Nutter unveils tax incentives for some businesses

Mayor Nutter today said his administration will experiment with new tax policies to retain research and development firms and the growing video gaming software industry.

In an speech before the Greater Philadelphia Chamber of Commerce, Mayor Nutter announced two pilot programs aimed at making the city's vilified business-privilege tax less onerous for those two sectors.

Officials said the programs don't require City Council approval, and will be introduced by the Revenue Commissioner as new regulations in the spring. Both proposals will be reviewed annually, the mayor said.

First, Nutter will alter the basis of the city's business income tax on income derived from scientific research and development. Companies involved in research and development are currently underrepresented in the city's economy, Duane Bumb, the city's senior deputy commerce director, said in an interview.

The new program looks to eliminate barriers to those R&D companies which might otherwise locate in the city.

The barrier is the existing business tax based not just on sales, but on property and payroll in the city. That means a company with headquarters and employees in the city pays more taxes than a company in the suburbs with the same sales figures in the city. The result: an incentive for a company to relocate outside of Philadelphia.

Nutter told the chamber during its annual mayoral luncheon, held at the Philadelphia Marriott Downtown, that the change would base the business tax solely on sales - and not on property and payroll. The change would remove "a disincentive to locate in our city," he said.

The program is not expected to generate more tax revenue in the short-term or have a real impact on next year's budget.

In October, the Mayor's Task Force on Tax Policy and Economic Competitiveness recommended that such a policy be adopted for all firms doing business in the city.

Also announced today was another experimental change to tax policy. Currently, the city taxes manufacturers only on the products they sell in Philadelphia, known as "market-based sourcing."

But service companies pay tax on all the services they sell, whether in the city or beyond.

Nutter said he would target the "computer systems design firms" for a change in tax policy, taxing those companies only their Philadelphia sales.

The Mayor's Task Force, which also recommended a shift to "market-based sourcing," reported that it would lower the tax burden on local companies, and help the city attract national and international companies.

The Task Force looked at five of 11 states who have implemented market-based sourcing - Pennsylvania has considered it statewide but not adopted such a policy - and found that it would not significantly change the amount of revenue raised.

Bumb said there appears to be a cluster of recent college graduates in and around Old City involved in gaming and other software programming with an international clientele - "A whole cottage industry . . . that looks like it is positioned for explosive growth."

The pilot program would encourage that expansion.

The tweaks to the business-privilege taxes are moves in the right direction, observers said, but do not address the larger issue of reducing and eventually eliminating the tax.

"Anything that becomes a little more pro-growth in Philadelphia is a good thing," said Kevin Gillen, vice president of Econsult Corp., which has made extensive studies of the city's tax policies. "It's a small step in the right direction but doesn't get us as close to the finish line as we need to be."