RON TARVER / Staff Photographer
Philadelphia's proposed 8 percent sales tax worries retailers, such as Georgia Doyle (left) and Lisa Howe of Artisans on the Avenue, who operate near suburbs. If the advantage outside the city grows to 2 points, shoppers are "going to do the calculation," another Chestnut Hill business owner said.
City retailers are on edge about a rise in sales tax
Suburban businesses already charge a lower levy. If the gap widens under a budget plan, merchants near the border fear customers will cross over.
It's a cool, breezy weekday morning in Chestnut Hill, but the businesspeople who run the boutiques along Germantown Avenue are generating plenty of heat.
"They're going to ruin us!" said a riled Barbara Caplen, an associate at the Antique Gallery.
Why the upset?
The Philadelphia sales tax. And not just the fact that it's poised to go up by 1 percentage point. What has businesspeople fuming is that the increase would create a 2-point gap between the city and the suburbs.
That would mean the larger the purchase, the higher the potential cost or savings - and the greater the incentive for consumers to shop outside the city.
"They're going to do the calculation," said Fran O'Donnell, Chestnut Hill's Main Street program manager and owner of the O'Doodles toy store.
That's particularly vexing to businesspeople in border areas, such as Chestnut Hill, where suburban shopping is minutes away. The 125 shops and restaurants in the leafy, cobblestone-street neighborhood draw customers from - and compete with - nearby areas including Plymouth Meeting, Lafayette Hill, Springfield, and Blue Bell.
Somebody buying a $3,600 big-screen plasma TV would save $72 by crossing the city line.
But Philadelphia's government faces miserable choices. Its budget is a shambles, staggered by a once-in-a-generation recession and a 10-week state budget stalemate in Harrisburg.
Pennsylvania imposes a 6-percent sales tax on goods and services, with exemptions including food, clothing, medicine, and textbooks. Philadelphia and Allegheny Counties have collected an additional percentage point, raising their totals to 7 percent.
Mayor Nutter's proposal to raise the city sales tax to 8 percent and defer pension payments would provide $700 million in revenue. Without that money, he said, he'd have to lay off 3,000 workers and close libraries, health clinics, and recreation centers.
The sales-tax increase is advertised as temporary, to last five years, though skeptics question whether that will prove true. Taxes tend to be permanent. The move requires legislative approval, which appeared near last week.
One tax expert estimated the tax increase could cost Philadelphia retailers hundreds of millions of dollars.
Why? The border effect.
That's how economists describe the migration of consumers across government boundaries in search of lower-priced goods.
"You'll go over the border to the extent that it's easy and convenient to do," said Robert Inman, a professor at the Wharton School of the University of Pennsylvania and an authority on taxes.
He estimated that raising the sales tax would reduce store sales by 3 percent to 7 percent, based on economic studies of similar situations. Here's what that could mean:
In the 12 months that ended June 30, 2008, Philadelphia collected $137 million in local tax on sales of $13.7 billion. If estimates cited by Inman hold, taxable sales would fall to between $12.7 billion and $13.3 billion - a loss of between $416 million and $961 million.
However, the city would still come out ahead. Even on that lower base, the extra tax would bring in $255 million to $266 million, more than the $137 million the city collected in 2008.
Of course, not every business is subject to sales tax.
