Those who think the city is taxing itself to death will be tempted to add a proposal by City Council President Darrell Clarke to impose a 1 percent tax on new construction to the mortality statistics.
The construction impact tax, expected to come up for a vote Thursday in Council, is designed to generate $20 million to fund affordable and mixed-income housing. This is an important goal as the city tries to balance continued growth and development with inequities that have many struggling to find the most basic housing — a squeeze that can be exacerbated by new, pricier development.
Clarke makes a strong case for the tax, and has done thorough homework, including an analysis of how other large cities fare with similar taxes, including Portland, Los Angeles, and Seattle. He also cites a decline in federal funds for affordable housing; which puts additional strain on the $11 million annually going to the Housing Trust Fund. The need is clear: Philadelphia’s historically high home ownership rates have declined in the light of federal cuts and other factors, such as declining wages.
This kind of directed tax rightly falls on developers, who, after all, already enjoy a 10-year tax abatement — a generous spur to development and job growth in the city. In fact, in measuring the tax abatement against the construction impact tax, it’s easy to consider the tax as nothing but an adjustment in the abatement. Adjusting or reconsidering the 10-year abatement has been a conversation that has been gaining steam. So in theory, the 1 percent construction tax deserves consideration.
On the other hand, someone else has given consideration to how to fund affordable housing and offers an alternative that could also make sense. Councilman Allan Domb is arguing for scheduled reductions in the abatement in lieu of the construction tax, and argues that even more money could be generated without the bad taste of a new tax.
Domb calculates that the imposition of the 1 percent construction tax is equivalent to reducing the 10-year abatement to 9.4 years. His idea is to scale back the abatement over a period of time to effectively turn it into a 8.5-year abatement. This would generate more than the revenue expected from the construction impact tax. The hitch is that the cash wouldn’t flow immediately, and the city would have to provide upfront cash for the Housing Trust Fund, which it would begin to reclaim after seven years.
Council members Domb and Bobby Henon recently requested a fiscal impact study on the construction tax; the results of that study were released Wednesday. The bottom line: The tax could end up costing the city $3 million a year due to losses in transfer tax and wage tax revenues due to reduced construction, as well as costs of monitoring and collecting the tax.
Given the arguments and issues on both sides, how Council proceeds on the construction tax is anyone’s guess, but the good news is there is little disagreement on the importance of affordable housing. Now it comes down to resolving the best way to pay for it.