City Tax Windfall Hits Small Biz
Originally published by the same author in May, 2019.
A South Philadelphia bike repair shop just close last month, and several other businesses in the same neighborhood are soon to follow. I spoke with someone with knowledge of this situation, and they blamed City taxes. In fact, the bike shop’s property assessment history reveals that its assessment increased 118% in just 3 tax cycles, from 2017 to 2020. Because the shop was commercial in nature, it is also subject to the City’s use and occupancy (“U&O”) tax, which increases or decreases with the property’s assessed value. Keep in mind that the U&O tax (1.21%) is almost equivalent to the real estate tax (1.3998%), so this shop’s U&O burden rose 93% in the same short timeframe. Perhaps large organizations can bear such a dramatic tax increases, but for smaller shops, it may mean the end of business.
As I’ve written about before, Philadelphia is the only county in the entire Commonwealth of Pennsylvania that is not legally required first to make its countywide reassessments revenue neutral and then vote subsequently on any increase, which is capped at either 5% or 10% overall. As such, Philadelphia is the only county that may lawfully generate unlimited tax increases by reassessing real property without any vote by duly elected representatives. The City’s ability to effect backdoor tax increases seems to have made Philadelphia officials punch drunk on the increased revenue generated by property reassessments undertaken since the Actual Value Initiative (“AVI”) in 2014.
Notably, from 2014 to 2018, Philadelphia’s real estate market was in an upswing. But that may not always be the case. If the City conducts a countywide reassessment that returns assessed values that are 6-10% lower, the City and School District will have to adjust their budgets downward, possibly by tens of millions of dollars. Two Philadelphia City Council members, Allan Domb and Brian O’Neill, introduced a bill that would address that concern. Their bill would require Philadelphia’s reassessments to be revenue neutral. The Kenney administration came out in opposition to this bill by claiming it would create a budget deficit. Notably, this position is based on a misconception that the real estate market will continually rise and never face a downturn.
It is patently illogical to assume that any real estate market will continually grow. It will not. If reassessments must be revenue neutral, then if and when the market experiences a prolonged downturn, the School District’s budgetary expectations would be protected, because any countywide reassessment that produces net negative assessed values would require Council to increase tax rate to take those lower assessments into account. This would prevent unexpected budget decreases, even while it simultaneously protected taxpayers from unexpectedly large budget increases.
The City may argue that the General County Assessment Law, which is one statute that governs Philadelphia assessments, specifically exempts Philadelphia from the revenue-neutrality requirement that binds the rest of the Commonwealth. See Pa. C.S. § 5020-402. However, the GCAL merely exempts Philadelphia from the mandate that its reassessments be revenue neutral. Nothing in the statute precludes the City from either voluntarily implementing a local requirement that reassessments be revenue neutral, or voluntarily capping revenue generated from a reassessment.
Still, even if revenue neutrality becomes the rule in Philadelphia, that will not necessarily help the property owners or small businesses that have already sustained 200-300% tax increases since 2014. For such businesses, the relief may be too little too late, and if we are entering another recessionary period, it is questionable whether the empty spaces left by small business closures can be promptly filled. This type of unintended consequence should be expected as the result from rapid, dramatic changes to any type of tax structure.
Notably, Philadelphia’s Office of Property Assessment is charged by City Council to follow the guidance of expert organizations like the International Association of Assessing Officers (“IAAO”). See Phila. Code § 2-305. The IAAO expressly recommends protections against tax windfalls of the sort the City has been generating by raising assessments without adjusting the tax rate. See IAAO Standard on Assessment Policy No. 5.2.1, 5.2.2. If Philadelphia wants to stabilize the City and School District budgets, the IAAO standards—which support revenue neutrality in assessments—are a start.