REGARDING the commentary by our City Council colleague Jim Kenney and City Controller Alan Butkovitz about the proposed business-tax reform, we're happy to engage in a policy discussion but also want to make sure that
readers get the facts.
FACT: The city's current business-tax strategy is picking "winners and losers."
The winners are those businesses that access the city's $60 billion marketplace and 1.5 million residents without making investments in property or employees here and whose tax burden is falling to zero under our current course. The losers are the local businesses and residents having to shoulder an unfair and growing tax burden.
FACT: The cited jobs analysis is fatally flawed because it looked at only one side of the equation (raising the gross-receipts tax) and didn't consider the positive job-creation effects of eliminating the 6.45 percent net income tax, a key component of the proposal. Of course we agree that raising the gross-receipts tax and leaving everything else constant (the scenario the analysis assumes) would cost jobs.
But that's not what we propose. By failing to consider the affect of eliminating the net income tax (everyone agrees it would be positive), the analysis is essentially meaningless.
So let's listen instead to an expert who did consider both sides of the equation, renowned economist Mark Zandi, who concluded: "eliminating the net income tax will have a more positive effect on Philadelphia's economy than the negative effect of raising the gross receipts tax."
FACT: The high-rate net income tax costs the city jobs every day as it drives employers out of the city and new businesses to not locate here. During hearings on the reform, a witness testified about trying to bring three large businesses to the city last year, creating 2,000 new jobs. Each business decided not to come because of the net income tax. Residents need only look across City Avenue or along the Route 202 corridor to see how the net income tax is driving businesses and jobs out of the city.
FACT: Based on the construction sector's own analysis, the proposal will result in savings to construction firms. During hearings, some representatives of the sector testified in support of the reform, and those who opposed it acknowledged that the current structure puts city-based contractors at a competitive disadvantage when bidding for work.
FACT: The hotel sector is a perfect example of what's so wrong with our business tax structure. Based again on the sector's own analysis, two hotels of the same size have wildly different tax burdens, with a Philly-based hotel paying 700 percent more in business taxes than its non-Philly-based competitor across the street that's legally avoiding the city's business tax.
Under the reform, competing businesses would pay the same tax on the same sales.
The total business tax cost under the reform will be a mere 80 cents on an average room charge. As the hoteliers acknowledged during the hearing, no customer is going to stay in Conshohocken or Cherry Hill rather than Philadelphia to avoid that 80 cents.
And with respect to hotel construction, the industry also testified that no hotel is going to be built or not built because of this tax change.
FACT: The reform will help retail, manufacturing and other labor-intensive sectors. The city has the opportunity to use its existing supply of industrial land and its underemployed workforce to tap into the huge growth potential in the green tech/clean tech sector. As a recent report supported by the city concluded, "we cannot wait to act: this historic opportunity will pass us by if we do not move swiftly" to assist manufacturing. The proposed reform does just that.
FACT: The reform will not cost the city $23 million a year. The Finance Department hasn't yet determined what tax rate is needed for the reform to be revenue-neutral. As soon as it does, we'll put that rate in the bill - just as we've been saying we would do.
FACT: The reform is far from rushed. We've worked with the administration for two years to analyze the relevant tax-return data and consider any potential unintended consequences. The proposal has a five-year phase-in to let businesses and the city plan responsibly for the shift.
Finally, we think it's important to have this policy discussion, which is about long-range planning and goal-setting, separate from the city's annual budget debates, which often focus on short-term funding issues.
With some facts on the table, we hope our colleagues will be willing to talk about the underlying goals: leveling the playing field for Philadelphia businesses, helping small businesses and encouraging entrepreneurs, and creating new jobs by generating economic activity, goals we hope all elected city officials would support.