Testimony: The Best Way to Improve Philadelphia's Business Climate? Fund the Schools.

The following is testimony presented by Sharon Ward to the Philadelphia City Council Finance Committee on December 11, 2013 on Bill 13-0530.

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Thank you for the opportunity to speak today. I am the Director of the Pennsylvania Budget and Policy Center, a nonpartisan research and advocacy organization that focuses on tax and budget policy. We review tax policy proposals for impact on revenue adequacy and on tax fairness.

I appreciate the work of Councilmembers Green and Quiñones-Śanchez to stimulate a dialog about improving Philadelphia’s business climate. I believe that a robust discussion of this important topic must be broadened include the whole range of issues that influence business climate. Education, workforce training, public safety, transportation, and quality of life are all factors that influence business location and retention decisions, yet they are seldom part of the discussion. And because business tax reform has the potential to reduce revenue available for these critical functions, they too should be part of the mix.

The proposed legislation essentially proposes two tax shifts, in the short term between businesses who are might see their tax liability change as the city replaces its net income tax with a higher gross receipts tax, and in the longer term a tax shift from business to residential taxpayers.

For this reason we support further analysis of this proposal to determine its impact on tax liability for different classes of business, on employment and on tax revenue. I would also suggest that the analysis include changes in the distribution of taxes between business and individual taxpayers and an incidence analysis to look at changes in taxation for different income groups.

This analysis can help Council quantify the impact of the proposed rate changes and determine whether it is substantial enough to be worth the shift in tax incidence and loss of revenue.

A recent example from Pennsylvania will help to illustrate why such an analysis is critical. In February, 2013 Governor Tom Corbett proposed a business tax reform that included a 30% reduction in the state’s Corporate Net Income Tax, elimination of the very low Capital Stock and Franchise tax (very close to a business property tax) and other tax changes long sought by the business community. Like this bill, the tax rates would phase down, in this case, over 18 years, at a cost to the Commonwealth of about $819 million. The economic analysis prepared for the Commonwealth concluded that it would result in a net gain of 18,000 jobs over 12 years. This large tax cut would increase employment by three-tenths of one percent, and reduce unemployment from 8.1% to 8.0%. To put the employment impact in perspective, the education cuts enacted by the Governor in 2011 led to a loss of 20,000 jobs in the education sector in just two years. State lawmakers did not adopt the proposed tax reduction.

Why such a small impact? Because the bulk of the savings from tax rate reductions would be spent out of state. The vast majority would go to multistate corporations that would distribute the tax savings to shareholders or spend it to expand operations where it would be most profitable, out of state or overseas. The same will likely be true in Philadelphia. Tax rate reductions are a blunt rather than a targeted instrument. They provide a windfall to many companies that have neither the wherewithal nor the interest in creating jobs. In fact, tax reductions may have the perverse impact of reducing employment by replacing existing workers with new, more cost effective equipment and machinery.

Pennsylvania’s experience with business tax reduction is instructive. Since 1998, the Commonwealth has reduced taxes to the tune of $3 billion annually. These large tax reductions have not had the desired impact. When business tax reductions were first enacted Pennsylvania ranked 27th in job creation. By 2010 we had fallen to 34th.

Philadelphia has had the tax reduction discussion many times in the past decade, and in 2003 empaneled a Business Tax Reform Commission which issued its final report in November, 2003. An econometric analysis prepared by Econsult, which looked at the revenue, income and employment impacts of various tax options favored by the Commission concluded the following:

“Our econometric and simulation analysis indicates that there are significant, positive impacts of reducing tax rates in the City—especially the gross receipts tax and the wage tax rates. In fact, from a purely economic point of view, the city economy would expand by shifting tax collections away from the gross receipts and wage taxes and shifting toward property taxes.”[1]

I bring this to your attention to remind you that for the better part of a decade the most hated business tax was the Gross Receipts Tax, which is now proposed to grow. I also want to make clear that both the intent and the inevitable outcome of business tax reduction is greater reliance on residential property taxes to pay for city services.

Why the reversal in position? First it was the Gross Receipts tax that was the drag on growth, now it is the tax on business income. How are citizens to trust the analysis of the problem or have faith that the proposed solutions are in their interest?

Many things have changed since the city began business tax reduction in 1996. The first is that for the decade leading up to the great recession in 2007, Philadelphia was reducing taxes, while virtually every municipality in the Pennsylvania was raising them. New Jersey raised income, sales and property taxes during that period as well. So Philadelphia’s relative position has improved, even with recent property and other tax increases enacted during the recession.

Another change is that Philadelphia, like New York City, saw a large increase in college education young people between 2006 and 2010. That change is evident throughout the city. Those young entrepreneurs are not deterred by the high relative tax rates in New York or Philadelphia.

The young people aren’t moving to the suburbs, many don’t even drive. What is necessary to keep them in the city is to fix the schools.

So I urge you to move slowly, and consider whether the number of jobs that will be created, once that number is quantified, is worth the price.

Thank you for your consideration.

Endnotes

[1] Econsult Corporation. Choosing the Best Mix of Taxes for Philadelphia: An Econometric Analysis of the Impact of Tax Rates on Tax Bases, Tax Revenue and the Private Economy. October 2003. Accessed at: http://www.philadelphiataxreform.org/