The AVI endgame begins

New housing construction in once-rundown neighborhoods like Northern Liberties, shown here, and Point Breeze means homeowners in those neighborhoods will likely face severe sticker shock once their 2014 tax bills arrive, thanks to the Actual Value Initiative. A homestead exemption is one way to absorb some of the shock. A split-rate tax on land and improvements could both absorb even more of it and promote further redevelopment – a win-win situation for the city and its homeowners.

Jot down these numbers:

$96 billion. 1.3. 1.4.

The first is the total value of all land and buildings in the City of Philadelphia, according to figures released by City Hall after Mayor Michael Nutter met with City Council members behind closed doors at the beginning of this week.

The second and third are the likely property tax percentage rates Mayor Nutter will recommend the city adopt as a result of the citywide reassessment that produced that first number, the Actual Value Initiative.

That $96 billion figure is far above the $38 billion total value of properties in the city under the current hodgepodge assessment system. That, in turn, means dramatically lower tax rates for Philadelphia property owners.

What it does not mean is dramatically lower tax bills. The third number is the rate the mayor proposes if, as is likely, Council approves some sort of relief measure to cushion the shock of significantly higher bills for residents in gentrifying neighborhoods where properties were undervalued to begin with.

At least one Council member – Jim Kenney (D-at large) – has gone on record as opposed to the higher tax rate. But given that the rate will be set to be revenue neutral – that is, the total income to the city will be no more and no less than it was under the old system – any relief measures will require higher tax rates to offset the lost revenue.

For now, revenue neutrality is the right strategy to follow, especially after upset residents and Council members lambasted Nutter’s early attempts to generate more revenue from the new tax regime. But in the longer run, the issue of how much revenue the city raises from property taxes should be revisited.

The moment is right for it: the city is now tax-competitive with its suburbs, thanks to dramatically higher property taxes in many suburban jurisdictions. And as the city’s wage tax remains nearly three times that found in those suburbs that have one, and the city’s property tax income per capita is well below that of its big-city peers, shifting the balance of taxation from income to property could encourage more people to move to, and stay in, the city.

The moment is also right for another move that could strengthen those virtuous trends: shifting the bulk of the property tax burden from buildings to land. Most of the appreciation in property values in those gentrifying neighborhoods comes from improvements on the land – new houses and office buildings, renovations and expansions. Were Council to adopt a split property tax rate, taxing land more heavily than improvements, the blow to homeowners in places like Northern Liberties and Point Breeze could be softened while maintaining the current revenue-generating effort – especially since undervalued vacant land in such areas would then be taxed even more heavily, encouraging land owners to develop it in order to cover the tab.

We’re not optimistic that this will happen; Council has already shown signs of imperviousness to new thinking with its moves to trash parts of the new city zoning code mere months after it took effect. But since we – like Council, we hope – want this city to not only grow again, but thrive and prosper, we will continue to argue for policies that will help it do so.