Philadelphia’s City Council is weighing a proposed 1% tax on construction to raise millions of dollars for affordable-housing programs, marking the latest push by a U.S. city to address rising residential costs.
The council could pass the new tax this week, setting up a possible showdown with Democratic Mayor Jim Kenney, whose administration warns the levy would hurt the city’s competitiveness as it vies to land Amazon.com Inc.’s second headquarters.
The debate has made odd bedfellows. The Building Industry Association of Philadelphia, which mainly represents residential developers, backs the tax, as do many affordable-housing advocates. Opponents include other business groups, such as the local Chamber of Commerce, and the building trades union, whose business manager calls the proposed tax “dumb.”
The measure cleared a council committee and has the support of Council President Darrell Clarke. The plan is aimed at “putting Philadelphians first and ensuring that Philly retains its character as a diverse, affordable and welcoming city,” Mr. Clarke said.
The construction tax would apply to most residential, commercial and industrial projects and would be calculated based on costs listed on building permits. Money raised would be used to give qualifying home buyers as much as $10,000 for down payments and closing costs. Both private and nonprofit developers also would be able to access funds for affordable-housing projects.
Backers say the tax could raise $22 million a year.
Though Philadelphia has the highest poverty rate among the 10 largest U.S. cities, housing values have risen sharply in areas close to Center City, driven by an influx of professionals. For example, since 2014, the median home value in the once-gritty Fishtown neighborhood has jumped more than 50% to around $270,000, according to home-search website Zillow.
Philadelphia is one of many cities grappling with soaring housing costs, as the problem stretches beyond traditional high-cost areas like New York and San Francisco. Detroit last year passed a law that requires developers getting city subsidies or discounted land to reserve 20% of units for lower-income households. Atlanta now mandates developers to set aside new units for low-income families in certain gentrifying areas.
In Philadelphia, the proposed 1% tax emerged after another idea stalled that would have required property developers to set aside 10% of new projects as below-market units, or else pay into the city’s housing trust fund. Elements of that plan are part of the construction-tax package, though the set-asides allowing developers to build taller and denser buildings would be voluntary and the density bonuses enhanced.
The building association opposed that earlier proposal but supports the 1% tax. “It was a difficult decision. Most industry groups don’t agree to tax themselves,” said developer Leo Addimando, the association’s vice president and managing partner at Alterra Property Group LLC.
But, he noted, some housing advocates don’t like aspects of the current proposal, such as one that extends assistance higher up the income ladder to families of four making $105,000 per year.
“No one’s really happy with it,” Mr. Addimando said. “I think it’s a pretty good compromise.”
The city’s housing trust fund brings in and spends about $13 million a year, nowhere near enough to help everyone with housing needs, including basic repairs, said Beth McConnell, policy director at the Philadelphia Association of Community Development Corporations.
“We have an overwhelming number of households facing housing instability and insecurity on a regular basis,” she said.
But the Kenney administration worries about both the administrative challenges and the effect on the city’s business climate, said James Engler, deputy mayor for policy and legislation.
The city has “a pretty onerous taxing system,” he said. “Adding an additional tax to that didn’t seem like the most effective thing for us to do at this point, especially when we’re in a national competition for the Amazon headquarters.”
Philadelphia is one of 20 U.S. locations Amazon is considering for its second headquarters. The city hasn’t disclosed the tax incentives it has offered the Seattle-based company, which is expected to announce a decision this year.
Mr. Engler declined to say if Mr. Kenney would veto the measure, saying it hasn’t passed the 17-member council. It would take 12 votes to override a veto.
The local chapter of NAIOP, an association of commercial real-estate companies, opposes the tax and worries it would weaken what spokeswoman Lauren Gilchrist called Philadelphia’s “renaissance.”
“It will absolutely increase costs for construction in an already expensive construction environment,” she said. Her group instead advocates a comprehensive evaluation of how the city taxes real estate.
John Dougherty, business manager of the Philadelphia Building and Construction Trades Council, criticized “the terrible timing of this antibusiness tax proposal.”
“This onerous tax proposal at this crucial time essentially tells Amazon that we’re not interested in their business. Dumb,” he wrote in a letter to council members.
But Mr. Addimando said he doubts the new tax would affect Amazon’s decision. He called it a necessary step that would make a small dent in the city’s growing housing affordability and availability problem.
“It will become even more necessary if Amazon comes to town,” he added.
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