How to fix Philly's poor tax collection

This is the third in a series that The Next Mayor project is embarking on throughout the summer that looks at some of the problems facing Philadelphia's next mayor. We'll identify problems, examine why they exist, and find best practices implemented elsewhere. At the end of each piece, we'll offer a fix. Today, we tackle Philly's high tax delinquincy. If you have a problem in the city that needs fixing, email us at rbriggs@philly.com.

One in six properties in Philadelphia has overdue real estate taxes. Some of the city's business tax streams may be paid by fewer than half the people that owe them. A recent estimate put total unpaid city taxes at nearly $1.2 billion. And yet City Council just approved $70 million in new taxes.

Tax delinquency has long plagued Philadelphia, although some recent strides have been made. The city now lets residents who fall behind on property taxes enter into monthly payment plans. About 6,300 people have already enrolled, with just a 7 percent default rate.

But for Montgomery Wilson, a lawyer with the non-profit Community Legal Services who assists Philadelphians facing foreclosure, even these tiny bright spots are hampered by the Department of Revenue's 20th century technology.

"No one gets monthly billing statements that I'm aware of and there's no way that you can set up your account to pay automatically," Wilson said. "Right now, clients just have to remember to pay. They get an old fashioned coupon book and then mail in their payments."

The city does offer a relatively new online payment system, but Wilson said it doesn't cover folks in monthly payment plans and can't be set up for automatic bank payments in any case.

It's an inconvenience that can have real repercussions for Wilson's clients, who are often elderly and indigent. One man, an illiterate 80-year-old from South Philadelphia, treks all the way to the CLS offices at Broad Street and Erie Avenue every month so social workers can help him fill out his payment forms.

"It's ridiculous. That gentleman is perfectly willing to pay his taxes. Why can't we set him up so that the money automatically comes out of his account?" asked Wilson.

It's an extreme case, but think about tax delinquency and most people imagine slippery scofflaws trying to game the system. Often, however, those that try to do the right thing find 'the system' is as problematic as those who evade it.

Northeast Philadelphia native Shannon McDonald, a social media coordinator for a news website called Billy Penn, previously ran a community news blog called neastphilly.com. The site became popular and McDonald made a tiny amount of money off web advertising.

She filed to pay business tax — about $26 dollars in 2012. She should have gotten a "thank you" card for her diligence, but instead she got legal threat.

"Out of the blue, I got this letter from [Revenue] that has this very serious tone about how they're going to take legal action against me for failing to file one page of the business tax forms," McDonald said.

The confusing letter said she had "failed to include or complete Page 2 Net Income or Page 4 or Page 7 of the Business Income & Receipts Tax return."

To be safe, McDonald refiled everything. She never heard from Revenue again, but she tried calling the department just to see if they got her materials.

"You try to get a human, but it just rings and rings and rings. Then a recording says 'Too many people are calling, try calling us back later,' and they hang up on you," she said. "The lack of transparency is infuriating. It's probably why a lot of people don't pay their taxes."

In 2009, Mayor Michael Nutter held a press conference on the sidewalk in front of law office of Robert Gamburg, who, along with two other lawyers, owed $348,000 in business taxes. Nutter was there to shame the trio into compliance and send a message.

"The city will be forced to collect our money by any means necessary," Nutter said, promising to post a quarterly list of the city's top 50 tax cheats.

Less than a month later, Gamburg agreed to pay the overdue taxes.

Nutter won that battle. But six years later, the outgoing mayor isn't winning the war. Revenue Commissioner Clarena Tolson said that, as of June 16, the city's yearly property tax collection rate was 91 percent. That's a 9 percent delinquency rate, up from 6 percent last year.

Tolson blamed 2 to 3 percent of that figure for major outstanding tax appeals — thousands of people, including the owners of high-profile Center City parcels like the Wanamaker building, are appealing property tax reassessments that went into effect last year.

"The [fiscal] year's not done yet. The appeals are a big impact on that rate," she said. "We're expecting to come in around 6 percent."

Even if her optimistic projections are accurate, it's the same as when Nutter took office in 2008, when the property tax delinquency rate was 6.2 percent.

That's almost double the average for big American cities. Tolson estimated the value of current property tax delinquents at $234 million.

And yet other city tax streams have even worse compliance rates. Business taxes are self-assessed, meaning people like Shannon McDonald have to voluntarily report their business information and income to the city. Tolson said her department is still "working on" sharing tax return data with state and federal authorities. Until that sharing happens, there's no automatic way for Revenue to cross check whether or not an individual is operating a taxable enterprise.

In other words, it's easy to fly under the radar. A 2012 Controller's report estimated the department was unaware of as many as 60 percent of businesses operating in Philadelphia. Another report found the city is owed as much as $310 million in unpaid business tax in the current fiscal year.

The city's liquor tax, hotel tax and and school income tax (a levy on unearned income, like dividends from stocks and bonds) similarly rely on self-reporting, and often go uncollected with few warnings or penalties.

It's not all bad. Tolson said her department was working with "behavioral economists" at the University of Pennsylvania to improve billing efforts; sheriff's tax sales were way up; and she hoped to make real estate payment plans, hotel and amusement taxes payable online soon. Tolson also added that a $4.1 million computer upgrade was finally sharing data with the Department of Licenses and Inspections, theoretically preventing tax cheats from getting city permits.

Strangely, that list of scofflaws Nutter promised to post publicly online six years ago exists only as a "Coming Soon" link on Revenue's website. Mayoral spokesman Mark McDonald couldn't offer an explanation of what happened to that promise.

Although it's a more entrenched problem here, Philadelphia is hardly alone in struggling to get delinquency under control.

In Milwaukee, Wisc., property tax delinquency increased tenfold between 2008 and 2012. So many people were falling behind on their taxes, the city didn't have the resources to crack down on everyone.

But a 2010 state law gave Milwaukee the option to collect taxes in multiple installments each year, instead of a lump sum. So, instead of getting tougher on collections, the city tried becoming more flexible.

Professor Andrew Reschovsky, of the University of Wisconsin, released a study of Milwaukee's strategy in 2013. His research showed that offering taxpayers the option to pay three times a year instead of just once or twice cut delinquency rates by almost half.

It's not unlike the monthly payment plans Philadelphia offers now to low-income homeowners struggling to pay their taxes, but there's a key difference. Milwaukee's payment plan is available to everyone.

Still, better enforcement has to accompany that flexibility. This week, the city announced the results of the first lien sale in years — essentially a sale of residents' tax debt to private collectors. Only a fourth of the liens attracted bidders at sale, but another 2,000 tax deadbeats who got letters saying the city might be auctioning off their debt paid up simply because of the threat.

Repercussions are good motivators, but simple reminders work too. British cities increased business tax collections by simply reminding people to file. The notices, which included summaries of the government services supported by tax payments, increased compliance by 15 percent.

For the Community Legal Services lawyer, Wilson, and his clients, who are making monthly payments by hand and check, most of the solution is simple: make it easier to pay. Implementing automated electronic payments, he believes, would be a big moneymaker.

"They could save a ton of money just on eliminating all those processing costs of opening envelopes and collating checks," he said. "I mean, it's 2015."