After decades of urban decline, most American cities have stabilized and begun growing again due to changing economic forces. Philadelphia underwent severe urban decline but reforms in the 1990s helped stabilize the city's finances. The city now faces challenges including improving its tax structure, schools, public safety, transit and water infrastructure. However, opportunities exist such as developing the Delaware and Schuylkill river waterfronts and innovation districts connected to higher education.

1. DICK VOITH, ECONSULT SOLUTIONS
October 23, 2015
The Changing Landscape of
Economic Development:
Opportunities and Equity Issues

2. Presentation Overview
• American Cities
– Urban Decline
– Changing Landscape
• Philadelphia: Challenges and Opportunities
– Tax Structure
– Key Challenges
– Opportunities
2

3. Changing Landscape of
American Cities
• After 40 years or more of decline, most American
cities have stabilized and begun to grow
3

4. Urban Decline
Decline in 1950 was inevitable:
• Development of highway system
• Housing subsidies for new construction
• Extremely cheap suburban development
• Changing manufacturing technology and
globalization
• Aging, disinvested city housing
4

5. Urban Decline
Exacerbated by:
• Social problems
• Racial tensions
5

6. Urban Decline
Formation of a new “American Dream”
• Suburban house with lots of land
• Cars equal freedom
• Cities were only for the poor, living in the city was
essentially a failure
6

7. Urban Decline
American dream continuously
reinforced:
• Movies, TV, commercials
• Cities were the opposite of the
dream
– Unsafe
– Obsolete
– Escape from New York (NYC was
declining and near bankrupt in
the 70s)
• Potential positive benefits of cities
were recognized by few..
7

8. Changing Landscape
8
By the 1990s The landscape began to change once
again, in part driven by basic economic forces:
• Suburbs became expensive places to develop
• Highway asset became expensive with transportation
expenditures focused on replacement rather than
new capacity
• Cities began the transition towards knowledge centers
• Production and consumption benefits of cities
appreciated once again
8

9. Changing Landscape
9
9
23%
45%
50% 51%
0%
10%
20%
30%
40%
50%
60%
1950 1980 2000 2010
% of People Live in
Suburbs

10. Changing Landscape
10
Cultural shift in attitudes towards cities
reflected in:
• Movies, TV, commercials
10

11. Changing Landscape
City and Suburbs now on more even ground
• Suburbs still growing but not fueled by city decline
11

12. Philadelphia
Philadelphia was on the verge of bankruptcy
in 1991
• Rendell administration reforms
– Union contracts
– Spending
– Tax policies
12

13. Philadelphia
13
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Population
Year
Philadelphia

14. Philadelphia
Key issues for Philadelphia:
• Tax structure
• Schools
• Public Safety
• Transit
• Water/Sewer
14

15. Philadelphia: Tax Structure
Addressing Philadelphia’s Tax Structure
• ESI involved since 2003 Tax Reform
Commission
15

16. Philadelphia: Tax Structure
Philadelphia’s wage and business taxes have
proven to have negative impacts on jobs
16
• Despite Phila’s
population
renaissance
employment growth
is modest at best

17. Philadelphia: Tax Structure
• Lack of competitiveness can be seen in the
low rents for offices
17
$75
$63
$51
$45
$36 $33 $31
$27 $26 $25
$0
$10
$20
$30
$40
$50
$60
$70
$80
CBD Rent per Square Ft Q4 2014
(source: Center City District)

18. Philadelphia Wage Tax
Reductions in Wage Tax:
• Resident Wage Tax 1995: 4.96%
• Resident Wage Tax 2016: 3.91%
Achieved through a series of incremental cuts
18

19. Philadelphia Tax Abatement
Real Estate Tax Abatement
• Since 2000, Philadelphia has offered a ten-
year abatement on all real estate
improvements
– Owner continues to pay tax on the value of
the land and the prior value of the
improvements during the 10 year period
19

20. Philadelphia Tax Abatement
20
• Pre abatement—virtually no residential construction
• Post-abatement—construction on pace with suburbs

21. Philadelphia Tax Abatement
21
Category Code
Total
Property
Count
Abated
Property
Count
Percent
Properties
Abated Abated LV Abated MV
Residential 459,219 12,077 2.6% $389,325,957 $4,642,431,100
Apartments 40,927 1,183 2.9% $123,471,227 $1,978,538,800
Mixed Use 14,760 177 1.2% $17,521,180 $93,296,700
Commercial 14,934 376 2.5% $342,288,819 $1,574,214,500
Industrial 4,406 51 1.2% $22,058,800 $113,627,500
Vacant Land 45,513 10 0.0% $321,600 $4,294,000
Total 579,759 13,874 2.4% $894,987,583 $8,406,402,600

22. Philadelphia Tax Abatement
22
Abatement Issues
• Center on fairness
• Superficially reasonable:
– Why shouldn’t those wealthy enough to
develop be able to pay higher taxes?

23. Philadelphia Tax Abatement
23
Theoretical Basis for Abatement
• Lowers tax on mobile capital—increases the
rate of investment in the city
– Half way to a land tax—but can tax the
capital once it is fixed
• Investment makes the city so much more
attractive that demand increases hugely
• Available to anyone—not subject to political
manipulation

24. Philadelphia Tax Abatement
24
Theoretical Basis for Abatement
• Increases the supply of housing at all levels
• Result is greater housing opportunity for all,
regardless of income level
– This is not true only if 100% of the people
looking for housing are new to the city
• Multi-family rental supply increases, lowering
rent costs for tenants

25. 25
• “Lost revenue” is only
relevant if investment
would have occurred
anyway
• Benefit taxes—high
income people
generate more
revenue than they
use—which results in
more money available
for basic services
Theoretical Basis for Abatement
Philadelphia Tax Abatement

26. Philadelphia Tax Abatement
26
Empirical Issues
with Abatement
• Concentrated in
Center City but
appear all over

27. Quartile Map of
Single Family
Residential
Abated
Properties by
Neighborhood
27

28. Philadelphia Tax Abatement
28
Empirical Issues
with Abatement
• Both rental and
owner-occupied
housing

29. Philadelphia Tax Abatement
29
Empirical Issues
with Abatement
• Significant use of
abatement for
low/moderate
income units

30. Philadelphia Tax Abatement
30
Empirical Issues with Abatement
• Abated properties have been turning back to the tax roles
– Approximately $1 billion per year (1% of taxable value)
• Now property tax revenue are increasing at a faster rate
than they otherwise would have
• Careful studies have shown that the abatement generates
more revenue to the city than it forgoes

31. Philadelphia Tax Abatement
31
Equity and the Abatement
• Important to look at the total tax package
– High wage and school taxes paid by high income
people mean that their revenues exceed the cost of
producing services for them—especially since they
place little burden on schools
• Philadelphia’s homestead exemption means that property
tax rates are considerably lower for low and moderate
income people (distribution of house values, and implied
tax rates with the homestead invention)

32. Philadelphia Tax Abatement
32
Equity and the Abatement
• Philadelphia’s homestead exemption means that property
tax rates are considerably lower for low and moderate
income people
Market Value of
Property
Abated
Property Count
Percent of Abated
Properties
< $124,999 1,465 10.6%
$125,001 to $250,000 3,317 23.9%
$250,001 to $500,000 6,129 44.2%
> $500,000 2,963 21.4%
Total 13,874 100.0%

33. Philadelphia Tax Abatement
33
Equity and the Abatement
• Philadelphia’s homestead exemption means that property
tax rates are considerably lower for low and moderate
income people
Market Value of Property
Abated
Residential
Property
Count
Percent of Abated
Residential
Properties
Total Residential
Property Count
Percent of
Total
Residential
Properties
< $124,999 1,256 10.4% 264,956 57.7%
$125,001 to $250,000 3,062 25.4% 145,914 31.8%
$250,001 to $500,000 5,490 45.5% 39,875 8.7%
> $500,000 2,269 18.8% 8,474 1.8%
Total 12,077 100.0% 459,219 100.0%

34. Philadelphia: Tax Structure
Philadelphia Growth Coalition Proposal
• Lower wage tax
• Lower net income tax
• Increase commercial property tax
34
Fiscal Year Wage Tax –
Resident
Wage Tax –
non Resident
Real Estate
Tax –
Residential
Real Estate
Tax -
Commercial
BIRT –
Gross
Receipts
BIRT –
Net Income
2016 3.9102% 3.4828% 1.3998% 1.3998% 0.1415% 6.3900%
2026 3.0000% 2.5000% 1.3998% 1.6098% 0.1415% 3.0000%

35. Philadelphia: Tax Structure
Philadelphia Growth Coalition Proposal
35

36. Philadelphia Key Issues: Transit
SEPTA, once a drag on the city because of
declining service, failing infrastructure, and
uncertain funding is finally on solid footing
• TFRC (2002-07) led to act 44
• More recently and more importantly Act 89—put
SEPTA on solid footing
• Ridership is growing
• More importantly, investments are being made
take advantage of SEPTA service creating a more
viable, equitable and sustainable form of
development
36

37. Philadelphia Key Issues: Water/Sewer
Philadelphia is a world leader in green infrastructure
• Saving billions by approaching the costs of its
aging combined sewer system through pricing
and incentives to limit runoff, rather than making
huge capital investments
37

38. Philadelphia Key Issues: Water/Sewer
Philadelphia is a world leader in green infrastructure
• Saving billions by approaching the costs of its
aging combined sewer system through pricing
and incentives to limit runoff, rather than making
huge capital investments
38

39. Philadelphia Key Issues: Public Safety
Significant improvements overall…
39

40. Philadelphia Key Issues: Public Safety
But geographically and demographically uneven…
40

41. Philadelphia Key Issues: Schools
Schools remain a challenge for the City
• Needy population
• Fiscal challenges
41

42. Opportunities
Delaware River Waterfront
42

43. Opportunities
Schuylkill River Waterfront
• Innovation Districts/Higher Ed tie-ins
43

44. Q & A