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Philadelphia Wants To Tax Housing Construction to Make Housing Cheaper

Real estate investors worry a new construction tax will halt construction in an already-heavily taxed city.

Sean Pavone/Dreamstime.comSean Pavone/Dreamstime.comPhiladelphia is hoping to join the growing rank of cities that seek to bring down housing costs by piling more taxes and fees on new housing development.

This week the Philadelphia City Council is expected to impose a 1 percent tax on new construction projects in the city.

The tax is supposed to raise roughly $22 million a year, which will be spent on building below-market housing units and subsidizing down payments for families making as much as $105,000 a year. The specifics of how this money will be spent have yet to be hashed out, but The Wall Street Journal reports that those down payment subsidies could reach as high as $10,000 per recipient.

Taxing the thing you want more of is not unique to the city of brotherly love.

Los Angeles passed a per-square foot "linkage fee" on new development with the intention of plowing the proceeds into affordable housing and homelessness services in late 2017, as did Denver in late 2016. (It's called a linkage fee because of the supposed link between new development and rising home prices and homelessness.)

Just because these taxes are becoming more common does not make them a good idea, says Vanessa Brown Calder, a housing policy analyst at the Cato Institute.

"It's a very silly and counter-productive idea to tax new development in order to somehow provide affordable housing down the line," Calder tells Reason. "Taxes have the effect of reducing the supply of the thing that you are taxing."

This is especially true of the housing market in Philadelphia, which is already heavily taxed compared to other cities, says Lauren Gilchrist, a spokesperson for local commercial real estate trade association NAIOP.

"I speak with capital partners that are local, national, international that are looking to invest in Philly and they are going, these guys are already so high taxed, you were already weak demand," says Gilchrist.

In addition to the potential construction tax, Gilchrist notes, Philadelphia property owners have seen massive hikes in the assessed values of their properties, which substantially increases their tax liabilities. Assessed values went up nearly 11 percent city-wide last year. Office properties, says Gilchrist, have seen their assessed values go up by some 38 percent, while multi-family properties have increased by 68 percent.

Philadelphia Mayor Jim Kenney has also been advocating for a 4.1 percent increase in the property tax, plus a slowdown in promised wage tax decreases.

"All of the sudden a construction impact tax layered in on that is just another onerous cost of doing business that could actually break the back of the market," Gilchrist tells Reason. Construction taxes can't raise money for affordable housing if new construction is deterred from happening in the city, she says.

The city's construction unions have come out strongly against the tax. John Dougherty, the head of Philadelphia's electrical workers union, sent what local news website Philly.com described as a "fiery" letter to the city council in which he decried "the terrible timing of this anti-business tax proposal given that the city, with significant assistance from the Trades, is on the short-list for Amazon's second national headquarters. This onerous tax proposal at this crucial time essentially tells Amazon that we're not interested in their business. Dumb."

The city has "a pretty onerous taxing system," Deputy Mayor for Policy James Engler told The Wall Street Journal. Like the unions, Engler expressed concern about scaring Amazon away. Mayor Kenney, for his part, is opposing the construction tax while pushing the property tax hike.

The plan has earned the enthusiastic backing of the city's Building Industry Association, which represents residential developers who, while having to pay the tax, also stand to be net recipients of new revenue that is earmarked for residential housing construction. Support within the City Council for the tax is also strong. It has received the sponsorship of nine out of 17 councilmembers. The construction tax passed out of the budget finance committee last week on a six to three vote.

If city officials really want to tackle housing affordability issues, says Calder, they should be looking not at tax increases but rather at tax cuts and deregulation.

"When you are concerned about housing affordability you are really concerned with ensuring that housing supply meets housing demand, and that that happens as quickly as possible," Calder tells Reason. Taxes on construction slow this process down, as do implicit taxes like zoning regulations.

"Remove all of the barriers to developing housing so that there is as much supply as possible," she says. "As supply grows housing costs will fall and those people will be able to do more with their own money."

Photo Credit: Sean Pavone/Dreamstime.com

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  • Diane Reynolds (Paul.)||

    The tax is supposed to raise roughly $22 million a year, which will be spent on building below-market housing units and subsidizing down payments for families making as much as $105,000 a year.

    We've lost our fucking minds.

  • Rhywun||

    The mayor's not just friends with poor folk, you know.

  • Hunthjof||

    Wait 105K? WTF

  • Leo Kovalensky II||

    You know the old saying, "if you want more of something tax it."

    Wait... is that how it went?

  • Microaggressor||

    It's Bernienomics. It requires a Rick and Morty-tier IQ to comprehend.

  • Wizard4169||

    Yet they inexplicably rejected my plan to expand the supply of housing by burning down houses.

  • Brandybuck||

    I've always said taxes are to fund the government. Once you tax for societal change you screw everything up. I'm not saying taxes are good, but if we are going to have them then limit them to funding the government. Fix the size and scope of government and taxes then solve themselves.

    Because people are ignoramuses. Especially about economics and incentives.

    Tax to fund the government and then if they get the taxes wrong they have a surplus. But tax to enact social change, and they get the economics wrong, then we get a whole bunch of "unintended" consequences and Philly politicians scratching their heads and wondering why housing prices keep going up when they're taxing new houses as fast as they can.

  • BYODB||

    Predictable outcomes are not unintended outcomes.

  • Rhywun||

    Yeah, it's pretty clear this is exactly what they want to happen. Their wealthiest donors demand it, in fact.

  • Hunthjof||

    Between San Fran Seattle and Philly it is almost like they are in some weird contest to see who can come up with the worst housing policy. It is like watching a road runner cartoon. You watch hoping they will stop ordering from the ACME central planners catalog yet they continue to do it. But I agree with you sometimes i just have to believe that they are doing this cause they want to make sure the unwashed masses are not in their communities. Like the refugee issue. In Virginia they are not putting them in Alexandria or Arlington where all the rich white liberals live they are going into the poorer areas down south near Richmond etc.

  • Hunthjof||

    That is the biggest problem both in DC and the local and state governments. We never had an issue with Gay marriage the issue was the numerous legal benefits we gave married couples one of the biggest being tax breaks. We offer breaks for having kids, we offer breaks to buy a house and a host of other things. For far to long we have allowed governments to try to economically and socially engineer society through the tax code and the result is often far away from what the politicians intend.

  • JunkScienceIsJunk||

    Philadelphia property owners have seen massive hikes in the assessed values of their properties

    An entire article should be written about this alone. This has been their ruse. It's also been the way they've gotten around 10 year tax abatement. The tax abatement applies only to the value of the land, not the house*. The land was always assessed at a higher value, so only a little bit of tax was owed. So then they flip-flopped the assessor value to make the house the dominant value, which basically renders the tax abatement pointless.

    * = I may have gotten this backwards... same concept though.

  • JFree||

    That looked messed up to me too.

    Assessed values went up nearly 11 percent city-wide last year. Office properties, says Gilchrist, have seen their assessed values go up by some 38 percent, while multi-family properties have increased by 68 percent.

    If there is a huge difference between 'office' v 'multi-family' development - the city is clearly deemphasizing raw land in their assessments and instead trying to micromanage development. Even though '% change' is the wrong metric to begin with (but that's a problem with all property tax).

    Another local article re single-family homes (with a map too) confirms that. Assessments up in gentrifying areas and down in others - and proposing a higher 'homestead exemption' and other loopholes/distortions. None of which prob has a damn thing to do with where Philly spends on local infrastructure improvements. Just chasing development to milk it.

    Shame too. Pennsylvania is the only state in the US with the inclination (and actual local experiments) to tax land instead of property via 'split-rate assessments'. Which is tough enough over a credit cycle when the Fed dicks around with interest rates (nationwide manipulation of local land values). You'd think the 'Henry George Foundation' could have an effect in the actual city where they are HQ'd.

  • JunkScienceIsJunk||

    By the way, the whole thing is intended to promote the gentrification (ahem... white-ification) of the city. That's also one of the reasons Philadelphia has the highest wage tax in the country, knocking on 4%. Raise the admission prices and the poor and middle class can't get in so easily. It's doing the exact opposite of their stated goal.

  • Hunthjof||

    But it is their actual goal and don't let them fool you.

  • albo||

    PA's economy is actually doing pretty well right now. Which is why the always-insane Philly government wants the city not to share in the good economy.

  • Fist of Etiquette||

    If Philadipshitia wants to raise revenue they should impose a tax on douchebaggery. They'd make a windfall from their own population.

  • albo||

    Sorry, we can't read that post over the glare shining off of our Lombardi Trophy.

  • General_Tso||

    Enjoy it while you can, because we're coming to take it back next year.

    Er, we being the Patriots, of course.

  • BYODB||

    I guess government forgot their rationale for sin taxes when it comes to other kinds of taxes. No surprise.

  • Scarecrow Repair & Chippering||

    It's just another redistribution scheme. Nothing special, proggies do it all the time. The fact it's a sales tax instead of an income tax is nothing radical. And the fact that it is stupid is also just par for the course.

  • Rhywun||

    "Remove all of the barriers to developing housing so that there is as much supply as possible," she says. "As supply grows housing costs will fall and those people will be able to do more with their own money."

    That's a nice thought but totally disconnected from current reality.

  • tommhan||

    GEEZE!!!!!!!!!!!!!!

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