Doctor StrangeNutter: Or How I Learned to Stop Worrying and Love AVI

Mr. Fox

Since Mayor Nutter came into office, property tax fairness has been one of his pet issues. And in 2013, a mere six years after he was originally elected, the Actual Value Initiative could finally be rolled out! You would think, with so many years to plan out a strategy, his administration would have come up with a plan that wouldn't sink the city. Regrettably, that's exactly what could happen if City Council passes any of the AVI proposals currently being considered.

A touch of background: Philadelphia property tax assessments are completely out of whack and have been for decades. Properties in lower income neighborhoods are generally taxed as if they're worth more than they actually are. Properties in higher income neighborhoods are generally undertaxed. Properties in neighborhoods that have improved in the last ten years or so are, in general, severely undertaxed. Also, spot assessments have been the norm, with similar houses on the same block sometimes assessed at radically different values. Not only is this categorically unfair, it's also illegal. Regrettably, kicking the can the road for so many years has made this situation progressively more challenging to fix.

We laud our leaders for finally making an effort to fix the broken property tax system in our fair city. But if they're not careful, things could go horribly, horribly wrong.

He wants to fix it, but...
even this guy is terrified about the possible results

The plan that seems likely to pass City Council next week, according to the Daily News, would result in a tax rate of about 1.8% of your property's assessed (real) value, less a $30K deduction in that value if you live in said property, and with a caveat that your assessment can only triple if you've lived in this house for more than a decade. All of these changes would take effect in 2013. Here are some examples of what will happen to several properties, located around Center City, according to a spreadsheet from Councilman Bill Green's office.

As you can see from our (admittedly cherry picked) chart, taxes in established neighborhoods could double, and tax increases in recently redeveloped neighborhoods could be unbelievable. The owners of the first property on the list, in the Graduate Hospital neighborhood, will see their monthly tax bill go from about $100 to about $650. Could you handle this sudden shock to your budget? We certainly could not. Unfortunately, something like this will be experienced by (tens of?) thousands of homeowners in Graduate Hospital, Francisville, Northern Liberties, Fishtown, and West Philly. Not only will this create a terrible hardship for many homeowners, but it will immediately reduce the value of their properties. As a result, plenty of people who bought their homes in the last couple of years with little money down will suddenly find themselves underwater. And because mortgage companies will simply add the revised tax figures into monthly mortgage payments, unprepared homeowners could very easily find themselves delinquent on their payments right away.

Tax bill would go up from $100/mo to $650/mo

And that's just one piece of the disastrous puzzle. Landlords finding their taxes have doubled or tripled (or worse) will try to pass through some of their increased tax burden along to tenants. For more details on this possible powder keg, read this well-reasoned piece by Isaiah Thompson.

As we wrote about last week, the consequences for small businesses located in under-assessed mixed-use properties could be terrible as well, as they are hit with a share of the higher taxes, as well as a significantly higher punch from a Use & Occupancy tax that rises as assessments go up. We estimate that, for example, the popular Shot Tower Coffee in Bella Vista will see their property tax plus U&O burden go from about $175/mo to $883/mo. That's a whole lot to ask for a little neighborhood business. And that's assuming that the U&O rate stays where it is today, which is not a lock by any means.

Another $700/mo is a lot to ask of a small business. Photo by Angelo Benedetto

So what do we do? How do we prevent a catastrophe for home owners, renters, and small businesses in Philadelphia?

We're glad you asked.

1) Wait a year: Make it law that AVI will be enacted in 2014 or the salaries of the mayor and everyone in City Council goes down to $1. For 2013, implement a property tax hike to raise half of the money desired by the school district, and commit to find the other half of the money from the pool of $515M in tax delinquencies. Waiting to enact AVI would allow a tax rate to be determined based on complete assessment data, rather than guesstimates from the mayor's office. Forgive us for not trusting their current guess of $80B, down from a guess of $120B just a few months ago.

2) Slow it down: Enacting 100% AVI in one year will be deadly for the neighborhoods that have produced the most energy in the city in the last decade. Roll out AVI slowly, over the course of ten years. Put a poison pill in there to prevent tampering by future administrations. Rather than causing a shock to the system, as immediate implementation would, a slowly growing tax bill would give homeowners a chance to budget over time, or sell their home if that's what needs to happen.

3) Forget about homestead acts: You've probably heard that homeowners need to apply for the homestead exemption by the end of July. You can't do it online, and they've already changed the destination mailing address for this form since they released it a few weeks ago. Can you imagine the number of man hours it's going to take to go through tens of thousands of handwritten forms? Does anyone actually think that low income residents that aren't plugged in, the very people who would benefit most from this exemption, will hear about this in time? And most importantly, doesn't this perpetuate imbalanced assessments, the very thing AVI is attempting to eradicate?

4) Protect long term residents appropriately: Instead of a cap on assessment increases that, along with the homestead exemption, would actually slightly reduce the tax bills of long term homeowners in gentrified neighborhoods, we propose deferrals of property tax increases for residents that meet certain criteria. Low-income homeowners or seniors should be protected, with their tax increase recorded, but not collected until they sell their homes in the future. Many states have programs that we can look to as a model. And while we're at it, let's raise the property tax floor from the proposed $100 to, say $300. You'd be surprised at just how much of an impact that would have on the property tax rate.

5) Recalibrate Use & Occupancy: We've seen no ink whatsoever about what will happen to the Use & Occupancy tax rate once new assessments are released. If necessary, change the U&O tax rate for commercial uses in smaller, mixed-use buildings, versus multi-million dollar commercial properties. Otherwise, you're hitting an already over-taxed small business base with a doozy that will force countless stores and restaurants to close up shop.

So there you go, Mr. Mayor and City Council. Free advice to save the city. Of course, you don't have to take any of our suggestions. Just understand that staying the course and going with one of the plans currently on the table, you could be doing something like this...

Slim Pickins, indeed

Please, just think about it, huh?