Should Philly tax sales, or profits?

Should Philadelphia tax firms' sales, instead of their profits?

The city charges two "business privilege" taxes. It demands $6.45 of every $100 of profits, the "Net Income Tax"; plus 14 cents on every $100 of total sales, the "Gross Receipts Tax." These city business taxes are slapped top of city property taxes and other local levies.

For a generation, Philadelphia business taxpayers, their lawyers, and the chamber of commerce have targeted the gross-receipts tax as unfair and discouraging to employers, says city finance director Rob DuBow. The current city tax ordinance calls for phasing it out over the next 12 years.

But City Council members Bill Green and Maria Quinones-Sanchez say that's backwards. "We have concluded lowering the net income tax will have a better effect on the Philadelphia economy than lowering the gross-receipts tax," Green told me last week.

Their draft bill, which they plan to introduce this fall, wouldn’t just cut the income tax; it would also boost the gross-receipts tax, to around 54 cents for every $100 in sales, while eliminating the city business-income tax, both in stages over the next five years.

Up until now, Green and Quinones have made mostly logical arguments in favor of the shift. It's relatively easy to verify sales at companies that already pay state sales tax. Out-of-town companies can be made to pay taxes on their sales to Philadelphians; "Home Depot, Lowes, Target, their stores are not going to move because their gross-receipts tax goes up a little bit," says Green.

By contrast, profits from Philadelphia sales are tough to trace, let alone tax, at big multistate companies, especially with legal local-income-tax dodges, like the Delaware invstment holding company, that turns taxable store profits into tax-free franchise or licensing fees.

That's why Texas and Ohio have switched to gross-receipts taxes recently, and a California state tax commission is recommending one, Green says.

But the two councilmembers are now going beyond ought-tos and logical arguments. They have built a new weapon: an analysis of city tax data by former city commerce director Stephen Mullin of Econsult, which shows who'll pay more, and who'd pay less, if they change the law.

The idea, says Green, isn't to boost business tax revenues, which topped $350 million in 2008-09. "We want this to be revenue neutral."

It's to change who pays, and put as much of the burden as possible on out-of-town companies that suck money out of the city, while exempting small businesses (local or not), easing pressure on the city's surviving manufacturers, and keeping new businesses that spawn in Center City, University City, and other neighborhoods from leaving.

According to a draft of Mullin's report, construction, retail and hotel operators would together pay up to $25 million more each year -- while law and accounting firms and manufacturers would collectively save up to $35 million a year.
An estimated 40,000 businesses, or nearly half the number currently paying the taxes, would drop off the business privilege tax rolls altogether, saving them a total of more than $10 million a year, because their bill would exempt the first $100,000 in yearly sales.

Banks and insurers would also pay less because state laws leave them exempt from most taxes on sales, Green told me.  Since construction company revenues have lately fallen due to the recession, and the analysis didn't initially take into account the financial-sales exemption, they may have to boost the tax it's possible they'll have to charge more like 60 cents per $100 to cover the loss of income-tax revenue.

The analysis does take into account breaks the bill offers manufacturers and retailers who pay tax on their employees, plus a break for food stores that sell a high proportion of fruits and vegetables following complaints from grocery chains their margins are already weak.

Tax lawyer Stuart Weintraub of Chamberlain Hrdlicka, who's served on tax-reform commissions under Mayors Rendell, Street, Goode, and Green (the councilman's father), says he's not surprised law and accounting firms come out as big winners.  "They pay the largest proprtion" of the net-income tax, he told me. Banks and utilities "will pay literally zero” if the new law passes. “They're also winners."

He’s concerned higher taxes on hotels and other tourist-focused businesses could hurt one of Philadelphia's few growth industries - though "whoever's ox is gored is going to scream."

"It is a huge competitive disadvantage to have a business tax at all," says Green. New York has a gross-receipts tax, Los Angeles has one, but most local and East Coast communities that compete with Philadelphia don't. Sales or income, says Green, "we need to lower business taxes over time."

The Nutter administration still prefers to cut the gross-receipts tax, DuBow told me, though it will review the report when it's final later this summer.

The proposal inherently picks winners and losers,” cautioned Rob Wonderling, president of the Greater Philadelphia Chamber of Commerce.

He praised Green and Quinones for reaching out, and said he is scheduled to meet with both again in the next few weeks. “They have data; we’re providing very candid perspective from our membership.” Big employers like Comcast and Aramark haven’t weighed in yet; Wonderling said discussions are “still at the technical stage, before we talk to our members.”

Lawyer Weintraub is watching the tax-change advocates’ “major push” closely. “If they can persuade people this is good economic policy, and they can convince ten of their colleagues on Council, then it's going to happen, notwithstanding the mayor's opposition."