Center City report: Overhaul tax structure

By measures big and small, Center City is booming, but if Philadelphia does not overhaul its tax structure, it will miss opportunities to keep up with other cities as the economy recovers, according to a report issued Thursday by the Center City District.

Philadelphia has transformed a decaying downtown with minimal nightlife into a vibrant area where people enjoy world-class food, shop at trendy boutiques, and, increasingly, live close to where they work, according to the district's 2012 State of Center City report.

But, says Paul Levy, chief executive of the Center City District, best known for raising revenue from businesses to pay for street cleaning and other improvements, Philadelphia's work is not done.

"Tax reform is the way to get a lot more cranes in the skyline and get more people back to work," he said.

He acknowledged that the call for reducing wage and business taxes here has resounded for decades, but said the city may be uniquely positioned to accomplish it now. The Actual Value Initiative promoted by Mayor Nutter, which would tax properties based on their market values, could create the confidence to shift the city's primary tax burden to real estate and away from wages, business income, and receipts, Levy said. He added that the change must include protections against big jumps in tax bills for long-term homeowners and people with modest incomes.

In the last decade, Philadelphia has become more attractive as a place to live, drawing legions of young people. Although Philadelphia overall has fewer college graduates than other big cities, many of Center City's new residents have advanced degrees, creating a pool of workers that appeals to employers. The city also has good public transportation, a bonus in times of rising gas prices.

"Fuel costs are our friend," he said.

Housing prices in Center City rose 288 percent in the last 20 years, far outpacing the rest of the city. They also have remained relatively stable despite the housing downturn, the report says. Smaller signs of life abound. The number of outdoor cafés reached a record high of 273 in 2011, the report said.

But Philadelphia has lagged at the crucial task of producing office jobs, which generally pay better than most other work.

"Given the richness of amenities, an urban form aligned with 21st century values, and an unrivaled concentration of educational institutions providing a steady stream of graduates, there is no reason for our share of office jobs as a percentage of total private-sector jobs to languish at 19 percent, when New York enjoys a 27 percent share and Boston and Washington are at 31 percent and 32 percent respectively," the report said. "No reason except that business taxes alone impose a 19 percent burden that does not exist elsewhere in the region, depressing office rents far below the level required to support new development."

The predominance of jobs in the health-care and educational sectors can't make up for the shortfall of office jobs, Levy said. Universities and hospitals are exempt from many of the taxes that other businesses have to pay, and they already have large investments in buildings and campuses in the city that mean they are unlikely to move.

Workers, however, can choose to live in cities with lower wage taxes than Philadelphia's. Businesses, too, can locate to places where taxes are lower.

"We have to shift from taxing what is mobile to taxing what does not move," he said at a news conference about the report. Mayor Nutter had started reducing the wage tax, but then held it steady when the recession reduced city revenue. His administration plans to restart those reductions in the middle of next year, but the Center City District wants that to happen more quickly.

"The simple argument, it seems to me, is that taxes and wages depress demand. It's not that we have weak office demand," Levy said. "It's that we have a tax structure that deflects office demand to the suburbs. It causes the higher-wage jobs to move to the suburbs ... and that, I think, weakens one of the major sources of demand for retail."

Mark McDonald, a spokesman for Nutter, said the city had to balance the pace of tax reform against the need to finance city services. Already, McDonald said, Nutter decided to renew wage-tax reductions a year earlier than originally planned and had backed legislation from Council members Maria Quiñones-Sánchez, Bill Green, and Jim Kenney that reduced some business taxes and made businesses responsible for paying taxes only on sales within the city, a game-changing reform meant to retain and attract large companies.

Levy said that while Philadelphia's economy weathered the recession better than many other cities, data from the early part of the recovery show that growth here was slower than elsewhere, probably because the tax structure discouraged growth.

Contact Miriam Hill at 215-854-5520 or hillmb@phillynews.com, or follow on Twitter @miriamhill. Read the City Hall politics blog at www.heardinthehall.com.

Inquirer staff writer Troy Graham contributed to this article.