Homeowners generally pay less than renters with similar incomes
Overview
Debates about Philadelphia’s future often center on the city’s tax system and two questions: Are the burdens it places on residents equitable, and are those on businesses counterproductive? To help inform the residential piece, The Pew Charitable Trusts examined the current system by calculating the percentage of total income Philadelphians pay in local taxes to the city and school district, depending on whether they own or rent their homes.
This analysis focused on four of the biggest local taxes imposed on residents: a 3.79% city tax on wages; a 1.3998% tax on real estate; the 2% local portion of the sales tax; and a 3.79% school tax on unearned income such as dividends, some forms of interest, and rent received by landlords.
We applied these income, property, and sales tax rates to households at 10 different income levels. The five sample homeowners and five renters each match the actual distribution of Philadelphia’s median household incomes for those housing types in 2022. Then we assigned a home value to each of the five homeowners and an apartment building per-unit value to each of the renters based on actual values of owned and rented properties determined by the Philadelphia Office of Property Assessment. Finally, we assumed that all the households made consumer purchases (some of which generate sales tax) at the same rate as do typical American households with similar incomes, based on data from the U.S. Bureau of Labor Statistics.
In calculating property tax bills for the homeowners, we assumed that all homeowners applied for and received the city’s widely used homestead tax exemption, which applies only to owner-occupied dwellings and for 2023 will reduce taxable assessed values by $80,000. Unlike homeowners, renters do not directly pay property tax. But their landlords pass it along to them, embedded in the monthly rent. We estimated the amount renters pay indirectly based on the value of a rental unit and included it in our calculations. For homeowners and renters alike, we did not include several other programs and taxes that affect overall tax liabilities because we could not link them directly to a household’s income or type of housing. (For a discussion of those taxes and programs, see the Appendix.)
All of this resulted in our ability to analyze the overall tax burden on 10 groups of representative households. We also computed, using census data, the race and ethnicity of actual households with incomes and homes like our hypothetical ones.
The analysis found that Philadelphia’s overall effective tax rate is lowest on low-income households that own their homes—largely because of the impact of this year’s increase in the homestead tax exemption from $45,000 to $80,000. The highest effective rate falls on low-income renter households, although not those who live in subsidized housing or have mobile rental vouchers. Nearly 6 in 10 lower-income households are renters, and a large majority of them do not receive federal rent assistance.
Other findings showed:
For homeowning households that use the homestead exemption, Philadelphia’s tax system, taken as a whole, is progressive under the changes taking effect in 2023, with lowest-income households benefiting the most from the exemption and getting the lowest effective rates. The effective tax rate among homeowning households ranges from 2.5% at the bottom of the income scale to 6% at the top.
Renters, who represent nearly half of all Philadelphia households, generally have higher effective tax rates than homeowners. For nonsubsidized renters, the tax system is regressive, with effective tax rates of 12.8% for the lowest income group compared with 6.7% for the highest—although for residents living in subsidized housing the tax burden is lower, often significantly so.
Black- and Hispanic-headed households account for two-thirds of the lowest-income renters and two-thirds of the lowest-income homeowners.
When homeowners retire and stay in their homes, their effective tax rate changes very little, but for most renters it rises in retirement. Neither group of retirees owes the wage tax or local taxes on Social Security and other retirement benefits. But renters still shoulder property tax through their rent, unlike many homeowners eligible for property tax exemptions and relief for seniors.
Creating representative households
In the first step of this analysis, Pew used detailed census figures to divide Philadelphia’s households into homeowners and renters. We then separated each of those groups into five subgroups, or quintiles, based on their income from all sources for all household members. We assumed these 10 households—five renting and five homeowning, hypothetical but representative—had incomes equal to the midpoint (median) of each quintile. From those medians, we used the census data to estimate the portions of income that came from taxable wages, investment dividends, and interest.
Then, employing data from the city’s Office of Property Assessment, we created 10 groups of residential properties by assessed market value, five for owner-occupied properties and five for apartment units within rental properties. We assigned the median value of each property group to the corresponding owner or renter quintile, using the full property value for homeowners and apartment-unit value for renters.1 For renters, we assumed that landlords passed all property taxes on to tenants through rent in proportion to the number of units in a building.2 Then using federal data on consumer expenditures, we ascribed purchases to each household of items subject to Pennsylvania sales tax at a level appropriate to its income. Finally, we subjected all the resulting base amounts to applicable city taxes, to find the tax burden and calculate the effective tax rate for each group.
The base amounts, rounded to the nearest $10 to make them easier to compare, are shown in Table 1 for homeowners and Table 2 for renters. (For more details on methods, see the Appendix.) View full report