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The pandemic took a big bite out of Philly’s tax base. What happens if suburbanites keep working from home?

Widespread remote work could not only reshape Philadelphia offices, but bring fewer commuters into the city, eating into a tax base that relies heavily on taxing workers’ wages.

Fran Coady. Sr. Vice President, Human Resources at Day & Zimmermann, shown here at her home in Blue Bell PA, January 05, 2021
Some Philadelphia companies are considering keeping some of their staff at home permanently after the pandemic, raising question's about the city's reliance on the commuter wage tax.
Fran Coady. Sr. Vice President, Human Resources at Day & Zimmermann, shown here at her home in Blue Bell PA, January 05, 2021 Some Philadelphia companies are considering keeping some of their staff at home permanently after the pandemic, raising question's about the city's reliance on the commuter wage tax.Read moreJESSICA GRIFFIN / Staff Photographer

With coronavirus vaccines on the way, Day & Zimmerman is deciding which workers to bring back to the office as early as this summer.

Fran Coady, head of human resources for the construction, manufacturing, and government services company, is exploring which jobs can be done well remotely, who wants to stay home, and whether the Philadelphia firm can cut costs by shrinking office space.

Many of Day & Zimmerman’s 41,000 workers — who make munitions, maintain power plants, and protect U.S. embassies around the world — can’t work remotely. But the company’s 450 office workers at its headquarters on Spring Garden Street are another story. Many of them could work from home permanently, either part- or full-time, Coady said. No decisions have been made yet.

“What we’ve concluded is that it should not be a one-size-fits-all,” she said. “It’s a job-by-job decision.”

Decisions like these could reshape Philadelphia offices. But they could also leave fewer workers coming into the city every day, eating into a tax base that relies heavily on taxing wages and business revenues. Three-quarters of Day & Zimmerman’s Philadelphia office workers live outside the city, Coady said.

The economic impact of widespread remote work — and its long-term effect on city finances — remains unclear until companies reveal their post-pandemic plans. Previous attempts to overhaul the city’s tax structure have failed. But some hope the crisis will spark new urgency to retool tax policies that have long been criticized as hindering job creation.

Such an effort would likely spark debate about whether tax reform should make the city more attractive to companies by reducing wage and business taxes, or look to businesses to help fund schools and social programs in the nation’s poorest big city.

Either way, it’s almost certain that fewer people will return to city offices than left last year, reducing weekday crowds in Center City and further disrupting struggling restaurants and retailers.

Philadelphia has already lost hundreds of millions of dollars in tax revenue since the coronavirus swept the country. Wage tax collections in the current fiscal year will be about $200 million less than initially projected. A portion of that loss could become permanent if companies keep employees home indefinitely. The city also imposes a levy on real estate occupied by companies, another revenue stream that could be hard-hit if stores downsize or leave.

“We are going to see a much thinner downtown in terms of the businesses,” said Subodha Kumar, a marketing and supply-chain management professor at Temple’s Fox School of Business. “And that will have a huge impact on city taxes.”

The highest-in-the-nation wage tax, currently 3.87% for residents and 3.5% for nonresidents who work in the city, has been a central pillar of Philadelphia’s fiscal policy for more than 80 years. The levy first propped up the city’s budget in 1939, when it was ravaged by the Depression. But critics say the wage tax, along with the business income and receipts tax (BIRT), lingers on as a job killer, steadily driving businesses and workers from the city. By some estimates, the wage tax has cost thousands of jobs. The pandemic has underscored Philadelphia’s fiscal vulnerabilities.

“Is this the right time to [restructure the tax code]? Yes,” said Paul Levy, president and CEO of the Center City District and a longtime advocate for cutting wage and business taxes. “Will Philadelphia seize the opportunity? There’s a question mark after that.”

There’s no strong movement or proposal to change the city’s tax structure at the moment. State laws limiting Philadelphia’s taxing flexibility create a barrier that doesn’t exist in other big cities, and officials say it’s too soon to plan for the post-pandemic economy.

A big impact on city finances

The pandemic has hastened the digitization of the workplace. Earlier in the outbreak last year, some experts estimated as much as half of American workers were telecommuting. According to a December survey by the global freelancing platform Upwork Inc., some 36.2 million Americans will work remotely by 2025, more than double pre-pandemic numbers.

A July survey of human resources officers — a majority from the region — found that more than half of firms planned to have at least 1 out of 4 staff members telecommuting even after the pandemic.

“As I see organizations start to formulate their move-forward workforce plan, it’s a combination of in-office and remote work,” said John Touey, a principal at the executive search firm Salveson Stetson, which conducted the survey.

Those decisions have serious implications in downtown economies like Center City, where foot traffic in December was less than half the levels during the same month in 2019, according to the Center City District. Fewer commuters means fewer customers for lunch spots and shops. Some of those businesses already pivoted to online delivery to survive. Others closed their doors. The number of small businesses open in the city fell 29% last year, according to Opportunity Insights, a Harvard-based research group.

HipCityVeg, a casual lunch and dinner spot with three locations in the city, has boosted online ordering, expanded its delivery boundaries, and increased its digital presence, owner Nicole Marquis said. But it’s more costly to reach customers now, compared with the hundreds who simply walked by her storefronts. Overall sales are still down 10% at Philadelphia locations, Marquis said.

“We pay very high rents to be in very dense office worker locations,” she said. “And now those workers are not there.”

The shifts could leave a lasting impact on city finances. The wage tax accounts for 45% of Philadelphia’s annual revenue, and is expected to decline by about $78 million this fiscal year — despite an increase in the nonresident rate. While it’s difficult to determine how much of that loss is due to furloughs and layoffs as opposed to remote work, the city typically collects 40% of its roughly $1.5 billion in annual wage taxes from nonresidents.

Commuters pay other taxes, too, including sales and parking taxes, as well as the sweetened-beverage tax that funds pre-K and a liquor-by-the-drink tax that goes directly to city schools. Businesses also pay a use-and-occupancy tax based on the assessed value of their buildings. But many stores will downsize their downtown footprints or move out completely once companies make final remote work plans, said Kumar, the Temple professor.

Some of the city’s largest employers are still grappling with how many workers will return to the office. Thomas Jefferson University, with about 7,000 employees telecommuting, expects some staff will work full-time in the office, while others will remain fully remote. A third group could work in “hybrid models,” in which employees split time between the office and telecommuting, a company spokesperson said.

“There’s a good chunk of our workforce that will probably work remote permanently,” Clayton Mitchell, Jefferson’s senior vice president for real estate and facilities, said during a Center City District meeting last month.

Some companies aren’t expecting major changes once it’s safe to work in the office. Comcast expects most of its staff at its company-owned, Center City skyscrapers to return. Independence Blue Cross, which also owns its office building, expects employees who worked in the city to come back.

Industry experts and academics said firms are mulling over a long list of factors, such as saving cash on real estate costs, the health and productivity of their workforce, and the impact of more telecommuters on company culture.

An ‘anti-commuter’ tax

Philadelphia was slow to revise its tax structure during an earlier seismic shift, from an industrial-based economy in the 1950s to a service-based one by the 1990s. The wage tax, for example, was a better fit when it was hard for factories to move. But professional service firms can ditch the city with ease.

City Hall has reduced wage and business taxes over time. The wage tax was at its highest rate of 4.96% for residents in the 1970s and ’80s, before Mayor Ed Rendell began incremental reductions in 1996.

Some critics, however, say the changes haven’t gone far enough. They say the wage and business taxes help push companies into the suburbs, where those levies are lower or nonexistent. About 41% of Philadelphia residents now work outside the city, according to a 2020 Center City District report.

Robert Inman, a Wharton business economics and public policy professor, estimates that Philadelphia has lost 172,889 jobs between 1971 and 2001 because of wage tax increases.

“What we’re doing now is moving from face-to-face service production to distance service production,” Inman said. “Our fiscal policy has to be responsive to that technology change. We don’t know how big of an effect it is gonna be, but the direction of the effect is clearly anti-commuter [wage] tax.”

Some of the city’s biggest employers have stopped withholding the 3.5% commuter wage tax from workers who live outside the city and have stopped coming downtown during the workweek.

That exemption remains in place only if employees are required to work from home. If companies allow employees to telecommute after pandemic restrictions are lifted, workers must pay the wage tax, regardless of whether they work from home or not. But if companies close Philadelphia offices or downsize and require workers to rotate in on assigned days, nonresidents will not pay the wage tax when working remotely. Philadelphia residents pay the tax no matter where they work.

Philadelphia relies more heavily on wage taxes than other cities and is also the only large city that taxes both business income and gross receipts. That tax, known as the business income and receipts tax (BIRT), has been gradually reduced since the mid-1990s, like the wage tax. After the 2008 recession, the city exempted the first $100,000 in gross receipts — essentially excusing small businesses from BIRT.

Philadelphia convened tax reform commissions in 2003 and 2009 that yielded little change. The 2009 recommendations, which focused on the need for job growth, included deeper cuts to the wage tax than the reductions already being made.

Levy, who as recently as March of last year unsuccessfully presented Mayor Jim Kenney with yet another plan to reduce wage and business taxes, uses jobs data showing that Philadelphia lags behind other U.S. cities to make his case.

Between 2009 and 2018, the 25 largest U.S. cities saw a 19% average increase in jobs earning between $35,000 and $100,000, according to the Center City District. Philadelphia had just a 6% increase in these jobs during the same time frame.

No ‘easy plan’

Many officials remain resistant to changing wage and business taxes. Councilmember Helen Gym said businesses are drawn to Philadelphia because it’s the economic engine of the region and the largest city in the state. Taxes alone wouldn’t keep businesses from coming, she said. Commuters and companies also rely on the city’s infrastructure and services, so the city’s expenses should not rest solely on residents, she said.

“Businesses gravitate toward economies and cities that are healthy overall and… taxes have a role to play, but they’re not the single determinant of whether a business can thrive,” Gym said.

City Council has focused on reducing poverty and slowing the rapid pace of gentrification in recent tax legislation. Since December 2019, lawmakers have reduced the value of a controversial 10-year real estate tax abatement designed to incentivize businesses and developers, and passed a new 1% tax on construction to fund an ambitious antipoverty program.

Those changes, championed by Council President Darrell L. Clarke, show that Council would not be easily swayed on tax changes that benefit the business community — and may not want to focus on wage or business taxes.

”If you are going to talk about tax reform but you only want to talk about one of many taxes that we deal with as a city, that’s not really tax reform,” said Gym, a leader of the progressive wing that holds growing sway in City Hall.

City Finance Director Rob Dubow said the Kenney administration is committed to gradual wage and BIRT reductions. The wage tax is at its lowest rate in decades, he said, and changes in the BIRT have helped businesses.

An additional roadblock is the so-called uniformity clause in the Pennsylvania Constitution. It requires all taxes to be applied at the same rate, blocking changes such as varying the wage tax rate based on income.

Levy and Gerard Sweeney, president and CEO of Brandywine Realty Trust, spent years working to exempt the city’s property taxes from the uniformity clause, allowing a higher tax rate for commercial parcels in exchange for lowering the BIRT and the wage tax. They argued it was a good solution that avoided burdening homeowners with the cost of reducing those taxes. But the proposal failed to win approval from the Republican-controlled state legislature and died quietly in 2018.

In place of rewriting its tax code, Philadelphia has created incentives that benefit businesses, such as the 10-year tax abatement over the years and a job-creation tax credit.

Levy and Sweeney presented Kenney with their most recent plan to reduce the wage and business taxes in early March. They suggested the city could simply view wage and business tax reductions as an expenditure and “buy down” their rates, especially after 11 straight years of job growth and tax-base expansion, Levy said.

Days later, the coronavirus shutdown brought an abrupt end to that idea.

“I don’t have any easy plan at this point,” Levy said.

City budget officials, who track potential economic shifts due to the coronavirus, said they are open to reexamining the tax structure. But they aren’t eager to act immediately — in part because there are still too many unknowns.

“I almost view it as trying to jump double Dutch jump rope — when do you hop in?” said Budget Director Marisa Waxman. “Right now we don’t know what our economy is going to look like, so it’s hard to figure out what the optimal tax-design structure would be.”

Correction: This article has been updated to reflect that about 41% of Philadelphia residents now work outside the city.

The Future of Work is produced with support from the William Penn Foundation and the Lenfest Institute for Journalism. Editorial content is created independently of the project’s donors.