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Council members' plan would change business-tax structure

WHEN JOE WEISS, chairman of the software-design firm Electronic Ink, heard about business-tax legislation cooked up by two freshman City Council members, he was shocked.

WHEN JOE WEISS, chairman of the software-design firm Electronic Ink, heard about business-tax legislation cooked up by two freshman City Council members, he was shocked.

"When I heard the proposal, I was incredulous," said Weiss, whose Center City firm employs 80 people.

And for good reason. Council members Bill Green and Maria Quinones-Sanchez have been working on a plan that would reverse a 14-year effort to reduce a tax on businesses' gross receipts.

But after a conversation with Green, Weiss has come around, at least part of the way.

"I talked to the councilman and I listened to his explanation, and now I have an open mind to listen," said Weiss. "He presented some numbers that made it look like his position is a positive one."

For Green and Quinones-Sanchez - who are expected today to introduce legislation that would radically change the city's business-tax structure - hearing that someone like Weiss has an open mind is probably a good start.

How it works

The city's business-privilege tax has two parts - a gross-receipts portion, which taxes firms on their sales, and a net-income portion, which taxes profits.

Based on a long-held belief that the gross-receipts portion is unfair because it charges businesses even when they lose money, Council and the mayor have been gradually reducing the gross-receipts tax since 1995.

But Green and Quinones-Sanchez argue that the current setup penalizes city-based firms and lets national retailers get away with paying little or nothing. That's because the tax on profits applies only to businesses headquartered in Philadelphia. Big chains, like Home Depot or Wal-Mart, pay nothing because they aren't based here.

Green and Quinones-Sanchez are proposing a five-year phase-out of the tax on profits in favor of a higher gross-receipts tax to keep revenues stable.

Both argue that such a system would remove the disincentive to locate a business in the city and spread the tax burden over more businesses.

"We believe we're going to create more jobs and send a message to the world that Philadelphia is open for business," said Green.

To protect smaller businesses and startups, the Council members want to exempt the first $100,000 of sales from any taxes. And, to protect grocery stores, they plan to provide an exemption for those selling fresh food.

"If people are looking to start up businesses, we want to provide people with an incentive," Quinones-Sanchez said.

Mayor Nutter, who has long been a champion of reducing the gross-receipts tax, said he still needed to see more research on how the change would affect businesses.

"Certainly it is a creative idea, but it is a different way of looking at tax policy," Nutter said. "We need to know about the impact."

What does business think?

In the business community, the pitch so far has met with mixed reactions.

Danilo Burgos, president of the Dominican Grocers Association, said he thinks the $100,000 exemption would benefit many of his more than 300 members.

"The small businesses - in our case, mom-and-pop businesses - those types of businesses are the ones that are going to benefit the most," Burgos said. "A lot of businesses in the first couple years, it's hard to break that $100,000."

And Ned Rauch-Mannino, director of policy and programs at the Urban Industry Initiative, a city-sponsored agency that supports manufacturers, said the proposal could aid manufacturing companies that sell goods outside the city, because outside sales aren't subject to the gross-receipts tax.

"Going forward, this bill could be a great advantage to any company doing the great majority of their business outside Philadelphia, bringing profits back to Philadelphia," said Rauch-Mannino. "Every one of the companies I have met with sees a significant increase [in profit] from the change."

But Rob Wonderling, president of the Greater Philadelphia Chamber of Commerce, stressed that there will be winners and losers under the plan.

"Clearly, it is a tax shift, not a tax cut. The result of that oftentimes, particularly in a recession, is it may have unintended consequences," said Wonderling, noting that car dealers or hotels may fare poorly.

Ed Grose, executive director of the chamber of commerce, said his members would need to run the numbers to see how they would fare. He also noted that the business tax isn't the only issue weighed by companies considering Philadelphia as a base.

"The Philadelphia hotel industry agrees with Council that Philadelphia needs to become more business-friendly to attract more corporations," Grose said. "However, just changing the business-privilege tax alone won't make Philadelphia more business-friendly. There are other taxes that are part of the equation."

Green agreed that there are other taxes confronting businesses, but noted that the wage tax is already being decreased.

"All those levers we can continue to move," Green said. "We're focused on all of them, but we're doing this first."

Comcast executive David L. Cohen, who serves as board chairman of the chamber of commerce, questioned the plan, noting that the city used to have a higher gross-receipts tax.

"There is a general perception around fairness that taxing profits is more fair than taxing revenues and receipts. There's a logic to that," Cohen said. "We used to have [a higher gross-receipts tax]. It was called the mercantile tax. There was widespread unhappiness and dissatisfaction."