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With U.S. cash, execs see a rare chance to cut Philly’s job-crushing business taxes

A $1.1 billion windfall from the stiumlus package gives Philadelphia a once-in-a-generation chance to fix its broken tax system and attract more companies to ease poverty, a business owner argues.

Arcweb founder Chris Cera.
Arcweb founder Chris Cera.Read moreMichael Hinkelman / File Photograph

Philadelphia should use a slice of the $1.1 billion in onetime federal economic stimulus headed to the city to fix its broken tax system, in a bid to attract employers and make it easier for residents to start businesses and reverse the city’s endemic poverty.

That’s the message from business leaders including Chris Cera, the kind of small employer Mayor Jim Kenney has said the city needs to attract, and others who spoke last week at a City Council hearing seeking ways to speed “the growth of well-paying jobs in Philadelphia.”

Cera, of South Philly, employs three dozen at his Old City software and design firm, Arcweb Technologies. He helped found Philly Startup Leaders to promote the city’s tech industry. And late last year, Cera joined the board of the Chamber of Commerce for Greater Philadelphia, , as he saw its leaders begin to reach out to businesses in diverse communities. “I can see that change is going to happen.”

» READ MORE: From wage taxes to red tape, here’s why Philadelphia is one of the hardest cities to do business

Cera cited a an Arizona State University study that ranks Philadelphia with New York as the highest-tax cities, and near the bottom for “Ease of Doing Business.” He joined other business leaders offering Council a handful of “things you can do this year” that he said would create jobs long after the Biden bump is spent.

He made these suggestions:

  1. Ease the paperwork. It takes 10 days and five separate bureaucratic procedures to start a business in Philadelphia, versus one day and three procedures in more-popular cities cited by the Arizona study. “We can fix this,” Cera said.

  2. End the business income tax. Most cities rely more on taxing property, which can’t move away. Philadelphia is a rare city that taxes, not just workers’ wages, but also business sales and income — atop federal and state income taxes. ”We should redo or eliminate the net [business] income taxes in order to make Philadelphia more attractive,” Cera told Council on Wednesday.

  3. Cut the wage tax. The city was doing that, slowly, until last year, when after several years of spending increases, revenues were hammered by COVID-19 closures. The city responded by boosting the wage tax, already the highest of any big city, on out-of-town commuters. Federal money could help fund a return to lower rates that make Philadelphia more competitive with its suburbs and other towns, Cera said.

  4. Slow the Business Income & Receipts Tax (BIRT). While business leaders aren’t calling for an end to the city’s general-revenues tax, many support reforms to what Cera called the city’s “extremely regressive practice of forcing businesses to pre-pay their taxes, starting in their second year.” Taxing revenues before they happen is “eating our young,” Cera said.

Delaying the tax until businesses actually have sales to tax for the year is more fair, and probably more defensible under the state constitution. This will require a onetime cash-flow adjustment that the federal money could cover. There is precedent. After the 2008 recession, the city exempted the first $100,000 in gross receipts, freeing small businesses from the tax.

Why is any of this necessary? Most American adults work for private businesses, large and small. If business health is a key to opportunity, Philadelphia is in trouble.

As U.S. Census data show, the city has only about half as many businesses, per resident, as New York or Atlanta. It has only one-third as many Black business owners, as Atlanta, and just half as many as New York.

“So many of the largest employers in this city are nonprofits,” noted Stephen Mullin, a former city commerce director who also testified last week.

Indeed, the universities, medical schools and hospitals that have replaced the railroads, factories and financial companies as the city’s largest employers now face pressure from liberal activists to pay more for city services, in the absence of private-sector taxpayers.

But there are signs that warn against relying too much on squeezing these institutions. Hahnemann University Hospital went broke and shut down in 2019, idling more than 2,500 workers and sending many of its medical residents and students to suburban and upstate hospitals. And both Penn and Drexel, the city’s largest and third-largest private employers (Temple is second), are currently scouting laboratory space in the suburbs to feed the gene and cell therapy start-ups that city leaders see as their economic future.

The $1.1 billion that Philadelphia expects is a share of the $350 billion set aside for state and municipal governments in the $1.9 trillion American Rescue Plan passed by the narrow Democratic majorities in Congress and signed by President Biden this month.

» READ MORE: Here’s what Pennsylvania and New Jersey are getting out of the $1.9 trillion stimulus package

The law said the money is meant “to mitigate the fiscal effects” of COVID-19, which for towns and cities includes taxes lost when hotels, airlines and other businesses closes and workers lost their jobs. The funds are supposed to help cities pay for teachers, social workers, public health, transit, and maintenance on public utilities, too often neglected when budgets are tight.

Mullin said the funds need to be part of a larger strategy. “A lot of people in Philadelphia think ‘economic recovery’ means ‘we have to make sure we get more money from the federal government when Biden gets in,” Mullin said.

He argued that the city can’t rely on handouts alone but needs “base businesses that make and sell stuff” if it really wants solid, sustainable job growth that will also lead to more city revenues over time. And private employers prefer to hire “in a jurisdiction that says it wants to see you grow instead of jamming its hand in your pocket.”

Cera said that Mullin and others “gave Council a master class” in how employers think and how to attract them. Is this message getting through to Council?

Council President Darrell Clarke said members have " generally supported these business-friendly actions on taxes — the gradual wage reductions [from 5% to 3.9% for residents and from 4.3% down to 3.4% for nonresidents]” and past BIRT exemptions. But the “devastating impact” of COVID-19 on the city, residents, workers and businesses will make this year’s budget harder to set, said his spokesman Joe Grace. “We need to examine every spending and revenue proposal” to settle on “a budget that is equitable and fair” for all.

The federal cash, and what to do with it, has delayed Mayor Kenney’s budget proposal for six weeks, to April 15, said spokesman Mike Dunn. “We wanted to wait and see the details of the federal stimulus package before making decisions on things like expenditures and tax rates,” Dunn said. “The questions raised by the business community are very important.” But, he added, “stimulus package is a one-time shot in the arm, not a recurring revenue stream,” so “long term concerns will also be taken into account as the budget is developed.”

Council commerce committee vice chair Allan Domb (D., At-Large) said there’s no time to waste. ”We have to be competitive in many areas where we are not,” he said. “We have to adjust our attitude and see that, ‘thank God, we have some good businesses and good-paying jobs.’ We need more of them.”

When asked for an example of the companies he wants to attract, Domb cited Oatly, the health-food company that has brought a crew of bright college graduates to the former Frankford Arsenal campus as the Swedish-owned firm’s U.S. headquarters.

Oatly’s U.S. office and labs are a win for Philadelphia — but the Swedish-owned company has located its production plant and blue-collar jobs 45 miles south in Millville, N.J., where its packing partner, Innovation Foods, last week announced a plant expansion and additional hiring.

It’s not just Oatly: Amazon is adding small neighborhood same-day delivery centers around the city, but continues to build its job-rich major distribution centers in outlying areas like the Lehigh Valley, Gloucester County, N.J. and central New Castle County, Del. Exyn Technologies, a fast-growing South Philly robotics company, determined to locate its contract production in the U.S. instead of abroad -- but had to go to Reading, more than an hour from its Washington Ave. engineering center, for a suitable contractor.

“We need those industrial jobs here, too,” Domb said.

Will Mayor Kenney get behind the pro business tax project? The needs across the board are legion. But Cera is hopeful: “I hope council members will see this as an opportunity for themselves to contribute to positive changes that grow jobs in this city,” he said at the end of his testimony. “I firmly believe that we can do this.”

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.