PhillyDeals: City taking another look at business taxes
For a little while, it looked as if Philadelphia was on its way to ending the Business Privilege Tax that raises one-sixth of the city's $2 billion in yearly tax collections.
That tax - really two taxes, one on profits ("Net Income"), the other on sales ("Gross Receipts") - is a target of the Greater Philadelphia Chamber of Commerce business lobby. The chamber has pushed for decades to remove what it sees as a "Not Welcome" sign around the city from Tinicum Island to Poquessing Creek.
Car dealers, supermarkets, and other "high-volume, low-profit margin businesses" are extra vulnerable to the gross-receipts tax, said Stewart M. Weintraub, tax attorney at Schnader, Harrison, Segal & Lewis L.L.P. and newly named chair of the American Bar Association's state tax committee. "It's a disincentive for businesses to locate or expand here in the city," Weintraub said.
Weintraub served on former Mayor Street's Tax Reform Commission, which recommended phasing out the business-privilege taxes. Mayor Nutter agreed.
But then city real estate sales and pension investment values collapsed last year, tearing holes in the budget that library and pool closings couldn't fill.
In November, Nutter suspended plans to reduce the business tax rate. The chamber swallowed hard and issued a statement backing Nutter, pending a recovery and the "revival of city-funded tax cuts."
Now, some people in City Hall are reconsidering the wisdom of ending the business taxes. At least the gross-receipts part.
The profits tax rate "is a scary number," said Justin DiBerardinis, aide to Councilwoman Maria Quinonez-Sanchez. "It's large - 6 percent."
But city Revenue Department numbers show a lot of big city-based businesses aren't paying the income tax - either because they're not profitable, or because they're big enough to legally move profits outside the city and away from its taxes, in the form of franchise payments or other fees.
By contrast, all businesses face the gross receipts tax, currently 1.4 mills - that's 1.4 percent of 1 percent of everything they sell.
Mostly that tax has been levied on Philadelphia firms. But it would yield millions more - making it easier to cut the rate - if it were more aggressively collected from out-of-town companies that sell here but don't have city operations they could close or workers to fire. "A one-mill tax on beer isn't going to stop Budweiser from selling here," DiBerardinis told me.
The profits tax is volatile. Collections doubled to about $300 million from 2001 to 2006, city figures show, as profits rose at real estate, oil, and information companies and law and accounting firms. But collections have since dropped, more than $30 million a year in the last two years, as the economy slowed.
By contrast, the gross-receipts tax has been stable at about $100 million a year since 2001.
Mayor Nutter's Task Force on Tax Policy and Economic Competitiveness has been meeting since April to "evaluate the Philadelphia real estate environment and tax structure," with recommendations due in September for action by the end of the year, said Marisa Waxman, director of Policy Planning and Outreach. It will hold a public hearing, its second, Aug. 13.
Quinonez-Sanchez campaigned to end the business-privilege taxes. Instead, she now supports giving business owners who pay taxes on their profits a credit toward their gross-receipts tax.
If that goes through, and if out-of-town companies that sell here are hit with the same gross-receipts tax city companies pay, Philadelphia companies would no longer pay a penalty for the privilege of locating in Philadelphia.
"The implication of deducting the income tax from the gross-receipts tax is to favor local businesses," said Sharon Ward, director of the nonprofit Pennsylvania Budget and Policy Center. "It's worth taking a look at."
That proposal "is gaining momentum" among City Council members, Sophie Bryant, chief of staff to city Councilman Bill Green, told me.
Meanwhile, city tax collectors are laying groundwork for a broader collection of business taxes.
In January, the city hired five new tax auditors and a supervisor, boosting the staff to 30, said Frank Breslin, deputy revenue commissioner.
That has allowed the department to resolve "eight large cases" against manufacturing, retail, financial, and sports taxpayers - the city won't name them - that have paid more than $2 million in previously uncollected business taxes. A dozen more cases "are in the pipeline," and the department may hire more auditors.
Philadelphia isn't the only place trying to expand tax collection from companies based outside its borders, said tax lawyer Weintraub. But it's not clear that the city has the legal right - under state or federal law - to keep it up, he added.
"This is being fought all over the country," Weintraub told me. "There is currently pending before the U.S. Supreme Court a case where a taxpayer, Capital One," the Virginia credit card lender, "has asked the court to hear an appeal" of a state tax case the bank lost in Massachusetts, where it has millions of customers but no operations. West Virginia won a similar state case against Wilmington-based MBNA America Bank (now part of Bank of America Corp.), Weintraub said.
Cash-strapped local governments will likely keep trying to expand their taxing area unless the Supreme Court stops them. "It's not good tax policy," according to Weintraub. "You're telling businesses, 'Whether you make money or not, we're still imposing a tax on you.' "
Contact staff writer Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.