Philadelphia has the highest business taxes among the nation's 30 largest cities. But instead of reforming its tax structure, the city has clipped around the edges by creating the greatest number of exemptions and incentives. That mishmash is an admission that the city's tax system is broken.
There is scant evidence that the 21 exemptions and incentives that the city offers are working, according to an analysis by the Pew Charitable Trusts. Revenue losses due to the tax breaks have skyrocketed from an average of $14.9 million annually from 2001 to 2003, to $109.6 million annually from 2010 to 2012.
The Pew report rightly describes the lost revenue as forgone taxes because it is unknown whether the businesses receiving breaks would have located here or expanded without them. But the water doesn't have to be so muddy. New York and Washington perform regular analyses of their tax-break programs to see if they really are having an impact on their economies. Philadelphia, too, should regularly assess the effects of its tax deals for businesses.
It should be clear whether the programs work or should be scrapped, but the only way to know is through thorough analysis.
On the campaign trail last year, Mayor Kenney acknowledged the need to make better sense of the city tax system. His predecessor, Michael Nutter, left a good base to build on with the Actual Value Initiative, the evolving tax reform that has been setting more accurate values on residential properties.
The city's Office of Property Assessment is also reevaluating commercial, industrial, and institutional properties. Meanwhile, recent tax code changes that exempt companies from paying the gross receipts tax on their first $100,000 of receipts have simplified taxation for about 60,000 firms in the city.
Now the city should take advantage of the momentum that Kenney gained through his early success in getting a sweetened-beverage tax passed to conduct a thorough evaluation of all business taxes.
A recent Inquirer analysis pointed out another shortcoming of the current tax structure, which has allowed some commercial property owners to avoid paying the full 4 percent real estate transfer tax. Sometimes transactions are structured so the tax is paid against a property's assessed value, which can be much lower than its actual purchase price. Other times the transfer tax is avoided by having the seller retain partial ownership, so technically a sale didn't occur.
"One of the principles of tax economics is that if the tax is high, people find a way of moving around it," said Robert Inman, a finance professor at the University of Pennsylvania's Wharton School. That principle is much easier to apply when the city becomes an enabler by not regularly evaluating its exemptions and incentives.