Should Phila. let its wage tax die?

Philadelphia's wage tax in its current form is doomed -- it violates the U.S. Constitution -- but it would be relatively easy to fix it so it was legal, two law profs argue in a new Penn Law Review article.

But (they also ask), should the city save the wage tax, or use the "opportunity" to cut labor and business levies and boost property taxes, like faster-growing cities do?

Business owners and business scholars blame Philadelphia's long, slow, costly collapse as a factory center and its failure to attract more office jobs on its 1939 wage tax, part of a complex city revenue system that violates the tenets of realistic urban taxation -- as University of Michigan law prof James R. Hines told a Drexel U audience in a talk sponsored by Econsult last week: Cities raise the most revenue with the least disruption when they slap heavy taxes on businesses that can't leave town -- real estate investment, downtown stores -- but ease taxes on light manufacturing, offices and other big employers which could easily go someplace cheaper.

That's also the view of Michael S. Knoll and Ruth Mason, law profs at Penn and UVa. respectively. In this article in the Penn Law Review, they cite Wharton researcher Robert Inman's finding that Philadelphia's 4 percent-ish wage tax, as applied to city residents and, at a small discount, to commuters from out of town, has driven jobs away.

They add that the tax in its current form is unconstitutional, following a recent US Supreme Court decision invalidating a Maryland county tax, because it discriminates against many non-residents who also pay taxes elsewhere, violating the "Dormant Commerce" clause in the U.S. Constitution.

The tax could be fixed by letting commuters off -- as New York City does -- or by rejiggering the rates, or adding offsetting tax credits, so city residents pay more and commuters less, Mason and Knoll note.

But, since Philadelphia would probably be better off cutting business and wage taxes altogether and jacking up real estate taxes (at least on commercial property, as the city's largest office landlord, Jerry Sweeney of Brandwyine Property Trust, advocates), it could be better to let the wage tax die, Knoll and Mason conclude:

"In the next few years, the courts will likely declare the City wage tax unconstitutional. That threat is an opportunity for the City to modernize its tax system."