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No, the Tax Abatement is not Responsible for 2/3rds of New Construction in Philadelphia
If you have been reading the news, you know that Councilman Curtis Jones is trying to 'green' Philadelphia's construction tax abatement. Under his plan, to get a 100 percent abatement, you would have to make the building 'green,' by getting it LEED Platinum certified.
There is, quite predictably, resistance to this. Whatever you think about the merits of the tax abatement, and whether it is needed, it is effectively a direct cash payment to developers. Those developers are pretty good at getting their voices heard.
But, I want to address one thing that keeps coming up, which touches on a similar theme that Isaiah Thompson mentions in an article about wage taxes, and the 'science' behind the claims about the amount of job losses the tax is responsible for. In the abatement context, we often hear that a study of tax abatements showed that the abatement was responsible for two-thirds of all building in the City.
I read the study, and I respect the work of the study's author, and of Econsult. But I would encourage you to read it, too. Why? Because I don't believe the study demonstrates the above claims.
Here is the study's methodology for this claim: (emphasis in the original)
Figure 9 displays Philadelphia’s per capita housing permits compared to the per-county average of its suburban neighbors housing permits from 1990 to 2000. The figure shows a dramatic change in the rate of housing permits and investment, which coincides with the expansion of abatement programs in 2000. Despite weak permitting in 2001 and 2002, permits averaged over 1,631 units per year in the City from 2000 to 2001, up from an average of only around 507 per year in the period 1990 to 1999.24 This represents more than a threefold jump in the issuance of residential permits in the City. This jump is a sharp contrast to the suburban experience. From 1990 to 1999, permits per county averaged 2,356 per year but, unlike the City, did not see a jump in permitting in the 2000-2005 period. The suburban rate of permit issuance averaged 2,442 per year from 2000-2005. The bottom line is that while the rate of housing permit issuance was basically unchanged in the suburbs in the 2000-2005 period compared to the 1990-1999 period, permits in the City tripled during the same time period.
For the purposes of this analysis, we assume that the City would have continued on its pre-abatement pace of construction, since the suburban rate of housing permits has remained unchanged over the entire period. Because the post abatement rate of permitting in the City was three times as large as in the preabatement period, we estimate that the two-thirds of the post abatement housing investment was a result of the abatement.
In other words, correlation equals causation.
Using similar methodology, I draw my own conclusions: First, my parents' purchase of a used Ford Focus station wagon is responsible for the Phillies winning the World Series. From 1990 to 2007, my parents had zero Ford Focuses (Focii?), and the Phillies and the Pittsburgh Pirates won zero championships. But in 2008, my parents bought a used Ford Focus, and the Phillies won the World Series, while the Pirates did not. Therefore, my parents excellent purchase of a clunky station wagon is responsible for the Phillies winning the World Series. It is a perfect correlation.
Obviously, my example is over the top. There is a connection between suburban and city building, and between costs of building in the city versus the amount of building in the city, but you get my point: correlation and causation are not the same thing. If you want to 'prove' that a tax abatement was responsible for two-thirds of building in the City, there are a lot more factors you need to examine. For example, how are other cities building compared to their own suburbs? Or, what is the price of housing construction, including permitting, in Philadelphia suburbs, and has it remained constant that whole time? Or, if the city and suburbs are competing for the same market, why wouldn't an increase in city building actually decrease suburban building? There are a million other questions, too.
Hell, if you parse the correlation, even that first quoted paragraph seems a little strange. In fact, what the figure shows is that in 2002, two years after the abatement started, Philadelphia had less permits issued than in 1996 or 1997, while the suburbs stayed constant in their level of building. What does that mean? I would assume that many other factors, besides tax abatements, play roles.
No one doubts that abatements are responsible for some level of building in the city. But, there is no proof that the abatement is responsible for two-thirds of Philadelphia building. Let's stop repeating that.