Philadelphia Gentrification Relief for Who?

Philadelphia's proposed $20 million/year of gentrification property tax relief fails to target the most deserving low-income residents and may even increase the regressiveness of the local tax system.

The city council bill defines gentrification as a 300% increase in your property value (after deducting the homeowner exemption). This seems like a lot until you realize that most properties were valued at 34% of market value - so the city is giving out gentrification relief to any property with an above average increase in value. If it were not for the homeowner's exemption this broad definition would include half of the residential properties in the city.

The means test is even more questionable. Philadelphia is using the HUD definition of median household income and applying a means test to only include households that are under 150% of that number. Unfortunately the HUD pools Philadelphia with our wealthier suburbs and derives a median household income of $81,500. This is more than twice the actual Philadelphia county value of $37,000 (source: American Community Survey). This HUD value is completely unrelated to the cost of housing or living in Philadelphia.

The actual means test limits are
$83,000 - one person
$95,000 - two people
$107,000 - three people
$119,000 - four people
And so on (add $12,000 for each additional person).

What this means is that approximately 83-91% of Philadelphia households, including most of the upper-middle class, will meet the means test for gentrification relief. Only 12.7% of Philadelphia households make more than $100,000/year.

The cost of the bill is limited to $20 million per year. If the demand for the money exceeds that amount, then homeowners will only receive partial relief. In practice this means that the money going to the upper-middle class could reduce the relief for low income people. Even if the bill's budget is not exceeded, the money could be better targeted to providing relief to low-income taxpayers or better spent funding schools.

Upper-middle class households are likely to have higher valued homes than low-income people and thus receive larger tax breaks from gentrification relief. This is even more true after you include the impact of the homestead exemption as this excludes more low-income households from getting relief than higher income households.

The correlation between income and house value is modest: 0.52 for Philadelphia (according to Census PUMS data and my analysis). This means that 27% of the house value can be explained by a household's income. Richer people are likely to have higher valued houses than low income people. It also means that 73% of property tax is not related to current income and that makes it a very regressive tax.

Low income people are more likely to rent. Long-time renters do not qualify for gentrification relief, but will pay higher rents due to gentrification and landlords passing on the cost of increased property tax. Low income renters already face increasing rents due to the AVI and the lack of a renter's homestead exemption -- gentrification relief makes things worse by increasing the property tax base rate.

Low income home owners are less likely to have owned their homes for ten or more years than higher income home owners and thus are less likely to qualify.

People who qualify for gentrification relief are likely to have lower taxes than those who do not as their property value is locked in for ten years. Non-gentrified property valuations will increase over the long run -- probably at the rate of inflation. In the tenth year, it is likely that non-gentrified properties will be worth (and taxed) 20-25% more (assuming a 2% rate of inflation).

Short term solution: The city should replace the HUD median household income with the Philadelphia County one. The value of gentrified properties should increase each year at the rate of inflation (or the same rate as Philadelphia property prices).

Long term solution: we need to replace residential property tax with a less regressive tax. We need to replace our local and state regressive taxes with progressive ones that tax people based on their ability to pay and reduce economic inequality.

The Gentrification Relief bill

Bad News for Owner Occupied Duplexes and Triplexes

The gentrification relief discriminates against duplexes and triplexes with a live-in owner - as you get $85,000 for the first household member but only get $12,000 for each additional household member. And the household is defined as everyone in the building.

This is probably not a big deal because the means-test is already so high. But it is still a weird choice.

Why should there be a bias in favor of people living in stand-alone houses? Why is owning a small row-house better than living in and owning the first floor of a larger house?

This policy could adversely affect some retired households who are renting out part of their building to pay for their retirement.