City leaders are engaged in the most substantial debate over Philadelphia’s tax structure in years.
Mayor Jim Kenney has proposed accelerating cuts to the city’s unusually high wage tax, while City Council members are focused on property tax relief. Progressives are pushing for a new city “wealth tax,” while the Chamber of Commerce pushes for business and wage tax cuts. And some observers are questioning fundamental assumptions about how the city collects revenue.
Council members and the administration are negotiating over the city budget that begins July 1. Given that many of those involved are pulling in opposite directions, it is possible that next year’s tax structure will look a lot like this year’s. But it won’t be the end of the debate, with potential candidates for next year’s mayoral and Council races staking out their visions for how the city should be funded.
There are several reasons taxes have taken center stage this year after recent budget cycles, which focused on how the city would survive the economic downturn at the beginning of the COVID-19 pandemic and how it would fight the gun violence crisis.
The first citywide property reassessment in three years has prompted lawmakers to prioritize how to soften the impact of rising real estate taxes. The city’s progressive movement is aiming to stake out a left flank of a debate that has long been dominated by centrist-minded solutions. And the coronavirus pandemic has changed the economy, with the increase in work-from-home threatening the already-fragile wage tax, and an infusion of federal aid giving the city wiggle room in its budget.
“It’s terrible that the pandemic is the thing that gets us to focus on this, but it’s a positive side effect,” said Paul Levy, who leads the Center City District, which promotes the success of downtown and was central to the last major push to reshape Philly’s tax structure. “That’s what’s forced this debate, and that’s good.”
Next year’s mayoral race, for which five Council members are considering a run, will see the divide over taxes reach new levels.
Councilmembers Derek Green and Allan Domb, for instance, believe lowering the wage tax will foster job growth, and would likely make business-friendly policy solutions a central campaign theme if they run. Councilmember Helen Gym, meanwhile, is part of the progressive push to reorient the city’s focus away from tax cuts and toward investing in social services. And technocratic Councilmember Maria Quiñones-Sánchez wants to continue her work reforming the business income and receipts tax.
But first, Council and the administration will hash out a compromise over tax policy for the next city budget in closed-door meetings that are ramping up now. They must reach an agreement by the end of June.
Wage tax woes
In 1939, Philadelphia became the first city in the country to enact a wage tax. It was supposed to be a temporary measure to see the city through the Great Depression, but it stayed on the books and became the root of a tax system unique among major U.S. cities.
Philadelphia’s 1.3998% property tax rate — of which 55% goes to the school district, and 45% to the city — is lower than most local governments’. Its wage tax rate — 3.8398% for city residents, and 3.4481% for people who work in the city but live outside of it — is the highest among big cities.
In this year’s $5.6 billion budget, the city projects it will take in $719 million in property tax revenue and $1.5 billion from the wage tax.
This year, Kenney is proposing reducing the wage tax rate for city residents to 3.7% over two years, while addressing rising property assessments by increasing the homestead exemption from $45,000 to $60,000, and adding funding to programs that help low-income Philadelphians hold on to their homes.
Council will likely go further on property tax relief, potentially increasing the homestead exemption to the legal maximum of $90,000, and some members are less eager to take a significant chunk out of the wage tax.
No major proposals on the business income and receipts tax have been made public, but business groups are pushing Council to lower or reform it.
Critics of the wage tax say it pushes jobs to the suburbs and subjects the city budget to unnecessary volatility because it is more responsive to economic ups and downs than property taxes. A succession of Philadelphia mayors beginning with Ed Rendell has followed a policy of small annual cuts to the wage tax, but it remains the highest in the nation.
The wage tax and the city’s proclivity for enacting new levies — in the last 10 years alone, Philadelphia has created new taxes on cigarettes, sugary beverages, and construction — have turned the notion that Philly is a high-tax city into conventional wisdom.
But progressives are now challenging that assumption. Marc Stier, director of the left-leaning Pennsylvania Budget and Policy Center, in April published an analysis in the Philadelphia Citizen showing that the city’s overall tax burden is in the middle of the pack when compared with peer cities.
At $4,302 per person, Philadelphia’s annual tax burden ranked 13th out of the 30 largest U.S. cities, Stier found. Past analyses showing Philly with extraordinarily high tax collections, he wrote, failed to take into account Philadelphia’s status as both a city and county.
Levy responded with an essay of his own, arguing that it was misleading to focus on the per-capita dollar value of the city’s tax burden instead of tax rates that drive businesses out of the city.
In many ways, the writers were talking past each other: It is true Philadelphia has an unusually high wage tax rate, and it is also true Philadelphia overall is not one of the most highly taxed cities.
A new group called Tax the Rich PHL wants city leaders to focus on better funding services instead of making the city more business-friendly through tax cuts. Led by Arielle Klagsbrun, who managed Councilmember Kendra Brooks’ historic 2019 win for the Working Families Party, the group is backing Brooks’ wealth tax proposal, which would capture up to 0.4% of Philadelphians’ direct holdings in stocks and bonds.
While the tax appears unlikely to pass this year, progressives are hoping it helps to reset the debate with a vision for what progressive taxation could look like in Philadelphia.
Strangely missing from the discussion is the Tax Reform Working Group, which was convened last year by Kenney and Council. Jim Engler, Kenney’s chief of staff, said the group met several times but failed to reach consensus.
“It was really good to have those discussions and have a shared understanding of the challenges that we face, but when you have these discussions I don’t know that there’s really one perfect answer,” Engler said.
Debates over Philadelphia’s tax structure tend to scramble ideologies.
Levy and the business community, for instance, have long lobbied for a substantial reduction in the city wage tax rate despite the tax being a major reason Philadelphia has a regressive tax structure. He even helped lead a major push to replace wage tax revenue with an increase in commercial property taxes.
Due to the Pennsylvania Constitution’s “uniformity clause,” which requires all taxpayers to be treated equally, Philadelphia cannot enact a progressive structure for the wage tax by taking a greater percentage from high earners, as the federal government does with the income tax.
That means low-income workers pay the same percentage of their wages as high-earners, placing a greater burden on the livelihoods of the working poor because wealthy people tend to take in more of their income from investments that are not taxed at the local level.
Many progressives, meanwhile, resist calls to cut the wage tax, arguing the city should focus on ways to increase funding for city services instead of cutting taxes. But they are loath to endorse increasing the property tax — which would make the city’s tax structure more progressive, because people with more valuable property holdings would pay more — due to concerns such a hike would accelerate gentrification.
After seeing assessments skyrocket in her West Philadelphia-based district, for instance, Councilmember Jamie Gauthier this year floated the idea of responding by lowering the property tax rate, which could help some homeowners in her district but would disproportionately benefit rich Philadelphians and developers overall.
Gauthier says she’s not actively pushing to lower the rate now but supports a property tax relief package introduced by Councilmember Kenyatta Johnson.
The city, she said, needs to focus on growing revenues to fund city services instead of cutting wage and business taxes.
“We’re trying to come out of a pandemic. City services have fallen down over the past two years, and we need to get back to offering high-quality services in an equitable way,” she said. “We need to support our communities, and I think our tax policy has to be looked at through that lens.”