A dramatic shift in business-tax policy could either wreak havoc with the Philadelphia economy or eliminate historical inequities and make the city's economy blossom, witnesses said Tuesday at an epic City Council hearing.
A bill by Council members Maria Quiñones Sánchez and Bill Green to flip the city's business-tax structure, and its current tax-overhaul strategy, got a lengthy airing over seven hours of testimony from two dozen witnesses. The hearing will continue Wednesday.
After Tuesday's session, Green and Sánchez said they had proved their most important point - that the change would benefit Philadelphia-based businesses at the expense of out-of-town companies. They also said the bill would protect small businesses by exempting the first $100,000 in sales, a provision that would eliminate the business tax for 50,000 businesses.
The two want to change the tax-overhaul target - a move the Nutter administration opposes, saying it is filled with known and unknown risks.
No one likes the city's two-pronged business levy, which taxes companies both on their total sales (gross receipts) and profits (net income). But conventional wisdom has held taxing gross receipts to be the greater of two evils. It's a tax that businesses have to pay even if they are not profitable.
That's why Council previously targeted the gross-receipts tax for extinction by 2022, leaving mostly intact the net-income tax, though reformers would love to get rid of that, too.
The bill from Green and Sánchez is "challenging the tax paradigm," Sánchez said at the beginning of the hearing, by preserving and raising the tax on sales while eliminating completely the tax on profits over five years.
That would prevent out-of-town companies from using legal accounting strategies to show little or no profits in their Philadelphia-based businesses, the two Council members say.
The net-income tax is much higher (6.45 percent) than the gross-receipts tax, currently just above 0.14 percent, about $1.42 per $1,000 of sales. But the gross-receipts tax affects more businesses because it tracks all sales.
Green and Sánchez instead would eliminate the net-income tax gradually over five years and nearly quadruple the gross-receipts tax to 0.53 percent, or $5.33 per $1,000 of sales.
Opponents argue that the move would unfairly benefit some industries at the expense of others. Councilman W. Wilson Goode, the author of existing law to eliminate the gross-receipts tax, questioned whether it was fair to increase taxes on some industries - such as large retailers and hotels - and benefit others, such as law firms.
Tuesday's testimony leaned slightly in favor of the proposal, against strong opposition by the construction industry, the hotel industry, and the Greater Philadelphia Chamber of Commerce.
Philadelphia-based manufacturers testified that the measure would significantly help their bottom line.
Dave Campoli, vice president of REIT Management & Research L.L.C., which owns more than five million square feet of Center City high-rises, including the Mellon Bank Center, 1600 Market Street, and 1 Franklin Plaza, said his company's tax burden would increase from $150,000 to more than $500,000.
But Campoli said that he believed the net-income tax had chased away at least three major tenants in recent years, and that he would favor the measure because Philadelphia would become more attractive for businesses and his company would benefit.
Green said that the hotel industry's figures show a contrast in the taxes paid by companies inside and outside the city.
A comparison of two hotels with sales of about $19 million each in Philadelphia illustrated his point. The Philadelphia-based hotel company currently pays $185,000 in business taxes; the outside hotel company pays about $26,000.
Each would pay about $100,000 under the bill's provisions - a more equitable distribution of taxes, Green said.
But Bill Walsh, general manager for the Marriott Philadelphia, predicted that if the bill passed, no hotels "of any substantial size" would be built in the city in the next five years, and each current hotel would shed 20 to 25 jobs.
The city needs between 2,000 and 2,500 new hotel rooms to support the newly expanded Convention Center, he said.