The Philadelphia Tax Abatement Program, in effect since 2000, has been the most talked-about tax break in the city for two decades. In this blog, we discuss what the program entails and the changes coming to it for both homeowners and developers.

The Philadelphia Tax Abatement Program, in effect since 2000, has been the most talked-about tax break in the city for two decades. While heavily debated reforms to the program were originally passed in 2019, an extension to the phase-out of the residential tax abatement program was needed due to a large backlog of abatement applications caused by the impending application deadline and COVID-19-driven delays. As a result, the City Council has passed several bills, including the extension for the current application deadline by one year, to Dec. 31, 2021. In this blog, we discuss what the program entails and the changes coming to it for both homeowners and developers.

What is the Philadelphia Tax Abatement Program?

Originally passed in 1997, and in effect since 2000, the Philadelphia Tax Abatement Program was originally conceived to encourage new development, affordability, and vitalization in the city.  While other factors have also played a role, the tax abatement catalyzed development that otherwise may not have occurred and has led to increases in total tax revenue.

How the Tax Abatement Program Works for Homeowners

Under Philadelphia’s residential tax abatement program, residential property owners may qualify for a 10-year tax abatement on the value of improvements related to new construction and rehabilitated properties. Historically, residential property owners could obtain a 100% tax abatement for 10 years. As a result of the extension, residential property owners can still receive the full 100% abatement for 10 years by submitting the abatement application by Dec. 31, 2021. For applications submitted after Jan. 1, 2022, the full 100% abatement will apply to the first year and be subject to 10% yearly reductions over the subsequent 9 years. In the short term, this extension benefits residential real estate developers in the city by creating demand, as individuals will be incentivized to purchase homes and apply for the abatement by Dec. 31, 2021, to take advantage of the 10-year 100% abatement. In the longer term, the phase-out schedule of the abatement could lower demand for new construction and rehabilitated properties in the residential space.

Reduction of Commercial & Industrial Tax Abatement

As with the residential tax abatement program, commercial and industrial property owners may also qualify for a 10-year 100% tax abatement on the value of improvements related to new construction and rehabilitated properties. However, the commercial and industrial tax abatement will only be reduced by 10% and will be not phased out over 10 years. The commercial and industrial tax abatement would be lowered to 90% for 10 years for any application submitted on or after Jan. 1, 2022.

The estimated $83 million in revenue generated from the reduction of the commercial and industrial tax abatement program will be used to fund the Neighborhood Preservation Initiative, which is a $400 million bond program that will, among other things, subsidize new affordable housing projects and support first-time homebuyers and neighborhood business corridor revitalization. In total, the City estimates that the Neighborhood Preservation Initiative is expected to create $2.5 billion in economic activity, produce $71 million in new tax revenues over the first four years, and support 14,700 jobs. The city’s focus on affordable housing provides a significant opportunity for developers of such projects, given the number of subsidies that would lower the overall costs of affordable housing projects.