February 21–28, 2002

slant

Roll It Back

by Jonathan A. Saidel

A government taxes for two reasons, to alter behavior or to raise funds to pay for services that the private marketplace cannot provide. But taxes are so high in Philadelphia that our need to raise revenue has altered behavior — it has encouraged residents and employers to flee.

Philadelphia’s overly burdensome and complex taxes place the city at a competitive disadvantage. Philadelphia job growth lags behind the nation, competitor cities and neighboring jurisdictions. More important, Philadelphia’s population and job loss continued throughout the 1990s. We should be growing like Boston, but instead are shrinking like Detroit. These are clear signals that we must alter the local tax burden if the city’s competitive position is to improve.

While the need to reduce taxes is abundantly clear, it is equally clear that tax cuts can work to improve economic conditions in the city without compromising budgetary priorities. Philadelphia’s experience in recent years provides compelling evidence that a tax cut does not necessarily threaten revenues. Despite positive growth in the U.S. economy since 1992, it was not until after the city reduced taxes that it experienced job growth. Even with a cumulative 8-percent decrease in the wage tax rate, total wage tax collections actually increased by 18.8 percent between fiscal year 1995 and fiscal year 2001. The Manhattan Institute for Policy Research estimates that reductions in New York City taxes since 1997 have created 80,000 new jobs, a quarter of all jobs created in the city during that time. Wage and business tax cuts could create thousands of new jobs here in coming years.

While tax cuts can help end flight, changes in our tax system can help us to end blight. By changing to a land-value tax system that encourages development and discourages property speculation, we can begin the redevelopment of our neighborhoods. Although new to Philadelphia, this tax system has been getting results in cities across Pennsylvania. Harrisburg Mayor Steven Reed says that, by using this system, Harrisburg has managed to reduce its vacant-building stock from more than 4,000 to fewer than 500 during the past two decades — a drop of approximately 90 percent.

My office recently completed the Tax Structure Analysis Report. A summary of our proposed reforms is below, and additional information is available at www.philadelphiacontroller.org. To improve the city’s competitiveness, I recommend:

Significantly reduce business taxes

• Reduce the net-income portion of the business privilege tax from 6.5 percent to 4 percent.

• Reduce the gross-receipts portion of the business privilege tax from .24 percent to .2 percent.

• Eliminate the city’s net-profits tax.

Shift taxes to cut wage tax and encourage development

• Change how property is taxed — shift taxes to land to discourage speculation and encourage development.

• Reduce the wage tax to 4 percent for city residents — shift the burden to the city’s real estate tax.

Accelerate the pace of wage tax reductions

• Reduce the wage tax to 3.5 percent for residents and 3.375 percent for non-residents by fiscal year 2007.

Eliminate confusing or unfair elements of the tax structure

• Eliminate need for businesses to double-pay the business privilege tax in the second year of operations.

• Adopt a single-factor apportionment formula to encourage firms to move to and remain in the city.

• Simplify and redesign business privilege tax forms.

Improve business-friendliness of the tax structure

• Implement a Philadelphia New Jobs Tax Deduction to encourage companies to create new jobs.

• Use technology and establish a taxpayers’ ombudsperson to improve relations with taxpayers.

Our current economic downturn must not provide an excuse to avoid tax reform. While, in the past, Philadelphia has been the canary in the economic coal mine, the city is demonstrating remarkable stability during this recession. This places the city in a fortuitous position. After past recessions, the city was unable to grow, but because the worst effects of the national downturn have bypassed Philadelphia, we can take steps now to finally enjoy the full benefits of expansion.

Without significant change to the city’s tax structure, Philadelphia will continue to grow more slowly than competitor cities and that population decline will continue unchecked. By reducing the overall cost of living and doing business in Philadelphia, and improving a tax structure that impedes smart growth, the city’s elected and appointed leadership can make an important stride toward making Philadelphia a preferred place to live, work and visit.

Jonathan Saidel is the city controller. If you would like to respond to this Slant or have one of your own (850 words), contact Howard Altman, City Paper interim editor, 123 Chestnut St., third floor, Phila., PA 19106 or e-mail altman@citypaper.net.