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New construction underway on Girard Avenue in Fishtown. Photo by Melissa Romero

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The construction tax bill, explained

The mayor has suggested an alternative to the bill, but has not vetoed it.

The deadline for a new, controversial construction tax bill, which would levy a one percent tax on new constructions in the city, is winding down.

Mayor Jim Kenney has one day to veto the bill before Philly City Council reconvenes after their summer recess tomorrow. And, with less than 24 hours to go, he proposed an alternative.

On Wednesday morning, Kenney suggested that instead of the construction tax bill, the city use the money generated by real estate taxes from properties with expiring 10-year abatements for affordable housing. City officials estimated that could raise between $52 and $56 million over the next five years, which would go to the Housing Trust Fund to pay for affordable housing, according to Philly.com.

Already some council members have voiced their opposition to Kenney’s proposal, including Maria Quinones-Sanchez, who proposed the construction tax bill, and said it would be “irresponsible” to spend less than $125 million over the next five years on affordable housing, Philly.com wrote.

It’s the latest news in a long saga over the bill, which was narrowly approved by council members in June, and which has drawn ardent support and harsh opposition.

As council prepares to go back in session tomorrow, and the deadline for the bill’s decision gets down to the wire, we’ve put together an explainer on the bill, its backstory, and what it means for Philly.

What does the bill do?

When people discuss the bill, they’re generally referring to two bills, which work in tandem. The first is the construction tax bill, Bill 180351, which would implement a 1 percent construction impact tax on all new construction and major renovations that require a building permit. Several projects are exempt from this bill, including affordable housing and non-profit developments. Also exempt are constructions in Keystone Opportunity Zones, which are state-designated sections of the city that already have reduced or tax-free status.

The property owner would have to pay half of tax at the beginning of the project—when they’re issued a building permit—and half during the building’s final inspection. If there’s no final inspection, they’ll need to pay the whole tax at the beginning.

However, construction costs are subject to change throughout the course of the project, and if a property owner doesn’t know how much the costs will be at the beginning, they’re expected to submit their best guess. They then keep the city informed about any changes to that number throughout the construction.

The second bill, Bill 180347-A, determines how the money is used. It suggests amending the Housing Trust Fund section of the Philadelphia code to include a sub-fund for the revenue generated by the tax. That money will then be used to fund housing for people making up to 120 percent of Philly’s median income, meaning anyone making less than $105,000 a year.

That means any group regardless of legal status, including for-profit developers, is eligible to access those funds.

What’s the controversy?

There’s a multi-faceted debate going on over the bill, which includes people concerned about how the money will be used, and others worried that it will deter city development.

We’ll start with the supporters.

The bill was introduced in April by City Council member Maria Quinones-Sanchez, and it was announced at a press conference held by supporters, including Council President Darrell Clarke, who said the tax would put residents first.

“I know Philadelphians are afraid of a tale of two cities,” Clarke said, referencing economic divide in Philly.

Quinones-Sanchez said the bill would generate money for affordable housing and would combat economic and racial segregation in the city.

In a somewhat surprising move, the Building Industry Association (BIA) joined the group of supporters, with with Leo Addimando, the BIA’s Vice President saying that the recognized the city’s need for more affordable housing.

But the bill has its fair share of opposers, too, starting with the Building Trades Union.

In a letter to city council in June, John Dougherty, head of International Brotherhood Of Electrical Workers Local Union 98, wrote that the bill could dissuade important developers, like Amazon, from coming to Philly.

“This ill-conceived tax would have the net effect of ending the recent, prosperous run of new construction that is transforming neglected sections of the city,” Dougherty wrote in the letter.

Frank Keel, spokesperson for the union, hammered their point home this summer when he said the union is opposed to the tax, and “any and all proposed amendments.”

Other opposers of the bill took a very different stance, questioning how money generated by the bill would be used. Some argue that because the bill sets aside funds for people making as much as $105,000, it’s not really an affordable housing bill.

“Somehow it turned into affordable housing-slash-home improvement bill,” one speaker said during a council meeting this summer, though he added that he supported the idea of the bill.

Max Ray-Riek, of the HIV/AIDS activist group ACT UP, said he took issue with the fact that the bill didn’t set aside funds for people in poverty, according to PlanPhilly.

What’s the timeline of the bill?

The bill was officially introduced this year, but it has a backstory.

In June of 2017, Quinones-Sanchez proposed a mixed-income housing bill, which would require developers to include a certain number of affordable units for every project that has 10 or more units. The bill included an incentive for developers, allowing them to construct taller or bigger buildings than the current zoning calls for, but it was still met with opposition, primarily from the BIA.

The City Planning Commission decided to not recommend that council pass the bill. What followed was months of debate between, primarily, supporters of the bill and the BIA.

In April, a package of new bills, including the construction tax bill, was introduced as a sort of compromise between the BIA and council members.

It moved through the City Finance Committee in the spring, and was amended by the council in June following opposition from the Building Trades Union. The amendment stipulated that Keystone Opportunity Zones would be exempt from the tax. If Amazon were to choose Philly for its next headquarters, they would likely choose a Keystone Opportunity Zone, meaning their new construction would be exempt from the tax.

The bill narrowly passed council in a 9-8 vote in June.

What now?

Despite speculation that Kenney would veto the bill—which would be his first veto during his time as mayor—he hadn’t exercised the power as of Wednesday afternoon. He has until 10 a.m. Thursday, when council gets back in session after their summer break.

However, that doesn’t mean he’s on board with the bill. The mayor proposed the alternative solution to use revenue generated by the expiring tax-abated properties Wednesday morning, and has been met with strong opposition from some.

In a letter to fellow council members, published by PlanPhilly, Clarke said the bill would raise about $22 million annually for the Housing Trust Fund (HTF)—substantially more than Kenney’s plan, which would raise up to $56 million over five years.

“We can think of no more equitable way of raising new funds into the HTF than through a small tax on developers and builders that have profited most from the current construction boom,” Clarke wrote.

He also argued that Kenney’s counter-proposal would raise less than half of what the construction tax would raise for the HTF.

Sponsors of the construction tax bill would have to recall the bill tomorrow in order to make Kenney’s proposal go forward. For now, no major decisions have been made.

Clarification: This story has been updated to clarify that the City Planning Commission did not put the 2017 bill on hold, but rather, decided not to make a recommendation on the bill.

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