





































Should the Philadelphia Property Tax Classification System Be Modified?


COMMONWEALTH, Volume 20, Issue 1 (2018). © 2018 The Pennsylvania Political Science Association.  
ISSN 2469-7672 (online). http://dx.doi.org/10.15367/com.v20i1.179. All rights reserved.

Should the Philadelphia Property Tax 
Classification System Be Modified?

JEFFREY CARROLL
Chestnut Hill College

JOHN F. MCDONALD
University of Illinois at Chicago

This article reviews issues related to proposed changes to the Philadelphia tax-
ation system. There are two proposed plans. The City plan proposes modest 
cuts to the wage tax and to the net income portion of the business income and 
receipts tax (BIRT). The plan proposed by the Philadelphia Growth Coalition 
includes larger cuts in these taxes combined with an increase in the property 
tax on commercial real estate. The increase in the property tax on commercial 
real estate is intended to make up for losses of revenue from the tax cuts and is 
proposed to create a property tax classification system in which different classes 
of property are taxed at different rates. These proposals have been studied by 
Econsult Solutions (2015), and their findings are scrutinized in this article. Also, 
this article includes information on the main example of a property tax clas-
sification system in Cook County, Illinois, as a cautionary tale.

The Philadelphia Growth Coalition has recently proposed increasing 
the property tax rate on commercial property in the City of Philadel-
phia along with reductions to the wage tax and the business income 

and receipts tax (BIRT). The proposed increase is from 1.4% of property value 
to 1.61% of property value, to take effect in the next tax year after adoption. 
We calculate that, by including the business use and occupancy tax imposed 
by the School District of Philadelphia, Philadelphia already effectively imposes 



40 Jeffrey carroll anD John f. McDonalD

higher property tax on commercial real estate of 1.8% of assessed value.1 The 
proposed increase would result in a tax rate of 2.01% on the assessed value of 
commercial real estate compared to the 1.4% on assessed value of residential 
property. The Central Philadelphia Development Corporation commissioned 
a study of the proposal from Econsult Solutions, a local economic consulting 
firm. That study is examined in this article.

The idea of raising the property tax rate only on commercial real estate 
(and not on residential real estate) caught our attention. The primary and 
most relevant example is the property tax classification system that has been 
in place in Cook County, Illinois, for many years. Cook County is the central 
county in the Chicago metropolitan area and contains the City of Chicago 
as well as numerous near-in suburbs. Cook County is surrounded by a set of 
counties, known as the “collar counties,” which do not employ a classification 
system. Philadelphia is, of course, a separate county. In contrast to the Cook 
County case, all municipalities outside the City of Philadelphia are in other 
counties.

This study produced five tentative conclusions. First, reducing reliance on 
the wage tax is a good objective and moves Philadelphia closer to an optimal 
mix of taxes. The issue is identifying sources of revenue to replace any wage 
tax revenue losses. However, we would also point out that the wage tax on 
nonresidents is a method for taxing employers, including nonprofit institu-
tions, that are exempt from property taxation (such as the city’s primary driv-
ers of its economy, the “meds and eds”).

Second, replacement of a portion of the wage tax with an increase in the 
property tax on commercial real estate seems to be based on the belief that 
the commercial property tax base is relatively immobile (at least compared to 
jobs). This is not necessarily correct in the long run because an increase in the 
property tax rate reduces the market value of property immediately and has 
the long-run effect of discouraging real estate development. Evidence of these 
points is provided by studies of Cook County, Illinois. 

Third, the empirical evidence from Cook County shows that the negative 
impact of a higher property tax on commercial property is greatest outside 
of the downtown area and nearer to the collar counties, where substitute real 
estate is readily available for tenants. This finding suggests that larger negative 
impacts of a property tax in Philadelphia may be in the remote portions of the 
city, away from Center City. 

Fourth, the experience of Cook County should be a cautionary tale for 
a jurisdiction considering a classification system for the property tax that 
involves a higher tax on commercial property compared to the tax in the 
adjacent counties.



Should the Philadelphia Property Tax Classification System Be Modified? 41

Finally, we believe that the proposed set of changes in tax policy needs 
further study. While a proposed increase in the property tax on commer-
cial real estate may be needed to offset the loss of revenue from cuts in the 
wage and business net income taxes, a greater increase in the property tax on 
commercial real estate runs the risk of discouraging commercial real estate 
development in the city.

Taxes and Tax Reform in Philadelphia

The City of Philadelphia relies on four sources of tax revenue: 

1. The wage tax is an income tax on all workers regardless of where 
they reside. The rate is currently at 3.91% for those who live and 
work in Philadelphia. For those who work in Philadelphia but do 
not live in its borders, the rate is 3.48%. At its highest (1993–1995), 
the Philadelphia wage tax was 4.96% for residents and 4.31% for 
nonresidents. There have been steady reductions in the wage tax 
since the mid-1990s.

2. The real estate tax is imposed at a rate of 0.6317% on the values (ad 
valorem) of both residential and commercial property.2 

3. The BIRT is imposed on all businesses at rates of 0.14% on gross 
receipts and 6.39% on net business income. 

4. The City uses a combination of other taxes, which include sales, 
parking, and real estate transfer taxes. These taxes make up 14% 
of total tax revenue, and are not part of the proposed tax reform 
package. 

Revenue for the City of Philadelphia from each source for fiscal year 2016 
is illustrated in Table 1.

table 1. city of Philadelphia revenue by source, fy 2016

source revenue ($, in millions) Percentage of general fund

Wage tax 1,742  53.8

Real estate tax 581  18.0

BIRT 454  14.0

Other taxes 460  14.2

total 3,237 100.0

Source: Econsult Solutions (2015).



42 Jeffrey carroll anD John f. McDonalD

The Philadelphia tax structure has undergone several changes in its major 
taxes since the turn of the century. The first change is gradual wage tax reduc-
tion. Philadelphia was the first major city to implement a wage tax in 1939, 
then at a rate of 1.5%. What was intended to be a temporary tax to provide 
fiscal stability in the wake of the Great Depression became a permanent fix-
ture in Philadelphia’s taxation system. The negative impact of the wage tax on 
employment in the city has been documented by numerous studies since 1980. 
Luce and Summers (1987) estimated that the increase in the wage tax from 
1.625% in 1964, to 2.0% in 1969, and to 4.3125% in 1983 resulted in 91,000 to 
136,000 jobs lost, or roughly 60% of the total jobs lost in the city during those 
years. They concluded:

It is very likely that a significant portion of the wage tax is, indeed, 
paid by businesses rather than commuters or city residents (in the 
form of higher wages that must be paid). The wage tax is, therefore, an 
inappropriate instrument being used to pursue an appropriate policy 
goal—matching the costs of public services to the beneficiaries. (Luce 
and Summers 1987, 59)

Given the documented negative impact of the wage tax on employment, 
it is understandable that reducing the wage tax has long remained an impor-
tant goal. Since the mid-1990s, gradual decreases in the wage tax have been 
made. Due to the recent economic crisis, the wage tax remained constant at 
3.928% for residents and 3.4985% for nonresidents between 2010 and 2013, 
after which gradual rate reductions recommenced. Unlike most municipal 
governments that rely heavily on real estate taxes, the City of Philadelphia 
relies on the wage tax for 54% of its tax revenue.

The second major change in the Philadelphia tax system was in the real 
estate tax due to the implementation of the Actual Value Initiative (AVI), an 
overhaul of the property assessment system. It had long been understood that 
there were inequities in Philadelphia’s property assessment system across 
the entire city as the amount of tax paid was severely misaligned with the 
value of the property. AVI’s purpose was to correct this imbalance by bring-
ing property assessments to their “actual value,” or true value of a property 
on the market. This ambitious plan sought to put into place three major 
changes simultaneously: (1) change the market value of each property parcel; 
(2) change the manner of how assessments are used to calculate tax bills; and 
(3) address how property owners would manage the tax increases as a result of 
the new system (Pew Charitable Trusts 2012). A study by the City of Philadel-
phia, Office of the City Controller (2013) before AVI’s implementation found 



Should the Philadelphia Property Tax Classification System Be Modified? 43

that 107,603 properties would receive property value decreases and 343,191 
properties would increase. The AVI process was intended to be revenue neu-
tral, but it shifted the share of taxable value by property type. A report by 
Pew Trusts on AVI (2013) shows that the share of taxable value of residential 
property increases from 53.9% to 59.9% of all property taxes collected, and 
the share for all other property decreases from 46.1% to 40.0%. This change 
in shares means a significantly higher yield in tax revenue from residential 
properties and a loss of revenue from other properties. Data presented below 
show that the property taxes on office buildings did decline.

It is worth noting that approximately 10% of Philadelphia’s real estate stock 
is owned by nonprofit institutions and is exempt from property taxes. These 
exemptions are controversial as nonprofit institutions hold some of the city’s 
most valuable real estate and are some of the city’s largest employers. In 1994, 
Philadelphia implemented a Payment in Lieu of Taxes (PILOT) program that 
allowed nonprofits to contribute voluntarily to the city’s general fund to assist 
in the provision of basic services such as street repair and trash pickup (City of 
Philadelphia 1994). The program required the property owner to make a five-
year commitment or risk having its tax-exempt status reviewed and possibly 
revoked. Prior to the commitments expiring, the Commonwealth enacted Act 
55, the Institutions of Purely Public Charities Act, which allowed most of the 
nonprofits to safely allow their PILOT commitments to expire. Since 2000, 
the City essentially abandoned its PILOT program. A 2012 report from the 
Lincoln Institute of Land Policy shows that 218 jurisdictions in 28 states have 
implemented PILOT programs since 2000 (Langley, Kenyon, and Bailin 2012). 
There are 30 jurisdictions in Pennsylvania that collected $10 million in total 
in PILOT revenue in FY 2011, the largest being Erie ($2.8 million) and Pitts-
burgh ($2.6 million). Philadelphia’s PILOT revenue was $491,860 or roughly 
0.11% of its total property tax revenue. In the last year, there has been great 
political pressure to acquire more revenue from nonprofits, particularly the 
city’s medical and educational institutions.

The third major change to Philadelphia taxes is the BIRT, which is a tax 
levied on all businesses in the city and which is divided into two parts: a tax 
on gross receipts and a tax on net income. Currently, the rate is 0.1415% on 
gross receipts and 6.39% on net income. This tax was previously called the 
Business Privilege Tax until its most recent reform in 2011 that resulted in 
two major changes: (1) businesses are now exempted from tax from the first 
$50,000 in gross receipts in 2014, $75,000 in 2015, and $100,000 in 2016 and in 
subsequent years, and (2) the tax rate on taxable net income would slowly be 
phased down to 6.0% by 2023. The impetus for these recent reforms stemmed 
from complaints that Philadelphia small businesses were at a competitive 



44 Jeffrey carroll anD John f. McDonalD

disadvantage relative to small businesses outside of the city that were subject 
to lower taxes.

The School District of Philadelphia heavily relies on local tax and nontax 
revenue for its general fund in addition to funding from the state and federal 
government. The property tax is 1.39998% of assessed value, of which 0.6317% 
goes to the city’s general fund and 0.7681% goes to the school district. In addi-
tion, the business use and occupancy tax is levied on the assessed value of 
commercial real estate at a statutory rate of 1.21% (with a number of exemp-
tions and exclusions provided). In short, some commercial real estate is taxed 
at a statutory rate of 2.61% of assessed value, minus any exemptions and exclu-
sions. The sources of revenue for the School District of Philadelphia for FY 
2016 are illustrated in Table 2.

According to the Econsult Solutions (2015) report, the real estate tax 
revenue for the City of Philadelphia of $581 million consists of $361 million 
(62.1%) collected from residential property and $220 million (37.9%) collected 
from commercial property. 

The breakdown of total real estate taxes into municipal, school district, 
residential, and commercial components is shown in Table 3. The computa-
tions are as follows. Commercial real estate tax collections for the City of 
Philadelphia are $220 million with a tax rate of 0.6317%, so the effective com-
mercial real estate tax base is $220 million/0.006317 = $34.83 billion. The 
tax base computed in this manner is not equal to the total market value of 
property because of exemptions and exclusions in the determination of the 
tax due. Given this tax base, the commercial real estate tax collections for the 
school district are $34.83 billion × 0.007681 = $267 million.

table 2. school District of Philadelphia revenue by source, fy 2016

source revenue ($, in millions)

Local Tax Revenue
 Property tax
 Business use and occupancy tax
 Sales tax
 Other local taxes

707
141
120
161

State Revenue 1,327

Local Nontax Revenue 131

Federal Revenue   11

total 2,599

Source: School District of Philadelphia (2016). 



Should the Philadelphia Property Tax Classification System Be Modified? 45

In addition, the school district collected $141 million for the business use 
and occupancy tax assessed on commercial real estate. The effective tax rate 
for the business use and occupancy tax can be found as B in:

$34.83 billion (0.007681 + B)  = $141 million + $267 million  
= $408 million

The solution for B is 0.004 (0.4%), which is the effective tax for the busi-
ness use and occupancy tax, far lower than the statutory rate of 1.21%, likely 
because of the exemption of $165,300 of assessed value and several exclusions 
(hotels, vacant space, living space, nonprofit business space, and port-related 
property).

Considering Two Tax Reform Proposals:  
The City of Philadelphia Plan and the Growth Coalition 
“Levy-Sweeney” Plan

Let us consider two tax reform scenarios: one proposed by the City of Phila-
delphia and one proposed by the Growth Coalition. The City of Philadelphia 
proposal plans to reduce the wage tax on residents from 3.91% to 3.52% and 
on nonresidents from the current 3.48% to 3.13% over a period of 10 years. 
The City believes that wage tax revenue will continue to grow even as the wage 
tax rate is cut.

On the other hand, the tax reform proposal by the Growth Coalition 
as laid out in an Econsult Solutions (2015) report has four major elements. 

table 3. real estate taxes in Philadelphia, fy 2016

sector
real estate tax revenue 
($, in millions) tax rate tax Base ($, in billions)

City
 Residential
 Commercial

581
361
220

0.6317 91.98
57.15
34.83

School District
 Residential
 Commercial

707
439
267

0.7681 91.98
57.15
34.83

Total
 Residential
 Commercial

1,287
800
487

1.3998 91.98
57.15
34.83

Sources: Econsult Solutions (2015) and School District of Philadelphia (2016). 



46 Jeffrey carroll anD John f. McDonalD

First, reduce the wage tax from 3.91% to 3.0% on residents and from 3.48% 
to 2.5% on nonresidents over a period of 10 years, instead of the planned 
smaller reductions to 3.52% and 3.13%. Second, increase the real estate tax on 
commercial property to 1.61% immediately in 2017, and hold the tax rate on 
residential property at 1.3998%. The revenue generated from the increase in 
the real estate tax rate initially is to be devoted entirely to the City of Philadel-
phia to make up for the decline in other taxes. Third, reduce the net income 
tax part of BIRT from 6.39% to 3.0% over a period of 10 years (instead of 
the planned reduction to 6.00%), and keep the gross receipts part of BIRT at 
0.14%. Finally, make no changes to the other tax rates.

The proposal to increase commercial real estate taxes to lower business 
and wage taxes has been dubbed the “Levy-Sweeney Plan” after the plan’s two 
most vocal proponents, Philadelphia Center City District CEO Paul Levy and 
Brandywine Realty Trust CEO Jerry Sweeney. As it stands, a property tax 
classification system in Philadelphia would be feasible only if politics allow. 
Article VIII, Section 1 of the Pennsylvania State Constitution (best known 
as the taxation “uniformity clause”) contends: “all taxes must be uniform, 
upon the same class of subjects, within the territorial limits of the authority 
levying the tax, and shall be collected and levied and collected under general 
laws.” This clause has been subject to rather strict interpretation by the Penn-
sylvania State Supreme Court, which has made tax categorization systems 
and varying rate taxation difficult to implement. A Philadelphia property 
tax classification system would require a constitutional amendment that 
includes the passage of legislation by the General Assembly during two con-
secutive legislative sessions and then approval by voter referendum. Phila-
delphia City Council approved a resolution during the summer of 2015 that 
called on Harrisburg to draft such legislation, which was eventually drafted 
and passed by the General Assembly. 

What is the expected change in tax revenue derived from the proposed 
increase in the tax rate on commercial real estate, assuming no other change 
in tax rates? If the entire increase in the tax is passed forward to tenants, then 
the value of the tax base remains at $34.83 billion. Tax revenue would increase 
from $487 million to $561 million, an increase of 15.2%. The share of revenue 
going to the City of Philadelphia would increase from $220 million to $293 
million. However, suppose that none of the increase in the tax is passed for-
ward to tenants because the market for commercial space is perfectly competi-
tive across the metropolitan area. The basic equation for the value of rental 
real estate is:

V = (R – tV)/ρ = R/(ρ + t)



Should the Philadelphia Property Tax Classification System Be Modified? 47

Here V is value, R is net rent excluding real estate tax (tV) at rate t, and ρ 
is the overall capitalization rate. Written in natural log form,

lnV = lnR – ln(ρ + t), and

dlnV = dlnR – dln(ρ + t), with dlnR = 0

Suppose that the overall capitalization rate ρ is 6.5% (0.065). Insert the 
alternative values for t of 1.3998% and 1.6098% and compute the change in 
ln(ρ + t). The change in ln(ρ + t) is –0.0262, so the value V declines by 2.6% 
from $34.83 billion to $33.92 billion. Tax revenue at the higher tax rate is $546 
million. The share of revenue going to the City of Philadelphia is $279 million 
(a $59 million increase). In short, whether the increase in the tax is passed for-
ward to tenants makes little difference to the increase in tax revenue. The City 
of Philadelphia might expect to obtain about $63 to $70 million in increased 
real estate tax revenue, a figure that matches the estimate obtained by Econ-
sult Solutions (2015).

Property Tax Rates in Philadelphia’s  
Surrounding Counties

The lament over Philadelphia’s “tax gap” relative to its suburban neighboring 
counties in Pennsylvania and New Jersey is well documented. The good news 
for Philadelphia is that it has closed its tax disadvantage significantly in the new 
millennium. A Pew Trusts report (2012) comparing the tax burdens of hypo-
thetical families in Philadelphia and its neighboring counties found that the city 
has closed its tax disadvantage by 3% in the Pennsylvania suburbs and 2% in 
the New Jersey suburbs. The hypothetical family’s tax burden in Philadelphia 
(after considering state income taxes) fell from 10.7% to 9.8% while the burden 
increased both in the Pennsylvania suburbs (9.8% to 12.2%) and New Jersey sub-
urbs (9.9% to 11.3%). The Pew study finds that the increased tax burden among 
Pennsylvania suburban counties was mostly due to property and wage taxes 
while the rise in New Jersey counties was mostly due to sales and property taxes.

Philadelphia’s median property tax rates are lower than the surrounding 
counties in Pennsylvania and New Jersey, based on data for residential prop-
erty (Table 4). If the median property tax rate for commercial real estate also 
is 0.91% of actual value (as opposed to assessed value), the addition of 0.40% 
from the business use and occupation tax makes the effective rate 1.31%. An 
increase in the property tax rate on commercial real estate in Philadelphia 
of 0.21% would bring the rate to 1.52% and place the City above the rates in 
Montgomery, Chester, and Bucks Counties.



48 Jeffrey carroll anD John f. McDonalD

Overview of the Philadelphia Commercial  
Real Estate Market

Commercial real estate in Center City Philadelphia has been growing steadily 
and is an inviting target for increased taxation. Nonresidential commercial 
real estate is broken down into four categories: office, industrial, hotel, and 
retail. Reports on the office and industrial markets are readily available, but 
detailed reports on the hotel and retail markets are not. This section is a brief 
overview of commercial real estate in Philadelphia.

Table 5 is a summary of the office market for Philadelphia and for the 
metropolitan area. The office market in Philadelphia contains 36% of the total 
square feet of office space in the metropolitan area (and 34% of the Class A 
office space). Philadelphia is dominated by the central business district (95% 
of the total space). The vacancy rate in the city is lower than the vacancy rates 
in the rest of the metro area and this pattern is typical in that central business 
districts have lower vacancy rates than suburban office markets. As one would 
expect, asking rents are higher in the City as well.

The Savills Studley (2015a) report on office rents in Center City shows 
that building owners have been doing well since 2011, the year of the bottom 
of the cycle for this market. Specifically, office-based employment increased 
by 2.5% in 2014 over 2013, which gave landlords the ability to increase rents. 
Furthermore, the recent citywide property reassessment gave a significant 
reduction in property taxes for commercial buildings. The average property 
tax per square foot on Class A buildings had been $3.10 from 2008 to 2012, 
then jumped to $3.98 in 2013, and fell to $2.36 in 2014. This is a 24% reduction 
for 2014 compared to 2012. Landlord effective rent on new leases in Class A 

table 4. Median effective Property tax rates in Delaware Valley 
region by county: 2017

county
Median effective  
Property tax rate (%)

Philadelphia 0.91

Chester 1.25

Montgomery 1.29

Delaware 1.67

Bucks 1.27

Camden 2.50

Gloucester 2.27

Burlington 2.06

Source: tax-rates.org. 



Should the Philadelphia Property Tax Classification System Be Modified? 49

buildings increased from $8.21 per square foot per year in 2012 and $8.57 in 
2013 to $13.82 per square foot per year in 2014.3 At the same time tenant effec-
tive rent increased from $29.90 per square foot per year in 2012 and $30.23 in 
2013 to $34.74 for 2014. With landlord effective rent of $13.82 and an overall 
capitalization rate of about 6.5% as reported by CBRE (2016), the total value 
of the office buildings in Philadelphia is an estimated $9.6 billion. Given the 
prominence of the office market in Philadelphia and the fact that property 
taxes have been reduced, it should come as no surprise that there is a proposal 
to increase the property tax rate on Philadelphia’s commercial real estate.

Table 6 provides a snapshot of the industrial market. We see that Philadel-
phia is not a prominent part of the industrial market, with 92 million square 
feet, just 19% of the total space in the metropolitan region. The vacancy rate 
in the city is higher than the average for the metro area, and quite a bit higher 
than the vacancy rate in the industrial market in the region’s suburbs in 

table 5. the office Market in Philadelphia and suburbs

location

total 
square 
feet
(msf)

Vacancy 
rate (%)

asking 
rent  
($ per sf 
per year)

class a 
square 
feet 
(msf)

Vacancy 
rate (%)

asking 
rent  
($ per sf 
per year)

Philadelphia 47.1 11.9 27.53 29.4 11.8 29.65

Suburbs in PA 54.6 18.9 24.71 39.4 16.7 25.74

Delaware 13.5 16.7 23.50 10.2 12.3 25.91

S. New Jersey 15.5 17.9 20.62 7.2 16.6 21.65

total 130.7 16.1 24.67 86.2 14.5 26.29

Source: Savills Studley (2015b). 

table 6. industrial real estate in Philadelphia and suburbs

location
total square 
feet (msf)

Vacancy rate 
(%)

asking rent ($) 
(triple net)

Philadelphia 92.4 10.5 4.04

 Flex Space 4.4 n.a. 9.20

 Warehouse/Manufacturing 88.0 n.a. 3.78

Suburbs in PA 275.3  7.2 5.42

Delaware 28.5 20.6 4.58

S. New Jersey 97.8  9.2 4.20

total 494.0  9.0 4.85

Source: Newmark Knight Frank (2015). 



50 Jeffrey carroll anD John f. McDonalD

Pennsylvania. Furthermore, asking rents in the city are lower than all the sub-
urban markets. The industrial market is divided into three parts: warehouse 
space, manufacturing space, and higher-quality “flex” space that includes 
more than a minimal amount of office space. However, f lex space is a very 
small portion of industrial supply in the city. Triple net asking rent is $4.04 
per square foot, so landlord effective rent may be about $3.50 per square foot. 
According to CBRE (2016), the overall capitalization rate for industrial space 
in Philadelphia is 6.5%, which would yield a value of $54 per square foot. This 
estimate of value means that the stock of industrial space in the city is worth 
about $5 billion.

The hotel market in Philadelphia as of 2014 includes 43 hotels in Center 
City with 11,210 rooms. Center City District (2015) reports an average daily 
rate of $173 per occupied room with occupancy of 75.5%, which means rev-
enue per available room of $131 and total revenue of $1.47 million per day for 
the Center City hotels ($536 million for the year). Other hotels are located near 
Philadelphia International Airport.

Philadelphia has a large retail sector. Center City District (2015) provides 
data on retailing between Girard Avenue and Tasker Street (as the respective 
north and south boundaries) and from the Delaware River to the Schuylkill 
River (as the respective east and west boundaries). In 2014, there were 3,193 
store fronts consisting of 1,080 retail stores, 958 restaurant and food and drink 
establishments, and 1,155 service businesses. A detailed report for the Market 
East retail submarket for 2014 by CoStar (2015) shows an inventory of 482 
buildings with 4.36 million square feet, a vacancy rate of only 5.5%, and aver-
age asking rent of $23.81 per square foot per year. Rent along Walnut Street is 
reported to be as high as $225 per square foot per year. Several big-box stores 
and other retail establishments are found along Columbus Boulevard next to 
the Delaware River as well.

Considering Tax Reform Proposals in  
the Growth Coalition “Levy-Sweeney” Plan

The Econsult Solutions (2015) report includes projections out to 2026 for the 
City only (not including the school district) under two “dynamic” scenarios: 
one with the smaller changes in tax rates and one with the larger changes in 
tax rates that includes the increase in the property tax. Table 7 shows a sum-
mary of the projections. We review those projections by comparing the two 
scenarios with the aim of understanding the long-run effects of the property 
tax increase.



table 7. tax revenues under two scenarios ($)  
(tax revenue in millions, tax base in billions)

Smaller Tax Change  
(City Scenario)

Larger Tax Change  
(Growth Coalition)

Year 2016 2017 2021 2026 2017 2021 2026

Wage Tax 
Revenue, 
Residents

1,045 
 

1,076 
 

1,168 
 

1,318 
 

1,061 
 

1,126 
 

1,199 
 

Tax Rate  3.91%  3.90%  3.70%  3.52%  3.82%  3.455%  3.0%

Tax Base 26.73 27.59 23.58 37.44 27.77 32.59 39.97

Wage Tax 
Revenue, 
Nonresidents

697 
 

717 
 

778 
 

879 
 

707 
 

751 
 

799 
 

Tax Rate  3.48%  3.474%  3.30%  3.13%  3.385%  2.99%  2.5%

Tax Base 20.30 20.64 29.36 28.08 20.89 25.12 34.50

Real Estate 
Tax Revenue, 
Residential

361 
 

366 
 

411 
 

454 
 

369 
 

437 
 

483 
 

Tax Rate  0.63%  0.63%  0.63%  0.63%  0.63%  0.63%  0.63%

Tax Base 53.78 57.94 65.06 71.87 58.41 69.18 76.46

Real Estate 
Tax Revenue, 
Commercial

220 
 

225 
 

263 
 

305 
 

296 
 

352 
 

415 
 

Tax Rate  0.63%  0.63%  0.63%  0.63%  0.84%  0.84%  0.84%

Tax Base 34.83 35.62 41.63 48.28 35.17 41.82 49.30

BIRT Gross 
Receipts

118 121 139 163 122 145 182 

Tax Rate  0.14%  0.14%  0.14%  0.14%  0.14%   0.14%   0.14%

Tax Base 84.29 86.43 99.29 116.43 87.14 103.57 130.0

BIRT Net 
Income 
Receipts

336 
 

340 
 

393 
 

447 
 

324 
 

331 
 

315 
 

Tax Rate  6.39%  6.35% 6.15% 6.00% 6.05% 4.7%  3.0%

Tax Base  5.26  5.35 6.39 7.45 5.35 7.04 10.5

Other taxes 460 469 559 672 479 590 732

total 3,237 3,314 3,711 4,238 3,358 3,732 4,125

Employment 
(1000s)

804 805 815 822 813 845 883

Source: Econsult Solutions (2015). Smaller tax change as proposed by City, larger tax change as pro-
posed by the Growth Coalition.



52 Jeffrey carroll anD John f. McDonalD

Comparison of the scenario with the smaller tax changes with the one 
with the larger tax changes shows that the wage tax on residents is being 
reduced from 3.70% to 3.455% in 2021 and from 3.52% to 3.0% in 2026. These 
are reductions of 6.62% and 14.77%, respectively. Revenue is projected to fall 
by 3.6% in 2021 and by 9.0% in 2026 as a result of shifting to the larger tax 
changes. The wage tax on nonresidents is reduced from 3.30% to 2.99% in 
2021 and from 3.13% to 2.5% in 2026, which are cuts of 9.39% and 20.1%. 
Revenue is projected to fall by 3.47% in 2021 and by 9.1% in 2026 compared 
to the scenario with the smaller changes in tax rates. Employment is projected 
to increase from 815,000 to 845,000 in 2021 (3.68%) and from 822,000 to 
883,000 in 2026 (7.42%).

The property tax rate on commercial property is increased from 1.3998% 
to 1.6098% in 2017 and held at that level. This is an increase in the tax rate 
of 15%. Revenue in 2021 for the City based on its new tax rate of 0.8417% is 
projected to increase by 33.84% in 2021 and 36.07% in 2026 compared to the 
scenario with the smaller tax changes, which includes no change in the prop-
erty tax rate. The tax on net business income is reduced from 6.15% to 4.7% 
in 2021 and from 6.0% to 3.0% in 2026. Revenue is projected to fall by 15.78% 
for 2021 and by 29.53% for 2026 compared to the scenario with smaller tax 
changes.

The cuts in tax rates on wages and business net income increase the tax 
bases and reduce tax revenue, which is the normal outcome. The findings 
for commercial real estate are very different. The combined impact of the 
changes in tax rates, including the increase in the commercial property tax, is 
essentially no change in the tax base for 2021 and 2026. The tax is increased 
in 2017 from 0.6317% to 0.8417%, which means an immediate increase in 
tax bills and not enough time to change the supply of real estate. If the entire 
increase in the tax bill is passed along to tenants, an unlikely outcome, the 
value of property (i.e., the tax base) will remain constant. The more likely 
outcome is that property values tend to decline. The Econsult Solutions (2015) 
report estimates that the tax base will decline by 1.3% immediately in 2017 
(and increase slightly in 2021 and 2026). Given that the tax rate increases by 
33.2%, tax revenue is projected to increase from $225 million to $296 million 
(31.6%) in the first year, an increase of $71 million. Recall that our estimate is 
only slightly lower.

Table 7 provides an answer to the question whether the larger tax changes 
proposed by the Growth Coalition are revenue neutral—whether total tax rev-
enue rises, falls, or remains constant given the changes. Comparing the two 
scenarios, Table 7 shows that total tax revenue for the City remains roughly 



Should the Philadelphia Property Tax Classification System Be Modified? 53

constant. In addition, the tax revenue from the four taxes that are changed 
(resident and nonresident wage tax, property tax on commercial real estate, 
and BIRT net income tax) does not change in 2017 or 2021. However, the 
revenue collected from these four taxes with the smaller tax changes is $2,949 
million in 2026 and $2,728 million with the larger tax changes in 2026, a 
shortfall of $221 million. 

Consider the other taxes on businesses in Philadelphia that are part of the 
City and Growth Coalition plans for reducing taxes, which include changes to 
wage taxes and the BIRT. Table 7 shows these taxes generated $2,078 million 
in 2016 on a base of $52 billion for a rate of 4%. Projections for 2026 for the 
two versions of tax cut plans are shown in Table 8. The dynamic version of the 
City plan collects $2,664 million on a base of $72.99 billion for a rate of 3.62%. 
The overall cut in the rate on this base from 4.0% to 3.62% is a cut in the rate 
of 0.38% (or 9.5% of 4.0%). The Growth Coalition plan cuts the overall tax rate 
to 2.81% on a base of $82.43 billion. The cut in the rate is 1.19% (or 29.75% of 
the original 4.0%). In other words, the tax cut proposed by the Growth Coali-
tion is three times the size of the tax cut proposed by the City.

table 8. comparison of tax scenarios ($ figures in millions)

Wage tax, 
residents

Wage tax, 
nonresidents

Business 
net 
income

total 
Wage and 
Business 
net income

commercial 
real estate

2016 Base
Rate 3.9102% 3.48285 6.39% 4.00% 1.4%
Revenue $1,045 $697 $336 $2,078 $220
Base $26,725 $20,013 $5,258 $51,996 $15,714

2026 city static       
(smaller tax change)
Rate 3.5165% 3.1322% 6.00% 3.63% 1.4%
Revenue $1,263 $842 $447 $2,550 $293
Base $35,916 $26,882 $7,450 $70,248 $20,929

2026 city Dynamic       
(smaller tax change)
Rate 3.5162% 3.1322% 6.00% 3.62% 1.4%
Revenue $1,318 $879 $447 $2,644 $305
Base $37,480 $28,063 $7,450 $72,993 $21,786

2016 growth coalition      
(larger tax change)
Rate 3.0% 2.5% 3.0% 2.81% 1.61%
Revenue $1,199 $799 $315 $2,313 $415
Base $39,967 $31,960 $10,500 $82,427 $25,776

Source: Econsult Solutions (2015). 



54 Jeffrey carroll anD John f. McDonalD

The Cook County, Illinois, Property Tax System

Every county in Illinois, except Cook County, assesses all property that is 
subject to property taxation at 33.3% of market value. The Constitution of the 
State of Illinois permits counties with population in excess of 200,000 to adopt 
a classification system for local property taxation in which the assessment 
ratio can vary across classes of property by a factor no larger than 2.5. Cook 
County is the only county that has adopted such a system, which currently 
includes six major classes and eight incentive classes. The six major classes 
and their statutory assessment ratios are illustrated in Table 9.

The Illinois Department of Revenue computes an equalization factor that 
brings the total assessed value of property for Cook County to 33.3% of esti-
mated market value for the entire county. Because residential property, Class 2 
and Class 3, the largest category of property, is assessed at only 10% of market 
value, the equalization factor is in the range of 3.0. The actual equalization 
factor was 3.30 in 2010 and 2.9706 in 2011. These equalization factors imply 
that, in effect, commercial and industrial properties in Cook County are being 
assessed at 82.5% to 74.3% of market value, compared to 33.3% in the collar 
counties such as DuPage, Lake, and Will. The classification system leads to a 
large divergence in property taxes on commercial and industrial properties 
that are otherwise identical between Cook County and the adjacent counties. 
On the other hand, the state equalization factor brings the assessment ratio 
for residential property in Cook County roughly into equality with residential 
property in the adjacent counties.

It is important to make the distinction between the assessment ratio and 
the property tax rate. The property tax rate for Cook County reported here 
is the property tax bill divided by the value of the property, i.e., property 
taxes as a percentage of property value. For example, the property tax rate 

table 9. cook county Property tax classifications by statutory assessment ratios

class type assessment ratio

Class 1 Vacant or farm land 10%

Class 2 Residential (6 units or fewer) 10%

Class 3 Apartments (7 units or more) 10% (as of 2011)

Class 4 Not-for-profit 25%

Class 5a Commercial 25%

Class 5b Industrial 25%

Source: Cook County Assessor’s Office (2015).



Should the Philadelphia Property Tax Classification System Be Modified? 55

for tax year 2011 in River Forest Township in Cook County is calculated as 
follows:

 
Tax Rate =

Estimated Property Value × Assessment Ratio  
× State Equalization Factor × Local Tax Rate

Estimated Property Value

Estimated Property Value cancels out from this equation, so in this case of 
commercial and industrial property in suburban River Forest Township in 
Cook County,

Tax Rate = 0.25 × 2.9706 × 0.09247 = 0.0687

(6.87% of estimated property value)

The corresponding tax rate for residential property in River Forest Township 
uses the assessment ratio of 10%, which produces a tax rate of 2.75%.

The studies of industrial property sales by McDonald and Yurova (2006, 
2007) found that the average property tax rate for 2001–2004 for a sample of 
419 properties was 4.32% of market value in Cook County and 1.69% of mar-
ket value in DuPage County. Other studies find similar differences.

Property Tax Rates in Metropolitan Chicago

Dardick and Bentle (2015) estimate effective property tax rates (property taxes 
as a percentage of property value) for 2015. Table 10 shows effective property 
tax rates for a representative sample of municipalities. Municipalities in Cook 
County and the adjacent counties of DuPage, Lake, and Will are shown. Table 
10 shows that property tax rates in suburban Cook County municipalities are 
much higher than property tax rates both in the City of Chicago and in collar 
county municipalities.

Table 10 shows that the 2015 effective property tax rate in the City of Chi-
cago on residential property (1.86%) was among the lowest in the metro area, 
but the rate on business property (4.64%) was higher than in most of the collar 
county municipalities. Funding from the State of Illinois for the Chicago Pub-
lic Schools is a major factor in keeping these rates as low as they are. However, 
effective property tax rates on business property were higher in suburban 
Cook municipalities than in the collar county municipalities—in most cases 
much higher. The highest effective property tax rates on business property 
were in the low-income southern Cook County municipalities of Harvey and 
Calumet City. In addition, effective property tax rates in prosperous Cook 



56 Jeffrey carroll anD John f. McDonalD

County suburbs such as Arlington Heights, Evanston, and Oak Park were 
double (or more) the rates in many of the collar county municipalities.

Economic Effects of the Cook County  
Property Tax System

Academic research on the Cook County property tax as it pertains to com-
mercial and industrial property has produced four significant findings 
pertinent to this study. First, the growth of the property tax base for both 
commercial and industrial property in a county is strongly negatively affected 
by a property tax rate that exceeds the average for the metropolitan area. A 
greater increase in the property tax rate also inhibits the growth of the com-
mercial and industrial tax base (McDonald 1993a). Second, higher property 

table 10. effective Property tax rates (%) in chicago area counties, 2015

Municipality residential Business

Cook County

 Chicago 1.86 4.64

 Arlington Heights 2.69 6.73

 Glenview 2.37 5.92

 Evanston 2.66 6.64

 Harvey 5.72 14.31

 Calumet City 7.10 17.74

 Oak Park 3.35 8.38

DuPage County

 Elk Grove Village 3.22 3.22

 Wheaton 2.67 2.67

 Naperville 2.45 2.45

Lake County

 Buffalo Grove 3.27 3.27

 Lake Forest 1.85 1.85

 Waukegan 5.52 5.52

Will County

 Joliet 3.63 3.63

 Peotone 3.15 3.15

 Naperville 2.76 2.76

Note: The City of Naperville is a Chicago suburb located in both DuPage and Will counties.

Source: Dardick and Bentle (2015).



Should the Philadelphia Property Tax Classification System Be Modified? 57

tax rates led to significantly slower growth rates for employment, commercial 
property values, and industrial property values in suburban municipalities 
during 1990–1996 (Dye, McGuire, and Merriman 2001).4 Third, industrial 
properties in Cook County sold for prices that were 16% lower than compa-
rable properties in DuPage County during 2001–2004. This estimate implies 
that the difference in property taxes was fully capitalized into lower prop-
erty values (McDonald and Yurova 2006, 2007).5 As McDonald (1993a) and 
Dye, McGuire, and Merriman (2001) show, lower market values for industrial 
property translate into lower growth in property of this type. Last, a study of 
the downtown office rents found that 45% of property tax differences among 
those buildings were shifted to tenants in the form of higher rents (McDon-
ald 1993b). This suggests that, under some conditions, a portion of higher 
property taxes is shifted to tenants rather than only reducing property value.

Conclusion: Philadelphia Must Exercise Caution  
but Continue to Seek an Optimal Tax System

We conclude with the observation that while reducing reliance on the Phila-
delphia wage tax is a good idea, the advisability of making a drastic cut in the 
business net income tax is open to question. Furthermore, while the creation 
of a property tax classification system faces legal hurdles, the separation of the 
property tax rates on residential and commercial property may lead to further 
increases in the tax on commercial property that could be harmful. As evi-
dence from Cook County shows, Philadelphia must exercise utmost caution 
if it chooses to enact a property classification system.

This study raises the question of what should be the best combination of 
taxes to raise the money needed to operate municipal services. Philadelphia 
uses most of the various taxes that exist: property, sales, wage, business net 
income, and business gross receipts revenue. It is even going so far as to reach 
into a new grab-bag of taxes such as its new “beverage tax,” a 1.5 cent per 
ounce tax on purchases of sugary and artificially sweetened beverages (“Phila-
delphia Beverage Tax” 2016). In general, Philadelphia has not taxed all forms 
of household income—just wages. There is general agreement that Philadel-
phia relies too heavily on the wage tax, but is there a solution to the problem? 
Philadelphia seems hard-pressed to figure out a solution that replaces its rev-
enue. Is Philadelphia “boxed in” by the wage tax?

An answer to this question must include an assessment of the City’s pub-
lic services as well. Cities must provide educational and social services, but 
to do so, they must be able to attract and retain households and businesses 
that are able and willing to pay taxes. Success in attracting taxpayers depends 



58 Jeffrey carroll anD John f. McDonalD

on providing the services and amenities that they demand. Good schools 
and safe neighborhoods probably top the list, but other factors such as parks, 
libraries, commercial corridors, and recreation centers are important too. Can 
the City leverage its public goods that attract new residents while retaining the 
residents that it has? Future studies must continue to think about whether an 
optimal combination of taxes exists and if cities can garner enough revenue 
to provide crucial services that meet its citizenry’s needs.

NOTES

1. The School District of Philadelphia imposes a tax of 0.7681%, which brings the total 
tax rate to 1.3998%. An exemption from property taxes for 10 years is available for new 
construction or substantial renovation of existing properties.

2. For the most part, local governments rely on property taxes for a large percentage 
of their revenue. According to the Urban Institute, all local governments together raised 
29.7% of tax revenue from real estate taxes, but that percentage has declined sharply from 
66.2% in 1967 (Urban Institute 2012).

3. Landlord effective rent is defined as rent received by the landlord after all expenses 
have been subtracted. This includes an annualized amount for tenant concessions such 
as months of free rent and allowances for upgrades of the space. Tenant effective rent is 
the total cost of occupying the space (including utilities, with an adjustment for tenant 
concessions).

4. The City of Chicago is not included in the study.
5. The studies focused on industrial properties in the O’Hare Airport market area.

REFERENCES

CBRE. 2016. “North American Cap Rate Survey, First Half of 2016.” Available at http://
www.cbrehotels.com/EN/Research/Pages/H1-2016-North-America-Cap-Rate 
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Center City District and Central Philadelphia Development Corporation. 2015. “State of 
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Cook County Assessor’s Office. 2015. “Definition for the Codes for Classification of Real 
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.costar.com/News/Article/Market-Trend-Philadelphia-Industrial-Vacancy-Decreases 
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Should the Philadelphia Property Tax Classification System Be Modified? 59

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tan Area. Philadelphia: University of Pennsylvania Press.

McDonald, John F. 1993a. “Local Property Taxes and Business Real Estate Values.” Jour-
nal of Real Estate Finance and Economics 6 (May): 277–287.

———. 1993b. “Incidence of the Property Tax on Commercial Real Estate: The Case of 
Downtown Chicago.” National Tax Journal 46 (June): 109–120.

McDonald, John F., and Yuliva Yurova. 2006. “Are Property Taxes Capitalized in the Sell-
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———. 2007. “Property Taxation and the Selling Price of Industrial Real Estate.” Review 
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60 Jeffrey carroll anD John f. McDonalD

Urban Institute. 2012. “State and Local Finance Initiative.” Available at http://www.urban 
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2017.

Jeffrey n. carroll is assistant professor of political science at Chestnut Hill College in 
Philadelphia, Pennsylvania, with scholarly interests that focus on state and local govern-
ment, urban politics, and urban public policy. He received his PhD in political science and 
MA in urban studies from Temple University.

John f. McDonald is emeritus professor of economics and finance, University of Illinois 
at Chicago, and Gerald W. Fogelson Chair in real estate emeritus, Roosevelt University. 
He received a PhD in economics from Yale University in 1971, and was awarded the David 
Ricardo Medal by the American Real Estate Society in 2013.


	Structure Bookmarks
	Taxes and Tax Reform in Philadelphia
	Considering Two Tax Reform Proposals:  The City of Philadelphia Plan and the Growth Coalition “Levy-Sweeney” Plan
	Property Tax Rates in Philadelphia’s  Surrounding Counties
	Overview of the Philadelphia Commercial  Real Estate Market
	Considering Tax Reform Proposals in  the Growth Coalition “Levy-Sweeney” Plan
	The Cook County, Illinois, Property Tax System
	Property Tax Rates in Metropolitan Chicago
	Economic Effects of the Cook County  Property Tax System
	Conclusion: Philadelphia Must Exercise Caution  but Continue to Seek an Optimal Tax System
	NOTES
	REFERENCES




