Most Philadelphians would likely agree that the city’s overall tax burden is one of the highest in the country and that the current tax structure chases away jobs and businesses. Given the recession and two years of general tax increases by the Nutter administration, it is a good time to rethink the city’s tax policy. Toward that end, City Council is scheduled to hold hearings Tuesday on a bill that would shift the business-tax burden from a levy on profits to a tax on sales. As with almost any new idea in Philadelphia, it is being met with resistance. But the proposal deserves a hearing.
Whether the measure is the right one, Council members Bill Green and Maria Quinones-Sanchez deserve credit for trying to come up with a better, fairer way to tax businesses. With the city’s revenue base eroding, City Hall is in need of some bold ideas to attract and retain businesses, and create jobs. Green and Quinones-Sanchez’s measure seeks to spread the business-tax burden and take away the incentive to locate a company outside the city. They believe the bill would provide a more predictable revenue stream.
The big question is how the change will impact city coffers. The Nutter administration said it would reduce business-tax revenues by $23.3 million a year. The analysis also said the bill would mainly benefit law firms, real estate, and manufacturers, while hurting the construction, insurance, and hotel industries. Green and Quinones-Sanchez questioned the administration’s calculations, but they did agree to amend the bill to address the construction industry’s concerns.
The broader goal of the bill is to shift the tax burden away from businesses headquartered in the city and capture revenue from big firms located on the other side of the city line, including Home Depot and Wal-Mart. The upside of the plan is that it would reduce the onerous tax on net income, or profits. To make up for the lost revenue, the bill would boost the tax on gross receipts, or sales, by 300 percent over five years.
Taxing revenue before a profit defies common sense. Since 1995, the city policy has been to trim the tax on gross receipts. But Green and Quinones-Sanchez argue that a tax on sales is easier to calculate and capture. Big outside firms can’t avoid the tax, as they often do with the tax on profits. Economist Mark Zandi has endorsed the concept, while Wharton’s Robert Inman and City Controller Alan Butkovitz have raised concerns.
One red flag: Any major shift in tax policy creates uncertainty for businesses and City Hall coffers. A counter argument is that the city needs to overhaul the current tax policies, which make it hard for Philadelphia to compete. Whether the bill before Council is best for the city is open to debate. But one thing is clear: Mayor Nutter and Council need to reduce the city’s overall tax burden to attract more jobs and businesses to Philadelphia.