Thank you. Are there any other questions of Mr. Nadol on Bill No. 970214? (No further questions.)
Seeing none, I would ask Mr. McPherson to please read the titles of Bill No.'s 980303 and 980927.
Bill No. 980303, an ordinance amending Chapter 19-1400 of The Philadelphia Code, entitled "Realty Transfer Tax," by decreasing the rate of the tax beginning July 1, 1999, by amending the definition of "acquired real estate company," the transfer of which is subject to the tax; and by limiting to individuals the exception for reclaiming purchase money deeds in lieu of foreclosure, all under certain terms and conditions. Bill No. 980927, an ordinance amending Chapter 19-1400 of The Philadelphia Code entitled "Reality Transfer Tax," by providing that only the transferor shall pay the tax due under this chapter, under certain terms and conditions. 103 10/28/99 WHOLE COMM. - 980303, 980927
Councilman Mariano, do you wish to be recognized?
Yes, Madam President. I have to leave on some personal business, and I would like to be stated as voting yes on all bills and any amendments.
Okay, thank you. Both of the bills that we're now considering involve the City's real-estate transfer tax. As I think Council well knows, the City now collects a 3 percent real-estate transfer tax on top of which the Commonwealth gets a 3 percent transfer tax. While I am aware that there are changing market conditions, and we do sometimes see significant year-to-year changes in market conditions, this tax revenue represents a major component in each of the last two fiscal years. We've collected more than $70 million as a result of this tax. Bill No. 980303 would propose to cut 104 10/28/99 WHOLE COMM. - 980303, 980927 the City portion of this transfer tax in half, in turn cutting our revenues from this tax in half, which would open up a gaping hole in the City's budget. According to the projections that are built into our current approved FY 2000 through 2004 five-year financial plan, this proposed tax rate reduction would result in revenue loses averaging over $33 million per year over each of the next 5 years, with a total projected loss over the course of the plan of over $166 million. Given the size of the revenue loss that this tax rate change would open up, and given some of the serious budgetary challenges that we face over the course of that five-year period just ahead, this proposal represents a matter of enormous concern and is not something that we could support because of its fiscal impact. Moreover, while the Administration is certainly not enraptured by the real-estate transfer tax, if you look at the various taxes that the City now includes as key to our revenue generation and you look at the different taxes that might be reduced and that we've been working hard to reduce, it's not at all clear to us that we would get the 105 10/28/99 WHOLE COMM. - 980303, 980927 greatest return on our investment by making the real-estate transfer tax a higher priority for tax reduction. Time after time, study after study, the devastating impacts of the wage tax and the business privilege tax have been shown and well documented. However, in terms of the transfer tax, the connection between that tax and any actual economic activity in the City is not clear at all. We've looked at different years during which the transfer tax has either increased or decreased, and we have not seen a strong relationship between the rate that the City imposes and the actual home sale activity. , while of course, there may be some relationship, the much more dominant factors include interest rates, personal income levels, economic cycles, and other considerations that are really far more powerful in determining the choices that people make. So given the relatively minimal impact that we think this change would have in terms of the City's economy, given the crying need for further tax reduction in other areas that are much more harmful -- again, such as the wage tax and 106 10/28/99 WHOLE COMM. - 980303, 980927 business privilege tax -- and given the tremendous revenue loss that cutting the transfer tax in half would bring about, this bill is something that we do not support and that we view as a very serious threat to the City's financial health. In addition to cutting the rate for the real-estate transfer tax, Bill 980303 also does propose several amendments to the existing ordinance designed to close certain loopholes in the current transfer tax and in the City's ability to collect the current transfer tax. We believe that many of these proposals have a good deal of merit and, in fact, do address some real problems that we've seen in our efforts to enforce and collect upon this tax. But in contrast to the revenue losses that we would see resulting from the rate reduction proposed in this bill, the benefits of closing those loopholes are really de minimis and would come nowhere even close to offsetting the serious fiscal problems that this bill would create for us. In terms of Bill No.
980927, this bill 24 would seek to place the formal liability for payment of the transfer tax on the person selling 107 10/28/99 WHOLE COMM. - 980303, 980927 the property, the transferor, and not continuing the current situation whereby the law is really excellent, but it's traditionally and historically a tax that's split between buyer and seller. From a revenue perspective, we would consider this ordinance to be essentially revenue-neutral and not to have any significant impact on the City' finances. But the Administration's position is that in order to permit home buyers and home sellers the maximum flexibility to structure transactions in a way that they see fit, that we would prefer to continue the current status quo and not to explicitly shift this tax burden onto either party in a real-estate transaction.
Mr. Nadol, you have indicated how the Administration feels about the bills. Is it your opinion that the Mayor would veto either one of these bills if City Council passed them?
These are certainly bills that we've looked very seriously at, and these are 108 10/28/99 WHOLE COMM. - 980303, 980927 certainly bills that the Mayor is well aware of. And in particular with regard to Bill No. 980303 and the proposed transfer tax rate reduction, this is a matter of grave concern for the Administration. I don't want to tie the Mayor's hands in terms of what he will do in the weeks ahead, but I can say that this is something we oppose in the strongest possible terms because of its fiscal impact.
Thank you. Are there any questions? The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Good afternoon. Is that Mr. Nadol and Mr. Dubow --
-- is it? I'm sorry. Let me just ask a couple preliminary questions. And, Madam Chair, there are numerous people here from the general public and the real-estate community who wish to testify as well. And I think Frank Piva (ph.) is back with us to talk about some of the loophole provisions 109 10/28/99 WHOLE COMM. - 980303, 980927 that are covered in this particular bill just to put some examples on the record. Let me first just kind of get my bearings with you guys. Mr. Nadol, your testimony, the cover of your testimony indicates that you are now the Director of Finance; is that correct?
Okay. Was that shortly after becoming Deputy Mayor for Finance?
That's correct. As many of the members of Council know, my predecessor as Director of Finance, Ben Hayllar, was serving simultaneously as Director of Finance and as the Interim Chief Executive for PGW.
And I asked to come over and support him as Deputy Mayor for Finance earlier this summer. And then upon Mr. Hayllar's full-time appointment at the Gas Works, I was appointed as Acting Director of Finance and then permanent, if you will, Director of Finance, following action by the Finance Nominating Panel.
Okay, so when did 110 10/28/99 WHOLE COMM. - 980303, 980927 that happen?
Since October 1st, you have been -- okay. And, Mr. Dubow, you moved up after Dean Kaplan left; is that correct.
Okay. Now, the FY '98 five-year plan, that was, I guess by way of the calendar, that was drafted in the winter of 1996; is that about right?
At that time, I would have 111 10/28/99 WHOLE COMM. - 980303, 980927 been Deputy Water Commissioner.
Okay, all right. And you've both then been serving in those capacities until a couple months ago?
Yes. And as I believe the Councilman knows, I've been with Mayor Rendell since the first day of his administration.
And for the period that you inquired about, I was the Deputy Water Commissioner.
All right. So it's only been since the summer that you've been in your respective positions to present.
Summer-fall of '99, okay, all right. Now, in your testimony, you say that 112 10/28/99 WHOLE COMM. - 980303, 980927 you assume -- I think it's on . These estimates assume a full year reduction in Fiscal Year 2000. Now, why do you make that assumption?
Mm-hmm. I think at the time the analysis was first put together, we were looking at it having an impact on that full fiscal year. I'm not. . .
And your testimony 13 is as of today, and you never talked to me. So I 14 didn't tell you that it was going to be a 15 full-year reduction in FY 2000, and we're in FY 16 2000 right now, right? 17
Okay. So how could we have a full year reduction if we're already in the fiscal year? We can't retroactively go back, can we?
The bill as drafted -- if I believe I have this correctly, it would have been effective for all transactions taking place on or after July 1, 1998. 113 10/28/99 WHOLE COMM. - 980303, 980927
That's because it was a 1998 bill and it was anticipated that if you introduced something in April, it might be ready to go July 1, 1998.
Right. If the effective date were to be in the middle of the fiscal year, then the revenue impact would be in the middle of the fiscal year.
I think the data that we presented gives Council a good feeling of what a full fiscal year impact would be, and given that this would presumably be an annual recurring impact, this gives you a good sense of the total impact across a typical five-year plan period. In terms of this specific FY 2000, if the bill were not to be effective until midway through this fiscal year, say, for the sake the discussion, January 1st, then you could adjust this number accordingly.
Right. Well, one, 114 10/28/99 WHOLE COMM. - 980303, 980927 we wouldn't be irresponsible and try to adjust the tax rate in the middle of the fiscal year. But secondly, if we had talked about this, you would know that we had planned to do this for the start of the next fiscal year, so it would be July 1, 2000, but we never had that conversation. So there have been no communications and, therefore, the Administration has no idea what the intentions are, and that's why you have a sentence in your testimony that says that you assume that something's going to happen, because there was no discussion about this, right?
Not in the, as you pointed out, relatively brief period that I've been in this position.
All right, okay. Now, let me ask you some questions about previous five-year plans and some of the estimates. In the FY99-FY03 five-year plan, the Administration estimated that in 1998, real-estate transfer tax would generate $62 million. IN the following year's fiscal plan, it apparently comes to light that there was a 51 percent increase FROM FY '97 to FY '98, resulting in an $82 million 115 10/28/99 WHOLE COMM. - 980303, 980927 transfer tax collection for FY '98. Now, I mean, did the Administration purposely underestimate what the real-estate transfer revenues were going to be, or did you just make a mistake?
There were a number -- and as I said at the outset of our testimony, there are a number of factors which determine what annual transfer tax collections will be, and some of those are hard to predict. This is a tax that experiences more variation as a result of changes in the overall economy, as a result of changes in interest rates, as a function of one, two, some small subset of large office building transfers, large commercial transactions that may in and of themselves generate significant revenues. 116 10/28/99 WHOLE COMM. - 980303, 980927 And in this particular time period that you're asking about, the City Records Department was able to clear out a significant backlog of pending documents that also help to create a one-time boost in our revenues in that year.
Or maybe even the closing of a loophole, as indicated by Bill 9 960397; is that possible? The five-year plan indicates that you received a lot of income as a result of some transactions that came as a result of Council's action on closing the loophole; is that correct?
Okay. So, I mean, Mr. Nadol, is it your testimony that based on your experience in this regard, or at least in the timeframe that you've been the Finance Director, that you have determined that the rate of the real-estate transfer tax has no impact whatsoever on what goes on in the real-estate market; is that your testimony?
No, I don't believe that's what I said. I think what I've said is that we've looked at the data to try to determine how great 117 10/28/99 WHOLE COMM. - 980303, 980927 an impact the rate changes in the transfer tax would have.
Basically what we've looked at is historical changes in the tax rate. This is a tax, as you know, that has not been as consistent over the years as some of our other taxes. And we've looked at the actual revenues generated by the tax adjusted for the rate changes.
And kind of for each percent of transfer tax, how much are we collecting. And what we've seen is that it's hard to see anything in terms of a correlation between rate changes and activity. You might hypothesize that raising the rate would discourage transactions and that lowering the rate would encourage them, but if you look at the data, that kind of relationship just isn't there. During most of the 1990s, the transfer tax rate was steadily coming down. And yet, the per-percent collections were strongest in the 118 10/28/99 WHOLE COMM. - 980303, 980927 early '90s during the years when we had the highest transfer tax rate. And what that indicates to us is not that it has --
Well, isn't that a function of the number of transactions times the rate, and the rate is high, and so then you have high collections?
No, no, adjusted for the rate. If you take kind of for each percent of transfer tax rate how much is being collected and adjust for the rate increases itself, you just don't see what you might have predicted in terms of economic stimulus effects or economic, you know, chilling effect as a result of either lowering or raising this tax rate.
Well, I mean, let me ask this question. I mean, know you've had a number of positions either in the Administration or in your prior career. Do you have a real- estate license?
Okay. Now, I mean, based on all your analyses and the determinations that you've made, what's your view of Council's role and right in the area of tax-rate levels and ha they should be and how we actually do our jobs as it relates to tax rate issues? Is it your view that it's just within the purview of the Administration to make those determinations and have final judgment on that, or does Council have a role in this process?
Of course, Council has a very important role in this process. I think one of the things this administration is very proud of is the partnership that we've forged with City Council to make changes and improvements and reductions in some of the critical tax policies and tax rates that the City lives under. We've partnered together for five consecutive rounds of wage and business privilege tax reduction. We've worked together on some of the creative abatement programs for conversion of vacant ant underused properties. We've dealt with difficult issues and complex issues in the reapportionment of the BPT that have helped to level the playing field for 120 10/28/99 WHOLE COMM. - 980303, 980927 Philadelphia-based businesses. And I think we view all of that as ideally a collaborative process. Some of the changes in the tax programs, you know, have been sponsored by Councilmembers, some of them have been sponsored or initially promoted by the Administration, some of them have been initially promoted by outside civic groups, helping to bring us good ideas. So it's a collaborative process.
So in that regard, I mean, we could, as reasonable people, just have a difference of opinion about this particular matter. And based on your glowing review of what we've done over the years, it doesn't necessarily mean that our view is wrong or that your view is always right; we just have a difference of opinion. And that under those circumstances, it's possible that you could be wrong and we could be right; is that possible?
It's certainly possible that we could be wrong, and it's quite probable that you will be right on many, many issues. On this particular issue, I think the critical factor for us is what will the impact be on the City 121 10/28/99 WHOLE COMM. - 980303, 980927 budget, and what is the most probable. Most likely effect of cutting the realty transfer tax rate --
-- in half. And any way we look at it, and when I say "we," I just don't just mean me in my relatively short time in this position; I mean the Administration as a whole. And we've taken this proposal seriously and we've talked about it with veteran members of the Administration with lots of experience and lots of licenses and lots of time-tested background with these issues. And every way we look at it, this is a $30-million-plus hole every year in the City's budget.
Last question in this particular. What do you think is the impact on the real-estate market in general where you have the City and County of Philadelphia having a 3 percent rate and the four counties around us having a percent rate? Do you think that has 24 any impact on the real-estate market in 25 Southeastern Pennsylvania, that disparity? 122 1 10/28/99 WHOLE COMM. - 980303, 980927
It certainly -- I can't -- I can't say it has no impact. I mean, if we were starting from scratch, if we were a brand-new community in a strong growth mode with healthy revenues, would we like to have transfer-tax rates structure that is in line with other communities? I mean, I think of course we would. The problem we face today is, that's not where we are. We're facing this question in the context of also being a municipality with very high noncompetitive wage-tax rates relative to where we'd like to be and higher business taxes than other communities and relative to where we'd like to be. And in terms of prioritizing, where do we get the biggest return on our tax-cutting efforts? Our judgment is that we are getting a bigger bang through what we've been successfully doing in partnership with City Council on the wage tax and the BPT.
Okay, thank you. No more questions. I would like to get Mr. Piva up at some point.
Are there any 123 10/28/99 WHOLE COMM. - 980303, 980927 other questions of Mr. Nadol? (No further questions.)
Gentlemen, I would ask that you remain for the remainder of the hearing, please.
Good afternoon. Please identify yourself for the record.
Frank Piva, Jr., Divisional Deputy City Solicitor, Law Department, Major Tax Enforcement.
Thank you. Good afternoon, Mr. Piva. Mr. Piva, can you briefly give us some examples as best you can just so we have a record on those particular issues related to the loopholes that are a part of -- or the closing of certain loopholes that are a part of Bill 980303? 124 10/28/99 WHOLE COMM. - 980303, 980927
Yes. This bill contains four of what can be viewed as loophole-closing mechanisms. But before I speak about each of the different loophole closings, I think it's important to just reflect on how folks become subject to the reality transfer tax.
I mean, obviously, we're all familiar when we own a property in own name and sell it to someone, that that transaction is subject to realty transfer tax. But there is another way that transactions can be subject to realty transfer tax, and that is when the owner of the property doesn't actually change, but who owns the owner, the stock in a corporation that owns a piece of property, that changes. And when that change occurs, if it's more than a 90 percent transfer of ownership of stock of a company that 90 percent of its assets is real estate, we treat that as well as a transaction that is subject to tax. And there's some parameters there. The first parameter is that it's a real-estate company. And we define "real-estate company" as 125 10/28/99 WHOLE COMM. - 980303, 980927 company where 90 percent of its assets are in real estate. We also say that in order for the transfer to be subject to tax, there has to be a transfer of an interest of 90 percent or more within a 3-year period. And if that occurs, if a real-estate company transfers 90 percent or more interest within 3 years, it's subject to realty transfer tax. " And it's advocated -- I've been to at least two seminars where tax professionals who are advising other practitioners on city taxes have suggested the use of this 89-11 mechanism. And what that does is, the person who owns the interest in the real-estate company decides to sell 89 percent of that company today and agrees to sell the remaining 11 percent of that company in 3 years and day from today. 22 Effectively by entering into that arrangement, the 23 seller and the buyer avoid the realty transfer tax 24 because on the (unintelligible) tax, you have to 25 sell a 90 percent interest within 3 years. Here 126 10/28/99 WHOLE COMM. - 980303, 980927 they haven't sold 90 percent interest within years; they actually have sold it within 3 years and a day. And so one of the mechanisms that we have here is to close that loophole. The other three are more minor, but the next one also goes to the definition of what a real-estate company is. As I've said, it's a company where 90 percent of its assets are real estate. Well, in Pittsburgh, they define a real-estate company for transfer-tax purposes as not 90 percent in real estate, but 50 percent. And, in fact, the Commonwealth courts have said that that is a fine definition of 50 percent. So another mechanism that's here is to reduce the percentage of the definition of what a real-estate company is from 90 percent of its assets being real estate to 50 percent. The third loophole closing also involves the definition of a real-estate company, and that is what constitutes real estate. As we've it, real estate is only real estate that's in Philadelphia. So you can have a company that has a number of properties of real estate and, for all practical purposes, all its assets are real 127 10/28/99 WHOLE COMM. - 980303, 980927 estate. But if it doesn't have 90 percent of all those real-estate properties in Philadelphia, it's not going to be considered a real-estate company, when, in fact, all its assets are real estate. So we would make clear that the definition of a real-estate company and of the term "real estate" include not only Philadelphia real estate, but all real estate, whether it's in Philadelphia or outside. And the final loophole mechanism that would be closed is a situation that occurs and, from what I understand -- I wasn't here at the time, but that initially Council created an exclusion for when someone has a piece of property and when they sell it, there's no lender, no bank involved, and they actually take back a note from the purchaser for part of the payment. So instead of getting paid 100 percent at the closing, they really get some money and a piece of paper saying, you know, I owe you X-amount and I'm going to pay you over time.
Well, what happens often or sometimes is that folks default, and they're not able to make those payments, and the original owner seeks 128 10/28/99 WHOLE COMM. - 980303, 980927 to get possession of the property again and foreclose. And so we created, many years ago, an exemption so that that person would not be subject to the tax a second time -- first when he sold it and received the note, and second, when he has to foreclose and receive the property back because the person who received the note defaulted. It's my understanding that when this was originally enacted, the intent was that this was more in the unsophisticated noncommercial contacts that this exemption would apply. What has happened is, this exemption has been used from time to time by financial institutions. And this fourth loophole would close that and would just limit it to transactions between natural persons in order to qualify for this fourth exemption. So that's a rundown of the four loophole closings that are referred to in this bill.
Mr. Piva, do you believe that -- let me ask you one technical question. After you've laid out these various 129 10/28/99 WHOLE COMM. - 980303, 980927 examples, do you feel confident that with the closing of these loopholes, there would be some additional tax revenue collection as a result of the closing of any of these loopholes similar to the previous one that I mentioned, I believe, from 1996?
Is it possible to get additional tax revenue collection as a result of the closure of various loopholes that it is generally believed people utilize to avoid paying transfer tax?
One would think that there would be some revenue, but it's hard to tell because we have a very sophisticate tax bar in Philadelphia, and when folks are focused to try to avoid a tax, if you close one loophole or another loophole, creativity exists, and someone will try to come up with another mechanism. Do I know of another mechanism today? No, I do not, but I have a lot of confidence in my colleagues outside, that if there is enough money to be saved, that folks will have looked for another mechanism. At this point, we would hope 130 10/28/99 WHOLE COMM. - 980303, 980927 that we would be closing all the perceived loopholes, but we have no way of knowing whether there is something else out there that somebody will be using.
Let me finish. Or in the alternative, you could do nothing and just allow people to continue doing whatever it is that they're doing.
If I might add to that, we have talked with a number of the auditors in the City Revenue Department and in an informal way bounced these ideas off of some of Mr. Piva's colleagues in the Law Department involved in tax enforcement. And the sense of these loophole closers is that they're positive, that there's likely to be some merit there, but we have not at all been able to quantify that it's not a situation where there are scores and scores of examples of companies that are known to us that are just on the other side of paying the tax and that we would 131 10/28/99 WHOLE COMM. - 980303, 980927 easily capture as a result of these modifications to the language.
Do you recall what the analysis was that led to the introduction and the subsequent passage of 960397?
I'm not personally familiar with the details of that particular initiative. I can say that with regard to those that are proposed in this bill, we've tried to assess how big a bang we would expect, and we have not been able to come up with any hard and reliable data. The best we can do is anecdotal in nature and impressionistic in nature, and those anecdotal impressions are that, at least for a while, we might capture a few more taxpayers. The likely revenue from that is hard to predict because it would likely be large commercial transactions that are sort of episodic, and some are big and some are less big. Under no 21 scenario can we imagine that the revenues that might be generated from these efforts to close loopholes, under no scenario can we imagine it coming anywhere close to the $30-million-plus that we would lose through the proposed rate 132 10/28/99 WHOLE COMM. - 980303, 980927 reduction. And there is also the longer-term risk that new loopholes will be dreamed up and opened up by what is a fairly sophisticated commercial real-estate community and tax bar.
Okay. Thank you, Madam Chair. I have no further questions for the gentlemen at the table.
Are there any other questions from members of the committee? (No further questions.)
Mr. Nadol, you're staying. You don't have to stay at the table but I would ask that you not leave the room.
Our next witness is Joseph Vignola. (Joseph Vignola comes forward.)
Good afternoon. 133 10/28/99 WHOLE COMM. - 980303, 980927
Good afternoon, Madam Chair. My name is Joseph Vignola. I am the Executive Director of the Pennsylvania Intergovernmental Cooperation Authority, known as PICA. Madam Chair, I delivered to you this morning and to the Mayor and now to the rest of members of City Council a letter which I wrote in regard to Bill No. 980303. Not to repeat the letter, but to summarize is that. . . The PICA staff has endorsed efforts by the City to cut taxes and has vigorously encouraged the City to take steps to reduce the cost of living and doing business in Philadelphia in general. And we have applauded the City's successful efforts to reduce both the wage tax and the business privilege tax. However, our endorsement of efforts to cut taxes has always carried a very important caveat: the City must be able to afford any tax cuts, either by replacing lost revenues, cutting expenditures, or some combination of such actions. After reviewing the Finance Department's analysis of the cost of this project 134 10/28/99 WHOLE COMM. - 980303, 980927 or this bill, especially in light of the fact that by the time the City passed its budget in its five-year plan earlier this calendar year, the Commonwealth of Pennsylvania removed the Pennsylvania utility real-estate tax (PURT) to the tune of some $60 million. We at PICA are concerned that the revenue shortfalls caused by enacting this proposal may reach a level whereby the PICA statutory intervention, i.e. declaring a variance from the revenues, could take place. In light of the dialogue between the Finance Director and Councilman Nutter, I am not prepared to say that it will happen in this fiscal year. But because the PURT tax cuts are even greater next fiscal year than they are in the current fiscal year and given a full year cut of the real-estate transfer tax without a raise in revenues as a result of the cut, the City could be facing a substantial revenue shortfall. And when you combine that with other planned cuts that are supposed to take place in the five-year plan, which PICA has questioned in its report to the PICA Board and the PICA Board's adoption of the five-year plan, we're concerned that these cuts, 135 10/28/99 WHOLE COMM. - 980303, 980927 while very laudatory, may run in opposition to the five-year plan that this Council adopted this spring and which the PICA Board approved and ongoing five-year plans that will come before this Council and my board. So with that, I'd be glad to answer whatever questions you or any other member of Council may have in regard to this matter.
Thank you. Are there any questions of members of the committee of Mr. Vignola? (No questions.)
Thank you so much for your patience. I know you've been here since 10 o'clock this morning. Please identify yourself for the record and proceed with your testimony. 136 10/28/99 WHOLE COMM. - 980303, 980927
I am Lindsey Johnston. I am the President of the Greater Philadelphia Association of Realtors. I have a quick -- first of all, I would like to say that those people -- I will not read their names into the record, but we had a fairly strong turnout, a couple of dozen people here this morning, to support this position; unfortunately, they could not stay around because they had to close real-estate transactions and get those transfer taxes in. So I would, though, like to read this statement: The Greater Philadelphia Association of Realtors has been an advocate for the reduction or repeal of the Philadelphia realty transfer tax. Currently at 3 percent, this transfer tax is one of the highest in the nation, serving as a significant deterrent to potential home buyers and commercial investors. The overriding goal of reducing the real-estate transfer tax should be to place Philadelphia on a level playing field with the competing communities and to improve housing affordability. The reduced cost of purchasing 137 10/28/99 WHOLE COMM. - 980303, 980927 property should stimulate investment in residential and commercial sectors and help Philadelphia shed its image as anti-business. In 1998, Councilman Nutter introduced legislation which reduces Philadelphia's real-estate transfer tax to 1.5 percent. To pay for this reduction, certain tax benefits for commercial real-estate transactions are eliminated, notably the 89-11 exemption. Well, I'm going to stop with my written testimony now and just make a couple of comments here. For instance, on this 89-11, as you know, the way real estate works is hypothecation or leverage. For $10,000, you can buy $100,000 worth of property. Well, if you're looking at something in Philadelphia -- and the idea with this is that you only have to come up then with 10 percent of the necessary money to do the deal. But if you put yourself in a situation where you've got 10 percent of your money and then another $1,000 in transfer tax, you come up with $11,000 to do the deal. If you're in the City of Philadelphia, you have to come up with $13,000 to do the deal. And when you're talking with a commercial investor 138 10/28/99 WHOLE COMM. - 980303, 980927 who's not talking on a $100,000 property but on a $10 million property, to have to bring million 4 versus 10 million to the table, that deal will go 5 someplace else. 6 And we are not just in competition with 7 the surrounding communities; we are in competition 8 with other cities. And I have a list of certain 9 cities. For instance Atlanta, where the transfer 10 tax is $1 per 1,000; Boston, where it's 2 percent 11 per 1,000. In New York, Washington DC -- 12 Philadelphia is way out of line with everywhere 13 else. And it does not do us well to say, We're used to it. Obviously we're not used to it. If we were used to it, we wouldn't have this drain of talent and people from the City. We do agree that it is not maybe only the transfer tax. There are other issues. There is wage tax, there is the qualification of a good workforce, but transfer tax is one place we can start, and we need to start now.
Thank you very much. Are there any questions from members of 139 10/28/99 WHOLE COMM. - 980303, 980927 the committee? (No questions.)
Good afternoon, Madam President and members of Council. I think that my statement is being distributed so I'll just be brief. Basically, I just want to echo the comments that Mr. Johnston made prior. And, actually, if anyone was here this morning, I don't think Councilman Kenney could have articulated the Chamber's position any better. It's just an issue of competitiveness, and I think that we in Philadelphia are in a daily struggle to remain competitive with our neighbors across suburban lines and our neighbors in this region of the country and really all over the country. And as the Pew Charitable Trusts report 140 10/28/99 WHOLE COMM. - 980303, 980927 points out, the City faces grave in terms of its uncompetitive tax structure. And I think anything that this Council can do to make Philadelphia more competitive is not only a wonderful tool in the retention and attraction, but at this point in the City's economy, I think it's a grave necessity. And as Mr. Johnston pointed out, the reality transfer tax in and of itself is not going to be the sole factor that makes someone remain in Philadelphia or that attracts someone from outside into the city. But I think when you look at the totality of the circumstances here, we need to really spread the incentives across. And I applied this Council and this administration to the highest degree for the things you've done on the wage and business tax cuts. But I think that we need some relief spread to some different tax areas, and this is a fine place to start. Thank you.
Thank you. Are there any questions from members of the committee? (No questions.) 141 10/28/99 WHOLE COMM. - 980303, 980927
Thank you so much. Do we have anyone else to testify on this bill? (No response.)
Would Councilman DiCicco and Councilman Nutter please approach the table. (Councilmembers DiCicco and Nutter confer with President Verna off the record.)
Mr. Johnston, are you going to be testifying on Bill No. 980927? I held back on the testimony, pending the dialogue on Bill No. 980303. This is the one where the responsibility would be --
Do you want to approach the witness table, please. (Lindsey Johnson returns to the witness table.)
Thank you, Madam President. As you know, I introduced a bill that would shift the responsibility for the transfer 142 10/28/99 WHOLE COMM. - 980303, 980927 tax to the seller, as currently in Philadelphia, the transfer tax is typically a percent split -- 4 2 percent to the seller and 2 percent to the buyer. The intent of this bill for me was to enable folks who are interested in buying a home to maybe be able to get to the settlement table a lot easier. In your testimony on Bill 303, you indicated that the transfer tax is a very high tax, and when someone wants to buy a home, I think you used the example of $10,000 becoming now $13,000 as a result of the transfer tax. But there are other items that are included in a closing statement -- Realtor fees, notary fees. If you do financing as well -- if you're financing a property for the purpose of purchasing, you also may add some points assessed to the mortgage. Those costs are considerable for most folks, and I was wondering if you have any testimony or could you, through your experience in real estate, could you tell us if all of those costs cumulatively have any negative effect on the ability for people to be able to purchase a property. 143 10/28/99 WHOLE COMM. - 980303, 980927 'Cause what I was attempting to do with this bill was by shifting the responsibility to the seller, for those buyers who have a difficult time coming up with settlement costs, Realtor fees, notary fees, points as it relate to mortgages, it's just an extra burden on them to get to that settlement table. And I thought that by shifting the responsibility to the seller, even though the seller may have to incur the additional 2 percent, should the seller decide to increase the sale price by whatever that 2 percent is equivalent to, the buyer could then absorb that cost into a mortgage and spread it out over to 15 30 years and it's relatively insignificant. And if I can just give you an example. I'm a homeowner in the City of Philadelphia and I have a home selling for $50,000. For whatever reason -- my family has grown or I'm doing better financially and I want to stay in the City of Philadelphia and I want to buy up, and I assume most people buy up. I'm now going to purchase a $100,000 home. At the $50,000 sale price of which I am the seller, under the current formula, I would incur $2,000 as my share of the transfer 144 10/28/99 WHOLE COMM. - 980303, 980927 tax, and the buyer would have -- I'm sorry, $1,000 to the seller and $1,000 to the buyer. Under the formula that I am presenting in this bill, I, as the seller will have to incur the full $2,000 transfer tax at the $50,000 sale. When I become the buyer under the present formula at a $100,000 home, I will have incurred $2,000 for the transfer tax as the buyer, and the seller will have incurred $2,000 as the seller. So cumulatively, as the buyer and seller, I will in effect have paid $3,000 for both transactions. So I'm actually paying a transfer tax both times for both transactions for the pleasure of living in the City of Philadelphia. Under my formula, as the buyer of the $100,000 house, I don't have to pay a transfer tax, so I will in effect have saved $1,000 on both transactions. I was the seller at 50, it cost me 2,000; I'm the buyer at 100, and it doesn't caught me anything. So I will have saved $1,000 on the transfer tax for both transactions. The Realtor who is handling the transaction, or the seller of the $50,000 property, if they don't want to absorb the extra 145 10/28/99 WHOLE COMM. - 980303, 980927 $1,000 -- and these are simple numbers that I'm using -- it could inflate the sale price by 1,000 or $2,000 to make up the difference. The salesperson, who obviously will benefit by it 'cause now the sale is not 50,000, it's 52,000, the City will still get the transfer tax based on the $52,000 of the price of the home for sale.
Now, I'm trying to be as simple as I can so what I'm telling you is that my intention was to get especially low-moderate and middle-income families who struggle sometimes to be able to come up with enough money to be able to purchase a home, to reduce some of that burden as best as possible without really affecting the sale price of the home that will affect their mortgage going forward to any extent that would really jeopardize their monthly payments so they couldn't afford it.
Councilperson, I understand your concept here, and there is a devil's advocate's argument that supports those contentions. And we applaud any legislation that brings the issue of high transfer taxes and how to reduce them, we applaud in the efforts. 146 10/28/99 WHOLE COMM. - 980303, 980927 I, however, feel that there are other scenarios where it might not be beneficial to the seller. Let's say that our seller is not a move-up seller but is selling because they're an empty-nester and so they are now selling their $100,000 five-bedroom home and moving into a $75,000 condo. Well, now they're getting hurt on both ends and they're not helped on both ends. Here's one of the things about Philadelphia that is unique for an East Coast city. Housing is affordable in Philadelphia. So when we look at the three factors necessary for home ownership, it's credit, it's income, and it's cash to close. Of those three factors, cash to close is often the biggest obstacle. And so, yes, your bill does address helping the seller on that -- helping the buyer on that cash to close factor. However, there is also the other end of the transaction where you've got a seller, and as I just said, if cash to close is a huge impediment, then let's say we've got a conventional or an FHA mortgage deal, if it's already got a 6 percent maximum seller assist on 147 10/28/99 WHOLE COMM. - 980303, 980927 it. So using your same numbers, I've got a $50,000 house and I've got it under agreement. It's an FHA deal, because that's the only deal that the buyer qualifies under. That seller is now paying 6 percent, or $3,000, towards the buyer's closing costs. They're paying a commission -- bless them -- and they're also hit with a transfer tax. By the time you add that up, they're looking at maybe a percent cost of 11 sale. 12 And so what it all comes down to is 13 that regardless of which side of the equation the 14 transfer tax is on, it is prohibitively high. 15 Therefore, with all due respect, I believe that Councilperson Nutter's bill, which is calling for a reduction in the transfer tax, is a more long-term and permanent solution to the issue.
And again, originally when I was thinking of this type of legislation, I don't know if I prepared another piece or not, but I was looking to find a way in 148 10/28/99 WHOLE COMM. - 980303, 980927 which people who remain in the city but move from one property to another do not have to go through the expense of paying a transfer tax on both transactions. And I was told that we have to do it, you can't just charge them on one transaction because under the Uniformity Act, it's illegal. So I just looking for an alternative to that, again, to make it more affordable for folks to either get to the table and/or continue to stay in the city without having to pay that transfer tax twice.
I do believe there's merit to that idea. I think it's a very original idea. I believe that even, again, Councilperson Nutter's initial bill offered not quite the same but a similar incentive for those people that would stay in the City of Philadelphia, and I think that it was the same reason, if I'm correct that, yes, that you would have to -- any other thing would be an unequal taxation or whatever and unacceptable under City Charter. But, again, when you take a look at solutions to this problem -- and it's not like Philadelphia -- and I'm going to go back to the 149 10/28/99 WHOLE COMM. - 980303, 980927 commercial real estate to illustrate this. They don't know about an 89-11 in Montgomery County, they don't know about an 89-11 in Bucks County. It doesn't matter because it's only a 1 percent transfer tax they're talking about. There is certain exposure and there are sizeable legal fees to structure such a deal. So because there's only 1 percent transfer tax, they don't bother. They say they accept it as a part of life. But in Philadelphia, where they talk about that 3 percent -- and it rankles the buyer and the seller -- then everybody gets creative in similar ways to what you have done. And ultimately, the answer is to reduce the transfer tax.
Well, we just made a big decision. The Committee of the Whole will stand in recess until Wednesday, November the 10th, at 11 a.m.. The Chair recognizes Councilman Nutter.
Madam President, can you announce that there was a Commerce and Economic Development Committee meeting which was 150 10/28/99 WHOLE COMM. - 980303, 980927 supposed to start at 2 o'clock. If members could stay to give us a quorum so we can take care of that business. It's a mere putting-forward of some amendments; there's no disagreement on the measure in front of us.
Fine. I think you just made that announcement. So thank you all again for your patience today. (Adjourned at 4:00 p.m.) - - - 151 C E R T I F I C A T E I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of Wednesday, October 27, 1999, were reported fully and accurately by me, and that this is a correct transcript of same. RE: COUNCIL COMMITTEE OF THE WHOLE BILL NO.'S 970214, 970652, 980303, 980927 __________________________________, JOSEPHINE CARDILLO, Registered Professional Reporter