Philadelphia tax proposal targets sales — and out-of-city companies

City Council members Maria Quiñones Sánchez and Bill Green make a tantalizing argument for their bill to revolutionize the city's tax structure: It would shift $120 million in taxes from Philadelphia-based businesses to companies outside the city.

In a bold proposal to be debated in a Council hearing Tuesday, Sánchez and Green would turn away from recent tax-reform wisdom and focus city business taxes on a company's sales instead of profits. They would exempt the first $100,000 of business activity to protect small businesses and provide incentives for corner stores to sell fresh produce.

The city last year collected $368 million from the net-income and gross-receipts portions of the business-privilege tax, and the Council members projections are aimed at collecting the same amount.

But by capturing taxes from companies whose profits are recorded outside the city - taxing them instead on transactions recorded inside city limits - the Council members hope to ease the overall burden on the city's economy, level the playing field for all, and create a more inviting climate for those who would otherwise move headquarters to the suburbs.

Sánchez conceived the plan as a way to collect taxes from large retailers that, through legal tax-accounting strategies, are able to show little or no profits in their Philadelphia businesses and pay little or no business-privilege tax.

"This is the most important tax change we have discussed in the city of Philadelphia for 30 years," Green said.

While the brash first-term councilman is not known for his humility, supporters and opponents agree that the discussion is important and the potential impact profound.

A mom-and-pop shop with $100,000 a year in sales and $50,000 profit, for example, would see its business taxes go from more than $3,300 to $0.00.

At the same time, entire industries would pay more.

For example, the wholesale trade industry would pay at least $10.7 million more in taxes, a 55 percent increase over its current bill, according to an analysis by the city Finance Department. The hospitality industry would pay an additional $2.9 million, a 122 percent increase.

Among the winners would be certain manufacturers, legal services, and real estate. City law firms - which include Kutak Rock, the partnership where Green is a lawyer - would pay $27 million less in taxes, a 39 percent decrease. The Manufacturers Alliance of Philadelphia supports the bill.

Supporters and opponents have prominent economists lined up to make their cases. Mark Zandi, chief economist at Moody's Analytics, argued for the proposal in The Inquirer last month, saying a tax on sales spreads the tax over a wider base and encourages profitable companies to stay here.

The guru of Philadelphia municipal finances, Robert Inman of the Wharton School of the University of Pennsylvania, says raising the gross-receipts rate would cost 75,000 jobs, with the number of jobs added by eliminating the net income tax uncertain.

The nonpartisan Washington-based Tax Foundation "looks down" on gross-receipts taxes because they tax some goods and services multiple times, said Kail Padgitt, an economist at the foundation. Efforts to offset that problem lead to systems as complicated as their predecessors, he said.

The bill, which would benefit some industries and hurt others, has a steep hill to climb. Mayor Nutter, City Controller Alan Butkovitz, the Greater Philadelphia Chamber of Commerce, and the Greater Philadelphia Hotel Association are against it, for reasons from timing to fairness to direct impact on certain industries.

"There are clearly some interesting ideas here," city Finance Director Rob Dubow said, citing the push to spread the tax impact and the exemption of start-up businesses from the first $100,000 of sales. "We're just really worried about the unintended consequences."

Many cite the proposal's potential effect on the hotel industry, named by many as the savior of Center City, with well over $1 billion invested in the Convention Center and its expansion over the last two decades.

The hotel industry acknowledges that hotel companies based outside the city would be hurt and city-based companies generally helped. The overall increase in the tax burden could mean loss of jobs in an industry that employs 10,500 people, 80 percent of them from Philadelphia, the Hotel Association estimates.

The city's business-privilege tax has two components - a tax on business profits and a tax on business sales (gross receipts). The tax on profits is much higher (6.45 percent) than the gross-receipts tax, currently just over 0.14 percent, about $1.42 per $1,000 of sales.

Under scheduled tax cuts, some of which have been postponed during the recession, the gross-receipts tax would be phased out by 2022. The net-income tax would be reduced to 6 percent.

Green and Sánchez instead would eliminate the net-income tax gradually over five years and triple the gross-receipts tax to 0.53 percent, or $5.30 cents per $1,000 of sales.

Green and Sánchez want the bill voted out of committee Tuesday, which would give Council a chance to vote on it before the end of the year.