First in an occasional series.
Mayor Nutter's property tax reform has been packaged as the fix for a badly broken and unfair system of assessments, but a powerful undercurrent has also driven the long and difficult effort.
Its most ardent advocates believe the Actual Value Initiative (AVI) will allow the city to finally right its notoriously business-hostile tax landscape, often blamed for Philadelphia's lagging behind other big cities in important economic categories.
Advocates for a modern property tax system have been arguing for years that the city taxes the wrong things - businesses and wages. Companies and people can pack up and leave, they note. Skyscrapers, on the other hand, aren't going anywhere. And, if business taxes are low, buildings are more likely to be full with tenants.
Taxing property more heavily has two other major benefits for anyone drafting a municipal budget: Real estate is more stable, making tax revenue less susceptible to economic swings.
And, if property is assessed accurately year after year, the city can capture revenue from upswings in the market without having to raise the tax rate.
Two mayoral tax commissions going back a decade have urged making this shift, but that was impossible without accurate, widely accepted property assessments.
The results of a citywide reassessment key to AVI were dispatched to property owners last month, generating much debate about how close the values assigned to every city parcel are to reality.
That's a conversation that will continue, but business leaders nonetheless believe the budget Mayor Nutter plans to unveil this month represents the watershed moment many have long anticipated. "We have an unbalanced tax structure. AVI is the chance to rebalance that tax structure," said Paul Levy, president and CEO of the Center City District. "It's a simple rule - if you tax something and it can move, it will."
In the current fiscal year, the city expects to collect 67 percent of its revenue from taxes on wages, business income and receipts, and earnings and net profits.
Meanwhile, just 17 percent of the city's revenue is expected to come from property taxes (nearly 60 percent of the $1.2 billion collected goes to the schools, not the city treasury).
Typically, that ratio would be flipped, and smaller suburban communities often collect nearly all their taxes from property, said Kevin Gillen, an economist at the University of Pennsylvania.
That "upside-down tax structure," he said, "provides a real disincentive to start a business in Philadelphia."
Levy said Philadelphia's business tax problems have been somewhat masked because of its wealth of large educational and medical institutions, which are more or less bound to their urban locations.
But he noted that office jobs have dropped 25 percent since 1970, and he cited statistics that show Philadelphia trailing East Coast peers in jobs and leading in poverty. "By every indicator, New York, Washington, Boston are doing better than we are," he said.
So, should Nutter present a comprehensive plan for reducing wage and business taxes in his budget address on March 14? Or would that be a bridge too far with many battles still to be fought implementing AVI?
"The jury's out on that question," Levy said. "There's an argument that comprehensive is hard to pull off, politically."
In his speech last week at the Greater Philadelphia Chamber of Commerce's annual mayoral luncheon, Nutter trumpeted a number of business tax cuts already on the books, as well as the scheduled resumption in July of wage tax cuts that were suspended in 2009, during the heart of the recession. One law, cosponsored by Council members Bill Green and Maria Quiñones Sánchez and passed in 2011, provides a $100,000 exemption on the gross-receipts portion of the Business Income and Receipts Tax (BIRT). Businesses also would not have to pay the net-income portion of the BIRT on the first $100,000 in sales.
While significant, the changes are being phased in and won't begin taking effect until next year. Also, the wage tax reduction anticipated in the current five-year financial plan - going from 3.928 percent to 3.924 - is minuscule (4 cents on a $1,000 paycheck).
Finance Director Rob Dubow said last week that the mayor could make a different proposal - conceivably Nutter could speed up those tax cuts - but he was not ready to talk about the administration's plans.
Dubow noted that the rate was more than 4.9 percent in the 1990s.
"It took a long time to get up to that height and it takes a little time to get out of it," said Councilman James F. Kenney, who sponsored a bill going into effect in July that will eliminate business license fees. "You can't just whack it all at once."
Chamber President and CEO Rob Wonderling said he would like to see the net profits tax eventually cut in half and the wage tax drop below 3 percent. Levy cited identical goals, saying he'd like to see them reached in 10 years.
"That tells a start-up on Third Street with a handful of employees that the government is a partner in having them grow," Wonderling said.
The rosiest view is that shifting the tax burden off businesses and wages would create untold new jobs and allow the city's economy to bloom. Working residents would come out ahead in wage tax savings even if they had to pay more on their homes.