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Tax and regulatory reform can help small businesses survive and thrive in Philadelphia | Editorial

Even before the disruptions of the pandemic, it wasn't easy to be a small business in Philadelphia, where buying power in many neighborhoods is low and the cost of doing business is high.

A sign in the empty Old City General Store on Philadelphia's South 3rd Street in early December.
A sign in the empty Old City General Store on Philadelphia's South 3rd Street in early December.Read moreTOM GRALISH / Staff Photographer

The economic crisis caused by the pandemic has brutalized small businesses in Philadelphia, where proprietors and advocates have long complained that burdensome taxes, arcane regulations, and unresponsive bureaucracies stymie growth. Despite two decades of dramatically increased vitality in Center City and adjacent neighborhoods, Philly continued to lag behind comparable cities in job creation and other economic health indicators, such as overall income growth, long before the coronavirus hit. And a study released this year by Arizona State University ranked Philadelphia 71st out of 80 American cities when measured by the ease of doing business.

City officials say a continuing development boom, as well as the 11 straight years of job growth preceding the pandemic, demonstrate that businesses large and small can do well here. They point out that a major 2016 policy change exempted businesses from paying city taxes on their first $100,000 in revenue, an exemption that applies to about three-quarters of all small businesses in Philadelphia.

According to a recent Pew report, the city’s small and medium sized businesses generated 39% of all jobs, 30% of sales receipts, and roughly half of local business tax revenues.

Given the importance of such business development, it’s not clear why even more impactful cuts weren’t feasible during the recent good years that saw the city flush with new revenue and spending an additional $1 billion. Philadelphia surely should not miss the opportunity the current crisis offers to consider fresh strategies and bold steps.

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

Tax rates — yet again, Philly’s are among the highest in the country — are a major reason why starting, sustaining, and growing small businesses can be so difficult in this city.

Philadelphia has the highest local wage tax in America. The incremental cuts over the years aren’t enough. And despite a reduction in Business Income and Receipts Tax rate, from 6.45 to 6.2%, Philadelphia remains one of only a half-dozen big American cities to impose what critics call a ‘profitability penalty’ by collecting taxes not only on revenue, but also on net profits.

The tax code is not the only obstacle to business development. Streamlining regulations and bureaucratic demands should also be a priority. These challenges existed prior to the pandemic. The particular — and crushing — blows to business that COVID-19 has delivered to all business sectors also require more aggressive action.

Serious attention to evictions has focused on keeping people in their homes, but rent relief and programs to ease the burden on struggling businesses should also be part of the conversation. Congress should craft the next stimulus package to insure that a greater share of more relief goes to small businesses. In Congress’ first round of stimulus relief, an analysis found that larger businesses got the lion’s share of the funds in the Paycheck Protection Program.

It’s difficult to understand why complicated tax breaks and elaborate incentives for big, often out-of-town developers are sold to the public as an essential tool to attract investment, while straightforward steps to ease the burdens on small businesses are perceived as unaffordable budget-busters.