Philly construction tax draws mixed reactions from housing analysts

With a key committee vote looming, questions abound about an ambitious new affordable housing plan recently unveiled by Philadelphia City Council.

Is it the long-sought solution for residents struggling to make rent or buy a house as city real estate becomes more expensive? Or does the legislation, endorsed by the Building Industry Association, actually let developers skirt real obligations to produce below-market-rate dwellings? Does it do a little of both?

It depends who you ask. Council leadership has spent years debating how to top up dwindling federal housing assistance as city housing grows less affordable. Their most recent attempt – called the “Putting Philadelphians First” – is a sweeping 1-percent impact tax on the cost of all construction projects that benefit from the city’s 10-year abatement on property taxes. 

These dollars would be placed into a sub-fund of the city’s Housing Trust to facilitate development of affordable housing. Some developers could also qualify for zoning bonuses by making affordable units part of their projects.

“While the construction boom has been a welcome development in Philly, rising prices are actually hurting some households,” Council President Darrell Clarke said, in a prepared statement. “By increasing funding to the Housing Trust Fund by as much as $22 million annually, we are putting Philadelphians first and ensuring that Philly retains its character as a diverse, affordable, and welcoming city.”

The proposal has notably drawn the support of figures from both sides of the debate, including affordable housing advocate Nora Lichtash from the Women’s Community Revitalization Project, Leo Addimando of the BIA, and some urbanist boosters.

Mark Schwartz, executive director of Regional Housing Legal Services, a nonprofit law firm that supports affordable housing initiatives, echoed much of this praise. He said the tax proceeds could be used to bridge the financial gap for more projects backed up by federal Low Income Housing Tax Credits. Some forms of this federal housing subsidy sit unused due to the difficulty in making projects financially enticing enough to attract private-sector interest.

“If a portion of the money that comes in is used to make (tax credit) deals feasible, then I think it’s a great initiative. If those deals benefit homeless or vulnerable populations, even better,” he said. “My number-one priority is filling gaps with LIHTC projects.”

Schwartz added that he would like to see some funding dedicated to housing programs not currently covered by the legislation.

“A local rental subsidy for people who were recently homeless would be wonderful. I think money to help people who are in danger of losing their homes through foreclosure prevention would be a good use of any funds. But I think that this bill is a good compromise that council has worked out – and one that they could get nine votes for” he said, referring to a voting majority needed to pass legislation out of City Council.

Local economist Kevin Gillen, of Drexel University’s Lindy Institute for Urban Innovation, said that elected officials’ desire to address growing housing costs was logical. But he believes that taxing development in a city already known for higher-than-average construction costs could actually make housing less affordable in the long run.

“The recently proposed legislation is a natural response,” he said, referring to gentrification concerns. “But, while I sincerely hope these proposals achieve their intended result, it should be remembered that our consistently high cost of development – the fourth-highest of any city in the U.S. – remains not only unaddressed by any of these proposals, but also acts as a countervailing force to inhibit the intended goals of this legislation.”

But Peter Gowan, a researcher with the People’s Policy Project, a socialist think tank that recently authored a study on improving affordable housing in the United States, had unvarnished criticism for the council proposal. 

He questioned the wisdom of levying a tax on both for-profit and nonprofit developers, as the current proposal does.

“The thing that worries me a lot is that it’s funded by a construction tax that is also levied on affordable housing projects,” he said. “In effect, you’re funding affordable housing by making it more expensive to build affordable housing.”

Council President Darrell Clarke has also reiterated his support for funding the construction of so-called “workforce housing” that can retail for upwards of $229,000, more than the city median. While these added costs may be small, Gowan said this system could lead to a scenario in which nonprofit-built, low-income housing paid the impact fee to fund the construction of less affordable units.

“Are we really going to tax low-income developments to build middle-class housing?” he asked.

Gowan’s favored system of “social housing” resembles many traditional, publicly-run housing models where government agencies build and lease housing at lower costs than private-sector counterparts. But social-housing models use the proceeds from leases to wealthier tenants to fund less-expensive units for the needy.