Commercial property: If you tax it, will they come?

9/17/2015 | Real Estate Blog

A new report commissioned by the Philadelphia Growth Coalition estimates that the city will add 18,000 new jobs over the next 10 years — if the city does nothing about commercial real estate taxes. If the city acts, though, the number of new jobs would more than quadruple to about 79,000. The Growth Coalition is hoping the report will add a greater sense of urgency to the business community’s efforts to change the way real estate taxes are levied in Pennsylvania.

In many U.S. cities, commercial and residential property are taxed at different rates. The revenue from each may even be used for different things: For example, commercial property taxes could pay for road and sidewalk construction, while residential property taxes funded the public school system. Further, residential real estate taxes may decline while commercial property taxes increase. The two tax schemed can operate completely independent of one another.

Not in Pennsylvania.

The Pennsylvania Constitution’s uniformity clause requires residential and commercially property to be taxed at the same rate, currently set at 1.4 percent. The Growth Coalition and other tax reform proponents contend that the low rate results in Philly relying too heavily on wage and business taxes for revenue.

The City Council approved a proposal that would amend the uniformity clause and lower both wage and business tax rates. Those decreases would make the city even more attractive to new and expanding businesses, proponents said. In fact, those decreases would improve the overall tax climate enough that they could mitigate the tax hit taken by property owners — the group that will be shelling out more for real estate taxes.

Council President Darrell Clarke was the lone holdout on the proposal. His complaint was not with the constitutional amendment but with the reduction in wage and business tax rates. If the property tax hike does not have the desired effect, the loss of revenue from the other two taxes could be a disaster for the city.

News articles on the proposal did not address how commercial tenants would respond to the change. Landlords are unlikely to absorb the increases on their own. And, while base rents may not fluctuate much, certainly common area maintenance fees will reflect at least part of a tax increase. Will new businesses be put off by the higher CAMs?

Source: Philly.com, “Report: Philly could gain jobs with tax restructuring,” Harold Brubaker, Sept. 8, 2015