Sunday, December 21, 2014

Things we'd like to hear from the Council hearing about business taxes

An IOM editorial in the Daily News previews the upcoming Council hearings about the city's business taxes:

Things we'd like to hear from the Council hearing about business taxes

Council members Bill Green, left-center, and Maria Quinones-Sanchez, right. File photo. (April Saul / Staff Photographer)
Council members Bill Green, left-center, and Maria Quinones-Sanchez, right. File photo. (April Saul / Staff Photographer)

An IOM editorial in the Daily News previews the upcoming Council hearings about the city's business taxes:

What if everything we think about local business taxes is wrong?

That's the fundamental question that Councilman Bill Green and Councilwoman Maria Quinones Sanchez are asking through legislation that would radically alter the structure of business taxes in Philadelphia.

The current structure - in which the city taxes both the gross receipts of a business, as well as its profits - is about as popular as pre-redemption Michael Vick. Unprofitable business are still on the hook to the city. The city has attempted over the last few years to correct this outrage by gradually eliminating the receipts part of the tax, and reducing the net income (profits) portion.

The Green-Sanchez proposal would reverse this. They want to eliminate the tax on profits and increase the receipts portion to make up for lost revenue. They say this would encourage more businesses to locate in Philadelphia, distribute the tax burden more equitably, and provide a more reliable revenue stream for the city.

We are intrigued as much by the radical nature of the idea, as well as by the proposal itself. We're not yet convinced it would be the right change; supporters and detractors are equally credible. That's why tomorrow's City Council hearing is so important, and why we hope that some of the following questions will be addressed:

Tax rate vs. Tax structure. The city needs to answer a basic question: Are Philadelphia's business taxes simply too high or does the structure of business taxes undermine our economic competitiveness? Green and Sanchez argue that the structure is the bigger problem, which means that a fundamental overhaul is necessary.

Winners and losers. The Green/Sanchez proposal is controversial partly because it would redistribute the tax burden. Some businesses will undoubtedly pay more, while others will pay less. It's worth noting, however, that our current tax- reduction strategy also has winners and losers, even if that point is rarely discussed. City Council will have to do an honest accounting of the winners and losers under both plans, and decide which is preferable.

Predictability. Changing our tax-cutting strategy sends a mixed message to businesses. We've been on schedule to eliminate the gross receipts portion of the tax for 10 years. Is it really a good idea to make such a sudden shift?

Predictability is also an issue for government. Relying on taxes from profits can vary widely and be hard to predict. The switch to relying on a tax on gross receipts could lead to a more reliable estimate for budgeting purposes.

Fairness. We need to make sure that any shift in tax policy won't unfairly burden small businesses, which are the main job creators in Philadelphia. At the same time, we need to make sure that big companies - especially out-of-town corporations that want access to our market of 1.5 million consumers - pay their fair share.

Exemptions. Green and Sanchez are considering a number of exemptions - for grocers that sell fresh food, businesses with less than $100,000 in receipts, construction firms and several other catagoriess- that are intended to mitigate the impact of the tax shift on specific industries that might otherwise get hurt. That's a fine idea, but each exemption has a price tag attached. Council will need to decide if too many exemptions make the tax code too complicated.

Green and Sanchez have introduced a left-field notion that gives the city and Council a chance to test its assumptions about taxing. Council should rise to the challenge.

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Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.

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