Philadelphia City Council will consider cutting taxes for businesses after the pandemic crushed the economy last year when stores closed and people started working from home.
Councilmember Allan Domb introduced three bills Thursday to overhaul the city’s business tax code, a week before Mayor Jim Kenney is set to propose a budget for the next fiscal year. A spokesperson for the mayor suggested Kenney may propose tax cuts of his own.
Domb’s plan would speed up a gradual decrease of the city’s highest-in-the-nation wage tax. It would also slash taxes on business profits, and allow businesses to pay taxes on revenue or profits, whichever is higher. Philadelphia is the only major city that taxes both.
Business advocates have long argued that the city’s tax structure is a barrier to job creation. And the pandemic exposed the city’s reliance on taxing workers’ wages, a tax base that is more vulnerable to economic downturns. A recent analysis from Pew Charitable Trusts found the city’s $750 million budget shortfall last year, as a percentage of the overall budget, was second only to Detroit’s. The city typically collects 40% of its annual wage taxes from nonresidents, many of whom worked from home when offices closed and no longer had to pay the tax.
Domb said his bills are aimed at jump-starting an economic recovery.
“Our city is facing a challenging, very unique moment in time,” said Domb, an at-large Democrat. “This is the moment where we can really change and step away from being one of the highest taxed cities with some of the highest poverty and some of the highest unemployment.”
Domb’s proposal is a notable attempt to reignite a conversation that has fizzled in recent years over how to alter Philadelphia’s unusual and widely criticized tax structure. But the bills, especially the wage tax proposal, face an uphill battle in City Hall. From President Darrell Clarke to progressive stalwart Helen Gym, many on Council have indicated there is little appetite for significantly reducing the wage tax.
“This is to open the dialogue. Am I locked into any of these things? Absolutely not,” Domb said. “But I am locked into making the city more competitive than we were before.”
Previous efforts at a major tax overhaul have failed, and city spending has significantly increased under Kenney. Domb and others have criticized those spending hikes and argued the city can be more efficient, but the Kenney administration has cited rising expenses. What’s more, both the administration and Council often have their own spending priorities that can make tax decreases politically difficult during budget season.
Domb said his proposed tax cuts could cost $65 million to $80 million in foregone revenue during the first year. His legislation does not provide a way to pay for tax cuts, but he said the city could close the gap through economic growth. He noted the city is receiving federal funds to help fill its budget deficit.
The wage tax bill would gradually cut rates for residents from 3.87% to 2.9% by 2042, and from 3.5% to 2.8% for nonresidents. Although technically a tax on workers, business owners have said they need to increase salaries to compensate workers for the tax.
Another bill would reduce the net income tax rate for businesses from 6.2% to 3% over a decade. A third would change the city’s Business Income and Receipts Tax (BIRT) so firms would pay the higher of net income or revenue, instead of both. The package of bills will be referred to the Finance Committee for public hearings, according to Domb’s office.
A Kenney spokesperson declined to comment on the legislation, but said Kenney would discuss tax cuts when he proposes a budget next week. The BIRT tax on businesses’ net income has gradually decreased under Kenney, from 6.39% in 2016.
“The Mayor will have much more to say about our efforts to reduce the tax burdens on individuals and businesses, while at the same time maintaining vital city services on which all residents depend, when he presents his new budget and Five Year Plan to City Council on April 15,” spokesperson Mike Dunn said in an email.
Philadelphia business leaders came out in support of Domb’s proposed tax cuts. Della Clark, president of the West Philadelphia nonprofit the Enterprise Center, said a tax overhaul “can help stimulate an inclusive and equitable economic recovery.”
“We support progressive tax policies that will alleviate the burden that many Black- and brown-owned businesses face in Philadelphia,” Clark said in a statement.
But left-leaning advocates panned the plan, arguing the city should be seeking more revenue streams. Erme Maula of the Friends of Whitman Library, which advocates for library funding, called Domb’s plan “short-sighted.”
“There is money in our city, and by not taxing the rich and by not going after these other various revenue streams, we’re never going to close that gap,” Maula said.