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- Defeat Corbett
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Other Taxes in Philadelphia
Submitted by tcarmody on Fri, 03/16/2007 - 9:56pm.
The Business Privilege Tax gets a lot of attention on YPP, partly because there are clear fault lines in the progressive community on this issue. But what about the other taxes that Philadelphians pay?
There are four that are particularly important: the wage tax, property taxes, sales tax, and the real estate transfer tax. In what follows I give a breakdown of some of the basic facts about each of these taxes -- rates, revenues, structure, etc. -- with the goal of fostering discussion of these taxes and how some of them could/should be changed, both to meet budget shortfalls and fund city programs, and to create incentives for job, business, wage, commercial, and real estate growth in the city.
1) The wage tax. The wage tax is paid at slightly different rates by both residents and non-residents. It's a flat payroll tax -- everyone pays the same rate regardless of income, and the money is taken directly out of your check. Perhaps not surprisingly, collection rates for the wage tax are stupendous compared to other taxes that allow payers to file a return or indefinitely avoid payment. The city collected 1.125 billion dollars in wage taxes in 2006, and is projecting to collect 1.189 billion in 2008. The wage tax rate has been steadily reduced beginning in 1996, going from 4.96% to the 2007 rate of 4.26%. Despite cuts, tax collections have steadily increased since 1992, moving slightly ahead of inflation. Gov. Rendell has proposed to accelerate reduction in the wage tax through casino revenue and a 1% in the state sales tax. Elsewhere in Pennsylvania, casino and sales tax revenue would offset reductions in property taxes.
2) Property taxes. Real property is taxed equally for residential and commercial property. There are two property taxes: the general property tax and the school property tax. Current real estate rates are 4.790% for the School district and 3.474% for the City; a total of 8.264%. However, since at present the city systematically undervalues its property (at around 20% of actual market value), the real tax rate is closer to 2%. Not all areas are equally undervalued: Hallwatch.org reported that between 1998 and 2000, houses in the Northeast, Germantown, Olney, East Falls, Kingsessing, and Point Breeze (among other zip codes) were assessed at between 20 and 25% of real market value, while houses in Chestnut Hill, Manayunk, South Philadelphia, Fairmount, Oak Lane, Kensington, and Center City were assessed at between 10 and 20% of market value. Two zip codes in particular, Nicetown (19140) and North Central Center City (19102) were assessed at 2 and 1% market value, respectively. The Full Value Project is scheduled to assess all city properties at their market value beginning in 2008, bringing Philadelphia back into accord with state law. (Reassessing property at full value also increases the city's debt ceiling, which is pegged to the total value of property in the city.)
3) Sales tax. Pennsylvania has a sales tax of 6%, and Philadelphia has a municipal sales tax of an additional 1%. Ed Rendell has proposed legislation to raise the state sales tax to 7%, putting Philadelphia's total sales tax at 8%. Our closest neighbors, New Jersey and Delaware, have sales tax rates of 7% and 0% respectively. In 2006, Philadelphia earned $127.8 million in sales tax.
4) Real estate transfer tax. When strangers transfer real estate to one another, the buyer has to pay a transfer tax of 3% of the sale price to the city of Philadelphia, in addition to 1% to the state. (Note that the city gets the same percentage that a realtor gets.) With a hot real estate market, this has been a significant revenue producer for the city, netting the city $236 million in 2006 -- nearly double the revenue from the sales tax and almost 60% of what we collect in real property taxes for the general fund. However the city is estimating that this number will go down in 2007 and 2008, as the market cools and the transfer rate slows down.
So -- where are we on these taxes? All of them are essential to the city's operating budget; some of them are not as progressive as they could be. Besides the real estate tax abatement, very few have figured in council or mayoral debates, except indirectly as they relate to casinos. What does everyone think? And is there anything big that I've missed?
Correction on RE taxes
Could you provide a link for the real estate transfer tax? I was under the impression the R.E. transfer tax in Philly is actually 4.0%, 2.0% each for the buyer and seller. This is in contrast to the surrounding counties where I believe it's only 1.0-3.0% in total but I'm not completely sure about this.
Actually, I'm correct at least on the Philly part:
(source:http://www.ballardspahr.com/press/article.asp?ID=1184 -- btw, time for the html editor, no?)
I believe one of the reasons the transfer tax is higher in Philly is because it's infrequent enough that nobody's going to complain but substantial enough that the city gets a decent amount of revenue from it.
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Supporting Michael Nutter for Mayor.
The real estate transfer tax
The real estate transfer tax is 3% to Philadelphia, 1% to the state, for a total of 4%. I left off the additional state transfer tax in my original post, but have amended it above to reflect the total tax paid.
In addition to infrequency, the tax also doesn't typically figure in to your calculations when you're making the purchase. It just gets rolled in with all of the other fees paid when you buy a house. Imagine if you reconciled and paid all of your sales tax at the end of each month.
As for who pays the tax, I think that's negotiable. The default may be to split it, or the buyer pays it; I can't recall.
I should note that while individual buyers may only pay the transfer tax a few times in their lifetimes, the city depends on a high frequency of transactions for its revenue. Again, it's just like a real estate agent -- you can sell one million dollar house, or a lot of 50,000 dollar houses and do equally well. If you sell a lot of high-priced condos, you make a killing.
I believe I paid the 4% when
I believe I paid the 4% when I purchased my home in Philly.
Let's start with property taxes
Since few people share my love of pure data, I'll start throwing some elbows and see who responds.
In my opinion, which I've shared elsewhere on this blog, the most problematic tax in Philadelphia is the property tax. In 1992, Philadelphia collected 343.3 million dollars in property taxes. Adjusted for inflation, that's $490.2 million in 2006 dollars. Over the decade, this figure was largely stagnant, moving only to $364.3 million in 2001 ($412.52 mil 2006 dollars). In 2006, the city collected only $395.8 million in real estate taxes. We collect less in real estate taxes, adjusted for inflation, than we did five years ago, and $100 million in inflation-adjusted less than we did in 1992. Meanwhile, the average value of real estate in the city increased by almost 100% between 1995 and 2004.
That increase in value represents a real increase in wealth, an increase that is going unrecognized in the city's revenue. And not all of it is attributable to tax abatements on new construction. There's been citywide pressure to keep property taxes low and mostly level, especially in certain neighborhoods that have seen the biggest growth in value: Center City, Bella Vista, Fairmount, Mount Airy, East and West Oak Lane, and Nicetown. (Part of the real estate story in Philadelphia has been the stratospheric rise in value in once-poor neighborhoods: over 142% between 1999 and 2004 alone).
Part of the story is that compared to virtually all other municipalities, property tax collection in Philadelphia is a joke. The only way to compel a delinquent property owner to pay taxes is for a neighbor or investor to force the property to tax sale. Many of the problem houses in Philadelphia houses are tax-delinquent buildings. But this also means that average homeowners behind on their taxes become targets for developers looking to purchase lots and buildings in attractive neighborhoods. Since the city lets tax collection slide, the owner of the property can often wind up losing it altogether, unless they have political or other strings to pull.
At the same time, the old widow living in the house she and her husband built has been used as a straw man to hold property taxes down for wealthy homeowners and owners of wealthy and commercial property. The median real estate tax paid in Philadelphia is around $1300/year. If you're a low-income homeowner or renter over 65, you're eligible for a state property tax rebate of up to $650 annually -- typically over half of your total tax burden. It's quite possible that many low-income older homeowners don't know about this program, but the solution is education and expansion -- not a global freeze (or only glacial increase) in property taxes, which is what we've had for about 15 years.
My position is that we need to strongly support the move to a full value system, so that homeowners throughout Philadelphia all pay taxes at the same rate relative to the real value of their property. I think we need to tie property taxes to budgetary needs, as other states and cities do, rather than fixed rates. I think we need to uncouple residential from commercial property. We need to get serious about collection. And I think we need to raise more money from property taxes for the general budget, but especially for Philadelphia schools. The school system deserves more and better from us -- we've wanted the schools to improve, but Philadelphia property owners have never been willing to make real sacrifices and a genuine investment to make that happen.
As for breaks, I think we need to build on the PA program of rebates for low-income, elderly homeowners with either an expansion of the state program or one of our own (perhaps also including low-income homeowners with children). I also think Michael Nutter's cap on year-to-year increases is a great idea, and will prevent sudden and unexpected new costs while at the same time allowing taxes to rise to reflect the true value of the property. And I think the city should support low-interest loans to homeowners, similar to the current city-subsidized loans for home improvements, so they can finance their property tax payments rather than paying penalty fees or ultimately losing their house.
I support Michael Nutter for Mayor.
Overall tax burden must be considered
I agree with most of Shrift's ideas but will throw a couple of others out. One is that $650 isn't much in terms of a rebate. I've heard several stories about little old ladies around 11th and Catherine not being able to pay their taxes although they've lived in the neighborhood for decades. Housing values in Queen Village, for instance, probably quintupled over the past decade.
My other thought, however, is that while I think full real estate valuation is the right direction city government needs to go, prior to doing that valuation I think we need to do a general accessment of Philly's tax burden versus the suburbs. Suburb real estate taxes are going through the roof and will continue to do so. I would rather pay a wage tax any day than get caught up in the suburban tradition. We can't think of our taxes individually in isolation because right now, Philly's tax burden for residents is relatively more appealing versus the suburbs than it's been in a long time. Furthermore, I'm not necessarily okay with taxing commercial properties and residential properties differently. One of the nice things about Philly is that so many properties get converted back and forth depending on what a building is being used for. Having the simplified tax structure would probably encourage best use of individual properties from an economic development standpoint.
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Supporting Michael Nutter for Mayor.
But of course
MDCPhilly writes:
I couldn't agree more, on both counts. First, trying to think of taxes organically/systematically is part of what this thread is about. And secondly, you're right that 1) although Philadelphians love to talk about the ways that they are overtaxed, they don't see the areas where the tax burden is less (and a lot less) than the suburbs. And I certainly don't think we need to be where New Jersey is today.
There are good reasons why Philadelphia gets the bulk of its revenue from the wage tax; chief among them is the fact that it's much easier to collect than property taxes, and in a city of commuters, provides the means to tax people who work in the city and benefit from its resources who otherwise wouldn't pay in at all.
At the same time, however, a high wage and sales tax with low property taxes means that the tax burden for all renters, including much of the working poor (and an increasing share as home ownership in the city grows more expensive) is unusually high. And while the differences between the city and the suburbs are driven by lots of other factors, when you look at what the suburbs do with all that property tax money -- great schools, clean streets, efficient services -- something closer to that model of taxing capital begins not to look quite so bad.
Last, about the old lady at 11th and Catherine. As I mentioned in my previous post, I think the way to address that and similar scenarios is through targeted rebate programs rather than a global or even neighborhood-based blanket on taxes. After all, there are lots of old ladies in Germantown, Olney, Point Breeze, and Bridesburg, but they're not catching quite the same break, nor do they have the hundreds of thousands of dollars in equity to show for it.