Note: This post has been updated below.
Council is holding a marathon hearing today on the radical business tax legislation proposed by Council members Bill Green and Maria Quinones-Sanchez.
Their bill would shift the business-tax burden from the net-income tax, which taxes profits, to the gross-receipts tax, which taxes sales. Green and Quinones-Sanchez, who have been working on the legislation for more than two years, argue that this method would spread the tax burden more fairly and remove the disincentive to locate a business in Philadelphia.
"We are unapologetically saying there has to be winners and losers," said Quinones-Sanchez at the beginning of the hearing. "We are choosing Philadelphia based businesses."
But the Nutter administration has come out against the bill, as has City Controller Alan Butkovitz, arguing that it could kill jobs and would harm certain businesses, like the hospitality industry. The city has been gradually reducing the gross receipts tax for 14 years, based on the long-held belief that it is unfair to tax businesses who don't make a profit.
"Basically what this does is reward high profit margin companies and penalizes low profit margin companies," Butkovitz said during his testimony.
A list of 27 speakers is lined up to testify both for and against the proposal.
UPDATE, Noon: After the Controller spoke, the first few panelists up today offered support for the legislation, saying it would benefit Philadelphia-based businesses. Of course, there's a lot of testimony scheduled from a variety of business groups – and the city’s finance director is coming at the end of the lineup. So the argument is very much underway.
Randall Scott, of the Thomas Properties Group, a Los Angeles-based real estate company with holdings in Philadelphia, said he hoped the legislation would boost businesses’ interest in locating in the city.
“In general the demand for office space in Philadelphia has been flat for 20 years. Building values are stuck at levels way below replacement costs,” Scott said. “The city is not on the radar of most institutional investors. Our firm is roundly criticized by analysts in New York for the capital we have in Philadelphia.”
Carmen Adames, an accountant whose firm services small Philadelphia-based businesses, said the legislation would benefit her clients.
“Philadelphia’s small business community should see a decrease in the business tax burden,” she said.
And accountant John Kostenbauder explained how a firm could legally avoid paying the city’s net income tax – by setting up an additional office outside the city, paying out profits as bonuses or setting up a holding company in Delaware.
“When it comes to the gross receipts tax, it’s where the product is delivered and where the service is rendered,” Kostenbauder said. “You can’t hide from the gross receipts tax.”
Breaking up the complicated discussion, Councilman Curtis Jones Jr. got the biggest laugh of the morning, with a comment about an analysis of the proposal in today’s Philadelphia Inquirer by Wharton Professor Robert Inman. Inman projects that the legislation could cost the city 75,000 jobs.
“A lot of assertions have been made about the potential 75,000 job loss,” Jones said. “I know enough about economics to know that that a lot of this is the WAG theory, which is a wild assed guess. And we don’t know.”
UPDATE, 2:15 pm: As the hearing drags on, some of the industries that would lose under the legislation are speaking up.
Walter Palmer III, president of the General Building Contractors Association, testified against the legislation, saying it would damage the construction trade in the city, which he described as low margin. He said that an amendment to soften the blow on construction would not do enough.
“No amendment is going to change the fact that construction in this city is barely profitable in the best of years, so reducing a profits tax and increasing a receipts tax will always be harmful to the construction industry,” Palmer said.
Emily Bittenbender, of Bittenbender Construction, LP, said she wasn’t convinced the amendment – intended to prevent multiple rounds of taxes on the same construction project – would hold the industry harmless. She also questioned whether the proposed policy would spur more development.
“If your tax policy does what you say and creates a building boom, I think all would be forgiven. But I think that there’s no proof that we can see where you’re going to offset these winners to the degree that there’s going to be a building boom,” Bittenbender said.
But testimony read by a representative of the Building Industry Association offered support to the legislation. James Rogers, testifying on behalf of BIA President David Perleman, said the amendment will help prevent any damage to construction and will encourage development.
Rogers said the bill was “a thoughtful economic impetus which is one step in a hopefully broader based strategy designed to jump start our industry and result in more real estate development in the city.”
UPDATE, 3 p.m. - Bruce Koch, of the Starr Restaurant Group, which has 13 restaurants around the city, including the Continental, Parc and Morimoto, testified that the business would take a substantial hit under the legislation.
“It’s clear this proposed change affects us because of our low margin,” said Koch, who said that if the tax change passes it would be taken into consideration when they think about developing a new restaurant in Philadelphia versus somewhere else.