Council taking two weeks to consider business-tax revisions

Too "dense" to digest over the course of a two-day hearing, a controversial proposal that would profoundly alter the way Philadelphia taxes business will see no City Council action for at least two weeks, ensuring that it will not pass before year's end.

Fellow Council members are clearly intrigued by the bill from Council members Maria Quiñones Sánchez and Bill Green, which purports to shift a third of Philadelphia's $368 million business-privilege tax burden to companies outside of the city.

Over 11 hours of hearings Tuesday and Wednesday, the sponsors presented their plan to shift the focus of taxes from business profits to business sales.

The two-week delay will allow opponents to ramp up their lobbying efforts, and sources privately worried Wednesday that the bill had missed its best chance to come out of committee. Green and Sánchez said they would continue to make their pitch that the bill would help small city-based businesses, and encourage companies to build headquarters here without worrying about giving back a chunk of their profits to the city.

Of the $368 million in business-privilege taxes collected in the last fiscal year, about 75 percent was taken from company profits, or net income, and 25 percent from sales, or gross receipts.

Because only sales within the city are taxed, and companies outside the city can legally write down their profits to escape the net-income tax, the tax burden falls unfairly on city businesses, the two Council members argue.

Their proposal, over the course of five years, would eliminate the net income tax, currently 6.45 percent, entirely. To keep the same level of tax revenue coming in, they would quadruple the gross-receipts tax, from $1.42 per $1,000 of sales to about $5.44 per $1,000 sales, using updated figures provided Wednesday by Finance Director Rob Dubow.

But members are also troubled about the inherent risks in a plan that means large tax increases for industries such as hotels, and large decreases for law firms, and others. Dubow called the plan a "gamble" that the city cannot afford to take in a weak economy - if ever.

"Dramatically increasing the gross-receipts portion of the [business privilege] tax would generate real costs for many important industries and businesses that are already suffering through the Great Recession. These added costs are likely to result in job loss for Philadelphians," Dubow testified Wednesday.

The most difficult question to answer is whether the jobs lost by some industries - estimated by Wharton professor Robert Inman to be as much as 75,000 - would be replaced by companies who are better able to compete under the new tax structure.

Also at issue is whether the city should favor high-profit companies over low-margin companies, most of whose employees live in the city.

It was not clear that the sponsors had enough votes Wednesday to get the bill out of the Committee of the Whole. Council leadership asked for more time to study it, Sánchez and Green said after the hearing.

The hearing will reconvene at 2 p.m. Dec. 15, meaning it has no chance for a final vote before Jan. 27, following the Council's six-week winter recess.

Green described the proceedings, loaded with charts, arcane tax policy, and the high-level economic debate, as "dense."

"We have waited two years . . ." Green said.

"So giving our colleagues two weeks . . . is important," Sánchez said.

Making the case for the Council members on Wednesday was Stephen Mullin, whose company, Econsult Corp., analyzed the issue for Council. Mullin was finance director and commerce director under Mayor Edward G. Rendell.

Conventional wisdom among business leaders over the last decade had been to target the gross-receipts tax for elimination first, as it taxes even businesses that are not profitable. In response Council has passed legislation to wipe out that tax by 2022, reducing the net income tax to 6.0 percent over the same time period.

Mullin acknowledged that he, too, had once been fixated on killing wage taxes over the gross-receipts tax. "I think this was my single biggest mistake as Commerce Director," he said.

Business owners who pay city taxes can calculate the estimated impact on their business at www.forwardphiladelphia.com, set up by the Council members and paid for with campaign funds.

The Nutter administration's analysis of the winners and losers in the proposal is at www.phila.gov/finance/.