This One Weird Trick Will Rescue Philadelphia’s Economy

Surprise! It's tax reform. This time with some new, politically significant twists.

One of the big political problems of Philadelphia’s 20-year-old tax reform movement has been the enduring perception that its principal aim isn’t to create jobs, so much as it is to reduce taxes on businesses. This dates all the way back to 2002 (if not earlier), when about 200 people, a lot of them in suits, marched on City Hall in protest of Mayor Street’s plan to repeal wage tax cuts. The protest later came to be called the “briefcase brigade,” and it was led by Charlie Pizzi, then the president of the Chamber of Commerce.

The protest was actually remarkably effective, at least in the short run. But with imagery like that, and with champions like the Chamber of Commerce, you can see how, over time, political leaders representing sections of the city that don’t have a lot of big business interests have come to hear tax reform talk as blah-blah-jobs-blah-stop-taking-money-from-my-successful-company.

And so tax reform has been put on the political back burner. Wage tax cuts continue, but at a snail’s pace, and only after they were tabled completely for a time during the recession by Mayor Nutter. And the problems the brigade hoped to highlight — that the city’s tax structure makes it harder to convince businesses to locate in Philadelphia and hire workers here — remain.

But in recent months, the tax reform movement has gained a bit of momentum.

The basic framework tax reform advocates propose is the same as it’s always been: the city should tax wages and businesses less. What’s changed is that the business leaders are now no longer just telling City Hall how to get by with less money or to raise property taxes on homeowners. Instead, business leaders are saying businesses should absorb the upfront costs of tax reform. How? By increasing property taxes, but only on commercial properties, not residential ones.

Politically, that’s a big deal. As Brandywine Realty Trust CEO Jerry Sweeney put it last week, “we’re prepared to pay more to make our city grow.”

This has given the tax reform movement new life. All of the big mayoral candidates have essentially endorsed what is often called the Levy/Sweeney plan, after Sweeney and Center City District executive director Paul Levy. Given their respective jobs, Levy and Sweeney are perhaps not the ideal figures to make the case that tax reform is in the best interest of average Philadelphians (as opposed to Center City interests), and they’re plenty smart enough to know that.

But it’s no longer just Levy and Sweeney banging this drum. Last week, at the formal rollout of this new tax reform plan, they were joined by organizations like the African American and Hispanic Chambers of Commerce, the Committee of 70, John Dougherty’s Local 98, the Regional Council of Carpenters and SEIU 32BJ, in addition to the usual suspects.

That’s a pretty broad coalition, and one that stands a much better chance of getting Council, the next mayor and Philadelphia’s delegation in Harrisburg to focus on tax reform than Center City business interests alone.

Why tax reform?

Before we talk about the plan, let’s talk about the problem it’s designed to solve, which is vividly illustrated by this chart, supplied by the Philadelphia Jobs Growth Coalition.

Screenshot 2015-04-22 23.19.48

Yeah, that’s an ugly trend line. The coalition is convinced that one of the biggest drivers of Philadelphia’s anemic job growth in recent years (and all that job loss in prior years) is the city’s tax structure, which is different from many cities in its heavy reliance on wage and business taxes over property taxes. If Philadelphia’s tax structure can be made to look more like those of other cities, the coalition contends, the city will have an easier time attracting employers. More jobs leads to more tax revenue, leads to better city services and schools.

But why would businesses prefer to pay higher property taxes over high business and wage taxes? If the tax burden doesn’t actually grow smaller, but is just rejiggered, how does that help?

Levy suggests there’s real merit to creating a tax structure that more closely resembles other cities. Businesses leasing office space don’t pay property taxes directly. They pay rent, and if rent is a bit higher, well that’s a cost businesses might be more willing to absorb than business taxes that they do pay directly, particularly since office rents in Philadelphia are comparatively quite low.

Shifting the burden to property taxes, and growing the tax base as those properties appreciate in value, would both provide for a relatively steady and predictable increase in tax revenue and make businesses more comfortable with Philadelphia. Or so the argument goes.

“When you’re inside Philadelphia you don’t realize how abnormal our tax structure is,” Levy said. “Each year there’s some tax increase. That’s a profoundly unsettling message to business that want some measure of certainty and predictability.”

So, what does the plan look like?

  • Dramatically accelerated wage tax cuts, reducing the rate from 3.92 percent for city residents and 3.49 percent for non-residents to three percent and two percent, respectively, within 10 years.
  • Cut the “net income” portion of the city’s big business tax in half over the same 10 year span.
  • Cover the lost revenue with a 15 percent increase in real estate taxes on commercial properties only. This plan proposes no increase in residential property taxes.
  • The plan is revenue neutral for the city in years one and two, and, if all works as planned, revenue positive for the city after that, as tax reform stokes job creation which yields new city revenues.
  • If the plan works as advertised, the school district would collect $42 million in additional revenue in the first five years, and $40 million to $60 million more each year after that.

The coalition estimates this shift would generate 50,000 to 100,000 new jobs over the next decade, which is an awfully big number.

What’s the hitch?

Oh right. The hitch. The linchpin of the whole plan — having commercial property owners pay more, without socking residential real estate owners — requires a change to the state constitution, which is, obviously, a pretty big deal. Right now, the constitution requires all Pennsylvania taxing authorities to tax property at the same rate, whether it’s commercial, industrial or residential. It’s called the uniformity clause, and until that’s changed, this plan will go nowhere.

Given the city’s relationship with Harrisburg, it could be a truly impossible mission. But the coalition hopes not. Their arguments? 1) It’d create jobs. 2) The constitutional change would be accompanied by state law requiring Philadelphia to dedicate increased property tax revenue for wage and business tax cuts, not spending. That could help assuage state legislators leery of liberal tax-and-spend Philadelphia Democrats. 3) “The convincing message to Harrisburg we think is: ‘we don’t want to be back every year, we want you to give us the authority to grow the tax base of our city so we’re not continually in a crisis,” Levy said.

It’s a good argument, but that’s no guarantee it’ll work. The coalition estimates it will take at least two years to enact, which is something to keep in mind the next time you hear a mayoral candidate talk about all the new revenue the Levy/Sweeney plan will generate for city schools.

Given the massive Harrisburg obstacle, some skeptics are suspicious about the coalition’s true intentions here. They quietly wonder if Sweeney and Levy’s true goal is to be able to say: “hey, we tried to get tax reform done by having commercial interests pick up the load, but the state wouldn’t let us, so we’ve got no choice but to raise property taxes on everybody.”

I get where the suspicions come from, but they seem misplaced. Consider the political facts on the ground. There’s been no appetite for years and years for tax reform that shifts the burden onto residential property owners. Why would that change if the coalition fails in Harrisburg?