Real Estate Tax revenue is the second biggest revenue earner for the city after the wage tax, bringing in $536 million for the City of Philadelphia and $662.32 million for the School District in 2015. However, Philadelphia’s reliance on real estate tax revenue is low compared to other East Coast cities, and PICA recently suggested that the city come up with a plan to lessen its dependence on the wage tax and focus on improving its revenue from real estate. Currently the city has $214 million in delinquent real estate tax principal, as well as abatements and exemptions for real estate taxes that limit the amount of immediate revenue sourced from real estate taxes. These programs are expected to pay off over a period of time; however, the real estate tax exemptions for nonprofits may not be beneficial for Philadelphia’s revenue purposes.
Tax abatement programs intend to encourage residential and commercial real estate growth in the hopes of creating more tax revenue in the future. New residential and commercial buildings can enjoy a 10-year abatement for real estate taxes that would be applied to the updated value of their respective properties. These abatements have created some immediate benefits, including new jobs and buildings that are subject to wage and real estate transfer taxes. A 2012 study predicted that tax abated building projects in the Brewerytown neighborhood alone would generate $2,971,585 in total net taxes over the 10-year abatement period.
No such study has been done to compare the cost-benefit analysis of real estate tax exemptions for nonprofits. Philadelphia leads the nation in tax-exempt land value, making up 10.8%, or $13 billion, of the city’s total land value as of 2012. Instead of paying real estate taxes, nonprofits are expected to make yearly “Payments in Lieu of Taxes” (PILOTs). Hospitals and universities only paid $347,000 in PILOTs in 2011, though this amount increased last year in $3.09 in PILOTs for the School District. However, compared to Boston’s PILOT program that collected $8.7 million in 2012 from Harvard alone, these numbers are considerably low.
At the current real estate tax rates in 2016, nonprofits would contribute $82,121,000 in revenue to the City of Philadelphia’s general fund and $99,853,000 to the School District if they were no longer exempt. However, taxing nonprofit organizations goes against ideological beliefs about the functions of nonprofits, which assumedly take some burden of service-providing off of the local government. In addition, hospitals and universities employ 36% of Philadelphia’s residents, a hefty portion of our taxable wage earners. Considering the city’s dependence on wage tax revenue, it would be risky to tax hospitals and universities at the same rate as other real estate properties.
The collection of real estate tax revenue should be a focus of reform if residential and commercial tax abatements continue to be a catalyst of economic growth in Philadelphia. Real estate tax collections on current owners in debt may not provide the kind of stimulus that tax abatement for new buildings creates; similarly, nonprofits maintain a steady hold on land that provides little for tax revenue besides what is sourced from individual wages. The City and the School District should consider enforcing PILOT contributions or create an acceptable tax rates for the large amount of property owned by nonprofits in Philadelphia.