We sat in City Council yesterday listening to a debate that, according to people on both sides of the issue, could have huge repercussions for Philadelphia's tax revenues, jobs, and -- basically -- future as a city.
Council is considering a bill that would completely restructure Philadelphia's business taxes, by eliminating the city's tax on profits and increasing the tax on total sales, known as gross receipts. This would be a dramatic shift from current law, which calls for the elimination of the gross receipts portion by 2022. You can read our previous coverage of the issue here and here, and Philly Clout post about the hearing here.
The debate is scheduled to continue today at 1pm, when City Finance Director Rob Dubow is scheduled to testify on behalf of the Nutter Administration. Here are some thoughts on some of the biggest issues raised yesterday.
Winners and losers. Council spent a lot of time yesterday discussing which businesses would pay more under the Green/Sanchez tax plan. According to an analysis by the Nutter Administration, some of the biggest winners would be certain kinds of law firms, the manufacturing sector, and real estate companies. Hotels, construction firms, and insurance companies are among the biggest losers.
This is an important discussion, but we should note that the current tax cut strategy has winners and losers, too -- and the big winner appears to be businesses based outside Philadelphia. When the gross receipts portion of the tax is eliminated, many large companies headquartered outside the city, like Wal-Mart or Target, will not pay any business taxes at all. That's because accounting tricks allow those businesses to legally hide profits. Even if the Green/Sanchez bill isn't passed, this is a major flaw in the current strategy that needs to be addressed.
Tax cuts vs. tax shift. For years, the city's main strategy to make Philadelphia more economically competitive has been to cut business taxes. Green and Sanchez are challenging that idea. They say the structure of Philadelphia's taxes is a problem. Specifically, the problem is that the current plan for tax reform will lead to profitable Philadelphia-based businesses paying more than everyone else.
The question of tax cuts vs. tax shift came up a lot yesterday and it struck us that the answer is probably ... both. Philadelphia may need to lower the overall tax burden and change the structure to encourage companies to locate in the city. Again, if City Council isn't ready to embrace the entire Green/Sanchez proposal, there still needs to be an effort to address the issue of city firms being penalized by the current plan.
Taxes as the silver bullet. According to people on both sides of the debate, the possible change in the tax structure will either dramatically grow or destroy the city's economy. For example, Professor Robert Inman has estimated that the proposal will cost 75,000 jobs. Meanwhile, Councilman Green argues the proposal will cause a rebirth in several important parts of our economy, especially the manufacturing sector.
We agree that taxes are an important part of the equation of making Philadelphia more competitive, but we should also be aware that they aren't a silver bullet. There are a wide variety of factors besides taxes -- such as quality of life, proximity to public transportation, workforce development, and the state of public education -- that influence business location decisions.
Want proof? Just look at the businesses who testified yesterday in City Council -- like Starr Restaurant Group, Marriott Hotels and Sandmeyer Steel -- who are located in the city despite our current tax structure. We noticed that no one seemed interested in asking WHY these companies decided to stay, despite some of the disadvantages of doing business in Philadelphia. But perhaps Council should ask, and then invest more in the things businesses identify as important.