PHILADELPHIA – In case you missed it, the Pew Charitable Trusts’ Philadelphia Research Initiative this week released its study of recent efforts by the Department of Revenue to increase collections of delinquent taxes. The report finds that the City’s collection rate improved to 96.1% in 2017 from 93.5% five years earlier. The Pew study attributes the improvement in part to the Department’s use of a variety of collection strategies, including improved and more frequent warning notices, and the implementation of a new data warehouse in 2017.
The full text of the report follows:
Philadelphia Makes Progress on Collecting Delinquent Property Taxes
By: Larry Eichel & Thomas Ginsberg
Philadelphia has made progress in the past five years in getting property owners to pay their real estate taxes. City officials and others attribute the improvement to a strong economy and real estate market, as well as changes in collection strategies that include more foreclosure warnings and expanded payment plans.
Property tax delinquency is a complicated issue in Philadelphia, as The Pew Charitable Trusts has documented in previous reports on the city’s tax collections and its relatively high poverty and homeownership rates. A comparison with figures from 43 other cities, including many of the largest and some of the poorest in the U.S., puts Philadelphia’s improvement in context.
In fiscal year 2017, the last full year for which numbers were available, Philadelphia reduced its noncollection rate in the year the tax was due—which is how tax collection is often measured—to 3.9 percent; the median for the other cities was 1.8 percent. That was an improvement from 6.5 percent in fiscal 2012, the year when Pew initially examined the topic; the median for the other cities in fiscal 2012 was 2.3 percent. (See Figure 1.)
In fiscal 2012, Philadelphia’s noncollection rate was greater than the median of the 14 cities studied that had poverty rates of 22 percent or higher. In fiscal 2017, Philadelphia’s rate was lower.
Still, the city says the property tax delinquency rate is too high. City Revenue Commissioner Frank Breslin has said his goal is 2 percent. Figure 2 shows the latest delinquency rates for all cities studied.
From 2014 to 2017, total delinquent accounts in Philadelphia dropped by about a quarter. Ninety-three percent of the reduction came from accounts with less than five years of tax debt, while the number of accounts five years old or older held relatively steady, reflecting the increasing difficulty of collections with each passing year. Since 2012, the city has designated thousands of decade-old and older delinquencies as “inactive” for collection or foreclosure efforts, meaning that it considers them much less likely to be collected and may reduce or waive the amount due when and if payment is made.
Approximately $447.7 million in delinquent taxes and penalties was outstanding at the end of calendar year 2017, down from the high of $548 million in 2014. This figure includes debts considered inactive, some of which are decades old; the city also reports active-only figures, which are lower.
Reasons for the decline in delinquency
Officials, housing activists, and independent tax collectors cite a variety of reasons for the improvement. Chief among them are the strong economy and the robust real estate market, which have led to an increase in the buying and selling of properties—including tax-delinquent ones—which often leads to the payment of outstanding taxes.
In addition, city officials have employed a variety of collection strategies, such as sending more properties into the foreclosure process, balanced by more accommodations and outreach to low-income homeowners. Said Breslin: “We create [payment] plans that will work, and then use the foreclosure process to drive payers into them.”
The city increased the number of properties it put into the legal process leading to possible foreclosure by approximately 1,200 percent, from 815 in 2010 to 10,437 in 2017, according to the city’s tax foreclosure report. The Department of Revenue also changed the frequency and wording of its warning letters about a possible foreclosure, nearly quadrupling the notices it sent since 2014. (See Figure 3.)
Often, the filings did not lead to actual property sales. In fiscal 2017, the owners of 6,475 properties—almost two-thirds of those initially hit with tax foreclosure filings—responded by paying, signing payment agreements, or taking some other action that prevented a foreclosure sale. The remaining third were sold; just 4 percent of sold parcels were owner-occupied homes, according to city data.
In fiscal 2017, the Philadelphia Sheriff’s Office reported collecting and turning over $61.3 million in delinquent taxes and fees to the city, up from $43.2 million in fiscal 2014. According to Michael McCabe, a partner at GRB Law, one of two private firms that collect delinquent taxes and pursue foreclosures on behalf of the city: “At present, the real estate market in Philadelphia is so strong that when we list properties for sheriff’s sale, they almost always sell, absent payment in full or a payment plan. We have even had success lately in selling longtime tax-delinquent vacant lots that would not have sold in the past.”
At the same time, the city has further expanded and promoted its delinquent-tax payment programs. Although the figures suggest that relatively few homeowners have been displaced through tax foreclosure, city leaders in 2018 enacted a system to divert owners facing foreclosure into payment plans. City Council President Darrell Clarke said, “We cannot become like the banks we have so often criticized and put people struggling with poverty out on the street.”
Philadelphia’s Owner-Occupied Payment Agreement (OOPA) now has five tiers of minimum payments depending on the owner’s income. The city also has an older Standard Plan primarily for nonresidential properties. In both plans, the city says owners must remain current on taxes while paying off their old debts; as long as they do so, tax collectors cannot take other actions against them, a status known as “not actionable.”
From fiscal 2014 to 2017, enrollment in OOPA more than doubled to 10,749 accounts owing $80.9 million in not-actionable tax debt and penalties from both active and inactive periods, according to data in city reports and provided by officials. Standard Plan enrollment fell by about a quarter to 16,502 accounts owing $29 million. Together in 2017, the 27,251 payment plan accounts owed $109.9 million, representing 25 percent of all delinquent taxes and penalties, up from 11 percent in 2014. (See Figure 4.)
OOPA enrollees are still considered delinquent but are insulated from foreclosure actions unless they default on the payment agreement more than twice, as specified in city law. Approximately 14 percent of enrollees—1,553 homeowners—defaulted on their agreements at least once in 2017. The default rate on Standard Plans was not available.
Among other strategies, the Department of Revenue now regularly provides information and assistance in neighborhoods for taxpayers and at the courthouse for those responding to foreclosure warnings. It has not used some tactics employed elsewhere, such as wage garnishment and the routine sale of tax liens.
The city has had some success with a strategy known as “sequestration” (sometimes called “rent receivership”). Under this strategy, the city gets court permission to take over management of a rental property and use the rental income to pay off the landlord’s tax debt—without displacing tenants. In fiscal 2017, the city initiated sequestration proceedings against more than 3,000 tax-delinquent landlords, many of whom paid quickly. The city reported closing the debts in 75 percent of the cases and collecting about $17 million. (Only Pennsylvania and Connecticut grant such power to their municipalities; Philadelphia was the only city in either state found to be using it.)
Officials attribute some of their successes in collecting property taxes, as well as other taxes and fees, to the installation of a $5.7 million system known as the “data warehouse.” Completed in 2017, it combines financial data from other city and state agencies with private databases to identify delinquent taxpayers and activity that might be taxable. Only a few major cities have such a system.
As Philadelphia tries to reach its goal of a 2 percent tax delinquency rate, it remains to be seen what will happen in the event of another economic downturn, which economists say would hamper collections and possibly boost delinquency again.
Larry Eichel directs and Thomas Ginsberg is a senior officer with The Pew Charitable Trusts’ Philadelphia research initiative.