It’s usually tax hikes that are controversial.
But Philadelphia Mayor Jim Kenney’s proposed cuts to wage and business taxes quickly became one of the most hotly contested issues this week as City Council began considering his $5.2 billion spending plan.
Kenney says the cuts would help entice workers back into offices and help the city and its economy recover from the coronavirus pandemic. But an array of lawmakers pushed back during the first two days of budget hearings — especially about a wage tax reduction for suburban commuters — saying city resources could be better spent on needy residents than affluent commuters.
“Why would we be rewarding this group by lowering their wage tax rates?” Councilmember Cherelle Parker said Tuesday. “They don’t live in the city of Philadelphia, and now some of them won’t ever be returning to Philadelphia to work. … So instead, why wouldn’t we be focused on some of the Philadelphians who both live here and they work here?”
Progressive Council members and activists expressed skepticism of the tax cuts when Kenney presented his plan last month. But several more moderate members, including Council President Darrell L. Clarke, shared similar concerns this week — signaling broader opposition to the proposal.
It’s somewhat unusual during city budget negotiations for lawmakers to oppose tax cuts. The debate this year is linked to discussions about how to best promote economic recovery and racial equity as the pandemic wanes and the city spends $1.4 billion in federal stimulus money. Council must approve a budget by the end of June.
Kenney’s proposed tax cuts would cost the city an estimated $180 million over the next five years through reductions in the resident and non-resident wage tax rates, as well as the business income and receipts tax rate. Some lawmakers questioned whether across-the-board, modest tax cuts — even for residents — are more important than the need to fight poverty, reduce gun violence, and restore services that were cut last year.
“The administration did a very scattershot approach as opposed to targeted approach,” Councilmember Derek Green said during Tuesday’s hearing.
City Finance Director Rob Dubow said he understands the concerns and is open to more discussion about the city’s tax structure. But he also defended the proposal, saying the cuts are important to make the city more resilient during economic downturns by reducing reliance on wage tax revenue, and encourage job creation and business growth.
“A number of studies have shown that both the wage tax and the business tax cost us jobs and that if we reduce them, that helps create more jobs that benefit the city in the long term,” Dubow told Council.
While city officials did not specify how many jobs they thought the tax cuts could create, Budget Director Marisa Waxman cited a study that concluded that previous tax cuts, between 1996 and 2008, resulted in 25,000 additional jobs for the city.
The impact on individual taxpayers and businesses would be modest. The median tax reduction for the next fiscal year would be $15 for residents and $20 for nonresidents, Waxman said. And the business tax cut would save $1,000 for a business with annual profits of $750,000, she said.
“It’s not so much a plan designed for the individual wage earner who has a job, but it is around creating jobs here for folks who don’t already have them,” Waxman said.
Kenney administration officials are also concerned with the long-term impact of the pandemic. They project that 15% of suburban commuters will never return to city offices after working remotely since the coronavirus shutdown began. That shift alone will cost the city about $100 million a year in lost revenue, Dubow said. While many of those workers will never return, Kenney administration officials hope they can lure at least some back with lower tax rates.
Clarke said Tuesday that keeping the nonresident tax at its current rate could “free up some dollars” to provide services to residents, and he cast doubt on the idea that a cut was necessary to stimulate the economy. Suburban commuters tend to make more money than city residents, Clarke noted.
“If you want to live in the suburbs, that’s all fine,” Clarke said. “But I’ve got to tell you that I really want that job that you currently have, if you’re working remotely, to go to a person that lives in the city of Philadelphia.”
Kenney administration officials have also acknowledged that a greater share of suburban commuters are white than the city’s population — and had previously cited racial equity as a reason for increasing the nonresident wage tax rate last year. This year’s proposal would reverse that hike and add an additional cut.
Councilmember Allan Domb, a condominium magnate who often supports business-friendly policies, disagreed with his colleagues. He has pushed for even steeper reductions to wage and business taxes, and introduced legislation last month that would do so.
“These tax adjustments are an investment in the economic growth of the city,” Domb said Tuesday, adding that the city needs to do more to attract businesses and help them grow.
Councilmember Jamie Gauthier suggested a small break for taxpayers was not worthwhile — if that money could go instead toward reducing gun violence, fighting the coronavirus, and helping the city’s public schools.
“I would still question,” she said after listening to administration officials’ rationale, “whether this is a good decision in this moment.”