Philadelphia Pennsylvania like most cities, counties and states have had to deal with tight budgets for nearly half a decade. For many reasons, not least of which are legacy expenses, revenue requirements will be increasing even as economies at the local and regional level still react sluggishly as the great recession of 2008 begins its ebb tide.
A complicating factor in Philadelphia's fiscal struggle is the reality that it's tax system is nearly unique in United States as the Washington DC Department of Finance annual tax comparison report so clearly demonstrates. Since the 1930s, Philadelphia depended on mobile subjects of taxation such as retail sales, wages and business. At the time it made sense, as business and citizens were tied much more closely to the urban center then today. Of course, those planes, trains, and automobiles have literally left their stations.
For decades Philadelphia has been trying to get out from under this terrible tax system which is generally acknowledged to have cost the city billions in wealth and hundreds of thousands of jobs and citizens.
After much debate, dozens of reports and commissions and studies, Philadelphia is still approximately the second highest taxed city in the United States. Interestingly, the higher the income in Philadelphia the tax burden jobs a bit lower. That puts Philadelphia and the company of cities like Bridgeport, Detroit, Louisville and Birmingham. That's a problem in a city that has far more gifts and attractions than its peers.
It has long been known that the best alternative to Philadelphia's tax system is to rely more heavily on property taxes with a corresponding reduction in other taxes. The problem getting from here to there is that real estate values have been hideously inaccurate for decades.
There is no consistency to values, and therefore no consistency the tax bills. The past half decade has seen efforts to reassess the entire city based on 100% of market value (as opposed to fractional assessments).
Unlike nearly every other jurisdiction in the US and across the world, Philadelphia has had an administratively and politically difficult time getting values and to place. This year's budget season is no different.
The administration under Mayor Michael Nutter is proposing applying something called the actual value initiative (AVI) which would have a revaluation in place by September 2012. But there's a rub. A budget must be set by July 1, 2012. The Nutter administration wishes to have instead of a property tax ordinance a revenue target goal for both the city and the school district (providing an extra $90 million for the Philadelphia school district in the process). Of course, that's usually not the way things are done.
This is standard practice, which is simplicity itself:
Budget Revenue Need ÷ Values = Tax Rate
Tax Rate X Values = Revenue
Will it be possible for AVI to be implemented? Even with some of the practical difficulties, the answer must be yes. Some call a reassessment without a tax rate in place a backdoor tax increase. It is entirely possible the more revenue will be raised with a revaluation down the line. Yet, the city government has raised property taxes officially in the past few years twice, along with the sales tax increase. Either way, tax bills went up.
AVI is meant to provide a fair, equitable and above all accurate system of values. Without accurate values, the City of Philadelphia will continue to stumble along in the long-term dependent on economy killing and job killing taxes. The property tax – made more efficient and fair by a land value tax – is the only alternative.
The Center for the Study of Economics has studied the Philadelphia property tax and the assessments upon which they are based for more than a decade. Last week, on May 2, 2012, we provided the following testimony acknowledging the technical issues arising from AVI. The bumps in the road will be no different than a reassessment where the values are provided long in advance of the budget season (witness Allegheny County earlier this year). All told, individual deficiencies in property values can be fixed down the road. AVI as a whole must be given a chance to get off the ground.