encourage real estate development by holding property taxes down. That strategy was largely inadvertent because it was the product of the taxpayer revolts that led to Proposition 13 in California and a similar movement in Boston. But it worked nonetheless. And the same strategy has been followed in New York and Washington, DC, two other fast-growing cities. Both of them have also has been relying less on property taxes in recent years. While we are still investigating this issue, it appears that the low property tax approach works because those taxes are a larger share of the costs of home ownership than business taxes are relative to the cost of doing business.
One could argue that this is the same strategy that has been used in Philadelphia by means of the property tax abatement program. While that program raises some of the same issues of lost revenues and fairness that we raise with regard to reduction in wage and business taxes, it is hard to dispute that property tax abatement has had a major impact on population and job growth in our city.
Philadelphia needs to figure out how to get the economic benefit of our relatively low property taxes while generating the additional revenues we need fairly. Raising the Homestead Exemption amount for property taxes is one policy tool that could do that. It reduces property taxes for all long-time homeowners while focusing the benefit on low- and moderate-income homeowners. Adding funds for LOOP would also protect low- and moderate-income homeowners. And additional reforms of the tax abatement program would make it fairer and more effective.
Moderating property tax growth, especially for those with low and moderate incomes, is not just a matter of economic development but also a matter of justice. The growing gentrification of Philadelphia is controversial, but many long-time homeowners recognize its benefits. When I go to community meetings people say things like, “I’m OK if higher-income people move into our neighborhood because they bring jobs and other good things with them. But I lived through the bad times and I want to be here for the good times.”
In the last few days, advocates for the schools have raised concerns about the impact of increasing the Homestead Exemption on school revenues. But those concerns should not block the proposal. The school district is likely to get a new influx of money from the state next year. And Philadelphia could use some of the additional revenues to provide more support to the schools directly, without allowing property taxes to increase too much.
Go out into the neighborhoods and you’ll see that Philadelphians are almost unanimous in their view that it is more important to moderate the increase in property taxes than to cut business and wage taxes. Council should have no hesitation about doing what their constituents want rather than listening to the Chamber of Commerce’s self-interested advice. It turns out that the people have a better grasp of urban economics than the owners of big corporations.