Philly taxes hold down job creation

Brownstein Group and Vault Communications are in similar businesses: advertising and public relations, which means their success depends largely on people - who can set up shop anywhere.

Brownstein is in Center City, while Vault is in Plymouth Meeting, and the tax consequences of their locations separate them far more than the 19 miles between their offices.

Vault pays a business privilege tax of 0.15 percent and no local net income tax in Plymouth Township. Brownstein's tax bill in Philadelphia includes a 6.45 percent corporate income tax, a 0.1415 percent gross receipts tax, a 1.13 percent use and occupancy tax, and a 2 percent city sales tax.

That heavier tax burden, coupled with the Philadelphia wage tax that is nearly four times higher than the average in the suburbs, has long handicapped the city's job growth.

Some business and civic leaders fear that Philadelphia's gains as a place to live, evident in seven straight years of population growth, are at risk if the city's tax structure isn't retooled to encourage job growth.

They are hopeful that a tax overhaul - which could also help improve Philadelphia's weak school system by building a stronger tax base - is on the horizon.

"I've never felt as much momentum toward this, so we'd better not blow it," said Marc Brownstein, president and chief executive of Brownstein Group Inc., of efforts to shift taxes from workers and businesses to real estate.

A group formed in 2013, the Philadelphia Growth Coalition, led by Paul Levy, head of the Center City District, and Gerard Sweeney, CEO of Brandywine Realty Trust, is pushing for the city to sharply cut wage and corporate net income tax rates over the next 10 years.

The coalition proposes making up for the lost revenue with a tax rate on commercial real estate higher than on residential property.

Taxing different classes of real estate at different rates, however, would require an amendment to the Pennsylvania Constitution, a significant political challenge that would take at least three years.

Sweeney said the coalition has been talking to lawmakers in Harrisburg, but it's just starting to seek a sponsor of legislation for the amendment.

"The general reaction we're receiving from both sides of the aisle is that this is a very pragmatic way to create an economic self-help program to make Philadelphia more competitive," Sweeney said.

State Rep. John Taylor (R., Phila.) said he supports the idea, but said its prospects are not good because City Council opposes business tax cuts.

"With Council putting up a big stop sign, I don't see it happening," Taylor said.

Leading mayoral candidates James F. Kenney and Anthony Hardy Williams have said they favor higher commercial property taxes and lower wage and business taxes.

The stakes for Philadelphia are high.

In jobs, Philadelphia has been losing ground to competing Northeastern cities. Since 1990, the number of private-sector jobs in New York City has climbed 22 percent, and in Washington the gain is even greater, at 31 percent. Over the same period, the number of jobs in Philadelphia is down 5 percent.

During the current economic expansion, Philadelphia has come close to holding its own in the eight-county region.

Private-sector employment in the region hit its low for the economic cycle in February 2010. Between then and September 2014 (the most recent county-level data available), the number of private-sector jobs in the city increased by 35,000, or 6.6 percent. The number of jobs in the eight-county region climbed 6.9 percent over the same period.

Robert P. Inman, a professor of finance and economics at the University of Pennsylvania's Wharton School, has compared city and suburban taxes.

Inman said small reductions in the city's taxes - including a 1 percentage point reduction in the wage tax since the mid-1990s and higher exemptions for certain business taxes - made the city more competitive.

"Every time you make a small rate change, there's going to be an effect on somebody who's sitting on a fence, making a decision to stay or go. That's the thing that matters," said Inman, who has worked as a consultant for the city.

Taxes are a significant factor in where businesses choose to locate, but Vault Communications, which has 26 employees and expects $4 million in revenues this year, illustrates that they are far from the only one.

Vault's current lease is expiring next year. The company is not considering Philadelphia as a place to move to, "but, frankly, that has nothing to do with money and everything to do with employee satisfaction," said Vault's president, Kate Shields.

"We have a lot of people who are younger and people who are getting married, having a family. They are in that stage where they just want to be in the suburbs," Shields said.

Vault's accounting firm, EisnerAmper L.L.P., is among those taking advantage of the city's modified Jobs Creation Tax Credit, which was modified last year.

For every qualified job created in the city this year, businesses may claim a $5,000 credit against their business income and receipts tax liability for five years, up from the usual one-year benefit of $5,000.

EisnerAmper, which moved from Center City to Jenkintown in the early 1990s, when Philadelphia was at its financial nadir, is returning to the city later this year and bringing 125 jobs, said Lori Reiner, partner in charge for the Philadelphia-area operations of EisnerAmper, which is based in New York City.

Reiner said the jobs tax credit was expected to be worth $2.5 million to the firm, which decided it was important to be in Center City, which is still the region's commercial heart.

"For us, it was really meaningful to be able to come back to the city," Reiner said.

Brownstein, by contrast, has stayed in the city since its founding in 1964, despite the tax climate.

"We don't add up percentages, but we are certainly aware of the onerous tax bite that comes with being in the city," said Brownstein, whose father founded the business in Mount Airy. It now employs 80 people and expects $14 million in revenue this year.

"But that's always been offset by the urban edge that being in the city gives you. There's a certain vibe, a certain energy that you get by being in the city, which fuels creativity and helps you attract and retain talent," he said.

Since returning to Philadelphia from New York in 1989 to help his father run what was then known as Berny Brownstein Advertising, Brownstein has seen Center City flourish as millennials and empty-nesters have fueled a restaurant and condo boom.

The city just needs jobs, he said.

"We'd better take advantage of this window because I don't think this window's going to last long," Brownstein said.