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Philadelphia Tax Reform Commission

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					 Philadelphia Tax
Reform Commission




   Final Report
November 15, 2003
     Volume I
Third Printing
CITY OF PHILADELPHIA
TAX REFORM COMMISSION                                         EDWARD A. SCHWARTZ
1401 John F. Kennedy Boulevard                                Chair
Municipal Services Building, Suite 1440
Philadelphia, PA 19102-1602                                   RAYMOND JONES
Tel: (215) 686-2140                                           AL TAUBENBERGER
Fax: (215) 686-2123                                           Vice Chairs




                                                               November 15, 2003


To the Citizens of Philadelphia:

On behalf of the Philadelphia Tax Reform Commission, we are pleased to submit
this report containing our recommendations for fundamental tax reform.

When you proclaimed your dissatisfaction with the local tax system, your elected
officials empowered you to change it by creating an independent Tax Reform
Commission through a ballot referendum. This opportunity was not lost on the
nearly 170,000 Philadelphians who voted in November 2002 to create this
Commission to “recommend methods to reduce the taxes of residents, workers, and
businesses.”

The Commission has worked hard since January to develop its recommendations,
which were endorsed by Commissioners Armbrister, Cruz, Forkin, Garrison-Corbin,
Jackson, Jones, Mandel, Miller, Newell, Schwartz, Sorgenti, Taubenberger,
VandenBrul, and Weintraub. Commissioner Stein dissented.

Our most important recommendations are as follows:
   Restructure, simplify, and improve the real estate assessment process, while
   creating a Taxpayers’ Advocate to represent property owners in assessment
   appeals;
   Utilize buffering techniques to guard against large, unexpected property tax
   increases, advocate for state property tax relief, and increase awareness about
   existing tax relief programs;
   Phase in land-value taxation, reducing taxes for most residents while removing a
   key impediment to economic development;
   Adopt a budget-based real estate tax system to ensure that the City collects only
   the taxes it needs to provide valuable and essential services to residents;
   Over the next decade, gradually reduce and finally repeal the Business Privilege
   Tax, which is levied on both the gross receipts and net income of firms doing
   business in the city;
   Reform the Business Privilege Tax while this tax still exists, to level the playing
   field between companies inside and outside the city and between incorporated
   and unincorporated firms, and to help startup firms manage early operating
   losses;
   Accelerate the City’s program of reductions in the Wage, Earnings, and Net
   Profits Tax rates, to achieve a goal of equalizing the resident and nonresident tax
   rates at 3.25 percent by 2014, and further improve the competitiveness of
   Philadelphia as a residential and business location; and
   Invest at least $1 million in the Greater Philadelphia Urban Affairs Coalition’s
   Campaign for Working Families, to help return up to $150 million in annual
   federal and state tax credits that currently are not received by eligible low-income
   Philadelphians.

Our study of Philadelphia’s tax system demonstrates that as a city we tax what others
do not; our taxes are too high; and our taxes are unfairly imposed. We have also
found that Philadelphia compounds the problem of a high overall tax burden by
relying too heavily on wage and business taxes, the taxes that are most likely to drive
residents, businesses, and jobs from the city. The city’s incomparably high wage and
business tax rates have damaged Philadelphia’s economy over the past three decades,
ultimately reducing tax revenue and the ability of the City and School District of
Philadelphia to finance citizen services.

Our tax system is broken. It didn’t break overnight and it can’t be fixed overnight.
The recommendations in this report provide the City with a 10-year plan for
fundamentally reforming its tax system. To regain its competitive edge, the City
needs to abandon its historic piecemeal approach to tax reform, and adopt the
ambitious, comprehensive reform program recommended in this report.

We appreciate the opportunity to be of service to our great city and gratefully
acknowledge all of those who assisted us in our work. We stand ready to answer any
questions and assist in any manner you deem appropriate.


Respectfully submitted,

Edward A. Schwartz             Raymond Jones              Al Taubenberger
Chair                          Vice Chair                 Vice Chair
Acknowledgements

The Tax Reform Commission’s study of Philadelphia’s tax structure relied heavily on
the help of many organizations and individuals. We apologize in advance for anyone
we may have overlooked.

We would like to acknowledge the help received from several members of the
Mayor’s Cabinet, including: Joyce S. Wilkerson, Chief of Staff; James J. Cuorato,
Director of Commerce; Janice D. Davis, Director of Finance; Nelson Diaz, City
Solicitor; Philip Goldsmith, Managing Director; Maxine Griffith, Executive Director
of City Planning Commission; Debra Kahn, Secretary of Education; and Dianah
Neff, Chief Information Officer.

The following members of City government provided invaluable advice, information,
and research support: Liza Chau, Jim Haley, Mike Isard, Nancy Kammerdeiner, and
Joe Kots, Department of Revenue; Rob Dubow, Kristin Fairweather, Michelle Lai,
Sean McNeeley, Kevin O’Hagan, Peggy Van Belle, and Harry Wellerstein, Office of
Budget and Program Evaluation; Eugene Davey, David Glancey, Ron Hoppes,
Marty Levit, Barry Mescolotto, and Robert Nix III, Board of Revision of Taxes;
Christine Bak, Richie Feder, Cheryl Kritz, Jack Panitch, and James Zwolak, City
Solicitor’s Office; Thomas Bathe, Tony DiMartino, Bruno Moser, and Marisa
Waxman, City Controller’s Office;

Other individuals, from numerous City departments and agencies, assisted the
Commission. In particularly we would like to thank: Hugh Allen, Darwin Beauvais,
Tom Erickson, Dave Forde, and Derek Green, City Council; Debbie Beatrice, Pat
DeSanto, Roz Payne, Beth Wetzell, Linda McBride-Brock, Finance Department;
Beau Bradley, Jacob Fisher, and Jay McCalla, Mayor’s Office of Neighborhood
Transformation; Bernie Brunwasser, Water Department; Gregg Buber, Joan Decker,
Joe Doyle, Don Goodman, and Jeanne Reedy, Records Department; Robert
Danford, Sheriff's Department; Michael Dean, Michael Harris, and Ted Piech,
Mayor's Office of Information Services; William Dill and James Muller, Fleet
Management; Vince Dougherty, Mayor’s Business Action Team; Fran Dougherty,
Nancy Ploppert, and Tony Torre, Office of the Managing Director; Hal Fichandler
and Mary Ellen Milovsky, Office of the Mayor; Latifa Ford, Office of Risk
Management; Delia Gorman, Office of Labor Relations; Joe James and Andy Perez,
Department of Public Property; Maureen Kelly and Debbie Thompson, City
Planning Commission; Alba Martinez, Department of Human Services; Celia
O'Leary, Personnel Department; Marissa Phillip, Philadelphia Convention and
Visitors Bureau; Sam Rhoads, Philadelphia Industrial Development Corporation;
Sally Sanelli, Water Revenue Bureau; and Herb Wetzel, Redevelopment Authority;

We would also like to extend our thanks to a long list of individuals from outside
City government who assisted the Commission. These individuals include: Richard
Bendis, Innovation Philadelphia; Linda Berkowitz, Michael Harris, Wayne Harris and
Chris Ward, School District of Philadelphia; Greg Byrnes, PECO/Exelon; Donna
Cooper and Kate Philips, Office of the Governor; Morris Davis, M. Davis and
Company Inc.; Georgia Masters Earp, and Terry Gillen, Pennsylvania Department of
Community and Economic Development; Robert Ebel, The World Bank; Kendall
Fullard, African-American Chamber of Commerce; Amy Gill, and C. Daniel Hassell,
Pennsylvania Department of Revenue; Philis Goddard, Bob Lane, Paul Levy, and
Elise Vider, Center City District/Central Philadelphia Development Corporation;
Joe Golden, Philadelphia Gas Works; Ed Goppelt, Hallwatch; Ted Gwartney, Town
of Greenwich, Connecticut; Benjamin Howells, City of Allentown, Pennsylvania; Les
Hudson and Carol Scheman, University of Pennsylvania; David Hyman, Kleinbard
Bell & Brecker LLP; Robert Inman, Wharton School, University of Pennsylvania;
Tom Felix and Ken Jarin, Ballard Spahr Andrews & Ingersoll; Jim Jordan, SEPTA;
Michael Masch and Carol Moyer, Governor’s Office of the Budget; Kim McFadden,
Governor’s Action Team; Janet Milkman and Ann Marie Walker, 10,000 Friends of
Pennsylvania; Uri Monson and Joe Vignola, Pennsylvania Intergovernmental
Cooperation Authority; Dianne Reed, KPMG LLP; Greg Rost and Anne Nadol,
Temple University; Debbie Sills, Deloitte Consulting; Tim Monahan and Hether
Smith, Julien J. Studley, Inc.; Joshua Vincent, Center for the Study of Economics;
and Laura Weinbaum, Project HOME.

The Commission would like to acknowledge the contribution of the many citizens
and leaders who testified at the Commission’s two public hearings and provided
written testimony to the Commission. Additionally, we would like to extend our
thanks to the individuals who helped to arrange the Commission’s public hearings,
including: Alice Gillespie, Robert Johnson, and Dolores Lamana. We are indebted to
the individuals and organizations that helped to set up and host town meetings in
locations throughout the city. They include: Angela Burton, Terrence O. Devlin,
John Kent, Rev. William H. Levering, and Michael Silverman.

The Commission also appreciates the generous hospitality of four organizations that
provided meeting space for the Commission: the Wharton School of the University
of Pennsylvania, especially Susan Eggles; Schnader, Harrison, Segal and Lewis LLP;
KPMG LLP; and Temple University, especially Bill Parshall.

Written reports and oral presentations of our consultants were of critical importance
and greatly appreciated. Above all, the Commission would like to thank: Kevin
Babyak, John DelRoccili, Steve Mullin, Paul Neergaard, and Dick Voith, Econsult
Corporation; Kevin Gillen, Wharton School of the University of Pennsylvania;
Barbara Bisgaier, Mark Kahn, Dean Kaplan, and Michael Nadol, Public Financial
Management; Carol O’Cleireacain, Non-resident Senior Fellow, the Brookings
Institution; and Alexis McGill, Alexis McGill Associates.

Much of what we have done was possible because of the terrific work of legal interns
Jim Boyer, Yan Gao, Tim Leska, and research interns Lisa Bolotin, Mike Fabius, Eric
Prengel, Amir Shachmurove, and Helen Tam. Director of Communications Robin
Leary and Administrative Assistant Megan McCormick have also been indispensable.
Finally this report reflects the serious, thoughtful analysis of our research staff,
including Jody Bradwell, Steve Landis, and especially Mary Braun, who managed its
planning, writing and production from beginning to end. The old adage that we
could not have done this without them certainly applies here, and we would be
remiss in not acknowledging their enormous contribution.
Table of Contents                                                        i




 Table of Contents: Volume I

List of Figures                                                    iii

About the Philadelphia Tax Reform Commission                       iv
   Creation of the Commission                                      iv
   Commissioners, Advisory Committee,                              iv
      Working Groups, and Staff

Executive Summary                                                 viii

Section 1: The Vision                                               1
   The Vision                                                       1
   Today’s Reality                                                  3
   The Roadmap                                                      3

Section 2: The Guiding Principles of a Quality Tax System           5

Section 3: Historical Overview of Philadelphia’s Tax System        7
   The History of Philadelphia’s Wage Tax                          8
   The History of Philadelphia’s Business Taxes                   12
   The History of Philadelphia’s Real Property Taxes              17
   Philadelphia School District Dedicated Non-Real Estate Taxes   20
   Miscellaneous City Taxes                                       23
   The Impetus behind Tax Reform in the 2000s                     26

Section 4: The Need for Tax Reform                                28
   Why Taxes Matter                                               29
   Philadelphia’s High Tax Burden                                 30
   High Tax Rates Hinder Economic Prosperity                      33
   Philadelphia’s Peculiar Tax Mix                                34
   A Bad Tax Mix Dampens Economic Prosperity                      35
   Inadequate Property Tax Assessment                             40
   Demographics and Philadelphia’s Service Responsibilities       42

Section 5: Tax Reform Recommendations                             46
   Assessment System Reform                                       46
   Budget-Based Property Taxation                                 50
   Land-Value Taxation                                            51
   Property Tax Relief                                            53
   Commercial and Residential Tax Rates                           56
   Real Estate Transfer Tax                                       56
   Real Estate Non Utilization Tax                                57
   Use and Occupancy Tax                                          57
ii                                         Philadelphia Tax Reform Commission

     Net Income Portion of the Business Privilege Tax,              58
         Structural Change
     Business Privilege Tax, Administrative Reform                 60
     Eliminate the Business Privilege Tax                          61
     Wage Tax, Earnings Tax, and Net Profits Tax                   62
     Income Tax Relief                                             64
     Miscellaneous Taxes                                           65
     Fiscal Impact of Tax Reform Commission Recommendations        65

Section 6: Financing Tax Reform                                    67
   Economic Growth                                                 67
   Local Implementation                                            69
   Budgetary Discipline                                            72
   Commonwealth Cooperation                                        73
   Changing Philadelphia’s Tax Mix                                 75

Section 7: Tax-Related Economic Development Tools                  77

Section 8: Complementary Reform Considerations                     79

Appendices                                                         84
Appendix A:   Philadelphia Tax Reform Resolution                   85
Appendix B:   Philadelphia Tax Reform Ordinance                    94
Appendix C:   Outreach Efforts                                     97
Appendix D:   Total Tax Collections                                98
Appendix E:   Philadelphia Tax Reform Commission Resolution        99
Appendix F:   Survey of Philadelphia’s Business Community         103
Appendix G:   Legal Barriers to Tax Reform                        108
Appendix H:   City Income Tax                                     113
Appendix I:   Tax Exemptions for Low-Income Philadelphians        117
Appendix J:   Economic Growth Acceleration Bonds                  120
Appendix K:   Assumptions Behind Fiscal Impact Estimates          122
Appendix L:   Endnotes                                            127
Appendix M:   Selected Bibliography                               132
List of Figures                                                                  iii




 List of Figures

Section 4: The Need for Tax Reform
Figure 4.1: Philadelphia Local Tax Rates Compared to                        32
             Other Cities and Suburban Jurisdictions, 2003
Figure 4.2: Distribution of Tax Revenues in the Ten Largest
             U.S. Cities, 1997                                              34
Figure 4.3: Current Local Income Tax Rates in the Twenty Largest            35
             U.S. Cities (Maximum Rate in Cities With Progressive
             Income Taxes)
Figure 4.4: Gap Between Philadelphia Employment And                         37
             U.S. Employment Growth
Figure 4.5: Comparison of Property Values in Selected Cities, 2000         38
Figure 4.6: House Price Indices, Philadelphia City, Philadelphia Region,   39
             and U.S. Average, 1980-2003 (1980=100)
Figure 4.7: Average Assessment Error by Property Type                       40
Figure 4.8: Price Related Differential by Tract Residential Properties      41
Figure 4.9: Philadelphia’s Tax Burden Compared to Other Jurisdictions       43
             in Pennsylvania, Fiscal Year 2001 (Total Taxes Collected as
             a Percent of Market Value of Real Estate)
Figure 4.10: Philadelphia Versus Other Pennsylvania Counties,               44
             Key Demographic and Fiscal Variables

Section 5: Tax Reform Recommendations
Figure 5.1: Land-Value Tax Phase-In Schedule                                51
Figure 5.2: Business Privilege Tax Phase-Out Schedule                       62
Figure 5.3: Schedule of Income-Based Tax Rate Reductions                    63
            (Without State Aid)
Figure 5.4: Schedule of Income-Based Tax Rate Reductions                    64
            (With State Aid)
Figure 5.5: Fiscal Impact of Tax Reform Commission                         65
            Recommendations (Millions of Dollars)

Appendices:
Figure D.1: Total Tax Revenue, City and School District                    98
            of Philadelphia and PICA, Fiscal Year 2002 Actual
            and Fiscal Year 2003 Preliminary, Dollars in Millions
Figure F.1: Burden of Philadelphia Taxes on Respondents                    105
Figure F.2: Problems of Philadelphia Taxes                                 106
Figure G.1: Estimated Net Revenue Impact of City Income Tax                116
            (Without Cost of Administration)
iv                                               Philadelphia Tax Reform Commission




 About the Philadelphia Tax Reform
 Commission
Creation of the Commission                       Committee is composed of
                                                 representatives from 23 different
In November of 2002, Philadelphia                business, community, educational, and
voters were asked the following ballot           research organizations.
question:                                            The Commission was sworn in on
                                                 January 15, 2003 and released its final
Shall the Philadelphia Home Rule Charter         report on November 15, 2003.
be amended to provide for the creation,
appointment, powers and duties of an             ______________________________
independent Philadelphia Tax Reform              Commissioners
Commission which would recommend
methods to reduce the taxes of Philadelphia         Edward A. Schwartz
residents, workers and businesses in an             Chair
equitable manner in order to enhance                Raymond Jones
Philadelphia’s ability to compete with other        Vice Chair
jurisdictions in attracting and retaining new
residents, businesses and jobs, based upon the      Al Taubenberger
Commission's comprehensive analysis of              Vice Chair
taxation in Philadelphia?                           Brett H. Mandel
                                                    Real Estate Tax Chair
By a four-to-one margin, Philadelphia
voters supported the creation of the                Stewart M. Weintraub
first independent Tax Reform                        Business Tax Chair
Commission in Philadelphia’s history.               William R. Miller, IV
     The Commission is composed of                  Communications Chair
15 members—four members
appointed by the Mayor, four                        Clarence D. Armbrister
members appointed by the City                       Luis Cruz
Council President, one member
                                                    Thomas P. Forkin
appointed by the City Controller, and
one member appointed by each of the                 Patricia Garrison-Corbin
following: the African-American                     Melvin T. Jackson
Chamber of Commerce, the Greater
Philadelphia Chamber of Commerce,                   David Newell
Greater Philadelphia First, the Greater             Harold A. Sorgenti
Northeast Philadelphia Chamber of
Commerce, the Hispanic Chamber of                   Jonathan M. Stein
Commerce, and the North                             Andrew VandenBrul
Philadelphia Chamber of Commerce.
The Commission’s Advisory
About the Philadelphia Tax Reform Commission                                                        v


Advisory Committee                                           Philadelphia Building and
                                                             Construction Trades Council
       Action Alliance of Senior Citizens                    Philadelphia Council AFL-CIO
       of Greater Philadelphia
                                                             Tenants’ Action Group
       Asian-Americans United∗
                                                             Urban League of Philadelphia
       Consumer Education and
       Protective Association∗∗                              West Philadelphia Partnership
       Community Legal Services                              Wharton School of the University
                                                             of Pennsylvania
       Federal Reserve Bank of
       Philadelphia
       Fox School of Business and                       Working Groups
       Management of Temple
       University
       Greater Philadelphia Association                 Business Tax Working Group
       of Realtors
                                                        Stewart M. Weintraub, Chair
       Institute for the Study of Civic
       Values
                                                        Group Members
       Keystone Research Center                            Luis Cruz, Commissioner
       National Association for the                        Thomas P. Forkin,
       Advancement of Colored People,                      Commissioner
       Philadelphia Chapter                                Louise Francis, National
                                                           Organization for Women,
       National Congress of Puerto                         Philadelphia Chapter
       Rican Rights                                        Patricia Garrison-Corbin,
       National Organization for                           Commissioner
       Women, Philadelphia Chapter                         Robert G. Graff, Pennsylvania
                                                           Economy League, Eastern
       Pennsylvania Economy League,                        Division
       Eastern Division                                    Stephen Herzenberg, Keystone
       Pennsylvania Institute of Certified                 Research Center
       Public Accountants, Greater                         Jack E. Hunter, Jr., Pennsylvania
       Philadelphia Chapter                                Institute of Certified Public
                                                           Accountants, Greater Philadelphia
       Philadelphia Bar Association                        Chapter
       Philadelphia Citizens for Children                  Raymond Jones, Commissioner
       and Youth∗∗∗                                        Brett H. Mandel, Commissioner
                                                           William R. Miller, IV,
       Philadelphia Unemployment
                                                           Commissioner
       Project

  ∗
         Declined to participate.
  ∗∗
         By January 2003, this organization had ceased to function.
  ∗∗∗
         Philadelphia Citizens for Children and Youth replaced the Parents’ Union for Public Schools,
         which, by January 2003, had ceased to function.
vi                                    Philadelphia Tax Reform Commission

     Frederic Murphy, Fox School of   Wage Tax Working Group
     Business and Management of
     Temple University                Raymond Jones, Chair
     David Newell, Commissioner
     Jonathan M. Stein,               Group Members
     Commissioner                        Luis Cruz, Commissioner
     Harold A. Sorgenti,                 John Dodds, Philadelphia
     Commissioner                        Unemployment Project
     Audrey C. Talley, Philadelphia      Patricia Garrison-Corbin,
     Bar Association                     Commissioner
     Al Taubenberger, Commissioner       Robert G. Graff, Pennsylvania
     Herb Taylor, Federal Reserve        Economy League, Eastern
     Bank of Philadelphia                Division
     David Thornburgh,                   Stephen Herzenberg, Keystone
     Pennsylvania Economy League,        Research Center
     Eastern Division                    Brett H. Mandel, Commissioner
     Andrew VandenBrul,                  William R. Miller, IV,
     Commissioner                        Commissioner
                                         Pedro Rodriguez, Action
                                         Alliance of Senior Citizens of
Real Estate Tax Working Group            Greater Philadelphia
                                         Edward A. Schwartz,
Brett H. Mandel, Chair                   Commissioner
                                         Harold A. Sorgenti,
Group Members                            Commissioner
   Clarence D. Armbrister,               Jonathan M. Stein,
   Commissioner                          Commissioner
   Joseph P. Blake, West                 Al Taubenberger, Commissioner
   Philadelphia Partnership              Herb Taylor, Federal Reserve
   Luis Cruz, Commissioner               Bank of Philadelphia
   Robert G. Graff,                      David Thornburgh,
   Pennsylvania Economy League,          Pennsylvania Economy League,
   Eastern Division                      Eastern Division
   Michael Mikstas, Greater              Stewart M. Weintraub,
   Philadelphia Association of           Commissioner
   Realtors
   Edward A. Schwartz,
   Commissioner                       Financing Working Group
   Jonathan M. Stein,
   Commissioner                       Edward A. Schwartz, Chair
   Al Taubenberger, Commissioner
   David Thornburgh,                  Group Members
   Pennsylvania Economy League,          Clarence D. Armbrister,
   Eastern Division                      Commissioner
   Stewart M. Weintraub,                 Luis Cruz, Commissioner
   Commissioner                          John Dodds, Philadelphia
   Alan M. White, Community              Unemployment Project
   Legal Services
About the Philadelphia Tax Reform Commission                          vii

   Scott R. Douglass, Wharton            Staff
   School of the University of
   Pennsylvania                          Christopher Dwyer,
   Thomas P. Forkin,                     Executive Director
   Commissioner
   Patricia Garrison-Corbin,             Joan E. Kreider Bradwell,
   Commissioner                          Staff Attorney
   Robert G. Graff, Pennsylvania
   Economy League, Eastern               Mary L. Braun,
   Division                              Research Analyst
   Melvin T. Jackson,
   Commissioner                          Stephen K. Camp-Landis,
   Brett H. Mandel, Commissioner         Research Analyst
   William R. Miller, IV,
   Commissioner                          Robin Leary,
   Jonathan M. Stein,                    Director of Communications
   Commissioner
   William J. Stull, Fox School of       Megan McCormick,
   Business and Management of            Administrative Assistant
   Temple University
   Herb Taylor, Federal Reserve          Legal Interns
   Bank of Philadelphia                  James Boyer
   David Thornburgh,                     Yan Gao
   Pennsylvania Economy League,          Timothy Leska
   Eastern Division
   Stewart M. Weintraub,                 Research Interns
   Commissioner                          Lisa Bolotin
   Andrew VandenBrul,                    Michael Fabius
   Commissioner                          Eric Prengel
                                         Amir Shachmurove
                                         Helen Tam
viii                                      Philadelphia Tax Reform Commission




  Executive Summary
The Philadelphia Tax Reform               more than 430,000 residents since
Commission was created by a vote of       1970.
nearly 170,000 citizens to                    We believe that tax reform will
“recommend methods to reduce the          fundamentally transform
taxes of Philadelphia residents,          Philadelphia’s economy and increase
workers and businesses.” On October       prosperity throughout the region. We
15, 2003, the Commission voted 14-        envision a tax structure that is fair and
to-1 for a comprehensive overhaul of      simple, real estate taxes that reflect the
the city’s tax structure.                 true value of property, lower taxes on
     Our 15 Commissioners and 23          personal income, and an elimination
Advisory Committee members, a             of onerous business taxes on sales and
group from diverse backgrounds and        profits. Above all, we conceive of a
perspectives, spent 10 months and         tax structure that no longer inhibits
more than 10,000 hours conducting a       and impedes economic prosperity. In
comprehensive review of the city’s tax    crafting our recommendations, the
structure. The thousands of pages of      Commission has been guided by five
evidence we reviewed and the dozens       principles of local taxation:
of experts and citizens to whom we        competitiveness, equity, stability, neutrality
listened persuaded us that                and simplicity.
Philadelphia’s unique tax structure has
fundamentally damaged the city’s
economy. We have concluded that tax       The Need for Tax Reform
reform is a prerequisite to economic
recovery and prosperity in                Residents and businesses in the
Philadelphia and throughout the           United States are able to choose
region. We believe our                    locations based on the attractiveness
recommendations meet our charge of        of the overall package of public
reducing Philadelphia’s tax burden        services and tax levels offered by a
equitably, in order to improve its        locality. Philadelphia’s tax structure
competitiveness in attracting and         and high tax rates have a variety of
retaining residents and businesses.       causes, some of which the City cannot
                                          control. However, Philadelphia’s
                                          policy makers can act to reduce the
Our Vision and Guiding Principles         high overall level of taxation, improve
                                          the mix of taxes, and reform
The Commission agrees with former         inadequate real property assessment
U.S. Supreme Court Justice John           practices.
Marshall that, “the power to tax
involves the power to destroy.” In        Why Taxes Matter
Philadelphia, high tax rates and an           Although many factors influencing
unusual tax mix have contributed to a     business and resident location
loss of more than 250,000 jobs and        decisions remain constant from
Executive Summary                                                               ix

community to community within a           the Wharton School of the University
metropolitan area, tax levels can vary    of Pennsylvania calculated
dramatically. Businesses and residents    Philadelphians’ combined state and
can move within a region to avoid         local tax burden as 14.4 percent of
paying high local taxes while still       income, compared with a level of only
enjoying many of the region’s benefits.   9.0 percent in the Pennsylvania
There is general agreement among          suburbs. Numerous studies have
economists that local taxes have an       attempted to measure the impact of
important impact on economic              local taxes on Philadelphia’s
growth; taxes have a significant impact   employment, resident income,
on where individuals live and work        property values and business activity.
and where businesses locate and           This econometric research suggests
invest. Econometric analysis shows        that 61 percent of the decline in
that, for this reason, taxes have their   Philadelphia’s share of national
strongest impact on local                 employment (approximately 172,889
communities.                              jobs) between 1971 and 2001 could be
                                          attributed to the rise in Wage Tax
Philadelphia’s High Tax Burden            rates over that period.
     Because Philadelphia’s tax burden
is higher than that of competitor         Philadelphia’s Tax Mix Dampens
jurisdictions, the city has difficulty    Economic Prosperity
competing for and retaining residents,         Philadelphia’s unusually high
businesses, and jobs. Substantial         reliance on business and personal
evidence from econometric analysis,       income taxes is far more damaging to
surveys and anecdotal evidence,           the economy than a more traditional
indicates that the city’s high tax        revenue structure would be. In 1997,
burden has significantly reduced the      personal income taxes accounted for
size of its economy.                      33.3 percent of total tax revenue in
                                          Philadelphia, as compared to an
Philadelphia’s High Tax Rates             average of 8.5 percent for the 10
Hinder Economic Prosperity                largest U.S. cities. Business income tax
    The city’s tax rates are              revenue contributed 12.4 percent to
substantially higher than those of        Philadelphia’s tax revenues, versus an
other major cities and nearby             average of only 5.3 percent elsewhere.
suburban municipalities. Since the        In contrast, in 1997 property taxes
1990s, the City’s Five-Year Financial     made up just 19 percent of
Plan has acknowledged that                Philadelphia’s tax revenue, while
Philadelphia’s unusually high rates       overall U.S. cities with more than
make it difficult to compete for          300,000 residents obtained 40 percent
residents and businesses, and             of their financing from this source.
numerous studies confirm the                   Only eight of the 20 largest U.S.
existence of an unusual tax burden in     cities levy local income taxes, with
Philadelphia. The District of             Philadelphia’s 4.4625 percent rate
Columbia’s annual report on tax           standing at more than twice the
burdens in the largest U.S. cities        average; the city’s nonresident rate is
consistently ranks Philadelphia as one    higher than that of any other locality.
of the highest taxed cities in the        The gross receipts portion of the
nation. Economist Robert Inman of         Business Privilege Tax is six-to-nine
x                                           Philadelphia Tax Reform Commission

times higher than in the average            increased property values throughout
southeastern Pennsylvania suburb.           the city. As property values rise, it will
Only three of the nation’s 20 largest       be possible for the city to generate
cities tax the net income of                additional Real Estate Tax revenue
corporations, and one of those cities is    without increasing the tax rate.
phasing out the tax.                            In sum, a broad array of evidence
     With its heavy reliance on those       points to the conclusion that reducing
tax sources that are most likely to         Philadelphia’s reliance on wage and
drive residents, jobs, and businesses       business taxes could significantly
from the city, Philadelphia                 increase the size of its economy while
compounds the problems created by           maintaining a tax revenue stream
its high overall tax burden. Today’s        adequate to finance needed public
workers, customers and suppliers are        services.
highly mobile; as a result, high local
business and income taxes directly          Inadequate Property Tax
reduce business profits and encourage       Assessment
flight from the city. Because land is            Although the city economy would
immobile, the effect of property-based      benefit from a move towards
taxes on employment levels, income,         property-based taxes, Philadelphia’s
and business activity is smaller than       inaccurate and regressive property
that of taxes on personal and business      assessments must be improved in
income.                                     order to increase tax system equity
     The City’s Five-Year Financial Plan    and maximize the revenue-generating
demonstrates that the gap between           potential of this approach.
Philadelphia employment growth and               Philadelphia’s property
U.S. employment growth dropped              assessments miss the industry target
significantly after Philadelphia began      for accuracy by more than 50 percent.
reducing income taxes incrementally         Other older cities with similar housing
in 1996. Econometric analysis               stocks do significantly better. The
conducted by Econsult Corporation           City’s assessments are also several
for the Commission indicates that           times worse than comparable cities in
reducing local business and income          terms of equity, with lower-priced
taxes results in substantial increases in   homes typically assessed at higher
jobs, resident incomes, business            fractions of their value than higher-
activity, and property values.              priced properties. Households in
     Philadelphia’s low property values,    poorer Philadelphia neighborhoods,
below those in cities such as               like North and West Philadelphia,
Baltimore, Hartford, and New Haven,         actually face a higher property tax
are also a symptom of economic              burden relative to property values
distress that should be improved by a       than those in more affluent areas such
more attractive package of taxes and        as the Northwest, Northeast, and
services. Philadelphia’s low property       Center City.
values can be linked at least in part to         Problems with the property tax
the city’s high overall tax burden and      system prevent the city from
its inefficient mix of tax revenue          experiencing efficiency gains
sources. Economic theory and                associated with tax reform. In
research indicate that reforming            addition, the city’s assessment process
Philadelphia’s tax structure will lead to
Executive Summary                                                               xi

is complicated and creates distrust of     most effective if implemented as a
the tax system.                            comprehensive tax reform package.
                                           Except where noted, each of these
Demographics and Philadelphia’s            recommendations would take effect
Service Responsibilities                   beginning in fiscal year 2005.
     Taxes in Philadelphia support
public education, municipal services,      Assessment System Reform
and county level services. Despite the     Recommendations
city’s high crime and poverty rates, it
is responsible for the same range of       Recommendation 1: Separate the
county level criminal justice and          Property Assessment and Appeals
human services expenditures as other       Process.
Pennsylvania counties. As a result, the        To address citizen concerns about
tax burden in Philadelphia for county      the impartiality of appeals, create a
level services is seven times the          seven-member Property Assessment
median of other Pennsylvania               Appeals Board (the “Appeals Board”)
counties. The City cannot change its       of qualified individuals appointed by
service responsibilities or the            the Mayor, which would be separate
Commonwealth’s method for                  from the Board of Revision of Taxes
supporting county level services, but it   (BRT). The current system, in which
can make overall tax reductions, adopt     judges of the Court of Common Pleas
a more efficient tax mix, and improve      appoint BRT members, would
the system of real property                continue.
assessment. If these changes promote
economic growth and jobs and reduce        Recommendation 2: Establish a
poverty, they may also reduce the          Taxpayers’ Advocate.
need for poverty-related and crime-            Create a Taxpayers’ Advocate
related services over time and             nominated by the Mayor and
strengthen the city’s tax base.            approved by City Council to advocate
                                           for property owners in appeals,
                                           improve public understanding of the
Tax Reform Recommendations                 assessment and appeals process,
                                           monitor the quality of the assessment
The Commission’s recommendations           process, and review both the BRT’s
are firmly grounded in tax and             Assessment-Practice Principles and
economic theory. Throughout our            the Appeals Board’s practices and
research process, we also sought input     procedures.
from Philadelphia businesses,
community groups, residents, and City      Recommendation 3: Establish
agencies to judge whether these ideas      Accurate Land and Structure Values
resonated with stakeholders. We            for All Property Parcels.
consider them sound in principle and           As real estate assessments are
achievable in practice. Although we        integral to an equitable and well-
believe each of these                      functioning local tax system, the BRT
recommendations will improve tax           should establish accurate land and
competitiveness, equity, stability,        structure values for all property
neutrality, or simplicity, they will be    parcels in Philadelphia through more
                                           comprehensive and accurate data
xii                                         Philadelphia Tax Reform Commission

collection. This effort could be funded     accuracy of their assessments. Other
by the City’s Productivity Bank, other      proposed changes to the property tax
savings related to proposed changes in      system would guard against
the Real Estate Tax, or a one-time          unreasonable increases in property tax
surcharge on Real Estate Tax bills.         bills as a result of this step.

Recommendation 4: Adopt a Set of            Recommendation 6: Implement a
Assessment-Practice Principles.             Property Tax Buffering Program.
    The BRT should adopt, publicize,            To allow for gradual adjustment to
and annually update a set of                any future changes in a property’s
assessment-practice principles that         assessed value, the Commission
includes:                                   rejects all types of phasing, caps, and
    a requirement that all assessors be     freezes in favor of recommending a
    state certified;                        three-year averaging program wherein
    a commitment not to create or           the Real Estate Tax is levied on the
    preserve inequalities by artificially   average of the assessed property value
    capping assessments;                    from the past three years. If the City
    a commitment to annual                  adopts a system of land-value taxation,
    reassessment of all properties to       the tax would be levied on the past
    reflect every increase or decrease      three years’ average land value plus the
    in value;                               current year’s structural value.
    a commitment to continually
    improve the quality of the data         Budget-Based Property Taxation
    collected about the condition of        Recommendation
    each property;
    a commitment to increase reliance       Recommendation 7: Implement a
    on computer modeling and                System of Budget-Based Property
    information management systems;         Taxation.
    a commitment to incorporate                 Beginning in fiscal year 2006, shift
    advanced regression techniques,         from an assessment-driven to a
    computer calculated                     budget-based system of property
    neighborhood indexes, GIS               taxation such as is used by most
    mapping, and Computer Assisted          municipalities. The Commission
    Mass Appraisal (CAMA) products;         recommends creating a system of
    and                                     budget-based property taxation by
    a commitment to provide more            legislatively obligating the Mayor and
    information about how                   City Council to determine all annual
    assessments are performed when          Real Estate Tax rates after setting the
    assessment notices are sent out.        budget and reviewing assessments,
                                            thereby maintaining a stable revenue
Recommendation 5: Eliminate                 stream under the control of local
Fractional Assessments.                     government. This system would end
    The BRT should assess properties        the revenue windfall that currently
at 100 percent of market value instead      occurs when property assessments rise
of the current 70 percent factor;           and the Real Estate Tax produces
removing an extra layer of complexity       more than the originally projected
from the process and making it easier       amount of revenue.
for property owners to evaluate the
Executive Summary                                                                 xiii

Land-Value Taxation                       Property Tax Relief
Recommendation                            Recommendations

Recommendation 8: Phase-in Land           Recommendation 9: Expand Efforts
Value Taxation.                           to Address Property Tax “Ability to
     Land-value taxation should be        Pay” Issues.
phased-in over 10 years; until 50             Although the net worth of all
percent of all Real Estate Tax            property owners increases when
revenues are generated from a tax on      values rise, those living on fixed
the value of land (an increase from the   incomes often find the corresponding
current 22.5 percent) and 50 percent      increase in property taxes difficult to
of revenues are generated from a tax      afford. The Commission developed
on the value of structures (a decrease    the following recommendations to
from the current 77.5 percent). To        address this concern.
achieve this target, the tax imposed          Implement a Quarterly Payment
upon structures would be gradually        Plan—Allow homeowners to pay their
reduced and the tax on land gradually     property tax in four installments
increased.                                through the fiscal year instead of one
     The Commission reviewed              lump sum. This system would save the
extensive research and testimony          City millions of dollars in borrowing
demonstrating that land-value taxation    costs as a result of tax revenues
maximized its economic development        starting to be collected at the
goals when implemented in                 beginning of the fiscal year.
conjunction with other types of tax           Apply Tax Payments to the Current
and policy reform. Land-value             Year’s Tax Liability—Applying any
taxation, complemented by the other       payments received to this year’s taxes
recommendations of this                   would help low-income elderly
Commission, would be consistent           residents qualify for the state’s
with the Commission’s mission to          property tax rebate program, even if
improve the City's competitiveness in     they have outstanding tax
a fiscally and socially responsible       delinquencies from past years.
manner. The Commission also                   Consider Developing a Low-Income
confirmed the practicality of             Property Tax Relief Program—The City
accurately assessing land values and      could create a program similar to the
determined that the issue of tax-         Water Department’s Water Relief
delinquency would not threaten            Assistance Program, to “freeze” the
attempts to impose land-value             delinquent Real Estate Tax bills of
taxation in a revenue-neutral manner.     low-income homeowners and provide
Land-value taxation, which                a tax credit or incentive to remain
encourages maximizing land’s              current in their bills.
potential, will encourage private
investment in the city and help reduce    Recommendation 10: Advocate for
blight and abandonment.                   Increased Property Tax Relief from
                                          the Commonwealth of Pennsylvania.
                                              Create a State Circuit-Breaker Property
                                          Tax Relief Program—The
                                          Commonwealth should join 31 states
                                          in providing low-income property
xiv                                        Philadelphia Tax Reform Commission

owners with an income tax credit           Real Estate Transfer Tax
calculated as a percentage of the          Recommendations
property taxes paid in excess of a
certain percentage of household gross      Recommendation 13: Do Not
income.                                    Reduce the Real Estate Transfer Tax
    Expand State-Funded Low-Income         Rate.
Property Relief Programs—The                   While the Real Estate Transfer
Commonwealth should raise the              Tax rate is one of the highest in the
maximum income eligibility                 country, in the current economic
requirements for participation in these    climate other taxes should receive
valuable programs.                         priority for the scarce resources
                                           available for tax reduction.
Recommendation 11: Increase
Awareness About Real Estate Tax            Recommendation 14: Recommend
Relief Programs.                           Technical Changes to the Real Estate
    Expand informational property          Transfer Tax.
tax outreach programs and provide              Restrict a taxpayer’s ability to
additional counseling for low-income       structure real estate transactions to
tax delinquent property owners to          avoid being subject to the tax.
increase the number of low-income
and elderly individuals taking             Real Estate Non Utilization Tax
advantage of the property tax relief       Recommendations
programs offered by the City and the
Commonwealth.                              Recommendation 15: Eliminate the
                                           Real Estate Non Utilization Tax.
Commercial and Residential Tax                  This tax, designed to penalize the
Rates Recommendations                      owners of unused, deteriorating
                                           property, has never been collected.
Recommendation 12: Advocate for a          After its adoption, its constitutionality
Change in the Pennsylvania                 was quickly challenged, and the court
Constitution to Allow for Variable         barred the City from collecting the
Real Estate Tax Rates.                     tax. Rather than allowing this
    The City should advocate for a         uncollectable tax to remain on the
change in the Pennsylvania                 City’s books, the Commission
Constitution that would allow the City     recommends eliminating it and relying
to tax real estate differently based       on implementation of land-value
upon its use. Consultant research          taxation and increased enforcement
requested by the Commission                efforts by the Department of Licenses
indicated that commercial and              and Inspections to achieve the goal of
industrial landowners are less sensitive   placing pressure on owners of under-
to increases in the real estate tax rate   utilized and deteriorating real estate to
than to other types of business taxes.     improve their properties.
Other business taxes could be reduced
more quickly if a higher tax on
commercial and industrial real estate
were levied.
Executive Summary                                                               xv

Use and Occupancy Tax                      collection while removing the
Recommendations                            disincentive to locate and grow here.

Recommendation 16: Do Not                  Recommendation 19: Grant
Reduce the Use and Occupancy Tax           Unincorporated Businesses a
Rate.                                      Deduction for Payments to Partners,
    Use and Occupancy business             Members, and Sole Proprietors when
taxpayers will benefit significantly       Calculating Net Income under the
from the reforms and phase-out of the      Business Privilege Tax
Business Privilege Tax, therefore other        Allow unincorporated businesses
taxes should receive priority for the      to deduct payments made to partners,
scarce resources available for tax         members, and sole proprietors. The
reduction.                                 Commission recommends initially
                                           allowing 50 percent deductibility and
Recommendation 17: Repeal the Use          increasing deductibility to 100 percent
and Occupancy Tax if a Constitutional      by 2010. While such businesses may
Amendment Permits Philadelphia to          now deduct 60 percent of their
Tax Different Classes of Real Estate       Business Privilege Tax liability against
at Different Rates.                        the Net Profits Tax that they also pay,
    Repeal the Use and Occupancy           their effective tax rate remains higher
Tax if the Pennsylvania Constitution is    than that of corporate competitors.
amended to permit commercial and           This recommendation would level the
industrial Real Estate Tax rates to be     playing field and help Philadelphia
higher than residential Real Estate Tax    compete with the suburbs in attracting
rates.                                     and retaining businesses.

Net Income Portion of the                  Recommendation 20: Lengthen the
Business Privilege Tax Structural          Business Privilege Tax Net Operating
Change Recommendations                     Loss Carryforward Period.
                                                Extend the net operating loss
Recommendation 18: Adopt Single-           carryforward from three to 10 years,
Sales Factor Apportionment.                effective with excess losses reported
    Adopt sales receipts as the only       on 2005 tax returns. Other
factor for apportioning the net income     jurisdictions, including the state and
base of multi-jurisdictional businesses.   federal governments, allow such losses
The current formula for apportioning       to be carried forward for 20 years.
income in Philadelphia double weights      This reform would make Philadelphia
sales and equally weights the              more competitive and business-
contribution of local property and         friendly towards start-up and high-
payroll to a business’ net income.         technology companies with life cycles
Businesses that make sales in              that often begin with many years of
Philadelphia without locating here         losses.
benefit from the current formula,
while businesses maintaining buildings
and employees in the city are
penalized. This change would simplify
Business Privilege Tax payment and
xvi                                         Philadelphia Tax Reform Commission

Business Privilege Tax                      environment, and hampers the City’s
Administrative Reform                       ability to attract and retain businesses.
Recommendations
                                            Incremental Elimination of the
Recommendation 21: Establish Two            Business Privilege Tax
Estimated Payment Dates.
     Restructure the Business Privilege     Recommendation 23: Incrementally
Tax estimated tax payment schedule          Eliminate the Business Privilege Tax.
by creating two estimated payment               Eliminate the Business Privilege
dates between April 15th and June 30th.     Tax by fiscal year 2015. This approach
The current structure forces                would minimize the revenue impact of
businesses to pay their entire tax          this recommendation and allow the
liability before they receive that year’s   City to gradually adjust its budget. In
gross receipts and net income,              addition to attracting new investment
compounding the detrimental impact          and retaining firms considering leaving
of the Business Privilege Tax on            the city, this measure will ensure that
Philadelphia’s ability to compete. New      businesses no longer bear more than
businesses must actually pay two years      their fair share of the tax burden. The
of taxes at once. This change would         Department of Revenue will be able
improve fairness, contribute to the         to enforce other business taxes more
city’s ability to compete, and reduce       aggressively, and the process of
the tax burden on fledgling businesses.     running a business in Philadelphia will
                                            be simpler. The Commission’s
Recommendation 22: Unify                    proposed gross receipts rate
Statutory Refund and Assessment             reductions through fiscal year 2008 are
Periods.                                    those already in the City’s Five-Year
     Set the statutory refund and           Financial Plan. To minimize the
assessment periods at a uniform three       financial impact of the Commission’s
years. Currently, no ordinance limits       three classes of Business Privilege Tax
the period within which the City is         reform recommendations (structural
authorized to audit a taxpayer and          change to the net income portion of
assess additional tax. The City is          the Business Privilege Tax, Business
authorized, by ordinance, to file a         Privilege Tax administrative change,
lawsuit for collection of unpaid taxes      and Business Privilege Tax
within six years of the date the return     elimination), the phase-out of the net
was filed or due. Conversely, a             income portion of the Business
taxpayer is limited, by ordinance, to       Privilege Tax does not begin until
filing a refund claim within three years    fiscal year 2006.
after the tax is paid. The net result is
that the City can audit a five-year-old     Wage, Earnings, and Net Profits
return and assess additional tax, but       Tax Recommendations
the taxpayer will not be able to claim a
refund from a four-year-old return          Recommendation 24: Adjust Wage
that could have offset the additional       and Earnings Tax Rates on January 1st.
tax. This disparity creates the                 Adjust the rates of the Wage and
perception that Philadelphia has a          Earnings Taxes January 1st of each
discriminatory business tax                 year instead of July 1st. Fiscal year
                                            adjustments have resulted in an undue
Executive Summary                                                                xvii

compliance burden, since firms report       payers to reflect the state aid allowing
earnings on a calendar year basis for       for the reduction.
state and federal purposes. This
recommendation will also make Wage          Income Tax Relief
and Earnings Tax rate changes               Recommendation
consistent with those of the Net
Profits and School Income taxes.            Recommendation 27: Help Low-
                                            Income Philadelphians Apply for State
Recommendation 25: Accelerate               and Federal Income Tax Relief.
Local Income-Based Tax Rate                     Last year, 45,000 eligible
Reductions.                                 Philadelphia households did not file
     Accelerate the City’s program of       for the federal Earned Income Tax
incremental reductions in the Wage,         Credit (EITC). An estimated $76.5
Earnings, and Net Profits Taxes             million in tax credits available under
reducing resident and nonresident tax       this program were not received by
rates to 3.25 percent by 2014. This         low- and moderate-income
approach minimizes the revenue              Philadelphia households. Pennsylvania
impact of rate reductions and allows        Department of Revenue data also
the City to gradually adjust its budget.    suggest that another $75 million in
By reducing the resident Wage Tax           annual Commonwealth tax
rate more rapidly than the nonresident      forgiveness is not received by eligible
rate, the resident and nonresident          low-income Philadelphians.
rates would equalize within 10 years.       The City should invest at least $1
The rationale for this policy is that the   million in the Greater Philadelphia
City should allocate a greater share of     Urban Affairs Coalition Campaign for
its tax reduction investment to             Working Families, an initiative to
lowering taxes for its residents, in the    increase participation in the EITC.
absence of financial assistance from        This funding will help low-income
the Commonwealth to reduce the              families negotiate the application
City’s Wage Tax burden.                     process necessary to receive federal
                                            and Commonwealth tax credits. It will
Recommendation 26: If the City              also support additional outreach to
Receives Support from the                   low-income households, free and low-
Commonwealth for Wage Tax Relief,           cost tax preparation services, and a
Adopt a More Aggressive Program of          new focus on expanding participation
Income-Based Tax Rate Reductions.           in the tax forgiveness program under
    Assuming the City receives aid to       the Pennsylvania Personal Income
finance Wage Tax cuts in an amount          Tax.
similar to that proposed under
Governor Edward G. Rendell’s Plan           Miscellaneous Tax
for a New Pennsylvania, the                 Recommendations
Commission recommends further
reducing the Wage Tax rates, until          Recommendation 28: Do Not
2014, when resident rates would be          Reduce the Sales Tax, Parking Tax,
lowered to 3.0 percent and                  Amusement Tax, Vehicle Rental Tax,
nonresident rates to 2.5 percent. This      Hotel Room Rental Tax, Liquor Sales
action would maintain the differential      Tax, Mechanical Amusement Device
between residential and nonresidential
xviii                                      Philadelphia Tax Reform Commission

Tax or Hotel Use or Occupancy Tax          proposed package is fiscally
Rates.                                     responsible.
    After conducting a comprehensive
analysis of all taxes imposed in           Economic Growth
Philadelphia, the Commission has                If lowering certain taxes helps the
concluded that other taxes should          city attract or retain firms and families,
receive priority for the scarce            a tax reduction will not reduce tax
resources available for tax reduction.     revenues on a dollar-for-dollar basis;
                                           this effect will grow over time.
Fiscal Impact of Tax Reform                Accordingly, the City can maintain a
Commission Recommendations                 consistent level of essential service
    After working closely with the         delivery without having to generate
City Departments of Finance and            dollar-for-dollar replacement
Revenue, the Commission estimates          revenues. Although there is much
that its recommendations would result      debate about the magnitude of
in a net revenue loss of $192.4 million    economic growth resulting from
to the City’s general fund over the life   federal tax reform, there is widespread
of the City’s fiscal year 2004-2008        agreement among economists that
Five-Year Financial Plan, and $142.4       reducing local taxes has significant
million for fiscal year 2009 (assuming     positive effects.
the City would otherwise have                   The Commission retained
continued only incremental tax             Econsult Corporation to conduct an
reductions that year). We believe these    econometric analysis of tax reform
recommendations are fiscally and           policy options. Econsult’s analysis of
socially responsible because their         the Commission’s recommendation to
incremental nature allows the City to      phase-out the gross receipts portion
gradually adjust its budget. These         of the Business Privilege Tax and
calculations used the most                 significantly reduce the Wage Tax rate
conservative possible assumptions and      suggests that:
do not take into account any of the             By 2010, an additional 47,604
expected benefits from a more                   Philadelphia jobs will be created.
competitive tax structure.                      By 2017, 175,165 new jobs will be
                                                created.
                                                The median house value, in real
Financing Tax Reform                            terms, will increase in value by
                                                $7,617 by 2010, and by $19,325 by
As tax reform improves Philadelphia’s           2017.
economy, the tax base will grow;                Through base expansion, the City
revenues will increase and there will           will be able to recapture a total of
be no long-term negative net fiscal             $276 million of lost revenue by
impact. However, while the economy              2008.
adjusts, a short-term fiscal gap may       Due to data constraints, econometric
affect budgeted priorities. The            analysis of the proposals to phase-out
Commission considered steps to             the net income portion of the
address this critical problem. As a        Business Privilege Tax, adopt single-
result, we are confident that the City     sales factor apportionment and level
can “finance” tax reform, and that the     the playing field between corporations
                                           and unincorporated firms is not
Executive Summary                                                              xix

possible. However, economic theory         cover the cost of the services they are
suggests that these reforms should         intended to fund. For example, the
produce a supply-side response similar     Gun Permit Fee generates $30,000 a
to that generated by other tax cuts.       year, yet the annual operating cost of
                                           the Gun Permits Unit is nearly $2.7
Local Implementation                       million. The City’s fee structure could
    We estimate that $42 million to        be analyzed and adjusted accordingly,
$75 million in recurring revenues and      increasing non-tax revenues.
$45 million to $55 million in one-time          Fees for Rights-of-Way Access—
revenues could be generated from           Philadelphia could follow the lead of
policy considerations not contingent       other cities and increase charges
upon state enabling legislation, state     associated with rights-of-way (ROW)
cooperation, or extensive cooperation      access in order to recover costs
with suburban jurisdictions.               associated with ROW management
    Improve Tax Collection—                and costs, direct and indirect,
According to the Department of             generated as a result of street
Revenue, the City currently collects       degradation and shortened street life.
between 90 and 95 percent, depending            Increase Code Enforcement—The
on the tax, of the amount due within       ultimate goal of increased code
two years of the due date. This            enforcement is increased compliance.
estimate does not include collection of    However, the experience of other
non-reported taxes. Improving tax          cities indicates that increased code
enforcement and increasing the             enforcement can lead to a temporary
penalty for non-compliance will            spike in non-tax revenues.
reduce the burden faced by residents            Collect Overdue Payments from
and businesses.                            Veterans Stadium Skyboxes—Efforts
    Initiate a Tax Amnesty Program—        could be made to collect the entire
In conjunction with an increased           amount still owed for City-funded
effort to improve voluntary taxpayer       renovations and construction of
compliance, a tax amnesty program          luxury boxes in Veterans Stadium.
could be implemented. This would                Adjust the Five-Year Plan for
bring new taxpayers onto the tax rolls     Unanticipated Refinancing Projects—
and give eligible taxpayers a last         Unexpected savings could be used to
chance to “come clean” before the          fund tax reduction. For example, the
implementation of aggressive new tax       savings realized by refunding a portion
enforcement policies.                      of the Philadelphia Municipal
    Analyze and Adjust the City’s Fine     Authority bonds associated with the
Structure—The amount of a fine can         Criminal Justice Center and the
be raised to whatever sum is necessary     Curran-Fromhold Correctional
to discourage future violations, subject   Facility could be dedicated to funding
to any restriction imposed by the          tax reform.
enabling statute or the state                   Increase Entrepreneurially
Constitution. All fines could be           Generated Revenues—The City could
analyzed and selected fines could be       seek entrepreneurial ways to increase
increased.                                 non-tax revenues, such as leasing
    Analyze and Adjust the City’s Fee      rooftop space on City-owned
Structure—Many fees do not generate        buildings to telecommunication and
sufficient amounts of revenue to           broadcasting companies and
xx                                          Philadelphia Tax Reform Commission

marketing exclusive rights to               extensive cooperation with suburban
concessionaires.                            jurisdictions.
                                                 Increase PILOT Payments by
Budgetary Discipline                        Tax-Exempt Institutions—The City
     The Commission is prohibited           could lobby the Commonwealth for
from recommending specific                  the authority to establish formal
expenditure reductions, municipal           payments in lieu of taxes (PILOTs) to
government cost savings, or municipal       require large non-profit organizations
government service reductions in            to pay for those City services that they
order to offset any potential revenue       use. Property owned by tax-exempt
reductions. However, discussion with        institutions accounts for about 25
various official agencies, examinations     percent of the city’s total assessed
of past efficiency gains, and analyses      value and annually costs $100 million
of initiatives in other municipalities,     in lost property tax revenues.
have convinced us that Philadelphia              Expand the Sales Tax Base—The
can achieve significant cost savings        base of the Pennsylvania and
through improved government                 Philadelphia Sales Tax could be
efficiency and effectiveness. The           expanded. Eliminating unnecessary
Commission proposes that future             exemptions would generate substantial
efforts include, but not be limited to:     revenue for both the Commonwealth
     Routine review of programs to          and the City. However, the
     determine the benefits received        Commission believes that some items,
     for the dollars spent.                 such as groceries and medicine, should
     Equitable sharing of spending          continue to be exempt from the Sales
     reductions by all elected officials.   Tax. City officials should also consider
     Holding all top-level managers         urging the Commonwealth to join the
     accountable for continuously           Streamlined Sales Tax Project, to
     improving city service and             enable the City and the
     administrative functions.              Commonwealth to collect Sales Tax
     Consolidation of information           from e-commerce vendors and other
     technology operations and              remote sellers.
     investment in newer technologies            Adopt a Regional Asset District
     that would support improved            Sales Tax—A regional sales tax could
     business practices.                    help fund parks, libraries, professional
     Consolidation and reorganization       sports facilities, cultural facilities,
     of City agencies to improve            historic sites, and civic facilities
     accountability and reduce              throughout the region. These promote
     redundancy.                            economic development and enhance
                                            the quality of life for residents in
Commonwealth Cooperation                    southeastern Pennsylvania, and
    The City’s efforts to achieve tax       financial support for them should be
reform could benefit from active            spread through the region.
assistance from the Commonwealth of              Regional Real Estate Tax
Pennsylvania. The following                 Reform—A regional tax distribution
additional policy considerations are        plan could be established. This type of
either contingent on state enabling         program redistributes resources based
legislation, state cooperation, or          on need.
Executive Summary                                                              xxi

     Adjust for Regional Disparities      repertoire works are exempt from the
Though Statewide Funding Reform—          Amusement Tax, the Commission
The City could advocate for reforms       feels confident that Philadelphia’s
to alter the manner in which local        cultural institutions would not be
jurisdictions in the Commonwealth of      adversely affected by this tax increase.
Pennsylvania fund public education             Increase Parking Tax Revenues—
and county services. The City should      The Parking Tax could be increased
also continue to lobby the                from 15 percent to 20 percent of
Commonwealth to fulfill its               gross parking receipts. Because the
constitutional obligation to fund the     Commission’s tax reform
local court system.                       recommendations will mitigate the
                                          burden placed upon parking lot
Changing Philadelphia’s Tax Mix           owners and operators, an increase in
     The Home Rule Charter directs        this tax would not overburden
the Commission to develop                 Philadelphia residents or businesses.
recommendations that will “decrease            Increase Property Tax
the overall tax burden on Philadelphia    Revenues—If all other revenue
residents, individuals who work in        generating options fail and there is no
Philadelphia, and Philadelphia            other way to fund the package of tax
businesses.” After analyzing the fiscal   reform, the City could increase
and economic impact of different          property-based tax rates. Evidence
taxes, the Commission believes that       suggests that shifting from local
long-term economic benefits would         business and wage taxes to property-
result simply from changing               based taxes will result in substantial
Philadelphia’s tax mix.                   increases in jobs, resident incomes,
     Although the Commission is not       business activity, and property values.
recommending any tax increases, it        A budget-based system of property
believes that there would be              taxation would act as a relief valve that
substantial long-term economic            would allow the City to expand its
benefits resulting from                   reliance on property-based taxation
implementation of its tax reform          only if it could find no other way of
recommendations, even if selected         incorporating the Commission’s
taxes were marginally increased. If the   package of reforms into the budget.
City cannot alter spending or generate
additional revenues to cover short-
term budgetary gaps, the City could—      Tax-Related Economic
as a last resort—increase certain taxes   Development Tools
to finance the proposed package of
tax reforms and still generate positive   Tax-related economic development
results.                                  tools have been necessary to offset
     Increase Amusement Tax               obstacles to development created by
Revenues—The Amusement Tax                Philadelphia’s tax structure. As tax
could be increased from five percent      reform is realized, the City should
to 10 percent of gross amusement          reevaluate its mix of economic
related receipts. Since all forms of      development tools to see if tax
traditional drama, comedy, musical        abatements, tax exemptions, tax
comedy, dramatic recitation of            increment finance districts, and
recognized works of literary art, and
xxii                                      Philadelphia Tax Reform Commission

collaborative tax incentive zones are     should invest in the technology
still necessary. The following            necessary to make the taxpaying
proposals—which could be                  experience more accessible and less
implemented immediately—should be         antagonistic by using
considered.                               telecommunications technology to
      Develop a Comprehensive             make paying taxes more customer-
Economic Development Plan—In              friendly and collections more certain.
conjunction with quasi-public                  Create an Office of Tax Policy—
development agencies, the City should     Given the influence that taxes have on
create a comprehensive economic           the City’s long-term economic health,
development plan.                         the City should invest in an
      Add Sunset Review Clauses to        institutionalized capacity to analyze
Economic Stimulus Programs—               tax and economic development policy.
Periodically review the usefulness of     An Office of Tax Policy, forms of
economic stimulus and economic            which exist in New York City and
development programs to evaluate          Washington D.C., would monitor
their effectiveness and to determine if   Philadelphia’s tax policy and the City’s
the life of these programs should be      largely decentralized economic
extended.                                 development policy and report on
      Expand Collaborative Economic       changes necessary to maintain and
Development and Tax Incentive             improve the tax system.
Programs—The Commission’s                      Continue to Research the
recommended package of tax reform         Feasibility of Implementing a City
reduces the City’s net cost of            Income Tax—The Commission
participating in these programs.          considered, but did not recommend, a
Therefore, the City should vigorously     proposal to replace four income-based
lobby for Commonwealth designation        taxes—the Wage Tax, the Earnings
of additional Keystone Opportunity        Tax, the Net Profits Tax, and the
Zones and other collaborative             School Income Tax—with a single
programs that provide state and local     City income tax using the same base
businesses tax incentives.                as Pennsylvania’s Personal Income
                                          Tax. A relative dearth of information
                                          about the economic impact of this
Complementary Reform                      proposal prevented the Commission
Considerations                            from recommending a City income
                                          tax. However, the Commission
If tax reform is to be feasible and       believes that this idea deserves further
meaningful, it must be accompanied        consideration. A Philadelphia Office
by other reforms in the way the City      of Tax Policy would be well suited to
manages the business of government.       continue this research.
The following proposals will                   Evaluate Tax Expenditures—City
complement and enhance the                officials and the public should be able
Commission’s package of tax reform        to apply the same degree of scrutiny
recommendations.                          to tax incentives as to direct
     Improve Interactions Between         expenditures and determine whether
Taxpayers and the City’s Revenue-         the investment of public resources is
Collection Bureaucracy—The City           justified by the social benefits. The
                                          City should annually publish a tax
Executive Summary                                                            xxiii

expenditure report containing              budget to ensure financial stability. A
information about each tax                 rainy-day fund designed to hold
expenditure’s source in law, rationale,    expenditures down in good times and
and an estimate of actual and              save for hard times would help
projected costs by fiscal year. The City   Philadelphia meet long-term service
should also periodically undertake         demands and continue planned tax
cost-benefit analyses of its major tax     reductions during periods of
expenditure programs. The Office of        economic contraction. Unlike the
Tax Policy could perform these             current fund balance, a rainy-day fund
analyses.                                  would have strict legal triggers for
     Attach Fiscal-Impact Statements       fund contributions and formulas to
to all Proposed Pieces of                  determine the amounts of fund
Legislation—The Administration and         withdrawals.
City Council currently have no means           Create a Non-Tax Revenue Master
of assessing whether a bill under          List—The Commission believes that
consideration represents sound fiscal      the City should evaluate its license
policy. To remedy this problem and to      charges and fees on a regular basis to
help promote better tax policy, the        determine whether the City generates
Commission believes that a fiscal-         enough revenues to adequately cover
impact statement should be attached        administration expenses, whether
to all proposed pieces of local            charges are unreasonably high and
legislation.                               should be lowered, or whether charges
     Amend the Pennsylvania                are nuisances to collect and administer
Uniformity Clause—In 1874, the             and should be abolished. A
citizens of Pennsylvania amended the       comprehensive master list of all non-
state Constitution by adding a series      tax revenue would help facilitate this
of provisions aimed at limiting the        process.
General Assembly’s authority to enact          Reform the City’s Regulatory
economically preferential legislation.     Processes—Outdated and
One of these provisions was the            unnecessarily burdensome regulations
Uniformity Clause, which states that,      have been cited as a major deterrent to
“all taxes shall be uniform, upon the      business growth in Philadelphia. The
same class of subjects, within the         City could establish a Regulatory
territorial limits of the authority        Study Commission to evaluate the
levying the tax.” This clause has often    relevance, necessity, cost, and benefit
prevented taxing authorities from          of any new City regulations, and serve
reforming the tax system to meet           as a filter agency through which
policy goals and could be amended so       proposed regulations are passed on to
that elected officials would have more     City Council. Concurrently, a Code
flexibility in crafting tax policy.        Task Force could review and revise
     Create a Rainy-Day Fund—The           the existing Regulatory Code to
City Charter requires that the City’s      eliminate or consolidate regulations
annual operating budget be balanced.       that are outdated, costly, or
Because of this restriction, the City      counterproductive. Inter-agency
has routinely overestimated some           databases should be expanded and
expenditure categories while               agency personnel should be cross-
underestimating revenues, in order to      trained to improve coordination
maintain a sufficient cushion in the       among the multiple agencies involved
xxiv                                        Philadelphia Tax Reform Commission

in the regulatory process and allow         steps to improve the City’s
caseworkers to address concerns             competitiveness.
raised by customers. Payments for
licenses and permits should be
accepted on-line by credit card and         Conclusion
customers should be able to check the
status of their applications and access     Implementing the Commission’s
code and payment requirements on-           recommended package of reforms will
line.                                       not be easy, nor will it happen
     Extract Greater Value From City        overnight. Philadelphia’s high tax
Assets—Large assets such as                 burden and damaging choice of taxes
Philadelphia International Airport,         is a problem that developed gradually
Philadelphia Gas Works, and                 over more than half a century, and it is
Philadelphia Water Department are           a problem that will not be fixed in a
the types of entities that Philadelphia’s   year or even five years.
competitor cities do not typically own           The Commission’s plan is
and operate. The City could actively        ambitious yet feasible. The
explore ways to extract greater value       recommendations are phased in over a
from its assets. Possible options           10-year period, so the City can have
include increasing annual transfer          time to adjust and the economic
payments made to the City,                  benefits of tax reduction can be
transferring operations to a                realized. With fiscal discipline and skill
government authority or a private           in gaining support and resources from
contractor for a substantial upfront        all levels of government, the City can
fee, and selling smaller city assets.       adopt the reformed tax structure we
     Market Philadelphia’s New Tax          recommend without reducing the
Structure and Improved Business             services that Philadelphia residents
Climate—Assuming that the                   want and need.
Commission’s recommendations are                 The Commission is asking
enacted into law, the Commission            Philadelphia’s citizens and public
proposes that the City, in cooperation      officials to have the courage and the
with private sector leadership              foresight to recognize what we
organizations, invest in a new program      ourselves have concluded after 10
of marketing Philadelphia’s business        months of intensive discussion and
climate, highlighting tax reform and        research: tax reform is a prerequisite
other public initiatives that enhance       to the sustained economic
the City’s and the region’s                 development that we all hope to
competitiveness. The marketing              achieve. The primary message of this
message should focus on the entire          report, and the research on which our
package of reforms implemented since        recommendations are based, is that in
the early 1990s, and ongoing                the long run everyone wins from tax
initiatives, including fundamental tax      reform.
reform. The economic benefit of the              Indeed—if Supreme Court Justice
Commission’s recommendations will           John Marshall is correct that “the
be leveraged to the extent that             power to tax involves the power to
business decision makers and                destroy”—it is equally true that the
investors are aware of the City’s tax       power to design a sound tax policy is
reform plans, and other progressive
Executive Summary                          xxv

the power to create. We can create a
city where the burdens and benefits of
citizenship are fairly divided, and
where economic opportunity abounds.
Philadelphia’s story in the 21st century
can be a story of rebuilding and
growth.
The Vision                                                                           1




 Section 1: The Vision

When we, the members of the                   The Vision
Philadelphia Tax Reform
Commission, began to review the               The City’s Economy is Vibrant
City’s tax structure in January 2003,              As artificial barriers to the city’s
we brought to the table diverse               development created by the onerous
backgrounds and different                     tax structure are lifted, the true
perspectives on the city, on public           potential of the city as a venue for the
policy, and on taxes. We differed             productive combination of ideas,
about the importance of the City’s tax        influences, and exchange might be
structure as a public policy problem          realized. The increased size and
and a vehicle for change, which taxes         density of the city economy will create
posed the greatest problem for the            a larger market for suppliers, more
city’s economy, and the fiscal                choices for customers, and faster
feasibility of reducing taxes at all. It is   diffusion of new ideas—all of which
testimony to the power of the                 will make Philadelphia firms more
evidence we have reviewed and the             competitive and successful. The
strength of the case for tax reform           increased productivity of the city
that we came to substantial agreement         economy will bring new jobs and
on a broad package of fundamental             businesses to Philadelphia, providing
tax reforms.                                  higher incomes and property values.
     The research and survey evidence              The economic development will
we have reviewed, the testimony we            bring with it new construction, more
have received, and our own personal           professional service and technology
experiences, taken as a whole, point          jobs, and continued growth in the
clearly to the same conclusion.               hospitality sector. Many newly
Philadelphia’s tax structure has had          employed professionals will choose to
damaging effects on the city’s                live downtown, fueling increased
economy. While we cannot predict              demand for new residential
fully the impact of the changes that we       development and an increasingly
propose, it is quite clear that without a     vibrant nightlife. The current
major overhaul of our tax system,             movement of suburban empty nesters
sustained, vibrant economic recovery          back into the city will continue and
will be difficult to achieve. At the          broaden support for Philadelphia’s
conclusion of a 10 month process of           cultural institutions. Demand for
research and deliberation, we believe         housing in city neighborhoods will
that fundamental tax reform is a              increase as well, reversing decades of
prerequisite to the economic                  housing abandonment and declining
transformation of Philadelphia.               property values. Those new residents
     We share a compelling vision of          will patronize neighborhood
Philadelphia’s future, if we embark           restaurants and stores, leading to more
today on a comprehensive, long-term           neighborhood jobs and businesses.
tax reform plan.
2                                           Philadelphia Tax Reform Commission

Philadelphia Residents Can Work             assessment is determined and
in Their Own City                           assistance in filing appeals. The Wage
    Economic development will               Tax rate will be significantly lower, no
benefit residents of Philadelphia.          longer taking such a large bite out of
Instead of enduring long commutes to        paychecks.
suburban jobs, there will be new
opportunities for employment within         The City of Philadelphia is the
the city, closer to their homes,            Region’s Economic Engine
families, and children. Enhanced job            An increasingly productive City
opportunities can create the realistic      economy will benefit the entire region.
possibility of attaining self-sufficiency   Suburban firms and residents will
for thousands of low-income                 obtain higher quality services—
residents.                                  ranging from legal, architectural, and
                                            accounting services to health care and
City Government Provides Quality            office supplies—at lower costs.
Public Services                             Suburban businesses will benefit from
    A larger tax base will enable city      being located in a more competitive
residents and businesses to receive the     metropolitan area and the wages and
services that they need and demand at       incomes of their workers should
a lower tax cost. As economic growth        increase. City and suburban property
drives up property values throughout        values are likely to rise to a level more
the city, the School District will          comparable to other major cities in
receive increased Real Estate Tax and       the Northeast.
Use and Occupancy Tax revenue with
no increase in the tax rate. Combined       Philadelphia’s Tax Rates Are No
with increased Commonwealth                 Longer a Major Obstacle to
support, the District should be able to     Economic Prosperity
provide its students with the same               Businesses and individuals will no
educational resources now enjoyed by        longer be forced to balance the
students throughout the region.             prestige, convenience, and
                                            productivity of a Philadelphia location
Philadelphia’s Tax Structure is Fair        against the City’s onerous tax burden.
and Simple                                  The Philadelphia region should move
     Of course, the greatest impact will    up in the rankings of city business
be on the tax system itself. Taxpayers      climates published by national
will have to spend less time and            magazines. The improved tax
money complying with the tax laws,          structure, coupled with the city’s
and have greater confidence that they       existing strengths, will provide the
are being treated fairly. The Real          city, the region, and the
Estate Tax paid by property owners          Commonwealth with the tools
will reflect the true market value of       necessary to effectively market
their property. No neighborhoods will       Philadelphia.
be systematically over assessed or
under assessed. Over time, individuals
will be more likely to trust the
property tax assessment system,
especially since they will have greater
access to information on how their
The Vision                                                                        3


Today’s Reality                            change is great, and the City budget
                                           could not withstand the impact of
Today, Philadelphia’s local Wage Tax       immediate implementation.
rate is higher than that of any city in         Our recommendations are phased
the country. The City’s Wage Tax rate      in over a 10-year period, to allow the
is more than four times that in nearly     City to make the necessary fiscal
every surrounding suburban                 adjustments. Further, this time frame
community. The City’s business tax         will allow the economic benefits of tax
rates are higher than in any other city    reduction to be realized.
except New York City, and                       The Commission’s plan is
Philadelphia is the only city in the       ambitious yet feasible given the
country that taxes both business gross     timetable established. With fiscal
receipts and net income. The overall       discipline and skill in gaining support
tax burden on residents—taking into        and resources from all levels of
account all local taxes—is second only     government, the City can adopt the
to New York City among the nation’s        reformed tax structure we recommend
largest cities. Numerous studies have      without reducing the services that
demonstrated what common sense             Philadelphia residents want and need.
suggests: these high tax rates have        Two things, above all else, are
driven out of the city hundreds of         required to implement our plan: the
businesses and thousands of residents      will of public officials and the support
that otherwise would have stayed.          of the citizens of Philadelphia.
Since 1969, the City has lost a total of        The Commission is asking
255,800 jobs and 432,446 residents.        Philadelphia’s citizens to think
An onerous and illogical tax structure     seriously about tax reform, weigh the
appears to have been a major factor        evidence, and follow the debate.
contributing to this loss.                 Citizens should consider our
                                           proposals in a public spirited way, and,
                                           when taking a position on tax reform,
The Road Map                               give weight to the interest of the entire
                                           city as well as their own interests as
The reality of 2003 is a far cry from      residents. Further, citizens should take
this vision of Philadelphia. The           the long view—consider the effects of
fundamental message of this                tax reform over the next 10 or 20
Commission, however, is that if we         years, and especially how their
hope to achieve this vision,               children and grandchildren will be
fundamental tax reform must be part        affected.
of the process. This report provides a          The Commission is asking the City
road map to achieve that vision.           and the Commonwealth’s elected
    The necessary changes will not be      leadership to have the courage and the
easy, nor will they happen overnight.      foresight to recognize what we
The City’s high tax burden and             ourselves have concluded after 10
damaging choice of taxes is a problem      months of intensive discussion and
that developed gradually over more         research: tax reform is a prerequisite
than half a century, and it is a problem   to the sustained economic
that will not be fixed in a year or even   development that we all hope to
five. The magnitude of the required        achieve. The primary message of this
                                           report, and the research on which our
4                                          Philadelphia Tax Reform Commission

recommendations are based, is that in
the long run everyone wins from tax
reform: city residents, workers,
property owners, and the working
poor. Most important, the primary
beneficiaries of our recommendations
will be our children. They are the ones
who will benefit most from a growing
economy, with increased employment
opportunities, wealth, and the promise
of a better future.
     Indeed—if Supreme Court Justice
John Marshall is correct that, “the
power to tax involves the power to
destroy”—it is equally true that the
power to design a sound tax policy is
the power to create. We can create a
city where the burdens and benefits of
citizenship are fairly divided, and
where economic opportunity abounds.
Philadelphia’s story in the 21st century
can be a story of rebuilding and
growth.
Guiding Principles                                                                  5




 Section 2: Guiding Principles of a
 Quality Local Tax System

When crafting its recommendations,         individuals be given a property tax
the Tax Reform Commission was              break.
guided by the following principles of a        The Uniformity Clause in
quality local tax system:                  Pennsylvania’s Constitution makes the
competitiveness, equity, stability,        central principle of a progressive tax
neutrality, and simplicity. A summary      system—that taxes be levied in
of these principles is provided below.     accordance with people’s ability to
                                           pay—virtually impossible.
Competitiveness                            Nonetheless, tax reform that imposes
     A municipality’s tax burden is one    a similar burden on similar types of
of the many factors that influence the     taxpayers, and policy initiatives that
location decisions of families choosing    address ability to pay issues, increase
a home; workers selecting a job; and       tax system equity.
businesses choosing where to locate
and invest. When calculating total tax     Stability
burden, it is important to consider the        As tax revenues are used to fund
tax rate, tax stability, tax               essential public services, it is necessary
administration, and tax structure.         for the tax structure to generate a
When a municipality’s tax burden is        relatively stable stream of revenue.
higher than that of competitor             Stability of revenues is important,
jurisdictions, it is difficult for that    since the demand for local services
municipality to attract and retain         does not decrease, and may even
residents, businesses, and jobs.           increase, during economic recessions.
                                           A balanced tax portfolio ensures that
Equity                                     tax revenues will not be unduly
     The principle of horizontal equity    sensitive to upward or downward
suggests that the tax system should        swings in the economy.
impose a similar burden upon similar
types of taxpayers. The principle of       Neutrality
vertical equity, often referred to as          Tax neutrality is a core component
progressivity, suggests that the tax       of the Commission’s mission to help
system should recognize the differing      Philadelphia attract and retain both
abilities of taxpayers to pay. These two   businesses and residents. The
principles often conflict. For example,    principle of tax neutrality is based
horizontal equity would require all        upon a conviction that the economy
residential property owners to pay at      and the marketplace, rather than the
the same property tax rate, while          tax structure, should influence
vertical equity would demand that          location decisions made by residents,
groups of asset-rich and income-poor       workers, and businesses. Typically,
                                           municipalities interested in achieving
6                                         Philadelphia Tax Reform Commission


greater tax neutrality reduce the cost
of tax compliance and shift the tax
structure away from mobile factors of
production such as capital and labor.

Simplicity
    A clear and easily understood tax
structure minimizes both the
monetary and non-monetary costs
incurred by businesses and residents
trying to comply with the tax system.
    By promoting tax system
simplicity and transparency, it is
possible to reduce the tax burden
borne by residents, workers, and
businesses without affecting tax
revenues. Increasing tax system
simplicity has the ancillary benefit of
reversing the erosion of trust that can
occur when taxpayers perceive the
system to be overly complex.
Historical Overview                                                               7




 Section 3: Historical Overview of
 Philadelphia’s Tax System
The power to tax is, and has always        property, which included parcels but
been, vested by the Pennsylvania           apparently, not residences and
Constitution solely in the                 structures. Over time, the tax base
Pennsylvania General Assembly. The         expanded to include all real property.
General Assembly has the power to          The modern real estate tax structure
delegate that authority to local elected   was authorized in 1933 when the
bodies through enabling legislation in     General County Assessment Act
which it defines the scope of their        established uniform assessment
authority. Article VIII of the             procedures. This act grants
Constitution, entitled “Uniformity of      Philadelphia the power to impose a
Taxation,” restricts the power of the      tax upon the real estate located within
General Assembly to the imposition         its territorial limits, subject only to
of taxes that are “uniform, on the         constitutional and state exemptions
same class of subjects…”1 This             and the restrictions of the Uniformity
uniformity requirement follows the         Clause of the Pennsylvania
delegation of tax authority, subjecting    Constitution.
all local taxation to the same                  Philadelphia’s broadest power to
constitutional uniformity standard.        tax was authorized by the Sterling Act.
     Philadelphia has been delegated       Enacted in 1932 in the midst of the
the authority to impose City and           Great Depression, the Sterling Act
School District taxes, but only City       allows Philadelphia to tax any person,
Council is delegated the power to tax.     transaction, occupation, privilege,
The School District of Philadelphia is     subject, or personal property,
governed by an appointed, not an           provided that such items are within
elected, body. Therefore, the General      the geographic limits of the City and
Assembly cannot delegate to it any         are not subject to a state tax or license
direct authority to impose taxes.          fee. The Mercantile License Tax
Rather, the School District’s authority    (1953-1984), the Real Estate Transfer
is derived from and limited by the         Tax, the Wage and Net Profits Tax,
City’s power to tax and any                and several minor taxes derive their
restrictions imposed upon that power.      authority from the Sterling Act.
The General Assembly imposes                    In 1963, the legislature enacted the
special requirements upon City             First Class City Public Education
Council’s exercise of its authority to     Home Rule Act, commonly referred
impose School District taxes and its       to as the “Little Sterling Act.” This act
responsibility to fund the School          authorizes City Council to grant the
District’s budget.                         School District the power to impose a
     Since colonial days, Philadelphia     tax upon anything the City is
has imposed a tax on property. The         permitted to tax, except the wages or
tax originally extended to personal        net income of nonresidents. The City
8                                           Philadelphia Tax Reform Commission

derives its current authority to impose     imposed the Sales and Use Tax and
the Philadelphia School Income Tax          Hotel Occupancy Tax to replace those
and the Business Realty Use and             revenues in the General Fund.
Occupancy Tax from the Little
Sterling Act. In the past, the act
provided authority for the now-             The History of Philadelphia’s
repealed School District’s General          Wage Tax
Business Tax on gross receipts and its
Corporate Net Income Tax. In 1971,          The 1930s–Creation of the Wage
the General Assembly enacted the            Tax
First Class School District Liquor               During the Great Depression, to
Sales Tax Act, which authorized the         “afford relief for the welfare and
City to impose a dedicated 10 percent       unemployment situations in
tax on retail sales of liquor to benefit    Philadelphia,”3 the General Assembly
the School District.                        enacted the Sterling Act. That act
    With the First Class City Business      authorized Philadelphia to impose a
Tax Reform Act enacted in 1984, the         tax upon any item or transaction
legislature for the first time permitted    within its territorial limits, provided
Philadelphia to impose a privilege tax      that the item or transaction was not
measured by net income, a subject of        subject to a current or future State tax
tax previously reserved for the State       or license fee.
and prohibited to the City pursuant to           Due to strong opposition from
the Sterling Act. Although the Sterling     Wage Tax opponents, the City was
Act authorized the Mercantile License       slow to act following the enactment of
Tax, also a tax based upon gross            the Sterling Act. Ultimately the City,
receipts, Philadelphia was previously       which was experiencing considerable
barred from imposing any corporate          budgetary problems, decided to
level business tax measured by net          temporarily adopt a Wage Tax. The
income. Pursuant to the authority           first ordinance, adopted in late 1938
granted by this enabling legislation,       and quickly repealed on January 7,
City Council adopted the Business           1939, imposed a 1.5 percent tax upon
Privilege Tax, a tax levied upon a          the wages and net profits of residents
taxpayer’s net income and a tax levied      and nonresidents working in the City,
upon gross receipts.                        but exempted certain domestic
    The Pennsylvania                        workers from tax and allowed a credit
Intergovernmental Cooperation               for Real Estate Tax paid.4
Authority Act for Cities of the First            After amending the original
Class (the “PICA Act”), enacted in          legislation to satisfy the Uniformity
1991, further expanded the City’s tax       Clause, on December 13, 1939, the
authority.2 Enacted to assist the City’s    City enacted the current Wage,
efforts to access the debt markets to       Earnings, and Net Profits Tax (the
secure the loans required to resolve a      “Wage Tax”). With that act,
financial crisis, the PICA Act              Philadelphia gained the dubious
authorized new City taxes. Pursuant         distinction of being the first city in the
to this legislation, the City dedicated a   nation to impose a personal income
portion of the existing resident Wage,      tax. The first year the Wage Tax was
Earnings, and Net Profits Tax to            collected, 1940, the tax provided 28
secure the debt repayment. It then
Historical Overview                                                               9

percent of all City and School District    jurisdictions the same taxing authority
tax revenues, establishing itself as an    that the Sterling Act granted to
important factor in the City budget        Philadelphia. However, to the
process.                                   exasperation of Philadelphia’s
                                           suburbs, Act 481 required that local
The 1940s–Growing Reliance on              jurisdictions allow all nonresident
and Opposition to the Wage Tax             Philadelphia employees to credit the
     The 1940s ushered in a wave of        Philadelphia Wage Tax against the
challenges and campaigns to eliminate      income taxes otherwise due. This
or reduce the harshness of the             provision effectively eliminated
unpopular Wage Tax. The tax had            support for such local legislation.
been sold to opponents as a                     Residents, nonresidents, and
temporary measure to help the City         federal and state employees all fought
weather the fiscal and human services      this tax in the courtroom. In Dole v.
crises caused by the Depression.           Philadelphia, 11 A.2d 163 (Pa 1940), a
However, it quickly became a               Philadelphia resident wage earner lost
permanent and increasing source of         his challenge when the Pennsylvania
tax revenue. Opponents of the tax          Supreme Court upheld the
continually tried and failed to cap the    constitutionality of the tax. Federal
tax rate and exempt nonresidents. The      employees working in Philadelphia
tax’s proponents justified inclusion of    launched a series of challenges. In
nonresidents with the argument that        Kiker v. City of Philadelphia, 31 A.2d
the City provided substantial benefits     289, 346 Pa. 624 (1943), cert. denied, 64
to nonresident employees through           S. Ct. 41, 320 U.S. 741, 88 L.Ed. 439,
City services and provision of high-       a New Jersey resident employed at the
income jobs.5                              Philadelphia Navy Yard unsuccessfully
     By the late 1940s, Real Estate Tax    challenged the constitutionality of the
revenues, as a percentage of total tax     tax on the dual grounds that
revenues had declined from a pre-          Philadelphia had no authority to tax
Wage Tax average of more than 90           him as a nonresident and had no
percent to 57 percent in 1947.             authority to tax him as a federal
Meanwhile, the share of tax revenues       employee working on federal
from the Wage Tax rose from 28             property. A Pennsylvania state
percent of 1940 tax revenues, to 37        employee lost a similar challenge in
percent of 1947 tax revenues.              Marson v. Philadelphia, 342 Pa. 369, 21
     Suburban legislators, frustrated in   A. 2d 228 (1941). Challenges to
their attempts to exempt nonresidents      Philadelphia’s authority to impose the
from the Philadelphia Wage Tax,            tax on federal employees continued
sought to transfer a portion of Wage       into the 1970s but were consistently
Tax revenues to the suburban               rejected by both state and federal
jurisdictions by granting those            courts.6
jurisdictions the authority to impose           Finally, in 1947, opponents of the
their own tax on the earnings of their     Wage Tax managed to secure
residents. Heeding their requests, the     limitations upon the spread of the tax
General Assembly passed Act 481            through amendments to the “Tax
during the 1947 legislative session.       Anything Act.” A one percent cap was
This Act, referred to as the “Tax          placed on Wage Tax levies in first
Anything Act,” granted most local          class counties, and second, third, and
10                                        Philadelphia Tax Reform Commission

fourth class counties were restricted     The 1970s–Limited Success for
from imposing a wage tax on               Wage Tax Opponents
nonresidents.                                 Pennsylvania imposed its first
                                          state tax on wages with the enactment
The 1950s–Continued Opposition            of the Personal Income Tax in 1971.
    Active opposition to the Wage         When the Sterling Act was enacted in
Tax continued unabated into the           1932, Pennsylvania reserved the
1950s, with repeated attempts to          authority to bar Philadelphia from
repeal the nonresident wage tax           imposing a tax upon any item that
provisions. However, throughout the       Pennsylvania chose to tax in the
decade the legislature steadily           future. Special legislation, a “Savings
approved higher wage tax caps. By         Clause,” was included to preserve
1957, the tax rate rose to 1.5 percent.   Philadelphia’s Wage Tax and avoid a
With the end of the post-World War        major fiscal deficit in the City.
II economic boom, efforts to restrain         During the early 1970’s the Wage
the growth of the Wage Tax were           Tax rate increased to 3.3125 percent.
undermined by the decline in              Triggered by a further Wage Tax
Philadelphia’s economy.7 Mayor            increase in 1976 to 4.3124 percent, in
Richardson K. Dilworth successfully       1977, opponents of the Wage Tax
argued that the budget surpluses of       upon nonresident income successfully
prior years would soon end and Wage       convinced the General Assembly to
Tax rate increases would be the only      amend the Savings Clause by
method of balancing the general           imposing limitations on the City’s
budget.                                   authority to increase the tax rate
                                          applicable to nonresidents. Pursuant
The 1960s–Further Expansion of            to that legislation, the nonresident tax
the Wage Tax                              rate was capped at the then current
    Between January 1960 and January      rate of 4.3125 percent until the rate
1969 the Wage Tax rate doubled from       imposed upon City residents rose
1.5 percent to three percent. During      higher than 5.75 percent. If the rate
this period, the City continued to        imposed upon residents reached this
increase its reliance upon Wage Tax       level, the nonresidents rate could be
revenues and decrease its reliance        increased, except that the rate
upon Real Estate Tax revenues. The        imposed upon nonresidents could
decade began with a 44 percent Real       never exceed 75 percent of the rate
Estate and 38 percent Wage Tax share      imposed upon residents. The decade
of total City and School District         closed with no further changes to the
revenues and closed with 29 percent       Wage Tax rate, which stood at the
and 55 percent shares, respectively.      statutory maximum of 4.3125 percent
During the 1963, 1965, and 1967           for both residents and nonresidents.
General Assembly sessions,
opponents of the tax introduced           The 1980s–Adoption of a Split-Rate
legislation that would have exempted           In July 1983, Philadelphia created
nonresidents. These efforts failed each   its first differential between the
time.                                     nonresident and resident Wage Tax
                                          rates. The resident rate rose to 4.96
                                          percent while the nonresident rate
                                          remained frozen at the 4.3125.
Historical Overview                                                              11

Philadelphia residents, asserting that         PICA was unwilling to rely upon
the differential violated the              revenues from new taxes for which
Uniformity Clause, challenged the          the City had no revenue history.
constitutionality of this split-rate       Consequently, the City chose to
structure.8 The Pennsylvania Supreme       dedicate 1.5 percent of the resident
Court upheld the tax on the grounds        Wage and Net Profits Tax to servicing
that the City had a reasonable and         the debt on the PICA bonds.9 The
non-arbitrary basis for imposing a         total wage tax rate structure remained
higher tax rate upon its residents than    the same. Only the allocation of the
upon the nonresidents.                     revenue changed.10 The City then
                                           enacted a one percent City Sales and
The 1990s–Philadelphia’s Fiscal            Use Tax and a one percent Hotel
Crisis and the Gradual Rate                Occupancy Tax to close the funding
Reductions                                 gap created by dedicating a portion of
    During the early 1990s,                the Wage Tax to PICA bond
Philadelphia experienced a serious         repayment.
fiscal crisis. Its budget deficit was          In 1994, the City successfully
inhibiting the City’s ability to provide   secured State legislation requiring
essential services and impeding it from    Pennsylvania’s suburban employers of
accessing the bond markets. After          Philadelphia residents to withhold the
much debate, the City and the              Wage Tax and remit it to the City.
Commonwealth agreed to work                This change significantly improved tax
together to resolve the City’s financial   collection.
problems. In 1991, the General                 Recognizing that Philadelphia’s
Assembly created the Pennsylvania          fiscal crisis was linked to the City’s
Intergovernmental Cooperation              struggling economy, Mayor Edward
Authority (“PICA”) to oversee the          G. Rendell implemented a gradual
City’s finances.                           Wage Tax reduction program. Fears
    The General Assembly legislatively     of creating another fiscal crisis limited
obligated the City to submit annual        the magnitude of these rate cuts.
five-year financial plans for PICA’s       During the first five years of the Wage
approval. PICA was vested with the         Tax rate cut, the resident rate declined
power to borrow money, issue bonds,        from a 1983–1995 high of 4.96
and secure the payment of the bonds        percent to 4.5635 percent, and the
with a dedicated source of tax             nonresident rate decreased from a 20-
revenue. The City, with the agreement      year high of 4.3125 percent to 3.9672
of PICA, was authorized to impose          percent, effective July 1, 2000. This
one or more new taxes as a dedicated       program of gradual Wage Tax rate
funding stream to secure debt              cuts was designed to send the message
repayment, or as a replacement source      that the City was serious about
for general fund revenues from             changing its tax structure and
established taxes that were dedicated      improving its business climate. Many
to debt repayment. The menu of new         economists and businesses considered
taxes included new authority to            these Wage Tax rate cuts to be long
impose a City Sales and Use Tax, a         overdue.
Hotel Occupancy Tax, and the option
of dedicating a portion the City’s
Wage Tax revenues to debt service.
12                                          Philadelphia Tax Reform Commission


The History of Philadelphia’s               Philadelphia taxation, because the
Business Taxes                              Commonwealth only taxed business
                                            net income.
Philadelphia’s First Business Tax               The School District Gross
     The early history of Philadelphia’s    Receipts Tax was enacted in 1950. In
business taxes parallels that of the        the late 1940s and early 1950s, the
Wage Tax. When the Sterling Act was         School District engaged in a capital
first adopted, Philadelphia was             campaign to build more schools to
preempted by the State’s Corporate          accommodate the post-war baby
Net Income Tax from imposing a tax          boom. In response to these funding
upon the net income of corporations         needs, the General Assembly
doing business in Philadelphia.             authorized the School District,
Unincorporated businesses were not          contingent upon the approval of City
subject to the State’s corporate            Council, to impose a Gross Receipts
income tax. Consequently Philadelphia       Tax upon any business operating
was authorized to tax their net             within the district.12 When, pursuant
income. When the City finally adopted       to that legislation, City Council
the Wage Tax in 1939 it also                authorized the School District General
implemented a tax upon the net              Business Tax effective January 1,
profits of unincorporated businesses.       1950, the School District became the
Although it is perceived to be a            beneficiary of the first local tax upon
separate tax, the Net Profits Tax           both incorporated and unincorporated
continues to be subject to the same         businesses. The General Business Tax
tax rates as those imposed upon             imposed a one mill∗ tax upon receipts
resident and nonresident wage               from business transacted within the
earners. The Net Profits Tax remained       School District by any resident or
the sole business tax imposed by the        nonresident, incorporated or
City until 1950.                            unincorporated business.
                                                Two years later, pursuant to the
1950s–New Business Taxes and                authority of the Sterling Act, City
Rate Increases                              Council imposed the Mercantile
    In the early 1950s, to relieve fiscal   License Tax upon incorporated and
pressure that had been building             unincorporated businesses for the
throughout the 1940s, Philadelphia          privilege of doing business in the City.
increased the Net Profits Tax rate to       The Mercantile License Tax was set at
1.25 percent. At the same time, the         a tax rate of three mills upon the
City attempted to broaden its business      annual gross volume of business
tax base. Although the City                 transacted in the City. All revenues
unsuccessfully attempted to expand          flowed directly to the City’s General
the Net Profits Tax to include              Fund.
corporations,11 during this decade it
imposed both a School District and a
City tax upon the gross receipts of
local businesses. The City was able to
pass these gross receipts-based taxes
despite the Sterling Act’s prohibition
of duplicate Pennsylvania and               ∗
                                             One mill is 1/1000, or one-tenth of one
                                            cent.
Historical Overview                                                            13

     This tax spawned a flood of            1970s–Creation of the Business
litigation.13 Citing the Sterling Act’s     Realty Use and Occupancy Tax
prohibition of City taxation of any         and Repeal of the School District
item that was the subject of a state        Net Income Tax
license fee, state licensed and                 During the 1970s, the City
regulated businesses asserted that they     continued to explore other sources for
were exempt.                                business tax revenues. In 1970, City
     Although the Pennsylvania              Council authorized the School District
Supreme Court upheld the                    to impose a Business Realty Use and
constitutionality of the Mercantile         Occupancy Tax upon all incorporated
License Tax, it held that state licensing   and unincorporated businesses. Two
fees and regulations preempted the          years later, the School District and
City from imposing this tax upon the        City Council elected not to re-
banks, savings and loan associations,       authorize the unpopular Corporate
securities dealers and a myriad of          Net Income Tax, the apparent result
other industries.                           of the School District’s forced choice
                                            between the Corporate Net Income
1960s–Philadelphia’s Increasing             Tax and the Business Realty Use and
Reliance on Business Taxes                  Occupancy Tax. During the years that
    During the 1960s, like individuals      businesses paid both taxes, the City’s
subject to the City’s Wage Tax,             revenue from each tax was roughly
unincorporated businesses liable for        equal: in 1970, $13.7 million in
the Net Profits Tax experienced a           revenue Corporate Net Income Tax
doubling of rates, from 1.5 percent in      and $11.3 million from the Use and
1959 to three percent in 1969. In           Occupancy Tax, and in 1971, $13.3
1968, City Council amended the              million from the Corporate Net
School District’s General Business          Income Tax and $14.0 million from
Tax, doubling the millage rate to two       the Use and Occupancy Tax. 16
mills, but capping the tax at two
percent of net income—which                 1980s–Sweeping Business Tax
effectively created a tax of the lesser     Reform
of two mills of gross receipts or two           To raise the revenues necessary to
percent of net income.14 The business       stave off an impending fiscal crisis,
tax burden grew two years later when,       Mayor William J. Green embarked
pursuant to the authority granted by        upon a major overhaul of City
the General Assembly in the First           business taxes:
Class City and School District                  Initially Mayor Green increased
Corporate Net Income Tax Act of                 the Mercantile License Tax rate
1969, the City enacted the Corporate            from three mills to four mills; a
Net Income Tax to benefit the School            year later he increased the rate
District.15 This tax imposed a rate of          from four mills to five mills.
three percent upon net income of                During this time, the tax was also
corporations for the privilege of doing         amended to provide that taxpayers
business within the City.                       could only deduct 50 percent of
                                                their receipts from out-of-City
                                                deliveries (prior to this change
                                                such deliveries were 100 percent
                                                exempt).
14                                         Philadelphia Tax Reform Commission

     In 1980, the Business Realty Use      to evaluate a business privilege tax as
     and Occupancy Tax rate doubled,       an alternative to the Mercantile
     increasing from 1.25 percent to       License Tax and General Business
     2.5 percent. This tax rate was        Tax.
     increased again in 1982 to 3.25           The Business Tax Committee
     percent.                              decided that two structural changes
     The Real Estate Transfer Tax (a       were necessary:
     tax that affects both businesses          The tax base had to be broadened
     and individuals) underwent a              to include the financial and other
     series of rate increases: doubling        regulated industries protected
     from one percent to two percent           from taxation by the Sterling Act
     in 1981 and increasing to 2.5             and by the implied preemption
     percent in 1983.                          doctrine applied by the courts to
     In 1982, the business Net Profits         exempt certain industries from the
     Tax rate increased to 4.96 percent.       Mercantile License Tax.
     In 1983, the Mechanical                   To make the business tax structure
     Amusement Device Tax, imposed             more equitable, the tax should be
     upon all coin operated                    imposed upon net income, not
     entertainment machines or devices         gross receipts, thereby basing the
     except jukeboxes, quadrupled              tax upon a business’s ability to
     from $25 to $100 per machine.             pay.
     Only the School District’s General    Under the Sterling Act, the State’s
     Business Tax remained                 Corporate Net Income Tax
     untouched.                            preempted such a City net income tax
                                           on corporations. Thus, the Business
Business Tax Committee                     Tax Committee realized that the
    Mayor Green’s actions alarmed          structural changes it sought could only
the business community—the                 be accomplished with the cooperation
Philadelphia Chamber of Commerce           of the General Assembly, and it set to
demanded that Mayor Green revoke           work enlisting support for the
these tax increases before further         necessary enabling legislation.
damaging the City’s economy and                Initially the Committee wanted to
business climate. The Mayor                replace the Mercantile License and
contended that he was forced to adopt      School District General Business
such severe increases as a result of the   Taxes with one tax upon business net
fiscal crisis he inherited upon taking     income. However, the City’s
office. His predecessor, Mayor Frank       continuing fiscal problems led newly
L. Rizzo, had granted generous wage        elected Mayor Wilson W. Goode to
concessions to the City’s labor unions     limit his support to revenue neutral
that were straining the City’s finances.   reforms proposed by the Business Tax
Nevertheless, he invited the Chamber       Committee. The Committee
of Commerce to provide a better,           reluctantly agreed to develop a
more equitable business tax structure      revenue plan that generated $210
that addressed the City’s fiscal needs.    million during its first two years. With
The Chamber of Commerce, in                the assistance of the Department of
conjunction with the Greater               Revenue, the City’s Business Tax
Philadelphia First Corporation,            Committee estimated that, with a tax
formed the Business Tax Committee          based upon business net income, the
Historical Overview                                                             15

rate would have to be set at 10 percent        Philadelphia now had sufficient
or higher. Realizing that—coupled              experience with the net income
with the State Corporate Net Income            portion of the Business Privilege
Tax rate of 10.5 percent—the total net         Tax to reliably predict the amount
income tax would drive businesses              of revenue that would be
from the City, the Committee                   generated at different rates of tax.
abandoned its goal of only taxing          The Business Tax Committee
business income.                           expected that this type of reduction in
    The Business Tax Committee             the gross receipts portion of the
eventually adopted a minimum gross         Business Privilege Tax would continue
receipts tax as one component of a         until only the net income portion of
comprehensive business tax.                the Business Privilege Tax remained.
However, before finalizing the tax
structure, the Committee knew that it      1990s–Tax Reform Efforts
had to gain the support of the                 During the 1990s, the City
industries previously exempt from          adopted several programs designed to
City taxation. These industries            spur job growth and revitalize
possessed enormous political power,        business development through
and the Committee feared that they         targeted tax relief.
would block the State enabling                 In 1990, the General Assembly
legislation required to impose the net         enacted the Pennsylvania Tax
income tax portion of the Business             Increment Financing Act, which
Privilege Tax. The Committee’s                 authorized the City and the School
solution was to provide special                District to create special economic
provisions that applied only to these          development districts in which the
industries.                                    increased tax revenue generated by
    Following the Committee’s                  development could be used to
recommendation, the City’s Business            finance improvements.17
Privilege Tax was adopted by                   In 1998, the General Assembly
ordinance on May 30, 1984. After               and City Council approved the
some debate, the initial rates of the          creation of Enterprise Zones,
Business Privilege Tax were set at 3.05        Keystone Opportunity Zones, and
mills of gross receipts and 3.7 percent        Keystone Opportunity Expansion
of net income. The revenue produced            Zones. Virtually all State and City
in 1985 from this initial rate structure       taxes are abated for the first ten
did not meet the $210 million revenue          years after a business moves into
neutral target. As a result, the rates         one of these zones. However, to
were increased in 1986 to 3.9 mills of         qualify for these abatements each
gross receipts and 4.35 percent of net         business must either increase its
income.                                        employment by at least 20 percent
    In 1989, City Council reduced the          during the first year of operation,
tax on gross receipts to 3.25 mills and        or make a capital investment in
increased the net income tax rate to           property in the zone equivalent to
the current 6.5 percent. Its decision          10 percent of its gross revenues
was influenced by two facts:                   for the preceding year.
    Pennsylvania’s Corporate Net           These tax incentive programs
    Income Tax rate had been reduced       encouraged business growth in those
    from 10.5 to 8.5 percent; and          select geographic locations most in
16                                         Philadelphia Tax Reform Commission

need of economic revitalization.              change was rejected even though
However, these reforms did not                it would have been a step in the
relieve any of the tax burden on the          direction of achieving tax parity
majority of Philadelphia businesses.          between incorporated businesses
                                              that pay only the Business
The Select Committee on Businesses Taxes      Privilege Tax and unincorporated
    In response to complaints from            businesses that pay both the
the business community, City Council          Business Privilege Tax and the
in 1992 created the Select Committee          Net Profits Tax.
on Business Taxes. This Select                The Committee recommended
Committee was charged with                    that the Business Privilege Tax
recommending changes to improve               new start provisions be changed.
Philadelphia’s anti-competitive               This change was rejected, even
business tax structure.                       though it would have helped new
    The City made a number of small           businesses by no longer requiring
changes based on the Select                   them to pay essentially a double
Committee’s recommendations:                  tax on their gross receipts, even if
    Effective with fiscal year 1996, the      they operated at a loss.
    gross receipts portion of the             The Committee recommended
    Business Privilege Tax was                that the Real Estate Transfer Tax
    lowered from 3.25 mills to 3.0            rate be reduced to 2.5 percent.
    mills.                                    This change was rejected despite
    In 1998, the City expanded the            the fact that it would have helped
    base of the gross receipts portion        both businesses and individuals
    of the Business Privilege Tax to
    include all businesses that have an    Business Taxes at the Dawn of the
    active presence in the City.18         New Millennium
    The City repealed four taxes               The 1990s closed on a decade of
    which collectively generated less      marginal job growth and continued
    than $25,000 in annual revenues:       population loss. The tax structure
    the Auction Tax, the Bowling           remained unchanged and the City’s
    Alley Tax, the Alarm Signal Tax,       marketability as a business location
    and the Sound Reproduction Tax.        continued to decline. Office
    The City made structural changes       expansion outside of the City
    to the calculation of the              exploded during the 1980s and 1990s,
    Amusement Tax and expanded             while new construction in the City was
    the tax base to include movie          minimal. Center City office and
    theaters.                              commercial property vacancies were
However, many of the Select                so high that in 1997 City Council
Committee’s most significant               approved special real estate tax
recommendations were considered            abatements for conversions of such
too costly to implement.                   property from commercial business or
    The Committee recommended              industrial use to commercial
    granting unincorporated business       residential use.19 The gross receipts
    a 100 percent credit of the net        portion of the Business Privilege Tax
    income portion of the Business         continued to slowly decline. However
    Privilege Tax to offset the tax due    this occurred too slowly to help many
    under the Net Profits Tax. This        businesses. By 2000, the City’s
Historical Overview                                                             17

piecemeal approach to tax relief-          Estate Tax rate decreased once in
driven economic development had            1974 and again in 2003, the total Real
little impact outside of the targeted      Estate Tax rate has risen steadily.
areas and businesses.                          More recently, the Real Estate Tax
                                           share of combined City and School
                                           District revenue has remained
The History of Philadelphia’s Real         relatively stable. In 1952, Real Estate
Property Taxes                             Tax revenue constituted a 28 percent
                                           share of the City and School District’s
Overview                                   combined revenue and in 2000
     During Philadelphia’s early           constituted a 29 percent share.
history, the City imposed a tax upon       However, during this same time
tangible real and personal property. A     period, Real Estate Tax revenue as a
general tax upon the personal estate,      share of general fund tax revenue
goods, and implements of residents         declined from 40 percent in 1952 to
dated back to the pre-Revolutionary        19 percent in 2000.
era. The first codified distinctions
between real and personal property         Property Assessments
appear to have been made during the            A system for valuing property
mid-nineteenth century, when the           subject to tax also predates the
General Assembly passed several laws       Constitution. Property assessors were
establishing assessment standards and      appointed until 1799, when the
authorizing taxation of intangible         legislature established that one
personal property.20 Tangible              assessor and two assistant assessors
personal property continued to be          should be elected in each ward in
taxed under the old law. State law did     Philadelphia. Also in 1799, assessment
not define the specific items of           procedures were codified for the first
property subject to property tax.          time. From 1834 to 1841, assessors
However, in 1887, the General              were required to hold meetings where
Assembly prohibited taxation of            they would set standard property
watches, household furniture, and          values. In 1841, the General Assembly
pleasure carriages.21 Current real         made several important reforms by:
property tax law is derived from the           Transferring valuation duties from
General County Assessment Act of               the assessors to the County
1933.22                                        Commissioners. For the first
     The General Assembly of                   time, standards for valuing
Pennsylvania authorizes, and                   property were separated from
Philadelphia imposes, both a City and          standards for assessing property,
a School District Real Estate Tax.             creating the precursor to the
The combined City and School                   modern structure where a board
District tax is referred to as the total       sets the standards and the
Real Estate Tax. Since 1952, the               assessors perform the
School District tax rate has increased         assessments.
from 1.325 percent to 4.79 percent.            Creating an Office of Assessor
During this same period, the City tax          and requiring the assessor and all
rate has increased from 1.7 percent to         assistant assessors to take an oath
3.474 percent. Although the City Real          of office to diligently and
                                               accurately value all real estate and
18                                         Philadelphia Tax Reform Commission

    tangible and intangible personal       Board of Revision of Taxes with the
    property subject to tax.               power to appoint assessors.26
    Creating the State Board of                With its enactment of the General
    Revision of Taxes charged with         County Assessment Law in 1933, the
    establishing a uniform system for      General Assembly provided standards
    the valuation of real and personal     with which each county assessment
    property and any other “objects”       office must comply.27 This law
    subject to tax.                        designates the subjects of taxation for
    Authorizing taxpayer appeals and       local purposes; regulates the
    creating the first assessment          assessment and valuation of persons,
    appeals process.                       property, and subjects of taxation for
The following year, the General            county purposes; and exempts certain
Assembly established satellite State       items from taxation. In addition, it
Board of Revision of Taxes offices in      delineates the procedures that each
every county.23 Each board was             assessor must follow when valuing
authorized to examine and determine        property. For example, the law
whether the assessment returns of the      requires each assessor to value
County assessors conformed to the          property according to its actual value.
laws of the Commonwealth. These            The assessor may consider the price at
offices were also charged with             which the property was sold, but this
equalizing the valuation of similar real   price cannot be controlling.
and personal properties if those               In 1937, the Board of Revision of
assessments did not conform.               Taxes’ authority expanded to include
    In 1854, the City-County               hearing condemnation cases resulting
Consolidation Act mandated that            from the City’s exercise of its right of
Philadelphia’s Board of Revision of        eminent domain. 28 The Board of
Taxes be composed of elected               View, which had been authorized to
officials, including the County            hear such cases, was abolished. In
Commissioners, the City Treasurer,         1964, the Board of View was re-
and the Receiver of Taxes. It also         established, but the majority of its
mandated that the Board continue the       members are the members of the
practice of electing assessors.24          Board of Revision of Taxes.
    During the years following city-           The Board of Revision of Taxes’
county consolidation, the General          current structure, powers, and duties,
Assembly changed the Philadelphia          were established by the legislature in
Board of Revision of Taxes from a          1939.29 It is composed of seven
state office to a separate municipal       members who are appointed for six-
office organized specifically to assess    year terms through secret election by a
and value property for taxation and        majority of the Court of Common
changed the method of selection of         Pleas of Philadelphia. By law,
board members from election to             members must be competent and
appointment. 25 The Court of               qualified citizens. The members of the
Common Pleas was vested with the           Board of Revision of Taxes appoint a
authority to appoint the members of        Chief Property Assessor, regular
the Board and with the authority to        assessors, and assistant assessors. The
hear appeals of its decisions. In 1873,    Board is required to divide the county
the General Assembly vested the            into assessment districts, establish
                                           records of assessments, update
Historical Overview                                                           19

records, allow the public to examine      Hospital Utilization Program v.
such records, and give notice of an       Commonwealth (hereinafter “HUP”)
increase or decrease in assessment        decision, many organizations were
value.                                    secure in their status as Public
                                          Charities. In HUP, the Pennsylvania
Abatement Programs                        Supreme Court articulated a subjective
    To encourage construction within      five-part test that organizations were
the City, Philadelphia has created        required to meet to qualify as a Purely
several abatement programs for its        Public Charity. This ruling effectively
real estate tax.                          called into question the exemption
    In 1974, City Council provided an     that many non-profit organizations,
    abatement for improvements            including hospitals and educational
    constructed to certain residential    institutions, had historically been
    properties in order to “repair and    granted. The ruling also introduced
    rehabilitate” the deteriorating       serious doubts into the minds of the
    neighborhoods of the City.            principals of charitable organizations
    For similar reasons in 1978, tax      about their tax liability, as local tax
    abatements were approved for          boards throughout Pennsylvania
    improvements to deteriorating         began to tax non-profit property.
    commercial and industrial                  In 1994, Mayor Edward G.
    property.                             Rendell issued an Executive Order to
    Again, in 1983, to encourage the      create a Voluntary Contribution
    construction of residential units     Program, in which non-profit
    within the City, any improvements     properties that had previously been
    or construction of residential        exempt were asked to make a
    buildings were granted abatement      voluntary payment in lieu of taxes in
    of the Real Estate Tax.               order to retain their previous
    Finally, in 1997, in order to fill    exemption. These voluntary
    vacancies arising from tenants        contributions equaled 40 percent of
    leaving commercial buildings, City    their Real Estate Tax and Use and
    Council authorized abatements for     Occupancy Tax bills (33 percent if
    the conversion of commercial          they agreed by an earlier deadline).
    buildings to commercial residential   Contributions were divided between
    buildings.                            the City (45.3 percent) and the School
In the decades following the adoption     District (54.7 percent), reflecting the
of these programs, the City made          general division of Real Estate Tax
multiple changes, expanding the           revenues. These institutions also were
programs and, in some instances,          given the option to provide services to
extending the abatement periods.          the City to pay for up to one-third of
                                          the negotiated monetary contribution.
Charitable Exemptions                     At the City’s request, services were
    According to Pennsylvania’s           focused on those disadvantaged
Constitution, Purely Public Charities     Philadelphians with the greatest need.
may be exempt from Commonwealth                By March 1995, 50 organizations
taxes. As such, local governments may     had signed five-year contracts to make
not levy a Real Estate Tax on any         voluntary contributions. Each contract
property used by a charity to further     was negotiated individually, and some
their charitable mission. Until the       smaller non-profits contributed at a
20                                          Philadelphia Tax Reform Commission

“hardship” level of $10,000 per year.       major changes were made to the
During this five-year period, the City      PURTA legislation and the revenues
and School District collected an            flowing to the City and the School
average of $4.8 million annually. A         District declined substantially.
major factor contributing to non-           Virtually all municipalities and school
profit willingness to negotiate             districts throughout the state
payments was the HUP ruling. Non-           experienced similar declines. An
profits saw the Voluntary                   isolated few reaped increased
Contribution Program as a way to            revenues.
avoid expensive litigation that might
result in the loss of their tax
exemption.                                  Philadelphia School District
    This program effectively ended in       Dedicated Non-Real Estate Taxes
1997 with the General Assembly’s
enactment of the Institutions of            Overview
Purely Public Charity Act. This act              The School Reform Commission
defined the requirements of an              is responsible for the School District’s
institution of purely public charity by     budget. Because this body is
codifying and providing objective           appointed rather than elected, it does
applications of the HUP opinion.            not have the authority to directly levy
    Consequently, when the term of          taxes. City Council, on behalf of the
each organization’s voluntary               School District, has the authority to
contribution expired, many                  impose taxes dedicated to the School
Philadelphia charities refused to renew     District and to reauthorize, amend, or
the agreement. By 2000, after the           repeal the taxes annually. As with all
original five-year voluntary                City taxing authority, City Council’s
contribution program contracts              authority to approve School District
expired, only 20 percent of the             tax legislation is founded in state
original 50 non-profits agreed to           enabling legislation.
continue their contributions.                    Historically, the City dedicated a
                                            portion of its Real Estate Tax
State Public Utility Realty Tax             revenues and equal amounts of its
     The Public Utility Realty Tax Act      Personal Property Tax revenues to the
(PURTA) imposes taxes upon                  School District. However, with the
incorporated Pennsylvania utilities in      1963 enactment of the Little Sterling
lieu of local real estate taxes. PURTA      Act, the School District’s potential
was first imposed by the Public Utility     sources of dedicated tax revenues
Realty Tax Act of 1970 and was              expanded. 30
reenacted by the Tax Reform Code of              In 1998, the General Assembly
1971. PURTA is a Commonwealth tax           enacted legislation providing the
imposed upon select real estate owned       criteria necessary for the legislature to
by utilities. The tax revenues from         declare a school district distressed and
PURTA flow into the Pennsylvania            the requirements imposed upon the
General Fund; a substantial portion of      school district, including appointment
these revenues are then redistributed       of a School Reform Commission and
to local school districts. As a result of   restrictions upon any changes in its
the deregulation of the electric, gas,      revenue. PA LEGIS 1998-46, §1 (“Act
and telecommunication industries,
Historical Overview                                                             21

46”). In 2002, the legislature declared     million in Real Estate Tax revenues.
the Philadelphia School District            A year after the General Business Tax
distressed. Pursuant to Act 46, the         was repealed, the School District
City must ensure that the District is       received $231.7 million in Real Estate
funded at a level equal to the highest      Tax revenue.
amount of revenue it received in the            In 1984, the City imposed a Real
previous three fiscal years. The City is    Estate Tax rate of 3.9 percent and the
further required to continue to             School District imposed a tax rate of
authorize and impose each tax that          3.575 percent. In 1984, the combined
was imposed prior to the date of            taxpayer rate was 7.475 percent. In
distress.31                                 1985, the City rate decreased to 3.505
                                            percent and the School District rate
School District General Business            increased to 3.970 percent, where they
Tax                                         remained until 1989.
     During the late 1940s, the School
District’s student enrollment growth        Personal Property Taxation
exceeded the capacity of the District’s          Historically, Philadelphia
facilities and resources. Unfortunately,    dedicated 50 percent of its Personal
it also outstripped the City’s ability to   Property Tax collections to the School
fund that growth. In 1949, the              District budget. The tax was repealed,
General Assembly recognized the             as it applied to the School District,
advantage of dedicated school taxes         effective in 1968, with the imposition
and authorized the School District          of the newly enacted School District
General Business Tax—a tax on the           Investment Net Income Tax.34
gross receipts of incorporated and
unincorporated businesses operating         School District Investment Net
within the School District                  Income Tax
boundaries.32 From 1950 until 1983,              After the Little Sterling Act was
revenues from this School District          created in 1963, the City was able to
General Business Tax increased from         tax, on behalf of the School District,
$5.6 million to $14.7 million.33            anything, including individuals, that
However, the School District budget         the City was authorized to tax under
required more revenue than the tax          the Sterling Act, with the exception of
could produce.                              nonresident wages or net income.35
     In 1984, at the urging of City         The City and School District first
businesses and with the support of the      acted upon this authority in 1967,
General Assembly, the City reformed         when they adopted the School District
its business tax system. To                 Investment Net Income Tax
compensate the School District for          (commonly known as the School
the loss of its dedicated revenue           Income Tax). The School Income Tax
stream caused by elimination of the         today is imposed at a rate equal to the
General Business Tax, the City              rate imposed upon wages and net
decreased its reliance on the Real          profits, but upon limited, unearned
Estate Tax and allowed the School           income sources.
District to increase its reliance
thereon. In 1983, the School District
received $14.7 million in General
Business Tax revenues and $181.3
22                                          Philadelphia Tax Reform Commission

School District Corporate Net               proportionate share of the assessed
Income Tax                                  value of the real estate, determined by
    In 1968, in response to a looming       the ratio of the square footage of the
budget crisis and a campaign promise        property used or occupied to the total
not to raise taxes, Mayor James H.J.        square footage available for use or
Tate balanced the City’s budget by          occupancy.
changing the City’s accounting system            During its first fiscal year, July 1,
from a calendar year to a fiscal year.      1970 through June 30, 1971, the tax
This maneuver allowed the City to           contributed $11.3 million to the
credit revenue from the eighteen-           School District’s revenues. The Use
month transition year against the           and Occupancy Tax rate increased
twelve-month budget. The following          several times during the 1980s,
year, with the City’s fiscal crisis         gradually rising from 1.25 percent to
exacerbated, and Mayor Tate’s               the current rate of 4.62 percent.
campaign promise fulfilled, the                 Less than two weeks after the tax
General Assembly authorized special         was adopted, the owners of the John
enabling legislation for a new School       Wanamaker Department Store
District tax. The City adopted the          invoked the Uniformity Clause to
short-lived School District Corporate       challenge the constitutionality of the
Net Income Tax.36 In its first year,        Use and Occupancy Tax.40 The
this tax provided the School District       taxpayer relied upon the long line of
with an additional $17.3 in revenue.        Supreme Court decisions prohibiting
During the following two years,             classification of real property for tax
revenues declined to $13.7 and $13.3        purposes based upon its use.41
million. After only three years, the        Although they prevailed in the lower
School District abandoned the tax in        court, the taxpayers lost in the
favor of the more reliable Business         Pennsylvania Supreme Court. That
Realty Use and Occupancy Tax.               court distinguished between the real
                                            property tax imposed on ownership of
Business Realty Use and                     property at issue in such decisions,
Occupancy Tax                               and the privilege tax, such as a use and
    In 1970, City Council overrode          occupancy tax, imposed upon the
Mayor Tate’s veto and adopted the           business use of property.42
Business Realty Use and Occupancy               The Business Realty Use and
Tax.37 Authorized by the Little Sterling    Occupancy Tax provides limited
Act, this tax is imposed by the School      exemptions from tax liability. The
District upon the actual user or            School District is not authorized to
occupier of real estate used or             levy this tax upon public utilities
occupied for the purpose of carrying        subject to tax by the Commonwealth
on any business, trade, occupation,         of Pennsylvania under the Tax Act of
profession, vocation, or any other          1963 for Education,43 or persons
commercial or industrial activity.38 As     engaged in Philadelphia Port-related
a tax imposed for the privilege of          activity. 44
doing business, the taxpayer is the              Persons and organizations
person exercising the privilege,            exempt from the Real Estate Tax are
whether that person owns the                exempt from the Business Realty Use
property, rents it, or merely occupies it   and Occupancy Tax based upon the
rent-free.39 Each person’s tax base is a    rationale that they do not use the
Historical Overview                                                              23

property for a business purpose.45 In      were required to submit the tax to
general, businesses that use and           Council’s vote each year. Having
occupy real property for which the         failed to re-authorize the tax for the
City grants real property tax              District’s 1996 fiscal year, the City was
abatements do not receive a                barred from collecting the tax. This
comparable abatement of the Use and        argument was dismissed by the Court
Occupancy Tax. 46 However, qualified       as based upon faulty logic and not
users are exempted from the Use and        grounded in the enabling legislation or
Occupancy Tax when their property is       the ordinance.52
located within a Keystone
Opportunity Zone or a Keystone
Opportunity Expansion Zone.47              Miscellaneous City Taxes

Liquor Sales Tax                           Personal Property Tax
    The School District experienced            Philadelphia’s tax on tangible and
serious financial shortfalls during the    intangible personal property predates
1990s. In an effort to secure additional   the Pennsylvania Constitution. Over
tax revenue, the School District and       time, the tax gradually became a tax
City turned to State enabling              solely upon intangibles.53 The most
legislation passed in 1971 granting the    recent reform and codification of the
District the authority to impose a 10      state tax enabling legislation occurred
percent tax on liquor served in retail     in 1919, when the stock of any
establishments.48 The District imposed     corporation subject to the State’s tax
the tax, which the City authorized,        on capital stock was excluded from
effective January 1, 1995.49 The public    the Personal Property Tax. This
reaction was swift and vocal. City         provision proved to be the undoing of
Council passed the ordinance by a          the tax. In the 1998 decision in
bare majority of nine to eight, after      Annenberg v. Commonwealth, 54 the
contentious public hearings and            Pennsylvania Supreme Court declared
Council debate.                            that the portion of the statute that
    Tavern and bar owners united in        imposed tax upon securities not
an effort to defeat the tax in court.      subject to the State Capital Stock Tax
The Licensed Beverage Association of       violated the Constitution. Although
Philadelphia and individual tavern and     the Court declared the provision
bar owners immediately filed for an        severable, the City suspended
injunction against enforcement.50          collection of the tax in 1997.
They alleged that the enabling
legislation either had expired, had        Public Parking Facility Tax
been implicitly repealed by subsequent         The Parking Facility Tax was
enabling legislation, or was pre-          originally approved in 1937 as a
empted by state taxes and fees             “Parking Lot Tax” imposed upon all
imposed upon the liquor industry. The      transactions in which a fee was paid to
court rejected those arguments. Their      park any type of motor vehicle in an
subsequent action to restrain the          open parking lot. The scope of the tax
collection of the tax after June 30,       was broadened in 1956 to include all
1995 was similarly rejected. 51 In that    public parking lots, and again in 1980
second action, the industry argued that    to include any public parking facility.
the School District and City Council
24                                         Philadelphia Tax Reform Commission

The initial rate of 10 percent set in      state imposition predates or postdates
1937 was not increased until 1985,         the City tax. When Pennsylvania
when it was raised to 20 percent. In       adopted a state-level transfer tax in
response to public pressure from           1953, the General Assembly avoided
business owners, the rate was reduced      the Sterling Act preemption by
to 17.5 percent in 1986, and to 15         specifically authorizing Philadelphia to
percent in 1987.55                         impose its Real Estate Transfer Tax.
                                           By convention, both parties to the
Amusement Tax                              transaction, the owner and the
    Philadelphia imposed a consumer        purchaser, generally pay equal shares
tax on the privilege of attending or       of the tax.
engaging in amusements as early as              In 1988, the City adopted an
1937. The ordinance excludes from          ordinance raising the Real Estate
the definition of “amusement”              Transfer Tax rate from 2.5 percent to
television broadcasts and any              4.07 percent. In response to a court
entertainment the proceeds of which        decree, the City agreed to reduce the
benefit religious, educational, or         rate to 3.0 percent by 1994. In its 1993
charitable organizations, military         report, the Select Committee on
organizations or personnel, and police     Business Taxes recommended further
or fire departments. In 1993, the tax      reduction to 2.5 percent. That
was amended to repeal a special 2.5        recommendation was not adopted and
percent gross receipts tax upon            the rate remains at three percent. The
establishments that raised liquor prices   Committee also proposed that the
when entertainment was provided and        City adopt the state Real Estate
to add movie theaters to the tax           Transfer Tax definition of a taxable
base.56 The tax is currently levied at a   lease to simplify administration of the
rate of 5.0 percent.                       tax upon long-term leases. The City
                                           acted upon this proposal.
Mechanical Amusement Device                     Philadelphia real estate
Tax                                        transactions are subject to one of the
    Adopted in 1945, the Mechanical        highest tax rates in the nation. This
Amusement Device Tax is imposed at         high rate encourages investors to seek
the annual rate of $100 on each coin-      legal methods of avoiding the tax on
operated amusement device, except          transfers. A common tax-avoidance
those operated pursuant to a sound         plan involves transferring, over a
recording license (i.e. jukeboxes).57      three-year period, up to 89 percent of
                                           the ownership interests in the
Real Estate Transfer Tax                   company owning the real estate
    Based upon the authority granted       (instead of transferring the property
by the Sterling Act, City Council          itself). Transactions are structured to
approved the Real Estate Transfer          provide that the owner retains an 11
Tax (enacted as the Realty Transfer        percent interest. However, the
Tax) in 1952, to be effective for all      transactions often lack economic
real property transfers completed on       substance: i.e., the retained interest
or after January 1, 1953. The Sterling     often is committed in the original
Act prohibits the City from imposing       transfer transaction, to occur three
a tax on the same property and             years and one day after the 89 percent
transactions as the state, whether the     transfer.
Historical Overview                                                              25

     Similarly, if ownership of land      Sales and Use Tax and Hotel
and the improvements therein are held     Occupancy Tax
by different ownership entities,              In 1991, pursuant to the authority
property lawyers have argued that         conferred in the Pennsylvania
transactions involving sales of leased    Intergovernmental Cooperation
property subject to 30-year leases are    Authority legislation, Philadelphia
subject to the tax on the land, not the   enacted a one percent Sales and Use
leased structures. The new property       tax upon the retail purchase price of
owner purchases the land and pays the     tangible personal property or services
tax thereon, then terminates the          sold or used within the City.61
leasehold after the transaction is        Because this tax is not dedicated to
recorded, thereby allowing the parties    fund the PICA debt, it contains no
to avoid the tax upon the structure.      sunset provisions.
The City vigorously litigates                 The City of Philadelphia also
transactions such as these that are       enacted a Hotel Occupancy Tax in
structured to avoid the tax through       1991 pursuant to the authority granted
technicalities that have no economic      by the PICA legislation.62 The Hotel
substance.                                Occupancy Tax is imposed at the rate
                                          of one percent of the rent of every
Real Estate Non-Utilization Tax           hotel room within the City.
     In 1982, Philadelphia enacted a
Real Estate Non-Utilization Tax for       Tourism and Marketing Tax
purposes of penalizing property               A 1999 City ordinance imposes a
owners for allowing property to lie       one percent Tourism and Marketing
fallow and deteriorate.58 The             Tax upon the cost of hotel room
constitutionality of this tax, however,   rental.63 This tax is in addition to the
was quickly challenged and the Court      existing six percent Hotel Room
granted declaratory relief barring the    Rental Tax. Together they are
City from collecting it.                  collected as seven percent tax.
                                          Revenue from this tax is dedicated to
Hotel Room Rental Tax                     funding the marketing of regional
    In 1982, Philadelphia adopted a       attractions.64
dedicated Hotel Room Rental tax to
fund the Pennsylvania Convention          Vehicle Rental Tax
Center.59 The tax rate was phased-in          On March 28, 2000, City Council
from three percent upon enactment to      enacted a two percent tax on the gross
six percent upon completion of the        price paid for all vehicle rentals.65
Convention Center. The proceeds           Revenues from this tax are used to
from this tax are dedicated to payment    fund the debt service for stadiums
of the debt and operations of the         built to host the City’s professional
Convention Center. If construction of     baseball and football teams.
the Center had not commenced by
1988, the balance of the dedicated
fund would have been used for
tourism promotion.60
26                                        Philadelphia Tax Reform Commission

Repealed Taxes                                Emergency Sales Tax—From
   Auctioneer Tax—An annual tax of            March 1,1938, until December 31,
   $500 was imposed on auctioneers            1938 the City imposed an
   between 1945 and 1993.66                   emergency two percent Sales
   Petroleum Processing Tax—                  Tax.73 Although it generated $6.8
   Petroleum processors were subject          million in revenue in its 10-month
   to a $5 per barrel tax imposed             lifespan, the emergency tax was
   from July 1, 1976 to June 30,              not re-enacted as a permanent tax.
   1977.67                                    The tax was a permissible City
   Gasoline Distributors Tax—                 levy because the state Sales Tax
   Gasoline distributors paid a two           had not yet been enacted.
   percent gross receipts tax on
   certain gasoline deliveries within
   the City. 68 In 1981, shortly after    The Impetus behind Tax Reform
   its creation, this tax was             in the 2000s
   superseded by a state tax on such
   deliveries.                            In November 2001, the City
   Pari-Mutual Tax—Harness and            Controller’s Office released its Tax
   flat racing wagers were taxed at       Structure Analysis Report, the result of
   rates between two percent and          an 18-month study of the City’s
   four percent from 1963 to 1982.69      economic health and tax system.
   This tax is not collected and no       Well-received by the business
   longer appears in the Philadelphia     community, the report called for
   Code of Ordinances.                    significant and more rapid reductions
   Vending Machine Tax—Between            in Wage and business taxes and
   July 1, 1988 and December 31,          adoption of land-value real estate
   1989, an annual tax of $100 was        taxation. At a public hearing on the
   imposed on all vending machines,       Controller’s Report held by City
   except those dispensing                Council in February 2002, more than
   newspapers.70                          50 expert witnesses appeared, most of
   Sound Reproduction Tax—                whom supported the conclusions
   Businesses engaged in sound            reached in the report.
   reproduction were subject to a five        However, in his January 2002
   percent gross receipts tax until its   budget proposal for fiscal year 2003,
   repeal in 1992.71                      Mayor John F. Street proposed
   Bowling Alley Tax—Enacted in           freezing the Wage Tax rates at the
   1945 at an annual rate of $25 per      2003 level and dedicating
   alley, this tax was imposed at a       approximately one-half of the revenue
   rate of $100 per alley when it was     saved from the freeze to accelerating
   repealed in 1992.                      the gradual reduction of the gross
   Condominium Conversion                 receipts portion of the Business
   Privilege Tax—Enacted in 1982,         Privilege Tax. The balance of the
   this tax was held unconstitutional     savings was intended to offset the
   on the grounds that it lacked          financial effects of a national recession
   uniformity. It was repealed in         and poor pension fund investment
   1993 and preempted by the              performance.
   Uniform Condominium Act.72
Historical Overview                                                          27

     Response to the Mayor’s proposal         After a difficult year filled with
by City Council and the general public    campaigns against Wage Tax rate
was immediate and intense. City           freezes and against unprecedented
Council quickly resolved, at a            increases in real estate assessments,
minimum, to preserve the gradual tax      support for tax reform was
cuts planned through 2007. A march        overwhelming. By a four-to-one
on City Hall demonstrating support        margin, City voters approved the
for continuation of the Wage Tax rate     referendum on November 5, 2002,
reduction policy was held on April 12,    creating the first independent Tax
2002. By April 15, 2002, a unanimous      Reform Commission in Philadelphia
City Council authorized the               history.
continuation of the scheduled Wage            Even after the Tax Reform
Tax rate reductions and accelerated       Commission was created, City Council
reduction if the City’s Wage Tax          continued to pursue Wage Tax
revenues increased.                       reform. On April 25, 2003, City
     During this fight for the Wage Tax   Council adopted legislation that
rate reduction, City Council moved        requires further Wage Tax rate
forward a resolution to convene an        reductions if Wage and Real Estate
independent commission to study the       Tax revenues increase above specified
City’s entire tax structure and           levels.74
recommend comprehensive reform.
In April 2002, Council approved a
referendum for the November 2002
ballot that would amend the City
Charter by creating an independent
Tax Reform Commission, with fifteen
Commission members and twenty-
three Advisory Board Members.
     In the late summer of 2002, the
citizen tax revolt was re-ignited by
newly released property assessments
which dramatically increased many
taxpayers’ liability.
28                                          Philadelphia Tax Reform Commission




 Section 4: The Need for Tax Reform

Many basic economic and social              Commission was created to make
forces have worked to Philadelphia’s        recommendations designed to
disadvantage in recent decades. The         improve the tax elements of the
loss of the city’s comparative              package of taxes and services
advantage as a manufacturing location,      Philadelphia offers citizens and
improved suburban transportation            businesses.
networks, and an increasing supply of            This chapter contains an analysis
low-density suburban housing all            of the major problems of
make it harder for the city to compete.     Philadelphia’s tax system. The city’s
While these trends are beyond the           high tax rates are partially the result of
control of local government, local          high service needs, a weak tax base,
public policy in Philadelphia has in        the city’s service responsibilities as a
some ways contributed to the city’s         city-county, and a low level of fiscal
economic decline.                           equalization in the state’s methods of
    The American federal system is          funding county services. To achieve
structured to allow local governments       more significant tax reductions over
to make their own decisions about           the long term, therefore, the state
education, law enforcement, taxation        should be an active partner in
and other public policies. Residents        reforming the state-level policies that
and businesses are free to choose a         contribute to the city’s high tax
location based in part on the               burden. However, local public officials
attractiveness of the overall package       can make tangible changes by
of public services and tax levels within    addressing three issues: Philadelphia’s
a local jurisdiction. Localities,           high overall level of taxation; an
therefore, effectively compete with         inefficient mix of taxation; and
each other for residents and                inadequate real property assessment
businesses. Locations that provide an       practices. Unilateral City-initiated tax
attractive package of services and tax      reforms may not be sufficient in and
rates will succeed in this competition;     of themselves to entirely restore the
localities that do not provide an           city’s competitiveness as a place to
attractive tax and service package will     live, work, and do business, but they
suffer decline.                             are vital elements of a package of
    Evidence suggests that, while           state, regional, and local public policy
Philadelphia’s tax and service package      changes that together could set the
has not been the only factor                city on a path to economic recovery.
contributing to the city’s long-term        Increasing tax structure
loss of population and jobs, it has         competitiveness, equity, stability,
certainly contributed to that loss. High    neutrality, and simplicity will set the
taxes, inadequate public schools, and       stage for a new Philadelphia.
low levels of public safety all appear to
have discouraged residential and
business growth. The Tax Reform
The Need for Tax Reform                                                              29


Why Taxes Matter                             residents and businesses to locate
                                             within the jurisdiction. While local tax
The dominant view among                      reductions may affect the quantity of
economists regarding the effect of           labor supply, consumption, saving, or
inter-jurisdictional differences in taxes    investment by individual households
and services is that businesses and          and businesses, the effect of tax cuts
individuals will “vote with their feet”      within a local jurisdiction upon the
when confronted with a tax structure         economy of that jurisdiction is
that is not competitive with nearby          expected to result primarily from
jurisdictions. Although many factors         changes in where individual households
influence business location, many of         choose to work, save, consume, and
these factors (such as cost and quality      invest. There is a solid basis, therefore,
of the labor force, housing quality and      to expect that the impact of taxes
cost, and energy and transportation          upon economic growth at the local
costs) are constant within any given         level is likely to be significantly greater
region. In contrast, tax levels can vary     than the impact of tax cuts at the
dramatically from community to               federal level. There is little serious
community. Thus, businesses can              disagreement among economists that
move within a region to avoid paying         overall local tax levels do have a
high local taxes while retaining many        significant effect on economic growth
of the benefits of operating in that         within a local jurisdiction.
region. By influencing location                   A review of the literature
decisions in this way, local taxes affect    addressing the effect of state and local
economic growth.                             taxes on economic growth by
     While there is considerable             economist Michael Wasylenko
disagreement about the magnitude of          concludes that, “taxes have a small,
the impact of federal taxes on national      statistically significant effect on
economic growth, there is more               interregional location behavior. The
general agreement among economists           suggested estimate of interregional
about the important impact that local        elasticity is -0.2.”1 This implies that a
taxes have upon the level of economic        10 percent increase in tax levels leads
growth within a local jurisdiction. The      to a decrease in overall economic
theory behind tax cuts at the federal        activity within a state or region of 2.0
level is that individuals will work, save,   percent. However, econometric
invest, or consume more in response          analysis reveals that taxes have a much
to lower income tax rates. There is,         stronger impact upon economic
however, substantial disagreement            growth within local communities.
about the magnitude of these                 Studies of the effect of local taxes on
responses to lower federal taxes.            intraregional economic growth find
     The primary behavioral effect of        elasticities ranging from -0.79 to
local tax cuts is that they influence        -1.95.2 This implies that a 10 percent
location decisions of households and         increase in tax levels leads to a
firms. Local tax reductions, holding         decrease in overall economic activity
constant all other factors that              of 7.9 to 19.5 percent.
influence location decisions, make a
location more attractive to individuals
and businesses, thereby inducing more
30                                            Philadelphia Tax Reform Commission


Philadelphia’s High Tax Burden                when businesses and residents choose
                                              where to locate. 62 percent of
Because Philadelphia’s tax burden is          respondents to the Commission’s
higher than that of competitor                survey of Philadelphia’s business
jurisdictions, it is difficult for the city   community on taxes classified the
to compete for and retain residents,          gross receipts portion of the Business
businesses, and jobs. There is                Privilege Tax as a large burden on
substantial evidence—from                     their business. 58 percent of
econometric analysis, surveys, as well        respondents found the Wage Tax to
as anecdotal evidence—that the city’s         be a large burden, and 56 percent
high tax burden has significantly             indicated that the net income portion
reduced the size of its economy.              of the Business Privilege Tax places a
                                              large burden on their business. One
Anecdotal Evidence                            respondent wrote, “The City Wage
    In 2002, the Central Philadelphia         Tax is possibly the greatest single
Development Corporation met with              reason this city is and will continue to
executives from large Philadelphia            be passed by, by other cities, counties,
companies. These business leaders             and states.” Another respondent
expressed serious concern about               wrote, “Doing business in
Philadelphia’s tax structure. 3               Philadelphia with the current wage tax
    A national accounting and                 structure makes it difficult to recruit
    consulting firm reported that their       individuals who have other choices
    Philadelphia office pays the              where they are not impacted by the
    second highest rate of business           tax.”4
    taxes among all of the company’s              Surveys conducted by various
    offices, with only the New York           organizations also suggest that high
    City office paying higher taxes.          taxes have contributed to the city’s
    An information technology firm            loss of population and business
    reported that it has lost many            activity in recent decades.
    high-salary employees to a                    A 2002 survey of registered voters
    competitor in the suburbs whose               in Philadelphia sponsored by the
    employees are not subject to the              Pennsylvania Economy League
    Wage Tax.                                     found that 49 percent of voters
    A chemical manufacturer reported              had considered moving out of the
    that its employees are paid higher            city and, among those, 18 percent
    salaries as compensation for the              reported that the high City Wage
    Wage Tax, but that employees still            Tax was among the reasons they
    view the tax as taking money from             considered leaving the city. This
    their pockets. Both employee and              was the third most often cited
    employer feel they are “paying                reason for leaving, behind only
    extra” for little benefit since most          “wanting a better environment for
    workers live in the suburbs.                  their family,” and, “crime, drugs
                                                  and violence.” Further, 54 percent
Survey Evidence                                   of respondents indicated that they
    Survey evidence from a variety of             believe the City’s taxes have “a
sources suggests that Philadelphia’s              great deal” of influence on the
total tax burden is an important factor           decisions of people to leave the
                                                  city.5
The Need for Tax Reform                                                         31

   In a 2001 survey of city business     mid-1990s, the City’s Five-Year
   owners and managers by the City       Financial Plan has acknowledged that
   Department of Commerce,               Philadelphia’s unusually high tax rates
   taxation was the most frequently      make it difficult for the city to
   mentioned disadvantage of             compete with other jurisdictions in
   operating in Philadelphia, cited by   attracting and retaining businesses and
   51 percent of respondents. Over       residents. In 1996, the City began a
   60 percent of representatives of      program of annual, incremental cuts in
   manufacturers and professional        the Wage Tax, Earnings Tax, Net
   service firms mentioned taxes as a    Profits Tax, School Income Tax, and
   disadvantage of a city location.6     gross receipts portion of the Business
   In a 2000 survey conducted by the     Privilege Tax. In the past seven years,
   Central Philadelphia Development      income-based tax rates have been
   Corporation, 63 percent of Center     reduced by over 10 percent and the
   City office workers identified the    rate of the gross receipts portion of
   Wage Tax as one of the things         the Business Privilege Tax has been
   they like least about working in      reduced by over 35 percent. However,
   Center City. Respondents cited the    the city’s taxes remain among the
   Wage Tax at a higher rate than any    highest in the country.
   other factor, including safety, the       Numerous credible studies have
   cost and availability of parking,     concluded that Philadelphia
   and the difficulty of commuting.7     businesses, residents, and workers
   In 1998, the City Planning            shoulder an unusually large tax
   Commission surveyed                   burden.
   Philadelphia households who were          In the District of Columbia’s
   selling their homes. Among                annual report on tax burdens in
   families with children, the primary       the large U.S. cities, Philadelphia is
   reasons behind their decision to          consistently ranked as one of the
   sell were a desire for: a safer           highest taxed cities in the nation.
   neighborhood (76 percent), lower          The overall 2002 state and local
   car insurance (71 percent), a more        tax burden on a Philadelphia
   attractive neighborhood (68               family earning $25,000 per year is
   percent), better schools (57              calculated to be the third highest
   percent), a larger home or yard           out of 51 cities included in the
   (52 percent), and the City Wage           report. For families at higher
   Tax (51 percent).8 While these            income levels, up to $150,000 per
   results clearly point to the              year, Philadelphia’s rank never
   importance of city services, they         falls below fifth out of 51 cities.9
   also indicate that taxes are an           A 1998 study by Vertex, Inc., a
   important consideration among             state and local tax research and
   families who choose to leave the          software firm, found that
   city.                                     Philadelphia’s business tax burden
                                             was the highest among 27 major
Philadelphia’s High Tax Rates                U. S. cities.10 The study estimated
   Philadelphia’s tax rates are              the combined federal, state, and
substantially higher than those of           local tax liability of a
other major cities and nearby                representative service company
suburban municipalities. Since the           with $15 million in gross revenue
   32                                                    Philadelphia Tax Reform Commission

        and $1.5 million profits. In terms                  local tax burden of a typical
        of local business taxes,                            Philadelphia resident in fiscal year
        Philadelphia’s tax burden ranked                    2000 was 14.4 percent of income.
        fourth out of 27 cities, behind                     The combined tax burden in the
        only New York City, Chicago, and                    city’s Pennsylvania suburbs was
        Cleveland. While the overall                        only 9.0 percent of income.12
        business tax burden in                              The City’s Wage Tax and Business
        Philadelphia in 1998 declined by                    Privilege Tax rates are well above
        2.15 percent from the 1993                          typical rates in other cities and
        estimate published in a previous                    local suburbs, as shown in Figure
        Vertex report—more than any                         4.1. The City’s resident Wage Tax
        other city—the overall tax burden                   of 4.4625 percent exceeds the
        in Philadelphia in 1998 remained                    average local resident income-
        the highest among the 27                            based tax rate in other cities by
        comparison cities.                                  462 percent and the average local
        A 2000 report by the New York                       earned income tax rate in the 240
        City Independent Budget Office                      municipalities in the western
        concluded that Philadelphia’s local                 suburbs by 499 percent.
        tax effort in 1997 was $6.84 per                    Philadelphia’s 6.5 percent tax on
        $100 in taxable resources. Only                     business net income exceeds the
        New York City had a higher local                    average rate in other cities by 907
        tax effort by this measure. 11                      percent. The City’s tax on business
        The city’s tax burden is extremely                  gross receipts of 2.1 mills exceeds
        high compared to its own suburbs.                   the average of other cities by 348
        A 2002 study by economist Robert                    percent and the suburban average
        Inman of the Wharton School of                      by between 500 and 775 percent,
        the University of Pennsylvania                      depending upon the industry.
        found that the combined state and

Figure 4.1: Philadelphia Local Tax Rates Compared to Other Cities and Suburban
Jurisdictions, 2003
                                             Average                     % by which     % by which
                                                            Average
                                            Rate in 20                   Philadelphia   Philadelphia
           Tax              Philadelphia                   Rate in PA
                                             Largest                    Exceeds Other     Exceeds
                                                            Suburbs
                                              Cities                        Cities        Suburbs
   Resident Personal
                              4.4625%        0.79%         0.745%           462            499
      Income Tax
Business Net Income Tax         6.5%         0.65%             0            907            N.A.
Business Gross Receipts
                              2.1 mills     0.47 mills    0.35 mills        348            500
      Tax (Retail)
Business Gross Receipts
                              2.1 mills     0.47 mills    0.24 mills        348            775
    Tax (Wholesale)
Business Gross Receipts
                              2.1 mills     0.47 mills    0.28 mills        348            650
      Tax (Other)

Source: Commonwealth of Pennsylvania, Department of Community and Economic Development, 2003;
Commerce Clearing House, 2003.
The Need for Tax Reform                                                         33


High Tax Rates Hinder Economic              lies somewhere between 0 percent and
Prosperity                                  100 percent. Accordingly, if the
                                            economy is operating to the right of
Economic research suggests that             the peak of the inverted-U curve, then
Philadelphia’s high tax rates have a        decreasing the tax rate can increase
detrimental influence on the city’s         government revenue as it attracts
economic prosperity. Since the 1980s        more tax-paying businesses and
numerous studies have attempted to          individuals than would otherwise
measure the impact of local taxes on        remain. In a 2001 study, Robert
Philadelphia’s economy.13 These             Inman and Andrew Haughwout found
studies generally conclude that local       that the rates of the gross receipts
taxes have a substantial effect upon        portion of the Business Privilege Tax,
Philadelphia’s employment, resident         nonresident Wage Tax, and Real
income, property values, and business       Estate Tax were beyond their revenue-
activity.                                   maximizing level. In other words,
     Econometric analysis indicates         raising their rates would generate even
that the city’s high relative tax burden    less revenue and lowering them would
has been a primary cause of the city’s      generate greater revenue. Their study
economic decline in recent decades.         concludes that, “Philadelphia is at, or
Between 1971 and 2001,                      very close to, the peak of its long-run
Philadelphia’s share of national            revenue hill.”15
employment declined from 1.24
percent to 0.52 percent. A
forthcoming study by Andrew
Haughwout, Robert Inman, Steven
Craig, and Thomas Luce, found that
61 percent of this decline
(approximately 172,889 jobs) could be
attributed to the rise in the City’s
Wage Tax rates over that period.14
This research suggests that the City’s
high tax rates have been a major
factor contributing to the city’s
economic decline in recent decades.
     Research also suggests that
Philadelphia has exhausted its long-
term capacity to increase local
government revenues through
increases in local tax rates. This
research is based on the idea that
government collects no revenue if the
tax rate is 0 percent and if the tax rate
is 100 percent. In between these two
points there is a graphical “inverted-
U” relationship between tax rates and
total tax collections. Government
revenue is maximized at a tax rate that
34                                                                                              Philadelphia Tax Reform Commission


Philadelphia’s Peculiar Tax Mix                                                               19 percent of Philadelphia’s tax
                                                                                              revenue. For all cities in the U.S. with
Compared to other large cities,                                                               at least 300,000 residents, the average
Philadelphia has an unusually high                                                            percentage of local municipal tax
reliance on business and personal                                                             revenue derived from the property tax
income tax revenue, and an unusually                                                          in 1997 was 40 percent.17
low reliance on property and sales tax                                                             When comparing Philadelphia’s
revenue.                                                                                      tax structure to the tax structure of
     As shown in Figure 4.2, in 1997                                                          other cities around the country, it is
personal income tax revenue in                                                                obvious that Philadelphia has an
Philadelphia–-revenue from the                                                                unusually high dependence upon
resident Wage Tax, Earnings Tax, Net                                                          business and wage taxes.
Profits Tax and School Income Tax—                                                                 Among the nation’s 20 largest
was 33.3 percent of total tax revenue,                                                             cities, only three tax the net
compared to an average of 8.5 percent                                                              income of corporations—New
among the 10 largest U.S. cities.                                                                  York City, Philadelphia, and
Business income tax revenue made up                                                                Detroit. Detroit’s 1.2 percent
12.4 percent of Philadelphia tax                                                                   Corporation Income Tax is being
revenue compared to an average of                                                                  phased out, with complete
5.3 percent in other cities.                                                                       elimination scheduled for 2009.
     When compared to other large city                                                             Philadelphia is the only major U.S.
governments, Philadelphia’s                                                                        city to levy a tax on both business
percentage of School District and City                                                             net income and gross receipts.18
revenue from the Real Estate Tax is                                                                The gross receipts portion of
unusually low. Real Estate Tax                                                                     Philadelphia’s Business Privilege
revenue made up only 39.7 percent of                                                               Tax is between six and nine times
City and School District tax revenue                                                               the average rate levied in suburban
in Philadelphia, compared to a big-city                                                            communities in southeastern
average of 59.7 percent.16 In fiscal year                                                          Pennsylvania, depending on the
1997, property tax revenue made up                                                                 industry.19

Figure 4.2: Distribution of Tax Revenues in the Ten Largest U.S. Cities, 1997

      100%

        80%                                                                                                                       Other

        60%                                                                                                                       General Sales
                                                                                                                                  Business Income
        40%
                                                                                                                                  Personal Income
        20%                                                                                                                       Property

         0%
                                                                                                                       New York
                                                                      Chicago

                                                                                Los Angeles



                                                                                                        Philadelphia
                             Houston

                                       Dallas




                                                                                              Detroit
                                                Phoenix

                                                          San Diego
               San Antonio




                                                                                                                         City




Source: New York City Independent Budget Office, 2000.
The Need for Tax Reform                                                                                                                                                                                                                                               35

   The local earned income tax rate                                                                                                                                    other city in the United States.
   levied on residents exceeds 1.5                                                                                                                                     The next highest local commuter
   percent in only three of 240                                                                                                                                        tax is 2.25 percent, the rate
   municipal jurisdictions in the city’s                                                                                                                               imposed in Dayton, Toledo, and
   Pennsylvania suburbs.20 Local                                                                                                                                       Youngstown, Ohio.21
   governments in Philadelphia’s
   New Jersey suburbs levy no local
   income taxes at all.                                                                                                                                  A Bad Tax Mix Dampens
   Among the 20 largest cities in the                                                                                                                    Economic Prosperity
   country, only eight levy local
   income taxes, as shown in Figure                                                                                                                      Economic theory and econometric
   4.3. Philadelphia’s local income tax                                                                                                                  research strongly suggest that
   rate for residents, currently 4.4625                                                                                                                  Philadelphia’s peculiar combination of
   percent, is the highest in the                                                                                                                        taxes is far more damaging to the
   nation. Among other major cities                                                                                                                      economy than an alternative revenue
   with local income taxes, the                                                                                                                          structure would be. With its heavy
   median rate is 2.0 percent, less                                                                                                                      reliance on those tax sources that are
   than half of Philadelphia’s current                                                                                                                   most likely to drive residents, jobs,
   rate.                                                                                                                                                 and businesses from the city,
   Philadelphia’s tax rate on                                                                                                                            Philadelphia compounds the problems
   nonresident income, currently 3.88                                                                                                                    created by its high overall tax burden.
   percent, is higher than that of any

  Figure 4.3: Current Local Income Tax Rates in the Twenty Largest U.S. Cities
  (Maximum Rate in Cities With Progressive Income Taxes)
                5.0

                4.5

                4.0

                3.5

                3.0
      Percent




                2.5

                2.0

                1.5

                1.0

                0.5

                0.0
                      Philadelphia




                                                                                                                    Indianapolis
                                                                                      San Francisco




                                                                                                                                                                             Dallas
                                                                                                                                                                                      San Antonio


                                                                                                                                                                                                               Jacksonville
                                                                                                                                                       Phoenix
                                                                                                                                                                 San Diego




                                                                                                                                                                                                                                                 Milwaukee
                                                                           Columbus


                                                                                                      Los Angeles




                                                                                                                                                                                                    San Jose


                                                                                                                                                                                                                              Austin
                                                                                                                                   Chicago




                                                                                                                                                                                                                                       Memphis
                                                                                                                                             Houston
                                                                 Detroit
                                                     Baltimore




                                                                                                                                                                                                                                                             Boston
                                     New York City




  Source: Commerce Clearing House, 2003.
36                                           Philadelphia Tax Reform Commission

Economic Theory                              have a relatively small economic
     In the 21st century, most workers,      impact. Unlike workers and
customers, and suppliers are highly          businesses, land is immobile and
mobile. As such, most businesses             cannot relocate to escape high taxes.
cannot pass on the cost of local             For this reason, economic theory
business taxes to their employees (by        predicts that the overall effect of
lowering wages), to their customers          property-based taxes on the city’s
(by raising prices), or to their suppliers   economy—employment levels,
(by reducing the purchase price of           income, and business activity—is
goods and services). Thus, high local        smaller than the effect created by the
business taxes in Philadelphia directly      Wage Tax or the Business Privilege
reduce profits and encourage                 Tax. Most economists agree that
businesses to leave the city. The            property-based taxes are capitalized
impact of business taxes upon profit         into the market value of real estate
margins is especially pronounced for         and as a result property values
businesses whose workers are willing         typically decrease when property taxes
to work in the suburbs, whose                increase. No tax comes without an
customers are not concentrated in the        economic cost. Wage and business
city, and who are not highly                 taxes drive out jobs and residents.
dependent upon city suppliers.               Property-based taxes lower property
Further, because there are costs             values. The task for policy-makers is
associated with commuting, to the            to select that mix of taxation which
extent that high business taxes result       does the least overall damage to the
in fewer jobs located within the city,       local economy.
the city will become less attractive as a
residential location.                        Evidence
     Although the City’s Wage Tax is              Results from two different
levied upon individuals, economic            Philadelphia business surveys indicate
theory suggests that a significant           that some taxes are more harmful than
portion of the burden created by the         others. City business owners who
tax falls upon city businesses.              responded to the Commission’s 2003
Businesses employing workers who             survey reported that the Wage and
have the option of working either in         business taxes were most burdensome
the city or the suburbs will have to pay     to their companies. The City
a premium (equal to the value of the         Department of Commerce surveyed
Wage Tax) in order to attract                Philadelphia businesses in 2001
employees. Although this premium             concerning the city’s business
may take many forms (such as higher          climate.22 Wage, Earnings and Net
wages, better benefits, or fewer work        Profits Taxes and the gross receipts
hours per day), this premium is an           portion of the Business Privilege Tax
extra burden that must be paid by            were the taxes most often cited as
businesses. This cost reduces the            those that should receive top priority
profitability of city firms and provides     for tax reduction. Approximately 77
an additional incentive for businesses       percent of respondents indicated that
to locate offices and factories in the       the Wage, Earnings and Net Profits
suburbs.                                     Taxes were among the top three taxes
     Compared to taxes on income and         in terms of priority for tax reduction,
business activity, property-based taxes      and 69 percent of respondents
 The Need for Tax Reform                                                                                37

 indicated that the gross receipts                        statistically significant impact upon
 portion of the Business Privilege Tax                    employment. Econsult also found that
 was among the top three taxes in                         shifting the city’s tax burden away
 terms of priority for tax reduction.                     from business and Wage taxes and
     Econometric analysis of the                          onto property-based taxes results in
 impact of taxes upon the Philadelphia                    substantial increases in jobs, resident
 economy is consistent with economic                      incomes, business activity, and
 theory and survey findings. Econsult                     property values. This finding suggests
 (2003) directly compared the                             that local tax policy in Philadelphia is
 economic impact of an immediate                          not a zero sum game. Dollar-for-
 $125 million cut in the Wage Tax to                      dollar replacement of business and
 equal dollar value cuts in the gross                     Wage Tax revenue with property tax
 receipts portion of the Business                         revenue leads to net increases in city
 Privilege Tax and the Real Estate Tax.                   tax bases, City tax revenues, and
 Econsult found that, in terms of the                     private economic wealth.
 increase in resident income and                               Evidence of this positive impact
 property values, Wage and business                       can be found in the City’s Five-Year
 tax cuts result in a substantially larger                Financial Plan (Figure 4.4), which
 impact than property tax cuts.                           shows how the gap between
 Further, although the Econsult study                     Philadelphia employment growth and
 found that Wage and business tax cuts                    U.S. employment growth dropped
 would substantially increase city                        substantially after the City began its
 employment, it did not find that                         program of incremental tax reductions
 property tax cuts would have a                           in 1996.

Figure 4.4 Gap Between Philadelphia Employment and U.S. Employment Growth



     5.0%
                     Pre-Tax Cut Program
                     Average Gap: 3.4%      4.3%

     4.0%
                                                                   Post-Tax Cut Program
                                                           3.5%     Average Gap: 1.4%
              3.4%                   3.3%
                       2.9%   2.9%
     3.0%
                                                   2.4%

     2.0%
                                                                  1.4%
                                                                                       1.3%
                                                                         1.0%
     1.0%
                                                                                0.6%

                                                                                                -0.4%
     0.0%
             1991      1992   1993   1994   1995   1996   1997    1998   1999   2000   2001     2002

     -1.0%                                                                                    (through
                                                                                                Nov.)



Source: U.S. Bureau of Labor Statistics.
 38                                                                                       Philadelphia Tax Reform Commission

 The Impact of City Tax Policy on                                                              Economic theory suggests that, to
 Property Values                                                                          the extent that tax reform makes
      Property values reflect market                                                      Philadelphia a more attractive place to
 expectations about the future value of                                                   live and work, tax reform will increase
 location as a place to live and do                                                       the demand for city property and lead
 business in the long run. As shown in                                                    to both higher market values of
 Figure 4.5, residential property values                                                  existing property, as well as new
 in the city of Philadelphia are low                                                      construction. Assuming that property-
 compared to other major northeastern                                                     based tax rates remain constant,
 cities. While Philadelphia’s large stock                                                 increasing property values will
 of single-family homes has made                                                          generate additional tax revenue.
 home ownership far more accessible                                                       Econsult (2003) supports this
 than in many other cities, the fact that                                                 theoretical assumption. Econsult’s
 property values are so far below values                                                  study finds that lower City Wage and
 in comparable regional cities is a                                                       business taxes would lead to increased
 symptom of Philadelphia’s economic                                                       property values in the city.23
 distress. Philadelphia’s low property                                                         Historical trends suggest that city
 values can be linked at least in part to                                                 property values are closely linked to
 the city’s high overall tax burden and                                                   market expectations of the City’s
 its inefficient mix of tax revenue                                                       future tax rates and fiscal condition.
 sources.                                                                                 While city residential property values

Figure 4.5: Comparison of Property Values in Selected Cities, 2000


   $450,000
                $396,400
   $400,000

   $350,000

   $300,000

   $250,000                       $235,500



   $200,000                                   $190,600
                                                         $157,200

   $150,000                                                                   $132,400
                                                                                          $119,000 $109,200
                                                                                                                 $96,900
   $100,000                                                                                                                  $69,100      $59,700

      $50,000

         $-
                                                                                                                                           Philadelphia
                  San Francisco


                                    Oakland




                                                           Washington, D.C.


                                                                                Chicago




                                                                                                     New Haven


                                                                                                                  Hartford


                                                                                                                              Baltimore
                                                Boston




                                                                                            Newark




Source: U. S. Census Bureau.
The Need for Tax Reform                                                                                                        39

kept pace with the nation in the 1980s,
housing prices fell significantly shortly                                  In considering the appropriate
after the City’s financial crisis of 1990-                            local tax mix for Philadelphia, City
1991. After it was revealed in August                                 officials should take a cue from the
1990 that the city faced a FY91 budget                                trend in other major cities. Other
deficit of $153.5 million, with the                                   cities are reducing their reliance on
prospect of future deficits as high as                                business and personal income-based
$450 million, the real estate market                                  taxation. The City of Detroit is
quickly responded to the possibility of                               reducing its income taxes for residents
future tax increases or service cuts.                                 and nonresidents by one third over a
City home values fell by over eight                                   ten-year period from 1999 to 2009.
percent in a six-month period.                                        The income tax rate for residents,
Property values continued to decline                                  which was 2.95 percent in 1999, is
through 1994. In 1995, following                                      scheduled to be two percent by 2009,
three consecutive years of balanced                                   and the nonresident rate will be
budgets and the announcement of the                                   reduced from 1.475 percent to one
first cuts in 20 years in the City Wage                               percent over the same period. Detroit
Tax and the gross receipts portion of                                 also plans to eliminate its corporate
the Business Privilege Tax, property                                  income tax by 2009. In 1999, New
values began to increase. Since then,                                 York City repealed its nonresident
while the City’s fiscal stability has been                            earnings tax, which had been levied at
                                                                             Source: Gillen, 2003.
maintained and tax rates have                                         a rate of 0.45 percent on commuter
continued to decrease, Philadelphia’s                                 wages and 0.65 percent on
property values have increased. See                                   nonresident earnings from self-
Figure 4.6.                                                           employment.24


   Figure 4.6: House Price Indices, Philadelphia City, Philadelphia Region, and U. S.
   Average, 1980-2003 (1980 = 100)
      340.0
                                    Philadelphia City

      290.0                         Philadelphia Region
                                    Nation

      240.0


      190.0



      140.0



       90.0
              1980

                     1981

                            1983

                                   1984

                                          1986

                                                 1987

                                                        1989

                                                               1990

                                                                       1992

                                                                              1993

                                                                                     1995

                                                                                            1996

                                                                                                   1998

                                                                                                          1999

                                                                                                                 2001

                                                                                                                        2002
    40                                               Philadelphia Tax Reform Commission

                                                     from market values. Philadelphia’s
        In sum, a broad array of evidence            property assessments do not meet
    points to the conclusion that                    industry standards for equity;
    Philadelphia’s high reliance on Wage             properties in poorer neighborhoods
    and business taxes leads to fewer jobs,          are, on average, assessed at a higher
    reduced resident income, less business           percentage of market value than
    activity, and lower property values in           properties in more affluent
    the city. Thus, it is necessary to reduce        neighborhoods. The inaccuracy and
    the proportion of overall tax revenues           regressive nature of Philadelphia’s
    that derive from Wage and business               assessments violate standards of
    taxes. With such a change in the City’s          vertical and horizontal equity.
    tax mix, Philadelphia can significantly          Inaccurate and regressive assessments
    increase the size of its economy while           effectively make policy makers less
    maintaining a tax revenue stream                 likely to support any efforts to
    adequate to finance needed public                increase reliance upon property-based
    services.                                        taxes.
                                                          Philadelphia’s coefficient of
                                                     dispersion (COD), a measure of
    Inadequate Property Tax                          assessment inaccuracy, is very high
    Assessment                                       compared to the standard
                                                     recommended by the International
    Philadelphia’s economy would benefit             Association of Assessing Officers
    if taxes were shifted away from mobile           (IAAO). Figure 4.7 presents the
    factors of production onto land and              average COD by type of property in
    property. However, problems with                 Philadelphia, based upon 2003
    Philadelphia’s property assessments              assessment data. For each class of
    diminish the revenue generating                  property, Philadelphia’s COD is
    potential of such a shift.                       significantly above the IAAO standard
                                                     for large urban jurisdictions.
    Accuracy and Equity                                   Philadelphia’s COD is also much
         Philadelphia’s property                     higher than that of suburban
    assessments do not meet industry                 jurisdictions in southeastern
    standards for accuracy; all across the           Pennsylvania and other major cities
    city, assessed values diverge widely             across the country. Although cities

Figure 4.7: Average Assessment Error by Property Type
                                                            Target COD
                                    Philadelphia Mean                         % Within
Property Type                                            According to IAAO
                                           COD                                 Target
                                                            Standards
Single-Family Residential                    34.4%            ≤15%             51.4%
Hotels, Condos and Apartments                32.2%            ≤15%             50.5%
Retail                                       48.6%            ≤15%             34.6%
Commercial                                   46.7%            ≤15%             37.3%
Industrial                                   58.9%            ≤15%             31.4%

Vacant Land                                  77.4%            ≤20%             26.0%
Source: Gillen, 2003.
The Need for Tax Reform                                                       41

like Boston, Baltimore and Chicago        Thus, the assessment system results in
have older, heterogeneous housing         a higher tax burden (in percentage
stocks similar to Philadelphia’s, they    terms) upon poorer households than
have a significantly lower level of       upon more affluent households.
general assessment error. Compared        Although many older cities have
to other major cities in the U.S. for     regressive assessments, Philadelphia
which comparable information is           has the highest degree of assessment
available, only Buffalo has a higher      regressivity among any major U.S. city
level of assessment error than            for which equivalent data is available,
Philadelphia.25                           surpassing such comparable cities as
     Another serious concern is that      Baltimore, Chicago, Pittsburgh, and
the city’s assessments are regressive.    Washington, D.C. by several orders of
The Price-Related Differential (PRD)      magnitude.26
is a quantitative measure of the degree       The extent of the problem can be
of assessment regressively. For single-   clearly seen in Figure 4.8. The map
family homes, Philadelphia’s PRD is       indicates the average assessment ratio
six times larger than what is             (the ratio between assessed and
prescribed by the IAAO’s national         market value) for residential property
standards for assessment uniformity.      in each city neighborhood as a
Lower-priced properties are typically     proportion of the citywide assessment
assessed at higher fractions of their     ratio. Darker tracts are overassessed
value than higher-priced properties.      relative to lighter tracts. Taken as a

  Figure 4.8




  Source: Gillen, 2003.
42                                        Philadelphia Tax Reform Commission

whole, neighborhoods with higher          Assessment System Simplicity
property values in the northwestern            Philadelphia’s assessment process
and northeastern sections of the city,    is overly complicated and convoluted.
as well as in Center City, are under      This violates the principle of tax
assessed relative to less affluent        system simplicity. The convoluted
neighborhoods in North Philadelphia       assessment process makes it difficult
and West Philadelphia.                    for average citizens to understand the
                                          process and to make an informed
Land Valuation                            judgment about whether their
     Problems with the property tax       assessment is accurate; furthermore, it
system also prevent another tax policy    erodes trust in the tax system. If
change that can be expected to            citizens do not trust the fairness of the
increase the efficiency of the city tax   assessment process, and if they cannot
system: the gradual shift toward land-    determine whether their own
value taxation. The efficiency benefits   assessments are fair, they will be less
of land-value taxation require that       likely to support a shift to increased
taxes place a higher burden upon          reliance on property taxation, as
property owners that own relatively       opposed to Wage and business taxes.
highly valued land and a lower burden
upon property owners with relatively
highly valued improvements. This          Demographics and Philadelphia’s
cannot be achieved without an             Service Responsibilities
assessment system that accurately
determines the value of both land and     Philadelphia tax revenues can be
improvements. Without major               divided into three parts—those taxes
improvements in the overall               levied to support public education and
assessment system, it will not be         dedicated to the School District of
possible to value land and                Philadelphia, those taxes levied to
improvements separately with a            provide traditional municipal services
sufficient degree of accuracy to insure   that are provided by the City, and
that land-value taxation results in an    those taxes levied to provide county-
accurate targeting of the tax burden      level services that are also provided by
toward property owners with higher        the City.
land values. The expected economic            Figure 4.9 presents a comparison
stimulus effects of land-value taxation   of the tax burden associated with
will for that reason be unlikely to       municipal, school district, and county
occur unless the current problems         services in Philadelphia and in the
with the assessment system are            average Pennsylvania municipality,
addressed.                                school district, or county, respectively.
The Need for Tax Reform                                                                         43



Figure 4.9: Philadelphia’s Tax Burden Compared to Other Jurisdictions in
Pennsylvania, Fiscal Year 2001 (Total Taxes Collected as a Percent of Market Value
of Real Estate)

                                                                   State Average
           Expenditure Type            Philadelphia
                                                              (Excluding Philadelphia)
          Municipal Services               4.3%                        0.4%
           Public Education                1.8%                        2.1%
           County Services                 2.8%                        0.5%
                 Total                     8.9%                        3.0%

Source: Commonwealth of Pennsylvania, Department of Community and Economic Development,
2003; City of Philadelphia, 2001; Commonwealth of Pennsylvania, State Tax Equalization Board,
2003.


Philadelphia’s tax burden for county                  districts in the Commonwealth do
and municipal services—measured as                    promote fiscal equalization to some
total taxes collected as a percentage of              extent. State and federal funding for
the market value of real estate—are                   public education is targeted to districts
extremely high compared to the                        with low fiscal capacity and high
statewide average. The city’s tax                     poverty among the student
burden to support public education is                 population.
comparable to, and in fact somewhat                        The Commonwealth’s method of
below, the state average. This suggests               providing aid to support the cost of
that the city’s high municipal and                    county services does not serve to
county tax burden are the primary                     equalize tax burdens. This works to
contributors to the city’s overall high               the disadvantage of Philadelphia more
tax burden.                                           than any other county in the state.
    Total Philadelphia taxes collected                With the exception of Philadelphia,
to support public education are 1.8                   counties in Pennsylvania generally
percent of market value, somewhat                     include a mixture of urban, suburban,
below the tax burden in the average                   and/or rural areas. As a result, outside
Pennsylvania school district. At the                  Philadelphia, higher income and lower
same time, School District of                         income areas share the cost of
Philadelphia spending per student in                  providing county services, which are
2001- 2002 ($8,748) was only 3.9                      closely related to crime and poverty.
percent below the state average of                    Philadelphia is the only city-county in
$9,099. This result might not be                      the Commonwealth, and this unique
expected, given the city’s relatively                 status has a significant impact on the
weak tax base of $152,718 per student,                City’s spending and tax burden. In
compared to a state average of                        terms of spending per capita, tax
$233,582 per student. The city’s ability              burden, market value per capita, and
to maintain a near-average spending                   indicators of need for service such as
per student despite its relatively low                crime and poverty rates, Philadelphia
school district tax burden and limited                is dramatically different from every
tax base reflects the fact that state and             other county in the Commonwealth,
federal funding of local school                       as illustrated in Figure 4.10.
  44                                                    Philadelphia Tax Reform Commission

      Despite the city’s demographic                   rates to support county human service
  and economic dissimilarity from other                programs. This result is reflected in
  counties, it is responsible for                      Philadelphia’s extremely high tax
  providing the same range of county                   burden for county level services, a
  level services as every other                        burden that is seven times the median
  Pennsylvania county: maintaining the                 among Pennsylvania counties.
  local judicial and corrections systems,                   The city’s high overall tax burden
  and providing children and youth,                    is also driven by a high tax burden to
  homeless, mental health, mental                      support municipal services. The city’s
  retardation, drug and alcohol, and                   municipal tax burden is more than ten
  public health services. The city’s high              times the average tax burden of other
  crime and poverty rates insure a                     municipal governments in
  significantly higher degree of need for              Pennsylvania. Clearly, this high tax
  these services than in other counties,               burden is driven in part by the city’s
  and this is reflected in the city’s high             high crime rate compared to the
  spending per capita for county                       typical local jurisdiction in
  services. At the same time, for some                 Pennsylvania. It is also the product of
  of these services (judicial and                      the city’s relatively weak tax base per
  corrections) state funding is minimal,               capita compared to other
  and for others, state funding, while                 municipalities, and the city’s broad
  substantial, is not targeted to counties             array of public services, including
  with high service needs or low fiscal                regional public amenities such as
  capacity. Generally, state funding for               funding of sports stadiums, museums,
  county programs is provided through                  and the Philadelphia Zoo.
  a matching grant with a single                            In sum, Philadelphia’s high overall
  matching rate for all counties. The                  tax burden reflects four structural
  result is that counties such as                      problems: high need for county level
  Philadelphia with high needs for                     services; low fiscal capacity;
  service and low fiscal capacity will                 Philadelphia’s service responsibilities
  necessarily be forced to levy high tax               as a city-county; and the fact that the


Figure 4.10: Philadelphia Versus Other Pennsylvania Counties, Key Demographic and Fiscal
Variables

                                     Crime Per           County         County Taxes
                                                                                          Market Value
                     Poverty Rate      1,000          Spending Per     as a Percent of
                                                                                           Per Capita
                       (1999)       Population           Capita         Market Value
                                                                                            (2001)
                                      (2001)             (FY01)            (FY01)
Philadelphia           22.9%            62.5            $2,232              2.8%            $20,794
Pennsylvania Counties (Excluding Philadelphia)
  Minimum              4.4%              4.6              $212               0.2%           $17,388
  Median              10.3%             16.9              $520               0.4%           $28,044
  Maximum              18.0%            33.7              $971               1.0%           $84,415

Source: Commonwealth of Pennsylvania, Pennsylvania State Police, 2001; Commonwealth of Pennsylvania,
Department of Community and Economic Development, 2003; Commonwealth of Pennsylvania, State Tax
Equalization Board, 2003; City of Philadelphia, 2001; and U. S. Census Bureau, 2003.
The Need for Tax Reform                     45

state’s method of supporting the cost
of county services does not explicitly
target funding to counties with high
service needs and low fiscal capacity.
The City cannot unilaterally change its
service responsibilities as a city-county
or the Commonwealth’s method of
providing financial support for
county-level services. Local
Philadelphia officials, however, can
make overall reductions in tax levels,
adopt a more efficient mix of taxation,
and improve the City’s system of real
property assessment. To the extent
that these policy changes promote
economic growth and jobs, and
reduce poverty in the city, they may
also reduce the need for county and
municipal services over time–-many of
which are directly related to poverty
and crime—and strengthen the city’s
tax base. It is clear, however, that
addressing the structural problems
that drive high city taxes will require
strong collaboration between the City
and State.
46                                            Philadelphia Tax Reform Commission




 Section 5: Tax Reform
 Recommendations
The Philadelphia Tax Reform                        Currently, a seven-member Board
Commission’s recommendations are              of Revision of Taxes, appointed by
firmly grounded in tax and economic           the judges of the Philadelphia Court
theory. However, throughout its               of Common Pleas, assesses all
research process, the Commission has          Philadelphia property and hears all
sought input from Philadelphia                assessment appeals. This arrangement
businesses, community groups,                 has been sharply criticized by
residents, and City agencies to judge         taxpayers who are displeased with the
whether its recommendations                   quality of property assessments and
resonated with stakeholders.                  who believe that the appeals process is
Consequently, the Commission                  neither fair nor impartial. The
considers these recommendations to            proposed Appeals Board would be a
be sound in principle and achievable          seven-member board of qualified
in practice.                                  individuals appointed by the Mayor to
     Although the Commission                  hear and decide the outcome of
believes that each of its                     assessment appeals. Because the duties
recommendations will improve tax              of the Board of Revision of Taxes will
system competitiveness, equity,               decrease with the creation of the
stability, neutrality, or simplicity, these   Appeals Board, the Commission
recommendations will be most                  recommends that further analysis be
effective if implemented as a                 conducted to determine whether it
comprehensive tax reform package.             might be appropriate to appoint fewer
Except where explicitly noted, each of        members to the Board of Revision of
these recommendations would be                Taxes.
effective beginning in fiscal year 2005.           Although some advocacy groups
                                              have argued that the Court of
                                              Common Pleas should not appoint
Assessment System Reform                      members of the Board of Revision of
Recommendations                               Taxes, the Commission believes that it
                                              is important for the assessing body to
Recommendation 1: Separate the                retain a degree of independence from
Property Assessment and Appeals               the Mayor and City Council. As such,
Process.                                      the Commission does not recommend
    To increase assessment accuracy           changing the Board of Revision of
and ensure that the appeals process is        Taxes appointment process.
unbiased, the Commission
recommends creating a Property
Assessment Appeals Board (the
“Appeals Board”) independent of the
Board of Revision of Taxes (BRT).
Tax Reform Recommendations                                                      47

Recommendation 2: Establish a            explicitly recommends expanding the
Taxpayers’ Advocate.                     scope of data collection for
     To increase taxpayer                Philadelphia land and structural
representation in the assessment         property characteristics. Funds from
process and to improve tax system        the City’s productivity bank, other
fairness, the Commission                 savings related to proposed changes in
recommends creating a position of        the Real Estate Tax (discussed in
Taxpayers’ Advocate. The Taxpayers’      Recommendation 9) or a one-time
Advocate should:                         surcharge on Real Estate Tax bills
    provide advice, council, and         should be used to fund efforts to
    education to property owners in      improve data collection and to
    the assessment and appeals           establish accurate land and structure
    process;                             values.
    represent low income residential          Assessments in heterogeneous
    property owners before the Board     cities tend be less accurate and more
    of Revision of Taxes and the         regressive than assessments in
    Appeals Board;                       homogeneous suburbs. However, of
    improve public understanding of      the other major cities in the U.S. for
    the assessment and appeal            which comparable information is
    processes;                           available, only Buffalo has a higher
    monitor and report on the quality    level of assessment error than
    of the assessment process; and       Philadelphia. Similarly, among major
    review and comment upon the          U.S. cities for which equivalent data is
    Board of Revision of Taxes           available, Philadelphia has the highest
    Assessment-Practice Principles       degree of assessment regressivity,
    and the Appeals Board practices      surpassing cities such as Baltimore,
    and procedures.                      Chicago, Pittsburgh, and Washington
The Commission recommends that           D.C. by several orders of magnitude.
the Mayor nominate and the City               Research performed at the request
Council approve candidates for the       of the Commission indicated that
position of Taxpayers’ Advocate.         barely half of Philadelphia’s stock of
                                         single and multi-family housing, a
Recommendation 3: Establish              third of retail and industrial properties,
Accurate Land and Structure Values       and a quarter of vacant land meet
for All Property Parcels.                industry standards of appraisal
     As real estate assessments are an   accuracy set by the International
integral part of an equitable and well   Association of Assessing Officers
functioning local tax system, the        (IAAO). This same research reveals
Commission recommends establishing       that properties in the most
accurate land and structure values for   economically disadvantaged
all property parcels in Philadelphia.    neighborhoods are generally over
Although investment in automated         assessed and properties in the most
appraisal technologies and statistical   affluent neighborhoods are generally
methodologies may yield some gains       under assessed. As a result, those who
in assessment uniformity, the highest    are least able to pay Real Estate Taxes
gain is likely to be realized by more    are forced to pay more than their fair
comprehensive and accurate data          share and those who are most able to
collection. As such, the Commission      pay Real Estate Taxes are allowed to
48                                         Philadelphia Tax Reform Commission

pay less than their fair share. Since      to these assessment-practice
basic public services (trash, fire,        principles.
police, etc.) are provided to all               The Commission recommends
households, implementation of this         that the following reforms be
recommendation would end the               incorporated into the Board of
current pattern of redistributing          Revision of Taxes’s set of
wealth from low-income households          Assessment-Practice Principles:
to high-income households.                     a requirement that all assessors be
     In addition to improving tax              state certified;
system equity, establishing accurate           a commitment not to create or
land and structure assessments helps           preserve inequalities by artificially
to ensure that the City will effectively       capping assessments;
capture the benefits of tax reform. If         an annual reassessing of all
the Commission’s proposed package              properties to reflect any increase
of tax reform induces households and           or decrease in value;
businesses to relocate to Philadelphia,        a commitment to continually
many of the fiscal benefits forecasted         improve the quality of the data
to accrue to the city would be in the          collected about the condition of
form of rising property values and             each property;
increased Real Estate Tax revenues.            an increased reliance on computer
The City will not be able to recognize         modeling and information
these gains unless property                    management systems;
assessments adjust as property values          the incorporation of advanced
change.                                        regression techniques, computer
                                               calculated neighborhood indexes,
Recommendation 4: Adopt a Set of               GIS mapping, and Computer
Assessment-Practice Principles.                Assisted Mass Appraisal (CAMA)
     To improve tax system equity and          products; and
transparency, the Commission                   a commitment to provide more
recommends that the Board of                   information about how
Revision of Taxes be required to               assessments are performed when
officially adopt and publicly                  assessment notices are sent out.
promulgate a set of assessment-                For example, each notice could
practice principles.                           contain information about the
     The Commission recommends                 average assessment in that
that formal assessment-practice                neighborhood for that type of
principles be created with the help of         property, and reasons why the
an advisory board comprised of                 assessment deviates from the
representatives appointed by the               average.
Board of Revision of Taxes, the
Mayor, City Council, the City              Recommendation 5: Eliminate
Controller, and the newly created          Fractional Assessments.
Taxpayers’ Advocate. Each year, the            In order to promote greater equity
Board of Revision of Taxes should be       and simplicity within the tax structure,
required to submit to City Council and     the Commission recommends
make available to the public, a report     eliminating fractional property
on any changes that have been made         assessments.
Tax Reform Recommendations                                                       49

     Currently, the actual selling price    previously under-assessed properties.
for most pieces of property is higher       Tax system stability and relief to
than the market price assigned to that      property owners who unexpectedly
property by the Board of Revision of        face large tax increases can be
Taxes. Assessing all properties at 100      achieved when property tax buffering
percent of market value, instead of the     programs are implemented.
current 70 percent, would remove an             After careful analysis of different
additional layer of complexity from             buffering programs, the
the process, and contribute to making           Commission rejects all types of
the administration of the property tax          phasing, caps, and freezes, in favor
more transparent.                               of recommending a three-year
     An analysis of Philadelphia                averaging program wherein the
assessments reveals that, even with the         Real Estate Tax is levied on the
Board of Revision of Taxes’ attempts            average of the assessed property
to assess all properties at 70 percent of       value from the past three years. If
their value, assessments across the city        the City adopts a system of land-
exhibit a great deal of variance. Some          value taxation, the Commission
properties are assessed at more than            recommends implementing a
100 percent of their market value               three-year land-averaging program
while other properties are assessed at          wherein the Real Estate Tax is
below 30 percent of their market                levied on the current year’s
value. This variance decreases tax              structural value plus the average
system equity. Because it will be easier        assessed land value from the prior
for property owners to evaluate the             three years.
accuracy of their assessment if all             By allowing for gradual
properties are assessed at 100 percent          adjustment to any future changes
of market value, this recommendation            in a property’s assessed value, tax
will decrease assessment error and              averaging increases tax-system
promote greater tax system equity.              stability and mitigates the impact
     To prevent unreasonable                    of market fluctuations and
increases in property tax bills when            property reassessments. Unlike
the practice of fractional assessing is         other buffering programs, tax-
abolished, this recommendation must             averaging does not distort the
be accompanied by the                           relationship between a property’s
implementation of rate reduction,               market value and its assessed
property tax buffering, and a budget-           value, build inequalities into the
based system of real estate taxation.           tax system, rely upon complicated
                                                formulas, or expose taxpayers to
Recommendation 6: Implement a                   future assessment spikes. Nor
Property Tax Buffering Program.                 does it lead to dramatically
     The Commission, in an effort to            increased property tax liabilities
increase tax system stability,                  when the program is eliminated or
recommends implementation of a                  when it expires.
property tax buffering program.
     Typically, large increases in real
estate assessments occur when real
estate values rapidly increase and
when efforts are made to reassess
50                                           Philadelphia Tax Reform Commission


Budget-Based Property Taxation               that revenue for delinquencies and
Recommendation                               court settlements, Real Estate Tax
                                             revenues should be the budget-closing
Recommendation 7: Implement a                item.
System of Budget-Based Property                   As such, the Commission
Taxation.                                    recommends creating a system of
     To promote greater tax system           budget-based property taxation by
equity, stability, neutrality, simplicity,   legislatively obligating the Mayor and
and competitiveness, the Commission          City Council to determine all annual
recommends shifting from an                  Real Estate Tax rates after setting the
assessment-driven to a budget-based          budget and reviewing assessments.
system of property taxation.                      Implementation of a budget-
     Compared to real estate tax rates       based system would reduce the
in municipalities around the country,        political need for inequitable
Philadelphia’s Real Estate Tax rates         assessment stabilizing policies such as
change infrequently. As a result, any        caps on assessment increases. When
increase in property values leads to         property values are artificially
increases in property taxes and              stabilized, significant tax-system
property tax revenues. This creates an       inequities inevitably develop.
assessment-driven rather than a                   In Philadelphia, property tax
budget-based property tax system. In         certainty and revenue stability
contrast, most municipalities have a         decrease when assessment error is
budget-based real estate tax system          minimized and assessments closely
that results in a rate-driven property       track property values. This instability
tax levy. These jurisdictions impartially    is the by-product of Philadelphia’s
assess property and then adjust              assessment-driven system and
property tax rates to meet explicit          systemic property market volatility. If
budgetary targets. In doing so, they         a budget-based property tax system
create a stable revenue stream and           were implemented, assessment
take advantage of the fact that              uniformity, property tax bill stability,
property-based taxes are uniquely            and property tax revenue certainty
under the control of the local               would cease to be incompatible policy
government, which has the power to           objectives.
value the base and to set the rate at             Because it allows property tax
which this base is taxed.                    revenues to be the City’s budget-
     All cities have a difficult task        closing item, this recommendation
providing services, budgeting for            could lead to an increase in the City’s
those services, and constructing a           reliance on Real Estate Taxes. If
revenue structure to fund those              projected tax and non-tax revenues
services. By taking control of Real          are lower than expected, and if
Estate Taxes as part of a budget-based       efficiency cannot be improved, the
property tax system, the City’s ability      City will have to increase its reliance
to perform this essential government         on property tax revenues. This would
function will improve. After taking          shift the tax burden from mobile
into consideration projections of            taxpayers, i.e., businesses and wage
revenues from other tax and non-tax          earners, to real estate. By minimizing
sources, and setting aside a portion of      the distorting effect of Philadelphia’s
Tax Reform Recommendations                                                        51

existing tax structure, this shift would    of land and 50 percent are generated
increase tax system neutrality.             from a tax on the value of structures.
     The complexity of the current               Even though land values and
property tax system typically leads         structure values are currently taxed at
taxpayers to blame the Board of             a flat rate, Philadelphia’s tax on land
Revision of Taxes when rising               only generates 22.5 percent of total
property assessments lead to increased      real estate tax revenues. To promote
property taxes. If the system were          greater tax system competitiveness,
sufficiently transparent, elected           equity, and neutrality, the Commission
officials could be held accountable for     recommends that the fraction of real
rising property taxes and the Board of      estate tax revenues generated from a
Revision of Taxes would be able to          tax on land values gradually increase.
focus on establishing accurate                   Because the need for City revenue
assessments. Shifting to a budget-          and the assessed value of property will
based system would create a more            change over the next 10 years, the
understandable system wherein               Commission has refrained from
elected officials are truly responsible     recommending specific land and
for levying taxes.                          structure millage rates. Rather, the
     Currently, a revenue windfall          Commission recommends the
occurs when property assessments rise       following revenue schedule. See
and real estate taxes produce more          Figure 5.1.
than the projected amount of revenue.
However, if a budget-based real estate      Figure 5.1: Land-Value Tax Phase-In
tax system were implemented,                Schedule.
windfalls of this type would be less                   Percent of      Percent of
                                                      Real Estate     Real Estate
likely to occur because elected officials   Fiscal   Tax Revenues    Tax Revenues
would have a disincentive to raise           Year     From Tax on     From Tax on
more revenue than is absolutely                       the Value of    the Value of
necessary. The process of annually                       Land          Structures
analyzing the property tax burden and        2004       22.50%          77.50%
the City’s budgetary needs would             2005       25.25%          74.75%
                                             2006       28.00%          72.00%
make Philadelphia’s tax structure more       2007       30.75%          69.25%
competitive. This recommendation             2008       33.50%          66.50%
would be effective beginning in fiscal       2009       36.25%          63.75%
year 2006.                                   2010       39.00%          61.00%
                                             2011       41.75%          58.25%
                                             2012       44.50%          55.50%
                                             2013       47.25%          52.75%
Land-Value Taxation                          2014       50.00%          50.00%
Recommendation

Recommendation 8: Phase-in Land                  The Commission reviewed
Value Taxation.                             extensive research and information
     The Commission recommends              concerning the impact of land-value
phasing-in land-value taxation until 50     taxation, as well as testimonials from
percent of all real estate tax revenues     officials in other jurisdictions that
are generated from a tax on the value       have adopted land-value taxation. The
                                            information was both enlightening
                                            and compelling. The research
52                                        Philadelphia Tax Reform Commission

demonstrated that land-value taxation          Land is unique because, no matter
maximized its economic development        how much it is taxed, the quantity will
goals when implemented in                 never change. This makes it possible
conjunction with other types of tax       to levy a tax on land without
and policy reform. Land-value             distorting people’s production
taxation, complemented by the other       decisions and stifling economic
recommendations of this                   progress. This ability to generate tax
Commission, would be consistent           revenue without distorting economic
with the Commission’s mission to          decisions is the very essence of tax-
improve the City's competitiveness in     system neutrality.
a fiscally and socially responsible            Municipalities use land tax
manner. During the course of its          revenues either to reduce other taxes
research, the Commission                  while keeping service levels constant,
satisfactorily resolved the issues        or to increase levels of local service
surrounding the practicality of           provision without raising other types
properly assessing land values and,       of taxes. Reducing fiscal dependency
backed by data from the City’s            on other taxes and increasing fiscal
Department of Revenue, determined         dependency on an economically
that the issue of tax-delinquency         neutral form of taxation promotes
would not threaten attempts to            economic development. For this
impose land-value taxation in a           reason, the economic impact of land-
revenue-neutral manner.                   value taxation is best measured in
      Because land prices are a           terms of its revenue alternatives.
reflection of the aggregated value             By discouraging speculative land
created by the surrounding                holding, this tax policy encourages
community, land taxation is more          property owners to maximize the
equitable than most other types of        revenue generating potential of their
taxation. Unlike structure values, land   land. Although this may violate the
values are not created by the actions     technical definition of tax neutrality, it
of individual property owners, but by     increases societal economic prosperity.
the community, acting in the              After reviewing the canon of tax
following capacities. First, society      literature, the Commission concludes
provides the legal institutions of land   that, even if it has the potential to
ownership from which the concept of       “distort” the economic decisions of
land value springs. Land would be of      landowners, land-value taxation
little value without the legal            remains the most economically
framework, which assures landowners       efficient and economically neutral
that their investments will not be        method of local taxation.
taken away from them without due               The Commission’s
process and compensation. Second,         recommendation of a gradual increase
the local government is the provider      in the tax on land and decrease in the
of infrastructure and amenities such as   tax on structures will encourage
good schools, roads, and police           greater private investment in
protection that give land much of its     Philadelphia. This investment will
value. Third, land values rise when       reduce the amount of blight and
population growth or increased            abandonment in the city, promote
community economic activity results       economic development, and increase
in an increased demand for land.          tax system competitiveness.
Tax Reform Recommendations                                                      53

     Because land is fixed in its          Property Tax Relief
location and quantity, and because it is   Recommendations
relatively unresponsive to business
cycle fluctuations, land values are an     Recommendation 9: Expand Efforts
ideal tax base. Taxing this base           to Address Property Tax “Ability to
produces a relatively constant revenue     Pay” Issues.
stream to fund public services.                 The Commission developed a
     Critics of land-value taxation have   tripartite series of recommendations
argued that Philadelphia’s patterns of     to help homeowners pay their
property tax-delinquency would             property tax bills. The Commission
reduce the land-tax revenues and           recommends: 1) establishing quarterly
decrease tax system stability. To          installment payment plans for all real
evaluate the merits of this concern,       estate taxpayers; 2) applying tax
the Commission undertook an analysis       payments to the current year’s tax
of property assessments and                rather than delinquent tax bills; and 3)
delinquencies. This research allowed       considering development of a low-
the Commission to confidently reject       income property tax relief program
the hypothesis that patterns of            similar to the Water Department’s
property tax delinquency would             Water Relief Assistance Program
reduce the stability of land-tax           (WRAP).
revenues.                                       Changing patterns of American
     The Commission recognizes that        investment and income have created a
the Pennsylvania Constitution’s            situation wherein the property tax is
Uniformity Clause could present a          more burdensome for some groups
potential barrier to land value tax-       than others. The most common
driven policy initiatives. If the courts   critique of property taxation involves
decide that the Uniformity Clause          elderly homeowners who are asset
precludes the division of land and         rich, but income poor. Although the
improvement for tax purposes, a land       net worth of all property owners
value tax will only see fruition if the    increases when property values rise,
legislature amends the Constitution.       elderly individuals and others living on
The Commission is not predicting the       fixed incomes often find it difficult to
outcome of a legal or constitutional       afford the corresponding increase in
challenge. However, land-value             property taxes. This creates an “ability
taxation has existed in Pennsylvania       to pay” problem. Another common
since 1901 and is currently in place in    critique of property taxation is that
a number of major Pennsylvania cities.     this tax is a regressive wealth tax. The
Although land-value assessments and        property tax is progressive to the
rate differentials have been challenged    extent that, as people accumulate
where the taxing municipality further      more wealth, they typically chose to
classified the property based upon its     live in larger homes on larger lots.
use or location (commercial vs.            However, equity issues arise because
residential, urban vs. rural), the         the poorest segment of the population
constitutionality of separate land and     has a greater portion of its wealth in
structure classes of property has never    real estate, which is subject to the
been challenged.                           property tax, while the wealthiest has a
                                           greater portion in financial
54                                             Philadelphia Tax Reform Commission

investments, which are not. The                in up to 20 installment payments.
Commission’s recommendations to                Although the Commission applauds
expand efforts to address property tax         the success of these programs, it
“ability to pay” issues were developed         believes that the property tax payment
to help counter these two critiques of         system should be restructured so that
the property tax.                              this type of relief is available to all
                                               taxpayers.
Implement a Quarterly Payment Plan                  Because the City and the School
     The Commission recommends                 District currently receive Real Estate
that the City establish quarterly              Tax revenues nearly three-quarters of
installment payment plans for all Real         the way through the fiscal year, both
Estate Tax payers. In most parts of            entities are required to issue Tax
the state, school district and municipal       Revenue Anticipation Notes (TRANs)
real estate taxes are levied separately.       and pay associated costs for issuance
Typically municipal real estate tax bills      and interest. Thus, in addition to
are levied in January and school               providing tax relief to all property
district real estate tax bills are levied in   owners, this recommendation would
July. In New Jersey and in Harrisburg,         save the City and the School District
elected officials have diffused the            millions of dollars each year in interest
property tax burden even further by            and issuance costs. These savings
requiring property owners to pay one           could be used to help fund necessary
quarter of their bill every three              changes to the assessment system.
months. This type of property tax
relief is not currently available to most      Apply Tax Payments to the Current Year’s
Philadelphians.                                Tax Liability
     In Philadelphia, City and School               In order to participate in the
District Real Estate Tax rates are set         state’s property tax rebate program,
when the City’s fiscal year begins on          funded by the Pennsylvania Lottery,
July 1st; assessments are completed in         elderly homeowners must meet certain
the fall of that same year; appeals are        income eligibility requirements and
made from October to November;                 they must prove that they have paid
real estate tax bills are mailed in            that year’s Real Estate Taxes.
January; and the bulk of all Real Estate       Currently, Philadelphia’s property tax
Tax payments are collected from                payment system prevents low-income
February to March. This collection             seniors with outstanding tax
schedule makes property tax payment            delinquencies from participating in
more burdensome for individuals who            this state program even if they have
do not escrow their property tax into          paid enough property tax to satisfy the
their mortgage.                                current year’s liability. To help low-
     In an attempt to correct this             income seniors qualify for
problem, the City has developed two            Pennsylvania’s property tax rebate
installment programs. Under these              programs, the Commission
programs, households meeting annual            recommends changing the property
income eligibility requirements may            tax payment system so that tax
pay their property taxes in up to eight        payments are applied to the current
installment payments and seniors               year’s property tax liability.
meeting annual income eligibility
requirements may pay property taxes
Tax Reform Recommendations                                                       55

Consider Developing a Low-Income Property   paid in excess of a certain percentage
Tax Relief Program                          of household gross income. Because
     The Commission recommends              this type of program is widely
that the City consider developing a         considered to be the most effective
low-income property tax relief              way of reducing property tax
program similar to the Water                regressivity, 31 states have a circuit-
Department’s Water Relief Assistance        breaker program to provide tax relief
Program. This type of program would         to people who are asset rich and
“freeze” delinquent real estate tax bills   income poor. However, any circuit-
and provide a tax credit or incentive       breaker program must be designed to
for qualified low-income homeowners         disallow reductions for those whose
to remain current in their real estate      incomes were reduced by large capital
tax bills. As in the Water                  losses or tax sheltered investments.
Department’s program and in
Philadelphia’s low-income senior            Expand State-Funded Low-Income Property
property tax freeze program, the            Relief Programs
Commission recommends that when                  The Commission applauds
the tax liability is “frozen,” a lien be    Pennsylvania’s efforts to provide tax
placed on the property to ensure that       relief to low-income elderly property
back taxes can be collected when the        owners, and it recommends raising the
property is sold.                           maximum income eligibility
                                            requirements for participation in these
Recommendation 10: Advocate for             programs.
Increased Property Tax Relief from
the Commonwealth of Pennsylvania.           Recommendation 11: Increase
     The Commission recommends              Awareness About Real Estate Tax
that the City advocate for increased        Relief Programs.
property tax relief from the                     The Commission recommends
Commonwealth of Pennsylvania.               increasing awareness about existing
Specifically, the Commission                property tax-relief programs. During
recommends that the state: 1) pass          the course of the Commission’s
“circuit-breaker” legislation so that       research, it became clear that many
individuals who meet income                 low-income and elderly individuals do
eligibility requirements can pay a          not take advantage of the property tax
reduced percentage of Real Estate           relief programs offered by the City
Tax; and 2) increase funding for low-       and the state. To correct this problem
income property tax rebate programs.        and promote greater tax system equity,
                                            the Commission recommends
Create a State Circuit-Breaker Property     expanding informational property tax
Tax Relief Program                          outreach programs and providing
     The Commission recommends              counseling for low-income tax
that the Commonwealth create a              delinquent property owners (such
property tax circuit-breaker program.       programs are already available through
Although every circuit-breaker              the City Office of Housing and
program is slightly different, these        Community Development).
programs typically provide individuals
with an income tax credit that is equal
to a percentage of the property taxes
56                                         Philadelphia Tax Reform Commission


Commercial and Residential Tax             in the country. However, when
Rates Recommendations                      examining Philadelphia’s economic
                                           climate, it is apparent that other taxes
Recommendation 12: Advocate for a          should receive priority for the scarce
Change in the Pennsylvania                 resources available for tax reduction.
Constitution to Allow Adoption of
Variable Real Estate Tax Rates.            Recommendation 14: Recommend
     To promote greater tax system         Technical Changes to the Real Estate
competitiveness, the Commission            Transfer Tax.
recommends that the City advocate               Because many businesses
for a change in the Pennsylvania           successfully avoid paying the Real
Constitution that would allow the City     Estate Transfer Tax, the burden of
to classify real estate based upon its     this tax falls most heavily on
use and to tax it differently based        purchasers of residential property. To
upon that status.                          increase tax system equity, the
     Research indicated that               Commission recommends that the
commercial and industrial landowners       following three technical changes be
are less sensitive to increases in the     implemented immediately.
Real Estate Tax rather than to other
types of business taxes. However, the      Deed in Lieu of Foreclosure
Commonwealth’s Constitution                      The Real Estate Transfer Tax
prevents any municipality from             must always be calculated using the
levying different tax rates upon           formula method when a property is
different types of real estate.            sold at a sheriff’s sale. However, when
Implementation of a land-value tax, as     a deed is transferred in lieu of
proposed by the Commission, would          foreclosure, the formula method need
shift some of the tax burden from          not be used. The Commission
residential properties onto vacant,        recommends formally mandating that
commercial, and industrial properties.     the formula method be used to
However, the Commission believes           calculate the amount of real estate
that other types of business taxes         transfer tax due for a transfer by deed
could be more quickly reduced if the       in lieu of foreclosure.
City were allowed to generate
additional revenues by formally            Economic Reality Test
levying a higher tax on commercial              Although the Real Estate Transfer
and industrial real estate.                Tax is levied upon the sale or transfer
                                           of real estate located in Philadelphia,
                                           special rules govern transfers of less
Real Estate Transfer Tax                   than 100 percent of the interest in a
Recommendations                            real estate company. A transfer of 90
                                           percent or more of an interest in a real
Recommendation 13: Do Not                  estate company, or a binding
Reduce the Real Estate Transfer Tax        commitment to transfer 90 percent or
Rate.                                      more of an interest in a real estate
    The Commission recognizes that         company within a three-year period, is
Philadelphia’s Real Estate Transfer        subject to the tax. If no more than 89
Tax is one of the highest transfer taxes   percent of the interest in the real
                                           estate company is transferred within a
Tax Reform Recommendations                                                      57

three-year period, tax is not due. Thus,   was created for the purposes of
to avoid paying the Real Estate            penalizing property owners for
Transfer Tax, buyers and sellers of        allowing property to lie fallow and
expensive commercial property may          deteriorate. The constitutionality of
enter into 89/11 deals. In these           this tax was quickly challenged. The
transactions, the parties enter into a     court granted declaratory relief barring
binding commitment to transfer 89          the City from collecting the tax. To
percent of the interests in the real       date, no action has been taken to
estate company during a three-year         remove the injunction against
period, and the remaining 11 percent       collection of this tax.
of the interests in the real estate             Rather than allowing this un-
company three years and a day later.       collectable tax to remain on the City’s
In order to discourage the use of          books, the Commission recommends
improper 89/11 deals, the                  eliminating this tax and relying on
Commission recommends creating an          implementation of land-value taxation
economic reality test to ensure that an    and increased enforcement efforts by
11 percent partner retains a real          the Department of Licenses and
“economic” ownership interest.             Inspections to achieve the goal of
                                           placing pressure on owners of under-
Termination of a Thirty-Year Lease         utilized real estate to improve their
     Under current law, a buyer can        properties.
structure a transaction to acquire land,
but not the building on the land, and
then obtain ownership of the building      Use and Occupancy Tax
by paying the lessee to terminate the      Recommendations
ground lease of the building.
Currently, the parties pay the Real        Recommendation 16: Do Not
Estate Transfer Tax on the value of        Reduce the Use and Occupancy Tax
the land, however, upon termination        Rate.
of the ground lease, tax is not paid on         The Commission recommends
the value of the building. The             that the Use and Occupancy Tax rate
Commission recommends that the             not be reduced at this time. Use and
Real Estate Transfer Tax be imposed        Occupancy taxpayers will benefit
on the value of the consideration paid     significantly from the reforms and
to the lessee for termination of a lease   phase-out of the Business Privilege
of 30 years or more.                       Tax. Other taxes should receive
                                           priority for the scarce resources
                                           available for tax reduction.
Real Estate Non Utilization Tax
Recommendation                             Recommendation 17: Repeal the Use
                                           and Occupancy Tax if a Constitutional
Recommendation 15: Eliminate the           Amendment Permits Philadelphia to
Real Estate Non Utilization Tax.           Tax Different Classes of Real Estate
    To promote greater tax system          at Different Rates.
simplicity, the Commission                     In the interest of promoting
recommends eliminating the Real            greater tax system simplicity, the
Estate Non Utilization Tax. This tax       Commission recommends repeal of
58                                           Philadelphia Tax Reform Commission

the Use and Occupancy Tax if the             local property and payroll to a
Pennsylvania Constitution is amended         business’s net income.
to permit commercial and industrial               While property and payroll
Real Estate Tax rates to be higher           undeniably contribute to net income,
than residential Real Estate Tax rates.      without sales, a business has no
                                             revenues and no net income. When
                                             that formula was originally conceived,
Net Income Portion of the                    local property and payroll investments
Business Privilege Tax Structural            by a multi-jurisdictional business were
Change Recommendations                       required in order to achieve the
                                             essential measure of its value—its
Recommendation 18: Adopt Single-             sales. However, the geographic
Sales Factor Apportionment.                  location of capital and payroll are no
     The Commission recommends               longer reliable measures of a
that the Philadelphia Department of          business’s exercise of its business
Revenue formally adopt sales receipts        privilege. Technological advances in
as the only factor for apportioning the      the manner in which sales are
net income base of multi-jurisdictional      solicited, approved, and executed have
businesses. This recommendation              allowed multi-jurisdictional businesses
would simplify compliance with, and          to operate in the Philadelphia
enforcement of, the Business Privilege       marketplace without investing in
Tax; increase the City’s ability to          property and payroll. Despite the
attract and retain business investment       adoption of a double-weighted sales
in jobs and facilities; and reform the       factor, Philadelphia’s apportionment
apportionment formula to more                formula continues to discourage local
equitably value a multi-jurisdictional       business investment and gives
business’s exercise of its Philadelphia      preferential tax treatment to multi-
business privilege based on its receipts     jurisdictional businesses that do not
from its sales activity in the               invest locally in property and payroll.
Philadelphia market.                              Philadelphia’s first step toward
     The Business Privilege Tax              encouraging business growth and job
imposes a tax upon the value of a            creation is to reform the Business
business’s exercise of the privilege of      Privilege Tax apportionment method.
doing business in Philadelphia. This         Under the three-factor, double-
value is based upon a business’s net         weighted sales formula apportionment
income and gross receipts from sales         formula, location or expansion of
in the city. A business that operates in     business operations in Philadelphia
more than one jurisdiction (“multi-          will increase a multi-jurisdictional
jurisdictional business”) must               business’s apportionment, even absent
apportion its net income to determine        any concomitant increase in local
the amount of income generated as a          sales. A change to single-sales factor
result its Philadelphia business activity.   apportionment would simplify
The current formula for apportioning         Business Privilege Tax payment and
income of multi-jurisdictional               collection while removing the
businesses double weights sales and          disincentive for multi-jurisdictional
equally weights the contribution of          businesses to locally invest in property
                                             and payroll.
Tax Reform Recommendations                                                       59

Recommendation 19: Grant                   for payments to partners, members,
Unincorporated Businesses a                and sole proprietors, would help level
Deduction of the Net Income Portion        the playing field between incorporated
of the Business Privilege Tax for          and unincorporated businesses.
Payments to Partners, Members, and              In addition to increasing tax
Sole Proprietors.                          system equity, this recommendation
     The Commission recommends             would help Philadelphia compete with
reforming the Business Privilege Tax       the suburbs when attempting to
to increase tax system equity and          attract and retain businesses. In
competitiveness. The                       contrast to suburban jurisdictions that,
recommendation has two distinct            at most, impose a gross receipts tax,
parts. First, the definition of “net       Philadelphia unincorporated
income” should be amended to allow         businesses are subject to an array of
unincorporated businesses, such as         taxes. This taxation of unincorporated
partnerships, limited liability            businesses intensifies the disparity
companies, and sole proprietors, to        between the cost of doing business in
deduct payments made to partners,          the city and in the suburbs and has
members, and sole proprietors.             been blamed for driving many
Second, after an initial shift to allow    businesses across the city line.
deductions of 50 percent of the            Permitting the deduction of these
payments to partners, members, and         payments would encourage business
sole proprietors, the deduction should     expansion in the City, increase
be increased by 10 percentage points       retention of such businesses, and
for each of the succeeding five years      encourage other unincorporated
so that 100 percent deductibility is       businesses to locate in the city.
achieved by 2010.
     Unlike their incorporated             Recommendation 20: Lengthen the
counterparts, and in spite of the fact     Business Privilege Tax Net Operating
that they must also pay the Net Profits    Loss Carryforward Period.
Tax on these distributions,                     To improve Philadelphia’s ability
unincorporated businesses are not          to compete with other jurisdictions
permitted to deduct payments to            when attracting and retaining
partners, members, owners, etc. from       businesses, the Commission
Business Privilege Tax.                    recommends reforming the Business
Unincorporated businesses currently        Privilege Tax by extending the net
receive a credit of 60 percent of the      operating loss carryforward to 10
net income tax portion of the              years, effective with excess losses that
Business Privilege Tax liability, which    are incurred in 2004, reported on the
is applied against their Net Profits Tax   2004 return filed in 2005. This
liability. However, even after             proposed 10-year period coincides
application of the credit,                 with the period of the proposed
unincorporated businesses pay a            phase-out of the Business Privilege
higher effective tax rate than their       Tax.
corporate competitors. The                      Philadelphia currently has a three-
Commission’s recommendation to             year net operating loss carryforward
grant unincorporated businesses a          period. In contrast, other jurisdictions,
deduction against the net income           including the state and federal
portion of the Business Privilege Tax      governments, allow net operating
60                                         Philadelphia Tax Reform Commission

losses to be carried forward for 20        timing of the imposition of the
years. Philadelphia’s relatively short     Business Privilege Tax more directly
carryforward period perpetuates the        corresponds with the benefit the
perception that the City’s business        taxpayer receives from the exercise of
environment is unfriendly, especially      the taxed privilege. By better
towards start-ups and high-technology      reconciling tax liability with the
businesses that have life cycles that      benefits received, this Commission
often begin with many years of losses      recommendation would improve tax
before becoming profitable.                system neutrality, improve the City’s
Lengthening the net operating loss         competitiveness, and reduce the tax
carryforward period, so that it more-      burden on fledgling businesses.
closely resembles that of other
jurisdictions, would improve tax           Recommendation 22: Unify
system competitiveness and make the        Statutory Refund and Assessment
city more attractive to new businesses.    Periods.
                                                The Commission recommends
                                           setting the statutory refund and
Business Privilege Tax                     assessment periods at a uniform three
Administrative Reform                      years.
Recommendations                                 Currently, no ordinance limits the
                                           period within which the City is
Recommendation 21: Establish Two           authorized to audit a taxpayer and
Estimated Payment Dates.                   assess additional tax. The City is
     The Commission recommends             authorized, by ordinance, to file a
restructuring the Business Privilege       lawsuit for collection of unpaid taxes
Tax estimated tax payment schedule         within six years of the date the return
by creating two estimated payment          was filed or due. Conversely, a
dates between April 15th and June 30th.    taxpayer is limited, by ordinance, to
     The Business Privilege Tax            filing a refund claim within three years
estimated payment structure forces         after the tax is paid. The net result is
businesses to pay their entire tax         that the City can audit a five-year old
liability before they receive the gross    return and assess additional tax, but
receipts and earn the income on which      the taxpayer will not be able to claim a
this tax is based. This structure          refund from a four-year old return
decouples tax liability from the           that could have offset the additional
realization of the tax base and it         tax. This disparity creates an uneven
magnifies the detrimental impact that      playing field between taxpayers and
the Business Privilege Tax has upon        the Department of Revenue, and adds
Philadelphia’s ability to compete with     unnecessary complexity to the tax
other jurisdictions in attracting and      system. Setting the statutory
retaining businesses. This estimated       assessment and refund periods at a
payment structure also forces new          uniform three years, while retaining
businesses to pay two years of taxes at    the current six-year collection period,
once during their first year of            would promote greater tax system
operation.                                 equity and simplicity.
     If the estimated tax system is to          Moreover, most jurisdictions have
be fair, it must be reformed so that the   uniform statutory assessment and
                                           refund periods of three years for
Tax Reform Recommendations                                                       61

collector and payer. Philadelphia’s         other local jurisdictions do not tax
non-uniform periods create the              businesses the way Philadelphia does.
perception that Philadelphia has a               Currently, the three main city
discriminatory business tax                 business taxes are the Business
environment, and hamper the City’s          Privilege Tax, the Net Profits Tax, and
ability to attract and retain businesses.   the Use and Occupancy Tax.
With this recommendation, the               Elimination of the Business Privilege
Commission hopes to reverse this            Tax promotes tax system equity by
perception and improve Philadelphia’s       ensuring that businesses are no longer
ability to compete with other               forced to bear more than their fair
jurisdictions in attracting and retaining   share of the tax burden.
businesses. These goals would be                 Elimination of the Business
accomplished without sacrificing the        Privilege Tax promotes greater tax
City’s current power to sue for             system simplicity. Not only will this
collection, or to audit and assess tax      reform decrease the Department of
against taxpayers who substantially         Revenue’s workload, enabling the
understate their income or tax due, or      department to enforce other taxes
fail to file returns.                       more aggressively, but it will also
                                            simplify the process of running a
                                            business in Philadelphia.
Incremental Elimination of the                   The following table provides a
Business Privilege Tax                      detailed schedule for the elimination
                                            of the Business Privilege Tax. It is
Recommendation 23: Incrementally            worth noting that rate reductions for
Eliminate the Business Privilege Tax.       the gross receipts portion of the
     To promote greater tax system          Business Privilege Tax are already
competitiveness, equity, and                incorporated into the City’s current
simplicity, the Commission                  fiscal year 2004 to 2008 Five-Year
recommends incrementally eliminating        Financial Plan. It is also worth noting
the Business Privilege Tax by fiscal        that, in order to minimize the financial
year 2015. This incremental approach        impact of the Commission’s three
would minimize the revenue impact of        classes of Business Privilege Tax
this recommendation and allow the           reform recommendations (structural
City to gradually adjust its budget. A      change to the net income portion of
gradual phase-out also leaves the City      the Business Privilege Tax, Business
with the option of adjusting the timing     Privilege Tax administrative change,
if the revenue impact is too great or if    and Business Privilege Tax
the revenue produced exceeds                elimination), the phase-out of the net
expectations.                               income portion of the Business
     Elimination of the Business            Privilege Tax does not begin until
Privilege Tax promotes tax system           fiscal year 2006.
competitiveness by attracting new
business investment, retaining those
businesses that are considering
leaving, fostering business expansion,
and creating more jobs. Simply put,
62                                             Philadelphia Tax Reform Commission


  Figure 5.2: Business Privilege Tax           with first six months of the calendar
  Phase-Out Schedule                           year, which are subject to one tax rate,
             Gross Receipts       Net Income   and the portion of earnings associated
  Year
                Tax Rate           Tax Rate    with the final six months, which are
 2004             0.21               6.50      subject to another tax rate. This
 2005             0.19               6.50      calculation would not be necessary if
 2006            0.175               5.85      the City were to make annual
 2007           0.1625               5.20      adjustments in the Wage and Earnings
 2008             0.15               4.55
                                               Tax rates effective on January 1 of
 2009             0.13               3.90
                                               each year. Businesses already report
 2010             0.11               3.25
 2011             0.09               2.60
                                               earnings for individual employees on a
 2012             0.07               1.95
                                               calendar year basis for state and
 2013             0.05               1.30      federal purposes. This change in the
 2014             0.03               0.65      effective date of the rate reductions
 2015               0                  0       will ensure that the requirement to file
  Note: Reductions in the rate of the gross    Wage Tax and Earnings Tax forms
  receipts portion of the Business Privilege   imposes no significant additional
  Tax through 2008 are already                 reporting burden on individuals and
  incorporated into the City of
  Philadelphia’s fiscal year 2004 to 2008      businesses.
  Five-Year Financial Plan.                         Moreover, this recommendation
                                               will make the tax treatment of
                                               employee compensation and earnings
Wage, Earnings, and Net Profits                income consistent with the City's
Tax Recommendations                            treatment of net profits and income
                                               taxable under the School Income Tax.
Recommendation 24: Adjust Wage                 Both the Net Profits Tax and the
and Earnings Tax Rates on January 1st.         School Income Tax are levied on
     To promote greater tax system             income received in a calendar year,
simplicity, the Commission                     with one tax rate applied to all income
recommends that the City adjust the            associated with that calendar year.
rates of the Wage and Earnings Taxes
effective on January 1st of each year.         Recommendation 25: Accelerate
     Currently, annual reductions in           Local Income-Based Tax Rate
the rates of the Wage and Earnings             Reductions.
Taxes are effective on the first day of             The Commission recommends
the City’s fiscal year, July 1st. This         that the City accelerate its program of
timing has resulted in an undue                incremental reductions in the local
compliance burden for businesses that          income-based taxes—the Wage,
are required to file annual Wage Tax           Earnings, and Net Profits Tax—to
reconciliation forms with the                  more rapidly improve the
Department of Revenue, and for                 competitiveness of the city’s tax
individuals who are required to file           structure. The Commission
annual Earnings Tax reconciliation             recommends that, by 2014, the rate be
forms. In particular, employers and            reduced to 3.25 percent for residents
taxpayers have been required to                and nonresidents.
determine the portion of employee                   Three decades of research by
compensation or earnings associated            economists have consistently shown
                                               that high income-based tax rates harm
Tax Reform Recommendations                                                      63

Philadelphia’s economy. Philadelphia’s      should allocate a greater share of its
local income-based tax rate is higher       tax reduction investment to lowering
than that of all other jurisdictions in     taxes for city residents.
the United States. Most other large              Figure 5.3 presents the
cities levy no local income tax. With       Commission’s recommended schedule
the exception of New York City,             of rate reductions, assuming the City
jurisdictions that do impose a local        receives no additional Commonwealth
income-based tax have rates that are        aid to finance Wage Tax cuts.
significantly lower than Philadelphia’s
rates.                                       Figure 5.3: Schedule of Income-
     The City Wage Tax provides an           Based Tax Rate Reductions
incentive for companies to relocate          (Without State Aid)
jobs outside the city, for workers to        Calendar    Resident     Non-Resident
seek employment outside the city, and          Year      Tax Rate       Tax Rate
for Philadelphia residents to move and        2004        4.4625         3.8801
seek work outside the city. Statistical       2005         4.350         3.835
analysis conducted by Econsult                2006         4.300         3.770
suggests that a reduction in the Wage         2007         4.200         3.705
Tax rate is likely to result in a             2008         4.100         3.640
substantial increase in the number of         2009         4.000         3.575
jobs located in the city, the income of       2010         3.845         3.510
city residents and workers, and               2011         3.690         3.445
property values in the city. Reducing         2012         3.535         3.380
the Wage, Earnings, Net Profits, and          2013         3.380         3.315
School Income Taxes paid by                   2014         3.250         3.250
residents and nonresidents would
significantly increase the city’s ability
to compete with other jurisdictions         Recommendation 26: If the City
for businesses and residents.               Receives Support from the
     The Commission recommends              Commonwealth for Wage Tax Relief,
gradually reducing income-based taxes       Adopt a More Aggressive Program of
so that resident and nonresident tax        Income-Based Tax Rate Reductions.
rates would be reduced to 3.25                   Assuming the City receives
percent by 2014. This incremental           Commonwealth aid to finance local-
approach minimizes the revenue              income tax cuts in an amount similar
impact of rate reductions and allows        to that proposed under Governor
the City to adjust its budget gradually.    Edward G. Rendell’s Plan for a New
     This recommendation would              Pennsylvania, the Commission
reduce the resident Wage Tax rate           recommends adopting a more
more rapidly than the nonresident rate      aggressive program of income-based
to achieve the goal of equal resident       tax rate reductions. By 2014, the
and nonresident rates within ten years.     Commission recommends that the
The rationale for a more rapid              Wage, Earnings, and Net Profits rates,
reduction in the resident tax rate is       be lowered to 3.0 percent for residents
linked to the conviction that, in the       and 2.5 percent for nonresidents. The
absence of any financial assistance         differential between the resident and
from the Commonwealth to reduce             nonresident tax rates should be
the City’s Wage Tax burden, the City
64                                         Philadelphia Tax Reform Commission

maintained to reflect the state aid that   moderate incomes. This program
allows the City to maintain lower tax      annually generates more than $252
rates.                                     million in additional income for low-
     Figure 5.4 presents the               income Philadelphians. Despite the
Commission’s recommended schedule          tremendous impact this program has
of rate reductions assuming the City       on the local economy and on the
receives additional state aid in an        ability of low-income families to pay
amount similar to that proposed under      their bills and save for the future, last
the Plan for a New Pennsylvania.           year 45,000 eligible Philadelphia
                                           households did not file for the EITC
Figure 5.4: Schedule of Income-Based       and an estimated $76.5 million went
Tax Rate Reductions (With State Aid)       unclaimed.
 Calendar     Resident    Nonresident           The Philadelphia Campaign for
   Year       Tax Rate     Tax Rate
                                           Working Families is an initiative to
  2004          4.00         3.50
                                           increase participation in the EITC and
  2005          3.90         3.40
                                           other public benefits programs
  2006          3.80         3.30          targeted at the working poor. In its
  2007          3.70         3.20          inaugural year in 2002, the program
  2008          3.60         3.10          helped Philadelphia residents qualify
  2009          3.50         3.00          for more than $10 million in new
  2010          3.40         2.90
                                           federal tax credits. For every $1 that
  2011          3.30         2.80
                                           the Campaign spent increasing
  2012          3.20         2.70
                                           awareness and operating 26 free tax-
  2013          3.10         2.60
                                           filing sites, it generated $14 for low-
  2014          3.00         2.50
                                           income families. With additional
                                           funding, this program could be
                                           expanded to reach more families.
                                           Additional support would also allow
Income Tax Relief                          the Campaign to begin helping
Recommendation                             families apply for Pennsylvania’s tax
                                           forgiveness program under the
Recommendation 27: Help Low-               Personal Income Tax. State
Income Philadelphians Apply for State      Department of Revenue data suggest
and Federal Income Tax Relief.             that each year as much as $75 million
     The Commission recommends             in tax forgiveness is not received by
that the City support expanded efforts     eligible low-income Philadelphians.
to promote participation by low-                The Commission recommends
income Philadelphians in federal and       that the City invest at least $1 million
state programs designed to reduce the      in the Campaign for Working Families
tax burden on low-income                   to support additional outreach to low-
households, including the federal          income households, free and low-cost
Earned Income Tax Credit (EITC)            tax preparation services, and a new
and the tax forgiveness program under      focus on expanding participation in
the Pennsylvania Personal Income           the tax forgiveness program under the
Tax.                                       Pennsylvania Personal Income Tax.
     The EITC is a refundable federal
income tax credit designed to benefit
working people who earn low or
Tax Reform Recommendations                                                        65


Miscellaneous Tax                         Figure 5.5: City General Fund Fiscal
Recommendations                           Impact of Tax Reform Commission
                                          Recommendations (Millions of
Recommendation 28: Do Not                 Dollars)
Reduce the Sales Tax, Parking Tax,
Amusement Tax, Vehicle Rental Tax,           Fiscal      Annual      Cumulative
                                             Year        Impact        Impact
Hotel Room Rental Tax, Liquor Sales
                                             2005          17.1            -
Tax, Mechanical Amusement Device
                                             2006          34.9          52.0
Tax, or Hotel Use and Occupancy Tax
                                             2007          56.4         108.4
Rates.
                                             2008          84.0         192.4
     The Commission recommends
                                             2009         142.4         334.8
that the Sales Tax, Parking Tax,
Amusement Tax, Vehicle Rental Tax,
Hotel Room Rental Tax, Liquor Sales            Although the Commission had
Tax, Mechanical Amusement Device           nothing with which to compare its
Tax, and Hotel Use and Occupancy           proposed tax structure for fiscal year
Tax rates not be reduced at this time.     2009 and beyond, it estimated the
After conducting a comprehensive           revenue loss to the City’s general fund
analysis of all taxes imposed in           for that year by assuming that the City
Philadelphia, the Commission has           would continue the current pace of
concluded that other taxes should          tax reductions and that current growth
receive priority for the scarce            projections would also extend into the
resources available for tax reduction.     future, resulting in a one-year shortfall
                                           of $142.4 million.
                                               The Commission believes that its
Fiscal Impact of Tax Reform                recommendations are fiscally and
Commission Recommendations                 socially responsible because of their
                                           incremental nature. Moreover, it is
    The City Charter requires the          important to note that these
Commission to evaluate the fiscal          calculations do not take into account
impact of its recommendations for          any of the expected benefits from a
changes to the tax structure. Working      more competitive tax structure and
closely with the City Departments of       use the most conservative possible
Finance and Revenue, the                   assumptions. For example, when
Commission used the most recent            calculating the fiscal impact, the
available data to estimate how its         Commission assumed that each
reforms would reduce tax collections       business that pays the Net Profits Tax
below the forecasts in the City’s Five-    and the net income portion of the
Year Financial Plan, Fiscal Year 2004 –    Business Privilege Tax would be able
Fiscal Year 2008 (the “Five-Year           to take advantage of the
Financial Plan”).                          Commission’s recommendation to
    As shown in Figure 5.5, the            allow unincorporated businesses to
Commission’s proposals result in a         deduct payments to partners,
cumulative revenue loss of $192.4          members and sole proprietors.
million to the City’s general fund over    However, certain payments on passive
the life the City’s Five-Year Financial    investments will not be deductible.
Plan.                                      Thus, the actual fiscal impact of that
66                                      Philadelphia Tax Reform Commission

particular recommendation will be
substantially reduced. Refer to
Appendix K for more information
about the underlying assumptions
behind the Commission’s fiscal impact
estimates.
Financing Tax Reform                                                              67




 Part 6: Financing Tax Reform
The Philadelphia Home Rule Charter         this short-term gap might affect
specifically states that the Tax Reform    budgeted priorities, the Commission
Commission’s “recommendations” are         gave consideration to a number of
to be “solely related to proposed          steps that the City can take to address
changes to the Philadelphia tax            this critical problem. As a result of this
structure.” Therefore, the                 research, the Commission is confident
Commission has refrained from              that the City can finance tax reform
recommending any specific dollar-for-      and that the Commission’s proposed
dollar replacement revenues to fund        tax reform package is fiscally and
the proposed package of tax reforms.       socially responsible.
However, because the Charter obliges             If only modest economic growth
the Commission to consider tax             occurs, and if the identified
reform in a manner that is “fiscally       supplemental sources of revenue and
responsible,” the Commission has           budgetary discipline cannot be used to
conducted extensive research to            fill the fiscal gap, the Commission
determine whether its tax reform           believes that the City could—as a last
recommendations meet that                  resort—increase certain taxes in order
requirement.                               to finance the proposed package of
     The Commission’s long-term            tax reforms. Through its research, the
answer is that lowering tax rates on       Commission has come to believe that
businesses and wages will reduce tax       long-term economic benefits would
revenues less than a static analysis       result simply from changing
might otherwise indicate.                  Philadelphia’s tax mix. The
Econometric research and economic          Commission is not explicitly
theory suggest that the Commission’s       recommending any specific tax
tax reform recommendations will            increases. However, it believes that
generate substantial economic growth.      there would be substantial long-term
The Commission is confident that           economic benefits from its tax reform
economic growth over the long run          package even if selected taxes were
will increase tax revenues sufficiently    marginally increased.
to offset the temporary impact of
reduced tax rates. Furthermore, based
upon its research, the Commission          Economic Growth
believes that as Philadelphia’s
economy improves, the tax base will        Although the benefits attributable to
grow and gradually replace revenues        economic growth can be difficult to
so that there will be no negative net      measure, the Commission believes
fiscal impact.                             that, if lowering certain taxes helps the
     However, the Commission               city attract or retain firms and families,
recognizes that until the economy          a tax reduction will not reduce tax
fully adjusts, the City may experience a   revenues on a dollar-for-dollar basis;
short-term fiscal gap. Concerned that      this effect will grow over time.
68                                             Philadelphia Tax Reform Commission

Accordingly, the City will be able to          options. They performed a statistical
maintain a consistent level of essential       analysis of historical data to estimate
service delivery without having to             the size of the supply side effects, if
generate dollar-for-dollar replacement         any, relating to changes in the rates of
revenues.                                      Philadelphia’s Wage Tax, Real Estate
    The dominant view among                    Tax and Business Privilege Tax (gross
economists regarding the effect of             receipts portion). Econsult found
inter-jurisdictional differences in taxes      consistent empirical evidence that:
and services is that businesses and                 Reductions in the Wage and the
individuals will “vote with their feet”             gross receipts portion of the
when confronted with a tax structure                Business Privilege Tax
that is not competitive. As a result, the           significantly increase employment
relationship between local tax rates                in the City of Philadelphia.
and local tax revenue cannot be                     Reductions in tax rates expand the
represented by a simple formula                     base of the particular tax being
where one multiplies the new tax rate               reduced.
times the old tax base. For example, a              Changes in the rates of the Wage,
decrease in the Wage and Net Profits                Real Estate, and the gross receipts
Tax rates is expected to result in more             portion of the Business Privilege
jobs and more wages and salaries.                   Tax have cross-base effects (a cut
Thus, when a tax rate falls by 10                   in one tax increases the revenues
percent, tax revenues are likely to fall            collected from other taxes).
by less than 10 percent.                       Initial losses in tax revenues are
    Economists refer to this                   partially offset by growth in the tax
phenomenon as a “supply side-effect.”          base resulting from tax reductions.
The underlying sources of supply-side          Econsult’s econometric analysis of the
growth are very different at the national      Commission’s recommendation to
and local levels. Supply-side growth at        phase out the gross receipts portion of
the national level is largely related to       the Business Privilege Tax and
increased investment and labor effort.         significantly reduce the Wage Tax rate
At the local level, the shifting of activity   suggests that:
from one jurisdiction to another                    By 2010, an additional 47,604
generates supply side growth.                       Philadelphia jobs will be created.
Although there is much debate among                 By 2017, 175,165 new jobs will be
economists about the magnitude of the               created.
supply side effects resulting from                  The median house value, in real
federal tax reform, there is widespread             terms, would increase in value by
agreement among economists that local               $7,617 by 2010, and by $19,325 by
taxes do have significant supply side               2017 (this calculation assumes that
effects.                                            the number of households is
    While economic theory clearly                   constant over the horizon).
establishes the beneficial impact of                Through base expansion, the City
lower local tax rates on local tax bases,           will be able to recapture a total of
it does not establish the size of the               $276 million of lost revenue by
effect. The Commission retained                     2008.
Econsult Corporation to evaluate this               Due to data constraints, it was not
issue by conducting an econometric             possible to econometrically analyze
analysis of various tax reform policy          the Commission’s proposals to phase
Financing Tax Reform                                                             69

out the net income portion of the               When calculating the revenue
Business Privilege Tax and adoption        impacts of the Commission’s tax
of single-sales factor apportionment.      reform recommendations, the largest
However, economic theory suggests          unknown variable is whether or not
that these reforms should produce a        the City will be able to increase
supply-side response similar to that       property-based tax revenues in
generated by other tax cuts.               proportion to the predicted rise in
                                           property values. It remains to be seen
Capture the Benefits of Wage and           whether the City can resist the
Business Tax Base Expansion                political pressure to slow the growth
     The Commission believes that tax      of assessments or lower the effective
revenue losses resulting from a            property tax rate as property values
reduction in tax rates will be partially   rise. Assuming that Real Estate Tax
offset by significant Wage and Real        revenues rise in proportion to
Estate Tax base growth. Thus, the          property values, the city will be able to
Commission expects that the City will      maintain a consistent level of essential
be able to maintain a consistent level     service-delivery while cutting taxes,
of essential service-delivery while        without having to generate dollar-for-
cutting taxes, without having to           dollar replacement revenues.
generate dollar-for-dollar replacement          Econsult research indicates that
revenues. Econsult research indicates      the phased-in tax reductions proposed
that, in 2010, the Wage Tax base will      by the Commission will cause the
be $2.7 billion larger (this translates    property tax base to be $4.9 billion
into 8.7 percent growth in wages and       larger by the year 2010. This
salaries). By 2017, the Wage Tax base      represents an 11.4 percent increase in
is expected to be $10.1 billion larger     property values. By 2017, the property
than it would have been without the        tax base will be $16.3 billion greater
tax cut. Similarly, by 2010 the base of    than would have been the case
the Business Privilege Tax (gross          without the Wage and Business
receipts portion) will have grown by       Privilege Tax (gross receipts portion)
$4.8 billion. However, by 2015 the         cuts. The growth in the property tax
gross receipts portion of the Business     base will also result in an increase in
Privilege Tax would be completely          revenues from the Business Realty
phased out so that additional growth       Use and Occupancy Tax.
in the tax base does not produce
additional revenue.
                                           Local Implementation
Capture Benefits of Property Tax
Base Expansion                             Based upon a review of economic
     To the extent that tax reform         literature and econometric research,
makes Philadelphia a more attractive       the Commission believes that the
place to live and work, property values    recommended package of tax reform
will rise. This occurs because property    will generate significant economic
values reflect market expectations         growth. In the short-term, while the
about the value of a location as a place   economy adjusts, the Commission
to live and do business. These             recognizes that its tax reform
expectations are influenced by the         recommendations could have a fiscal
City’s long-run economic prospects.
70                                       Philadelphia Tax Reform Commission

impact. This section of the report       realized. However, based upon
contains a detailed list of policy       discussions with the Revenue and Law
options that could be immediately        Departments, the Commission
implemented to successfully fill this    believes that the benefits of improved
short-term gap. The Commission           tax collection far outweigh the costs.
estimates that $42 million to $75
million in recurring revenues and $45    Initiate a Tax Amnesty Program
million to $55 million in one-time           The Commission considered that,
revenues could be generated from         in conjunction with an increased
policy considerations that are not       effort to improve voluntary taxpayer
contingent upon state enabling           compliance, a tax amnesty program
legislation, state cooperation, or       could be implemented. This type of
extensive cooperation with suburban      program would bring new taxpayers
jurisdictions. Consistent with its       onto the tax rolls and give eligible
charter, the Commission has refrained    taxpayers a last chance to “come
from analyzing specific cost-reduction   clean” before the implementation of
programs. However, the Commission        aggressive new tax enforcement
believes that Philadelphia can achieve   policies. The Commission believes
significant cost savings though          anyone who participated in prior
improved government efficiency and       amnesty programs should be barred
increased budgetary discipline.          from participating in this amnesty
                                         program. Such an amnesty program
Improve Tax Collection                   should provide attractive terms, such
     Philadelphia must do more to        as penalty abatements and reduced
collect revenues from individuals and    interest. In addition to the one-time
businesses that are either ignorant of   revenues generated by this program,
their tax obligations or consciously     increased taxpayer compliance will
choose not to pay what they owe the      result in a broader tax base.
City. Improving enforcement and
increasing the penalty for non-          Analyze and Adjust the City’s Fine
compliance will allow the City to        Structure
finance tax reform and lower the              The primary purpose of fines is to
burden faced by all Philadelphia         punish and deter inappropriate and
residents and businesses.                illegal behavior. Since a fine serves not
     The Commission proposes that        only as a punishment but also a
tax collection and compliance be         deterrent, the amount of a fine can be
increased. According to the              raised to whatever sum is necessary to
Department of Revenue, the City          discourage future or continued
currently collects between 90 and 95     violations, subject to any restriction
percent, depending on the tax, of the    imposed on the dollar amount by the
amount due within two years of the       enabling statute or the state
due date. This estimate does not         Constitution. Thus, the Commission
include collection of non-reported       considered that all fines could be
taxes. There will be costs associated    analyzed and that selected fines could
with increased tax collection, and an    be increased. This would have the dual
initial adjustment period will be        benefit of generating additional non-
necessary before payoffs from new        tax revenue and helping to curb illegal
collection initiatives can be fully      or inappropriate behavior.
Financing Tax Reform                                                             71

Analyze and Adjust the City’s Fee          Increase Code Enforcement
Structure                                      The ultimate goal of increased
    A fee is a voluntary payment made      code enforcement is increased
by members of the public who elect to      compliance. However, the experience
exercise certain privileges. Although      of other cities indicates that increased
revenue raised through fees may only       code enforcement can lead to a
be used for the administration and         temporary spike in non-tax revenues.
supervision of the exercised privilege,    Increased code enforcement should
many fees do not generate sufficient       have one of two results: either non-tax
amounts of revenue to cover these          revenue goes up from fining violators
costs. For example, the Gun Permit         or violators come into compliance.
Fee generates $30,000 a year, yet the      Regardless of which result occurs, the
annual operating cost of the Gun           City is a winner. Since there are also
Permits Unit is nearly $2.7 million.       non-monetary benefits associated with
The Commission does not believe that       increased code enforcement, this
the provision of these types of            strongly complements the
services should be subsidized by tax       Commission’s mission of developing
dollars, and it considered that the        socially and fiscally responsible
City’s fee structure could be analyzed     reform. The Commission believes that
and adjusted accordingly. Increasing       the City could generate additional
any artificially low fees would increase   revenues by actively improving its
non-tax revenues.                          code enforcement.

Fees for Rights-of-Way Access              Collect Overdue Payments from
     The Commission considered that        Veterans Stadium Skyboxes
the City could follow the lead of other         The Commission considered that
cities and increase charges associated     efforts could be made to collect the
with rights-of-way (ROW) access in         money still owed to the City for City-
order to recover costs associated with     funded renovations and construction
ROW management, and to recover             of luxury boxes in Veterans Stadium.
costs generated as a result of street      If the City is going to seriously pursue
degradation and shortened street life.     tax reform, it is imperative that it is
Currently, costs associated with rights-   vigilant in its efforts to collect these
of-way management are not fully            types of revenue.
recovered by telecommunications
license fees and rights-of-way fees.       Adjust the Five-Year Plan for
These costs, borne primarily by the        Unanticipated Refinancing
Streets Department and the Law             Projects
Department, include direct salaries,            The Commission considered that
benefits, overhead, computer systems,      all unexpected savings (savings not
vehicles, and consultant studies. In       built into the current Five-Year Plan)
addition to recommending that a new        could be used to fund tax reduction.
nexus of fees be introduced to cover       For example, the savings realized by
these costs, the Commission believes       refunding a portion of the
that street-opening charges should be      Philadelphia Municipal Authority
sufficiently large to cover the indirect   bonds associated with the Criminal
costs associated with street               Justice Center and the Curran-
degradation and shortened street life.     Fromhold Correctional Facility could
72                                          Philadelphia Tax Reform Commission

be dedicated to funding tax reform.         analyzing specific cost-reducing
Although this type of unexpected            programs. The Commission is
savings has traditionally been used to      prohibited from recommending
fund a variety of special projects, there   specific expenditure reductions,
is no reason why this money could not       municipal government cost savings, or
be set aside and used to fund tax           municipal government service
reform.                                     reductions in order to offset any
                                            potential revenue reductions.
Increase Entrepreneurially                  However, discussion with various
Generated Revenues                          official agencies, examinations of past
     The Commission considered that         efficiency gains, and analyses of
the City could seek entrepreneurial         initiatives in other municipalities have
ways to increase non-tax revenues.          convinced the Commission that
These revenues would give the City          Philadelphia can achieve significant
greater budgetary flexibility and allow     cost savings through improved
it to finance tax reform. After             government efficiency and
analyzing programs in cities across the     effectiveness. The Commission
country, the Commission is convinced        believes that it would be fiscally and
that it is possible to increase non-tax     socially irresponsible to ignore the
revenues without increasing the cost        potential benefits associated with
of living and doing business in             programs that increase government
Philadelphia.                               efficiency and effectiveness. After
     The Commission considered that         careful deliberation, the Commission
the City could aggressively pursue          has reconciled this apparent conflict in
entrepreneurial activities including,       the Charter by foregoing the
but not limited to:                         evaluation of specific proposals in
     leasing rooftop space on city-         favor of stating that it believes the
     owned buildings to                     City can achieve significant cost
     telecommunication and                  savings though improved government
     broadcasting companies;                efficiency.
     developing and trademarking an
     official logo in order to sell         Steps Towards Budgetary
     novelty items and souvenirs;           Discipline
     marketing exclusive rights to              The Commission strongly
     concessionaires; and                   endorses the City’s ongoing efforts to
     creating either a boutique or an       examine its operations, to improve the
     online marketplace to sell used city   delivery of services, and to address the
     property, such as old street signs,    serious problems of public society that
     parking meters, demo voting            require high levels of City spending.
     machines, and expendable library           Within this framework, the
     books.                                 Commission proposes that future
                                            efforts include, but not be limited to:
                                                routine review of City programs to
Budgetary Discipline                            determine the benefits received
                                                for the dollars spent;
Consistent with its charter, the                equitable sharing by all elected
Commission has refrained from                   officials of spending reductions;
Financing Tax Reform                                                             73

    holding all top-level city managers    Commonwealth for the authority to
    accountable for continuously           establish formal payments in lieu of
    improving city service and             taxes (PILOTs) so that large non-
    administrative functions;              profit organizations may pay for those
    consolidation of information           City services that they use.
    technology operations and              Philadelphia, like many other major
    investing in newer technologies        municipalities across the country, is
    that would support improved            home to numerous tax-exempt
    business practices; and                institutions. Government facilities,
    consolidation and reorganization       publicly-owned utilities, educational
    of city agencies to improve            institutions, many healthcare
    accountability and reduce              providers, athletic and convention
    redundancy.                            centers, religious institutions, cultural
                                           and performing arts venues, and other
                                           non-profit organizations are exempt
Commonwealth Cooperation                   from paying Real Estate Taxes.
                                                Property owned by these tax-
The Commission believes that the           exempt institutions accounts for about
City’s efforts to achieve tax reform       25 percent of the City’s total assessed
could benefit from active assistance       property value and annually costs the
from the Commonwealth of                   city $100 million in lost property tax
Pennsylvania. Within this framework,       revenues. This exemption reduces the
the Commission unanimously                 property tax base and increases the tax
endorsed Governor Edward G.                burden on non-exempt property.
Rendell’s proposal to use funds from       PILOT payments are made by tax-
the Commonwealth of Pennsylvania           exempt organizations in order to
to help the City of Philadelphia reduce    partially compensate the City for its
its resident Wage Tax to 3.7415            lost tax revenue and to help pay for
percent by fiscal year 2008 and to         the services used by these institutions.
increase Commonwealth funding of
the School District of Philadelphia by     Expand the Sales Tax Base
$282 million by fiscal year 2006.              The Commission considered that
     The following policies, considered    the base of both the Philadelphia and
by the Commission, are either              the Pennsylvania Sales Tax could be
contingent on state enabling               expanded. Eliminating unnecessary
legislation, state cooperation, or         exemptions would generate substantial
extensive cooperation with suburban        revenue for both the Commonwealth
jurisdictions. The Commission did not      and the City. However, the
calculate a precise fiscal impact of       Commission believes that some items,
these initiatives. However, it believes    such as groceries and medicine, should
that the potential fiscal impact of this   continue to be exempt from the Sales
category would be substantial.             Tax. City officials should also consider
                                           urging the Commonwealth to join the
Increase PILOT Payments by Tax-            Streamlined Sales Tax Project, which
Exempt Institutions                        would enable the City and the
    The Commission considered that         Commonwealth to collect Sales Tax
the City could lobby the                   from e-commerce vendors and other
                                           remote sellers.
74                                         Philadelphia Tax Reform Commission

Adopt a Regional Asset District            increase over the 1971 assessment is
Sales Tax                                  put into a metropolitan pool, which is
     The Commission considered that        then redistributed according to each
a Regional Asset District Sales Tax        community’s population and tax base.
could be developed to fund regional        When the program began,
assets. Regional parks, libraries,         Minneapolis and St. Paul were the
professional sports facilities, cultural   major beneficiaries. However, as a
facilities, historic sites, and civic      result of successful downtown
facilities promote economic                redevelopment, Minneapolis is now a
development and enhance the quality        net contributor and St. Paul receives
of life for residents throughout           significantly less money than it
southeastern Pennsylvania. Therefore,      previously received. Small
financial support for them should also     communities are now the major
be spread through the region. Creating     beneficiaries of the regional tax-
a regional asset district would insure     sharing program.
that cultural institutions and other
important regional assets are no           Adjust for Regional Disparities
longer supported directly by the City’s    Though Statewide Funding
general fund. This type of regional        Reform
financing was first recommended                 The Commission recognizes that,
more than two decades ago, in a            on its own, Philadelphia cannot fully
report to the Pennsylvania Tax             resolve issues of tax fairness and
Commission.1 The mechanism for             regional tax disparities. Thus, the
dividing these revenues could be           Commission considered that the City
modeled after the Allegheny Regional       could advocate for reforms that would
Asset District or Denver’s Scientific      alter the manner in which local
and Cultural Facilities District.          jurisdictions in the Commonwealth of
                                           Pennsylvania fund public education
Regional Real Estate Tax Reform            and county services.
     The Commission considered that             The Commission examined
a regional tax distribution plan could     whether the Commonwealth should
be established. This type of program       meet its constitutional mandate to
would redistribute resources based on      “provide for the maintenance and
need. It would discourage inter-           support of a thorough and efficient
jurisdictional competition, since any      system of public education” by
regional growth would benefit the          increasing state funding. The
entire region instead of just one          Commission supports Governor
community.                                 Rendell’s proposal to significantly
     Philadelphia could model its          increase the state share of public
program after the Minneapolis-St.          school funding statewide.
Paul metropolitan area property tax             The Commission reviewed
sharing system (which has been in          whether the Commonwealth should
existence since 1975). Municipalities      increase its funding for county-level
within the Minneapolis-St. Paul region     programs in Philadelphia. An
annually compare their commercial          underlying factor behind
and industrial property values with the    Philadelphia’s high tax burden is its
1971 total assessment for those classes    dual status as both a city and a county.
of properties. Forty percent of the        Thus, unlike all other cities in
Financing Tax Reform                                                           75

Pennsylvania, it is unable to spread the   increases. However, it believes that
financial burden for county services to    there would be substantial long-term
suburban residents. If the                 economic benefits, even if selected
Commonwealth increases its support         taxes were marginally increased. Thus,
for the cost of poverty-related county     if only modest economic growth
level services in Philadelphia, it would   occurs and if the City cannot alter
be possible for Philadelphia to embark     spending or generate additional
on a more ambitious tax reform             revenues to cover any short-term
program that, among other things,          budgetary gaps, the Commission
would dramatically reduce or eliminate     believes that the City could—as a last
the nonresident Wage Tax.                  resort—increase certain taxes in order
    The Commission believes that the       to finance the proposed package of
City should continue to lobby the          tax reform.
Commonwealth to fulfill its
constitutional obligation to fund the      Increase Amusement Tax
court system. In 1987, the                 Revenues
Pennsylvania Supreme Court                      The Commission considered that
invalidated county funding of local        the Amusement Tax could be
courts. Subsequent legal activity and      increased from five percent of gross
Supreme Court action established           amusement related receipts to 10
guidelines for the Commonwealth to         percent of gross amusement related
implement a unified court-funding          receipts. Historically, the Amusement
scheme. However, full                      Tax has been as high as 10 percent;
Commonwealth assumption of these           currently it is only five percent. When
funding obligations has not yet            compared to other Philadelphia taxes,
occurred. If the Commonwealth              the economic burden created by the
assumes these obligations, the City        Amusement Tax is relatively small.
would be able to more aggressively         Revenues generated from an increase
pursue tax reform.                         in the Amusement Tax would enable
                                           the City to reduce more onerous taxes.
                                           Since all forms of traditional drama,
Changing Philadelphia’s Tax Mix            comedy, musical comedy, dramatic
                                           recitation of recognized works of
Philadelphia’s Home Rule Charter           literary art, and repertoire works are
directs the Commission to develop          exempt from the Amusement Tax, the
recommendations that will “decrease        Commission feels confident that
the overall tax burden on Philadelphia     Philadelphia’s cultural institutions
residents, individuals who work in         would not be adversely affected by
Philadelphia, and Philadelphia             this tax increase.
businesses.” After analyzing the fiscal
and econometric impact of different        Increase Parking Tax Revenues
taxes, the Commission has come to              The Commission considered that
believe that long-term economic            the Parking Tax could be increased
benefits would result simply from          from 15 percent of gross parking
changing Philadelphia’s tax mix.           receipts to 20 percent of gross parking
    The Commission is not explicitly       receipts. Historically, the Parking Tax
recommending any specific tax              has been as high as 20 percent, and
                                           Pittsburgh currently has a parking tax
76                                        Philadelphia Tax Reform Commission

rate of 31 percent. Because the
Commission’s tax reform
recommendations will mitigate the
burden placed upon parking lot
owners and operators, the
Commission believes that an increase
in this tax would not overburden
Philadelphia residents and businesses.
When compared to other Philadelphia
taxes, the economic burden created by
the Parking Tax is relatively small.

Increase Property Tax Revenues
     The Commission considered that,
if all other revenue generating options
failed and there were no other way to
fund the Commission’s recommended
package of tax reform, the City could
increase property-based tax rates.
Economic theory and econometric
evidence suggest that shifting from
local businesses and wage taxes and
onto property-based taxes will result
in substantial increases in jobs,
resident incomes, business activity,
and property values. Thus, it is
possible for the City to decrease its
total tax burden by reducing its
reliance on business and income-
based taxation and increasing its
reliance on property-based taxes. The
Commission considered that a budget-
based system of property taxation
could act as a relief valve that would
allow the City to expand its reliance
on property-based taxation if the City
could find no other way of
incorporating the Commission’s
package of tax reforms into the
budget.
Tax-Related Economic Development Tools                                         77




 Section 7: Tax-Related Economic
 Development Tools
The Philadelphia Home Rule Charter         Development Corporation,
explicitly charges the Tax Reform          Philadelphia Commercial
Commission with “conducting a              Development Corporation, and
comprehensive analysis of and making       Redevelopment Authority), the City
recommendations regarding reforms          should create a comprehensive
to…real estate tax abatements, tax         economic development plan.
increment finance districts,                   Mechanisms to be considered
Empowerment Zones, Keystone                should include tax increment
Opportunity Zones, and any other           financing, grants, low-interest loans,
programs that use tax abatements or        and tax abatements to target industries
exemptions as economic development         that exhibit a competitive advantage,
tools.”                                    have significant prospects for growth,
      After examining Philadelphia’s tax   and will stimulate local economic
structure and numerous tax-related         growth. The City should then utilize
economic development tools—used in         clawback mechanisms, which would
Philadelphia during the past several       ensure that recipients of City funding
decades—the Commission believes            either meet or exceed expected targets
that tax-related economic                  or refund government money.
development tools have been
necessary to offset obstacles to           Add Sunset Review Clauses to
development created by Philadelphia’s      Economic Stimulus Programs
tax structure. However, as tax reform          Because the City’s economic
is realized, the Commission believes       climate is always changing, it is
that the City should reevaluate its mix    important to periodically review the
of economic development tools to see       usefulness of economic stimulus and
if tax abatements, tax exemptions, tax     economic development programs in
increment finance districts, and           order to evaluate their effectiveness
collaborative tax incentive zones are      and to determine if the life of these
still necessary. In the interim, the       programs should be extended. As
Commission believes that the               such, the Commission proposes that
following proposals—which could be         sunset review clauses be added to all
implemented immediately—should be          existing and future economic
considered.                                development programs.

Develop a Comprehensive                    Expand Collaborative Economic
Economic Development Plan                  Development and Tax Incentive
    The Tax Reform Commission              Programs
proposes that, in conjunction with             The Commission believes that the
related quasi-public development           locally derived economic benefits will
agencies (e.g., Philadelphia Industrial    exceed the locally borne costs of
78                                        Philadelphia Tax Reform Commission

participating in these programs. For
example, the Commission’s proposal
to phase-out the Business Privilege
Tax and reduce the Net Profits Tax
rate, combined with the City’s existing
10-year Real Estate Tax Abatement
programs, would minimize the local
cost impact of designating additional
Keystone Opportunity Zones, while
providing significant Commonwealth
tax benefits. Therefore, the
Commission proposes that the City
vigorously lobby for Commonwealth
approval of the designation of
additional Keystone Opportunity
Zones and other types of collaborative
economic development zones.
Complementary Reform Considerations                                               79




 Part 8: Complementary Reform
 Considerations
The Tax Reform Commission believes             businesses to use Electronic Data
that if tax reform is to be feasible and       Interchange and Electronic Funds
meaningful it must be accompanied by           Transfers to pay taxes.
other reforms in the way the City
manages the business of government.        Create an Office of Tax Policy
The following is a list of reform               Given the influence that taxes
proposals that will complement and         have on the City’s long run economic
enhance the Commission’s package of        health, the Commission believes that
tax reform recommendations.                the City should invest in an
                                           institutionalized capacity to analyze
Improve Interactions Between               tax and economic development policy.
Taxpayers and the City’s Revenue-          The Commission considered that an
Collection Bureaucracy                     Office of Tax Policy could be created
     The Commission considered that        to regularly monitor Philadelphia’s tax
the City could utilize technology to       policy and report on tax changes
facilitate improved interactions           necessary to maintain and improve the
between taxpayers and the City’s           City’s tax system.
revenue-collection bureaucracy. The             There is no central office for tax
Commission believes that the City          policy in Philadelphia, such as those in
should invest telecommunications           New York City, Washington D.C.,
technology to make paying taxes more       several states, and the U.S. Treasury
customer-friendly and collections          Department. In addition, economic
more certain. The Commission               development policy is detached from
recognizes that the Department of          the City’s financial administration and
Revenue has made some strides in           administered largely through quasi-
improving interactions between             governmental agencies. If the city is to
taxpayers and the City’s revenue-          become competitive in the face of
collection bureaucracy. However, the       global economic shifts, continuing
Commission believes that the City          changes in the marketplace, and
should also consider:                      increased competition from other
     making all tax-related activities,    jurisdictions, tax reform should be
     from finding forms to filing tax      institutionalized through a continuous
     returns, available on-line;           review of taxes (both local and state),
     allowing individuals and              local and regional economic
     businesses to pay taxes with credit   development tools, and the City’s
     cards;                                overall competitive position. This
     allowing taxpayers to file tax        ongoing review could result in new
     returns by phone; and                 City policies, regulations, and
     developing an information data        ordinances, as well as the proposal of
     exchange system to allow              Philadelphia Home Rule Charter
80                                         Philadelphia Tax Reform Commission

amendments, state legislation, and        If created as proposed by this
amendments to the Pennsylvania            Commission, a Philadelphia Office of
Constitution, if necessary, to            Tax Policy would be well suited to
continuously improve Philadelphia’s       continue this research.
tax structure.
                                          Evaluate Tax Expenditures
Continue to Research the                       The City has increasingly used tax
Feasibility of Implementing a City        incentives as a tool of economic
Income Tax                                development policy. Granting a tax
    The Commission considered, but        abatement or exemption to certain
did not recommend, a proposal to          taxpayers entails a cost equivalent to
replace the City’s four existing          City expenditures. City officials and
income-based taxes—the Wage Tax,          the public should be able to apply the
the Earnings Tax, the Net Profits Tax,    same degree of scrutiny to tax
and the School Income Tax—with a          expenditures as they do to direct
single City income tax piggybacked on     expenditures. They should be able to
Pennsylvania’s Personal Income Tax.       determine whether the investment of
    A relative dearth of information      public resources in any particular tax
about the economic impact of this         expenditure program is justified by the
proposal ultimately prevented the         social benefits the investment
Commission from recommending a            generates.
City income tax. However, the                  To this end, the Commission
Commission believes that this idea        believes that the City should annually
deserves further consideration and it     publish a tax expenditure report. This
suggests that the City continue to        report could be similar in structure to
research:                                 the tax expenditure reports published
    the likely effects of a City income   by the federal government and by the
    on city employment, resident          Commonwealth of Pennsylvania. The
    income, and property values;          report should contain information
    the amount of additional revenue      about tax credits, deductions,
    that could be generated from          exemptions, and abatements provided
    broadening the tax base (this         in law that result in a significant
    estimate should take into account     reduction in revenues that would
    the cost of administration and        otherwise be received. For each tax
    potential differences in              expenditure program, the report
    enforcement difficulty under the      should include a description of the
    current system and under the          nature of the tax expenditure, its
    proposed system); and                 source in law, its rationale, and an
    the distributional shift in tax       estimate of its actual and projected
    burdens created by the proposal—      costs by fiscal year.
    specifically the impact of                 In addition, the City should
    increasing tax burdens on high-       periodically undertake cost-benefit
    income households (who would          analyses of its major tax expenditure
    be more heavily taxed) and            programs. The estimated costs for
    decreasing tax burdens on low-        specific tax expenditures should be
    income households (who could be       compared to the estimated benefits
    eligible for tax forgiveness).        (such as the number of jobs created,
                                          the value of new construction, and
Complementary Reform Considerations                                                 81

new taxes generated). These analyses             The Commission considered that
could be preformed by the Office of         the Uniformity Clause could be
Tax Policy, and used to assess which        amended so that elected officials
tax expenditure programs are                would have more flexibility in crafting
producing the largest return on the         tax policy. Some of the possible
city’s investment. This would allow         reforms that would be possible if the
policy makers to better target the          Uniformity Clause were amended
City’s investment toward the most           include:
productive tax expenditure programs.           increasing tax system progressivity
                                               by allowing for a graduated income
Attach Fiscal-Impact Statements to             tax;
all Proposed Pieces of Legislation             promoting economic growth by
    The administration and City                providing tax relief to small
Council currently have no means of             businesses and start-up companies
assessing whether a bill under                 that are creating jobs; and
consideration represents sound fiscal          improving tax system
policy. To remedy this situation and to        competitiveness by allowing real
help promote better tax policy, the            estate to be classified based upon its
Commission believes that a fiscal-             use and taxed differently based
impact statement should be attached            upon that classification.
to all proposed pieces of local
legislation.                                Create a Rainy-Day Fund
                                                The City Charter requires that the
Amend the Pennsylvania                      City’s annual operating budget be
Uniformity Clause                           balanced. This provision has been
     In 1874, the citizens of               interpreted to preclude the City from
Pennsylvania amended the state              budgeting an excess of revenues over
Constitution by adding a series of          expenditures. Because of this
provisions aimed at limiting the            restriction, the City has routinely
General Assembly’s authority to enact       overestimated some expenditure
economically preferential legislation.      categories while underestimating
One of these provisions was the             revenues, in order to maintain a
Uniformity Clause, which states that        sufficient cushion in the budget to
“all taxes shall be uniform, upon the       insure financial stability in the event of
same class of subjects, within the          an economic downturn or major
territorial limits of the authority         unanticipated expenditure. As a result,
levying the tax.” This clause does not      the budget has become a less realistic
destroy the government’s ability to         representation of the City’s actual
distinguish between, and tax                available resources and spending
differently, classes of taxpayers.          targets.
However, it has been interpreted to             To successfully reduce taxes over
require a substantial equality of the tax   the next decade, the City will need to
burden upon each member of the              exercise a high degree of budgetary
same class. Pennsylvania’s Uniformity       control. To enhance the City’s ability
Clause has often prevented taxing           to commit to tax cuts the City should
authorities from reforming the tax          create a rainy-day fund. Rainy-day
system to meet policy goals.                funds are one type of mechanism,
                                            used at the state level and by other
82                                          Philadelphia Tax Reform Commission

large cities, which can help stabilize     Study Commission to evaluate the
spending during cyclical periods of        relevance, necessity, cost, and benefit
revenue contraction and expansion. A       of any new City regulations, and serve
rainy-day fund designed to hold            as a filter agency through which
expenditures down in good times and        proposed regulations are passed on to
save for hard times, would help            City Council. Concurrently, a Code
Philadelphia meet long-term service        Task Force could review and revise
demands and continue planned tax           the existing Regulatory Code to
reductions during periods of               eliminate or consolidate regulations
economic contraction.                      that are outdated, costly, or
    To adopt the rainy-day fund, the       counterproductive. Inter-agency
City may need to amend the Charter         databases should be expanded and
to explicitly authorize the City to        agency personnel should be cross-
budget a surplus. Unlike the current       trained to improve coordination
fund balance, a rainy-day fund would       among the multiple agencies involved
have strict legal triggers for fund        in the regulatory process and allow
contributions and formulas to              caseworkers to address concerns
determine the amounts of fund              raised by customers. Payments for
withdrawals.                               licenses and permits should be
                                           accepted on-line by credit card and
Create a Non-Tax Revenue Master            customers should be able to check the
List                                       status of their applications and access
    The Commission believes that the       code and payment requirements on-
City should evaluate its license charges   line.
and fees on a regular basis to
determine whether the City generates       Extract Greater Value From City
enough revenues to adequately cover        Assets
administration expenses, whether               Large assets such as Philadelphia
charges are unreasonably high and          International Airport, Philadelphia
should be lowered, or whether charges      Gas Works, and Philadelphia Water
are nuisances to collect and administer    Department are the types of entities
and should be abolished. A                 that Philadelphia’s competitor cities
comprehensive master list of all non-      do not typically own and operate. The
tax revenue would help facilitate this     Commission does not believe that the
process.                                   sale of these assets will provide
                                           sufficient revenues to fully finance tax
Reform the City’s Regulatory               reform any time in the near future.
Processes                                      However, it considered that the
    Outdated and unnecessarily             City could actively explore ways to
burdensome regulations have been           extract greater value from its assets.
cited as a major deterrent to business     Possible options include sale of
growth in Philadelphia. Efforts to         smaller assets, contracting operations
make the City’s tax structure more         with a substantial upfront one-time
resident and business friendly should      payment to the City, transferring
be complemented by reforms to the          operations to an authority with a
City’s regulatory processes.               substantial upfront one-time fee, and
    The Commission considered that         increasing annual transfer payments
the City could establish a Regulatory      made to the City. Extracting greater
Complementary Reform Considerations        83

value from its assets would give the
City budgetary flexibility and allow it
to pursue tax reform more
aggressively.

Market Philadelphia’s New Tax
Structure and Improved Business
Climate
     Assuming that the Commission’s
recommendations are enacted into
law, the Commission proposes that
the City, in cooperation with private
sector leadership organizations, should
invest in a new program of marketing
Philadelphia’s business climate,
highlighting tax reform and other
public initiatives that enhance the
City’s and the region’s
competitiveness.
     The marketing message should
focus on the entire package of reforms
implemented since the early 1990s,
and ongoing initiatives, including
fundamental tax reform. The
economic benefit of the
Commission’s recommendations will
be leveraged to the extent that
business decision makers and
investors are aware of the City’s tax
reform plans and other progressive
steps to improve the City’s
competitiveness.
     The City, in conjunction with
private sector leadership
organizations, must develop a vision
for the City’s economic growth. This
vision should focus on those sectors
in which the City is well positioned to
compete from both a tax and non-tax
perspective. A coordinated marketing
effort with a focus on industry clusters
will help to pave the road for
increased economic development.
84




     Appendices
Appendix A                       85




  Appendix A: Philadelphia Tax
  Reform Resolution
86                                             Philadelphia Tax Reform Commission




                      Council of the City of Philadelphia
                         Office of the Chief Clerk
                            Room 402, City Hall
                                 Philadelphia
                              (Resolution No. 020264)

                                  RESOLUTION

Proposing an amendment to the Philadelphia Home Rule Charter to provide for the
creation, appointment, powers and duties of a Philadelphia Tax Reform
Commission, and providing for the submission of the amendment to the electors of
Philadelphia.

       WHEREAS, Under Section 6 of the First Class City Home Rule Act (53

P.S. §13106), an amendment to the Philadelphia Home Rule Charter may be

proposed by a resolution of the Council of the City of Philadelphia adopted with the

concurrence of two-thirds of its elected members; now therefore



       RESOLVED, BY THE COUNCIL OF THE CITY OF

PHILADELPHIA,

That the following amendment to the Philadelphia Home Rule Charter is hereby

proposed and shall be submitted to the electors of the City on an election date

designated by ordinance:
Appendix A                                                                                  87

       ARTICLE III – EXECUTIVE AND ADMINISTRATIVE BRANCH –

                                    ORGANIZATION

                                  CHAPTER 1
                       OFFICERS, DEPARTMENTS, BOARDS,
                      COMMISSIONS AND OTHER AGENCIES

           Section 3-100. Executive and Administrative Officers, Departments, Boards,

Commissions and Agencies Designated. The executive and administrative work of

the City shall be performed by:

                              *                *                  *

           (e)    The following independent boards and commissions, which, except

for the Board of Trustees of the Free Library of Philadelphia, are hereby created:

                  City Planning Commission;

                  Commission on Human Relations;

                  Board of Trustees of the Free Library of Philadelphia;

                  Board of Pensions and Retirement;

                  Civil Service Commission;

                  Philadelphia Tax Reform Commission and its Advisory Committee.

                              *                *                  *

                                       CHAPTER 8
                                  INDEPENDENT BOARDS
                                    AND COMMISSIONS

                              *                *                  *

           SECTION 3-805. Philadelphia Tax Reform Commission and Advisory Committee.

The Philadelphia Tax Reform Commission shall be composed of fifteen members, appointed as

follows:

           (a)    Four members shall be appointed by the Mayor;
88                                                      Philadelphia Tax Reform Commission

         (b)      Four members shall be appointed by the Council President;

         (c)      One member shall be appointed by the City Controller;

         (d)      One member shall be appointed by each of the following: the President of the

African-American Chamber of Commerce, the President of the Greater Philadelphia Chamber of

Commerce, the Chief Executive Officer of Greater Philadelphia First, the President of the Greater

Northeast Chamber of Commerce, the President of the Hispanic Chamber of Commerce, and the

Executive Director of the North Philadelphia Chamber of Commerce.

         (e)      The Commission’s Advisory Committee shall consist of twenty-three members.

One member of the Advisory Committee shall be appointed by each of the following: the Director of

Action Alliance of Senior Citizens of Greater Philadelphia, the Director of Asian-Americans

United, the Director of Community Legal Services, the President of the Board of the Consumer

Education & Protective Association, the Director of the Keystone Research Center, the President of

the National Congress of Puerto Rican Rights, the Director of the Parents' Union, the Director of

Philadelphia NOW (National Organization for Women), the Director of the Philadelphia

Unemployment Project, the Director of the Tenant Action Group, the President of the Federal

Reserve Bank of Philadelphia, the Dean of the Fox School of Business and Management of Temple

University, the President of the Greater Philadelphia Association of Realtors, the President of the

Institute for the Study of Civic Values, the President of the NAACP Philadelphia Chapter, the

Executive Director of the Pennsylvania Economy League Eastern Division, the President of the

Pennsylvania Institute of Certified Public Accountants Greater Philadelphia Chapter, the President

of the Philadelphia Bar Association, the Business Manager of the Philadelphia Building and

Construction Trades Council, the President of the Philadelphia Council AFL-CIO, the President

of the Urban League of Philadelphia, the Executive Director of the West Philadelphia Partnership,

and the Dean of the Wharton School of the University of Pennsylvania. If any of those
Appendix A                                                                                           89

organizations ceases to exist or refuses to make an appointment, the members of the Commission

shall by a majority vote designate an organization of a similar nature to make an appointment.

         (f)       All appointments to the Commission and its Advisory Committee shall be made

within thirty days after the Commission is first created.

         (g)       No member of the Commission, while serving as a member, shall seek or hold a

position as an elected public official within the Commonwealth, or as an officer of a political party.

         (h)       Vacancies on the Commission and its Advisory Committee shall be filled by the

appointing authority who originally appointed the member whose seat has become vacant.

                                *                  *                  *

                                  ARTICLE IV
                         EXECUTIVE AND ADMINISTRATIVE
                           BRANCH POWERS AND DUTIES

                        The Mayor, The City Representative and
                 Departments, Boards and Commissions under the Mayor

                                *                  *                  *

                                CHAPTER 9
                    PHILADELPHIA TAX REFORM COMMISSION

         SECTION 4-900. Powers and Duties.

         (a)       Within sixty days after its creation, the Philadelphia Tax Reform Commission

shall convene its first meeting in the City Council chambers and thereafter the Commission shall

meet at least monthly at such times and at such places as determined by the Commission. Members

of the Advisory Committee shall be provided notice of all meetings of the Commission in the same

manner as notice is provided to members of the Commission, and shall be permitted to attend all

such meetings. The purpose of the Commission is to conduct a comprehensive analysis of and make

recommendations regarding reforms to the tax structure and all taxes imposed in Philadelphia and

the tax structure of the Commonwealth of Pennsylvania which affects Philadelphia and all counties
90                                                       Philadelphia Tax Reform Commission

in Pennsylvania, including but not limited to the wage tax, the business privilege tax, the net profits

tax, the gross receipts tax, the amusement tax, the use and occupancy tax, the real property tax, the

school income tax, the real estate transfer tax, the liquor-by-the-drink tax, the parking tax, the

Philadelphia sales tax, the hotel bed tax and any other taxes imposed by the City and by the School

District, as well as real estate tax abatements, tax increment finance districts, Empowerment Zones,

Keystone Opportunity Zones, and any other programs that use tax abatements or exemptions as

economic development tools. The Commission shall also examine all laws of the Commonwealth of

Pennsylvania that authorize or limit the ability of the City to impose taxes. The Commission shall

analyze each tax to determine why it is imposed, how much revenue the tax generates, the impact of

the tax on businesses or residents and the Philadelphia economy, whether it may be eliminated or

consolidated with another tax or otherwise simplified, and whether and to what extent the rate of the

tax may be decreased in a fiscally and socially responsible manner. The Commission shall also

compare and contrast the tax structure in Philadelphia to the tax structures in jurisdictions that

have experienced growth in residents and businesses, using accepted models of economic analysis. The

Commission’s work shall be guided by the principle that Philadelphia’s tax structure should enhance

and improve Philadelphia’s ability to compete with other jurisdictions in the region and throughout

the nation in attracting new residents, businesses and jobs and retaining current residents, businesses

and jobs. The Commission's work shall also be guided by the principle of tax fairness and tax

equity in apportioning tax burdens. The Commission shall, subject to the availability of

appropriations, appoint and fix the compensation of an executive director and such other staff as

may be required for the proper conduct of its work (provided that the appointment of an executive

director shall require a vote of two-thirds of all the members of the Commission), and it shall invite

the participation of any staff or Board members of each of the organizations that appoint members to

either the Commission or the Advisory Committee as set forth in subsections 3-805(d) and (e), as
Appendix A                                                                                            91

well as utilize any available resources, studies or reports of any such organization. The Commission

may also, subject to the availability of appropriations, retain as consultants any other organization

or individual with regionally or nationally recognized expertise in local tax policy or municipal

finance. The Commission’s Advisory Committee shall provide technical, economic and public policy

advice to the Commission. All departments, boards, commissions and other City agencies shall

cooperate fully with the Commission in the performance of its duties and responsibilities and shall

provide any and all documents, data, analyses or other information related to revenues, taxes, or tax

policy requested by the Commission, except documents the nondisclosure of which is legally privileged

or which have been prepared for or by the Law Department for use in actions or proceedings to which

the City is or may be a party, and provided that the Commission shall maintain the confidentiality

of any documents, data, analyses or other related information upon the written request by any City

agency that the material being provided to the Commission be treated as confidential. The

Commission shall hold at least two public hearings in the Council chambers to receive testimony from

the public concerning tax reform.

         (b)      On November 15, 2003, the Commission shall by a vote of two-thirds of all

members of the Commission adopt a written report containing specific recommendations solely related

to proposed changes to the Philadelphia tax structure in order to decrease the overall tax burden of

Philadelphia residents, individuals who work in Philadelphia, and Philadelphia businesses. The

Commission shall also consider recommendations made by the Advisory Committee in the

development of its report. The Commission shall also make recommendations related to state-wide

tax reform, including public education funding, that will enhance and improve the overall tax

structures in Philadelphia and all other counties in the Commonwealth of Pennsylvania. The

Commission shall not make any recommendations related to any expenditure reductions, municipal

government cost savings, or municipal government service reductions to offset any potential revenue
92                                                        Philadelphia Tax Reform Commission

reductions which may result from the implementation of any recommendations set forth in the

Commission’s report. The Commission shall provide copies of its report to the Mayor, each member

of Council and the Clerk of Council, to each of the Commission’s appointing authorities, and to

each member of the Advisory Committee, and the Commission shall see to it that copies are provided

to all public libraries in the City and that a copy is posted on the City’s official Internet site. The

Commission shall also provide copies of its report to the Governor, the President Pro Tempore of the

Senate, the Majority Leader of the Senate, the Minority Leader of the Senate, the Speaker of the

House of Representatives, the Majority Leader of the House of Representatives, and the Minority

Leader of the House of Representatives. For each recommendation that requires action by the

Council or the General Assembly, the report shall include a proposed ordinance or bill implementing

the recommendation with a fiscal impact statement and an econometric analysis of the projected

revenue change, if any, resulting from such recommendation. The Commission shall also publish and

distribute with its report any minority report adopted by three or more members of the Commission.

          (c)      After issuing its report, the Commission shall thereafter be reconvened only as

directed by a resolution of the Council adopted by a two-thirds vote of all the members of the

Council, provided that the Commission shall not be reconvened until at least five years have elapsed

since the date the Commission adopted its last report. Within sixty days after adoption of such a

resolution, new members of the Commission and its Advisory Committee shall be appointed in

accordance with the appointment process set forth in Section 3-805, provided that any former

member of the Commission or the Advisory Committee may be reappointed as a member of the

Commission or Advisory Committee.

          (d)      Nothing in this Section shall be construed to prevent any member of Council or

the Mayor from proposing, enacting, or approving at any time any bill relating to taxes or tax

reform.
Appendix A                                                                          93

                           *             *              *

___________________________________
Explanation:

Italics indicate new matter added.



CERTIFICATION: This is a true and correct copy of the original Resolution,
Adopted by the Council of the City of Philadelphia on the sixteenth of May, 2002.


                                              Anna C. Verna
                                              PRESIDENT OF THE COUNCIL



Marie B. Hauser
CHIEF CLERK OF THE COUNCIL




Introduced by:       Councilmembers Nutter, Mariano, DiCicco, Goode, Kenney, Rizzo,
                     Tasco, Ortiz, Council President Verna, Councilmembers Blackwell,
                     Clarke, Krajewski, O'Neill, Reynolds Brown, Miller and Cohen
Sponsored by:
94                     Philadelphia Tax Reform Commission




     Appendix B: Philadelphia Tax
     Reform Ordinance
Appendix B                                                                          95




                              City of Philadelphia
                                  (Bill No. 020255)
                                 AN ORDINANCE

Providing for the submission to the qualified electors of the City of Philadelphia of
an amendment to the Philadelphia Home Rule Charter relating to the creation,
appointment, powers and duties of an independent Philadelphia Tax Reform
Commission, as approved by Resolution of the City Council; fixing the date of a
special election for such purpose; prescribing the form of ballot questions to be
voted on; and authorizing the appropriate officers to publish notice and to make
arrangements for the special election.


THE COUNCIL OF THE CITY OF PHILADELPHIA HEREBY ORDAINS:

SECTION 1. There shall be submitted for the approval or disapproval of the

qualified electors of the City of Philadelphia at the election to be held November 5,

2002, an amendment to the Philadelphia Home Rule Charter relating to the creation,

appointment, powers and duties of a Philadelphia Tax Reform Commission.


SECTION 2. There shall be placed on the ballot the following question to be

answered “Yes” or “No” by the qualified electors participating in the election:

       Shall the Philadelphia Home Rule Charter be amended to provide for
       the creation, appointment, powers and duties of an independent
       Philadelphia Tax Reform Commission which would recommend
       methods to reduce the taxes of Philadelphia residents, workers and
       businesses in an equitable manner in order to enhance Philadelphia’s
       ability to compete with other jurisdictions in attracting and retaining
       new residents, businesses and jobs, based upon the Commission's
       comprehensive analysis of taxation in Philadelphia?

The proposed amendment is contained in Resolution No. 020264 approved by
96                                               Philadelphia Tax Reform Commission

Council on May 16, 2002, and filed in the Office of the Clerk of Council.


SECTION 3. The Clerk of Council is hereby directed to have printed in pamphlet

form, in sufficient number for general distribution, the proposed amendment to the

Philadelphia Home Rule Charter as set forth in Resolution No. 020264, together

with the ballot question set forth in Section 2 of this Ordinance.


SECTION 4. The Clerk of Council is hereby directed to cause to be published in

three (3) newspapers of general circulation in the City and in the Legal Intelligencer

the proposed amendment to the Philadelphia Home Rule Charter, together with the

ballot question set forth in Section 2 of this Ordinance, once a week during the three

(3) weeks preceding the election on November 5, 2002; and further, at such other

time and in such other manner as she may consider desirable.


SECTION 5. The Mayor is hereby authorized and directed to issue a proclamation

giving at least thirty (30) days’ notice of such election. The Clerk of Council shall

cause a copy of the proclamation to be published, together with the notice provided

for in Section 4 of this Ordinance.


SECTION 6. The appropriate officers are authorized and directed to take such

action as may be required for the holding of an election on the ballot question set

forth in Section 2 of this Ordinance as provided for by the laws of the

Commonwealth of Pennsylvania.
Appendix C                                                                     97




Appendix C: Outreach Efforts

Public Meetings                           expressed to the Commission through
    The Tax Reform Commission             direct testimony and written
commenced its work on January 15,         statements at these hearings. The
2003 when commissioners and               testimony before the Commission was
advisory committee members were           videotaped and broadcast over the
sworn into their positions. The           local public access channel. It was
Commission continued to hold public       also transcribed.
meetings at least once a month until
November 2003. During this time the       Availability of Information
Commission held 14 public meetings.            Public hearing transcripts, written
Audio recordings were made at each        testimony, and videotapes, as well as
of these public meetings.                 public meeting and town meeting
                                          audiotapes are on file as records of the
Town Meetings                             Commission and open for public
     During the course of its work, the   review.
Commission organized town meetings             Additional information about the
in the northeastern, northwestern,        Commission’s work and research
western, and southern sections of the     materials may also be obtained from
city. These four meetings allowed         the Commission website:
neighborhood residents a chance to        www.philadelphiataxreform.org.
voice their concerns about
Philadelphia’s tax structure. Audio
recordings were made at each of these
public meetings.

Public Hearings
    On May 15, 2003 and on October
7, 2003 the Commission held public
hearings in City Council chambers.
This was done pursuant to a City
Charter requirement that the
Commission “hold at least two public
hearings in the Council chambers to
receive testimony from the public
concerning tax reform.”
    At these hearings, the
Commission listened to testimony
from elected officials, interest group
representatives, experts, and citizens.
Each hearing lasted approximately
eight hours. The views of more than
100 citizens and organizations were
98                                          Philadelphia Tax Reform Commission




 Appendix D: Total Tax Collections

       Figure D.1: Total Tax Revenue, City and School District
       of Philadelphia and PICA, Fiscal Year 2002 Actual and
       Fiscal Year 2003 Preliminary, Dollars in Millions

                                             FY02             FY03
       Tax                                   Actual        Preliminary
       Amusement Tax                              13.8            14.1
       Business Privilege Tax                    295.8           286.1
       Hotel Room Rental Tax                      29.6            29.3
       Liquor Sales Tax                           28.3            29.1
       Net Profits Tax
           City Portion                           13.4             11.7
           PICA Portion                            9.9             10.7
           Total                                  23.3             22.4
       Parking Lot Tax                            37.9             38.7
       Real Estate Tax
           City Portion                          373.6           361.1
           School District Portion               441.2           490.2
           Total                                 814.8           851.3
       Real Property Transfer Tax                 96.7           103.4
       Sales Tax                                 108.1           108.0
       School Income Tax                          16.9            16.9
       Use and Occupancy Tax                      93.4           101.6
       Vehicle Rental Tax                          3.9             3.9
       Wage and Earnings Taxes
           City Portion                       1,006.0          1,013.4
           PICA Portion                         268.1            273.4
           Total                              1,274.1          1,286.8

       Total Taxes                            2,836.6          2,891.6
       Note: All Fiscal Year 2002 figures are actual. Fiscal Year 2003
       figures for School District and PICA taxes, Hotel Room Rental Tax
       and Vehicle Rental Tax are preliminary. All other Fiscal Year 2003
       figures are actual.
       Source: City of Philadelphia, Department of Revenue, 2003; City of
       Philadelphia, 2003; School District of Philadelphia, 2003.
Appendix E                      99




 Appendix E: Philadelphia Tax
 Reform Commission Resolution
100                                            Philadelphia Tax Reform Commission




                    Philadelphia Tax Reform Commission
                   Municipal Services Building, Room 1440
                                 Philadelphia
                                (Resolution No. 001)

                                   RESOLUTION


       WHEREAS, the Philadelphia Home Rule Charter amendment establishing

the Philadelphia Tax Reform Commission mandates that the Commission “make

recommendations related to state-wide tax reform, including public education

funding, that will enhance and improve the overall tax structures in Philadelphia and

all other counties in the Commonwealth of Pennsylvania;” and



       WHEREAS, the Charter amendment stipulates that “the Commission’s

work shall be guided by the principle that Philadelphia’s tax structure should enhance

and improve Philadelphia’s ability to compete with other jurisdictions in the region

and throughout the nation in attracting new residents, businesses and jobs and

retaining current residents, businesses and jobs;” and



       WHEREAS, the Rendell Administration has proposed a program of

statewide tax reform that will provide funds from the Commonwealth of

Pennsylvania permitting the City of Philadelphia to reduce Philadelphia’s resident

wage tax to 3.7415 percent by Fiscal Year 2008 and to increase Commonwealth
Appendix E                                                                             101

funding of the School District of Philadelphia by $282 million by Fiscal Year 2006;

to raise $282 million for the School District of Philadelphia locally would require a

37 percent property tax increase; and



        WHEREAS, an Econsult Corporation analysis of the Governor’s statewide

tax reform plan commissioned by the Philadelphia Tax Reform Commission has

concluded that, “the Rendell tax reform proposal is likely to increase the size of the

Philadelphia economy and increase the city’s property values” and “increase City

revenues so that wage taxes plus the state aid to the city will significantly exceed

baseline revenue forecasts;” and



        WHEREAS, the Econsult analysis concludes further that “increases in

property values would allow the city to generate additional funds for both the City

and School District without increasing tax rates;” now therefore



        RESOLVED, that the Philadelphia Tax Reform Commission supports the

Rendell Administration’s proposal to use funds from the Commonwealth of

Pennsylvania to help the City of Philadelphia reduce its resident wage tax to 3.7415

percent by Fiscal Year 2008 and to increase Commonwealth funding of the School

District of Philadelphia by $282 million by Fiscal Year 2006.



        The Philadelphia Tax Reform Commission further urges the Pennsylvania

General Assembly to give serious consideration to the Econsult analysis of these

proposed statewide tax reforms in making its final decision.
102                                       Philadelphia Tax Reform Commission




                           *             *             *




CERTIFICATION: This is a true and correct copy of the original Resolution,
Adopted by the Philadelphia Tax Reform Commission on the fifth of June, 2003.


                                             Edward A. Schwartz
                                             COMMISSION CHAIRMAN



Christopher Dwyer
COMMISSION EXECUTIVE DIRECTOR




Introduced by:    Chairman Schwartz
Appendix F                                                                   103


 Appendix F: Survey of
 Philadelphia’s Business Community
In August 2003, the Commission           Characteristics of Businesses That
surveyed a sample of Philadelphia        Responded to the Survey
businesses to determine their views on
Philadelphia’s tax system. The           A number of survey questions asked
Commission felt it was important to      respondents about the characteristics
have results from an up-to-date survey   of their businesses, including industry,
that sampled the views of all            location, number of workers,
Philadelphia firms, including            percentage of workers that live in the
businesses from across all city          city, and the race and the ethnicity of
neighborhoods and industries.            the business owners. The diversity of
     With the assistance of the          responses suggests that the 206
Department of Revenue, Commission        respondents well represented the city’s
staff developed a random sample of       entire business community.
firms that pay the Business Privilege         The respondents were distributed
Tax. The sample was stratified into      across a wide range of industry
three groups by the amount of the        sectors, with the largest concentration
Business Privilege Tax payment, to       in business and professional services
insure adequate representation of        (24 percent), retail services (18
small, medium, and large-sized           percent), health care (11 percent), and
businesses. A total of 1,000 surveys     manufacturing (10 percent). The
were mailed, and 206 responses were      remaining 37 percent of respondents
received. A 20.6 percent response rate   represented a wide range of other
such as this survey achieved is          industries, including: manufacturing,
considered excellent for a mail-only     construction, distributor/wholesaling,
survey with no follow-up telephone       retail, finance, insurance, real estate,
call or mail reminder.                   transportation, education, social
     The cover letter to the survey      services, hotels, restaurants, and bars.
requested that the survey be                  Firms were asked to indicate their
completed by the “owner or other top     primary place of business. The largest
executive of your business, a person     percentage of respondents were from
who has the ability to make decisions    Center City (38 percent), Northeast
about the location of your business.”    Philadelphia (20 percent), and South
The surveys asked questions about        Philadelphia (9 percent). 10 percent of
firm characteristics, views on           firms responding to the survey
Philadelphia taxes, and expectations     reported that they did business in
for future business growth. The          multiple locations in the city. The
results of the survey are reported       remaining 23 percent of respondents
below.                                   were widely distributed across all
                                         other areas of the city.
104                                        Philadelphia Tax Reform Commission

     Firms that responded to the           Views on City Taxes
survey represent a range of business
sizes. 55 percent of respondents had       Survey Comments
fewer than 20 employees, another 24             When asked if they had any
percent had between 20 and 99              comments or concerns about
workers, while the remaining 21            Philadelphia taxes at the end of the
percent of firms had 100 or more           survey form, many respondents had
employees.                                 notable responses. One firm wrote,
     A high percentage of the              “All business and wage taxes should
employees at the responding firms live     be phased-out over a five-year period,
in the city. Yet, there were a             during which time real estate taxes
substantial number of respondents          should be increased to make up for
whose workers generally live outside       the phase out of all other taxes.”
the city. For 37 percent of the            Another wrote, “The City Wage Tax is
respondents, between 80 and 100            possibly the greatest single reason this
percent of workers live in the city. For   City is and will continue to be passed
15 percent of the respondents,             by, by other cities, counties and
between 0 and 20 percent of workers        states.”
live in the city.                               With respect to the fairness of the
     Survey respondents were asked         Business Privilege Tax, one
about the race and ethnicity of the        respondent wrote, “The Business
majority of the owners or                  Privilege Tax and gross receipts tax
shareholders of their businesses.          are an unfair tax for businesses that
Eighty-three percent of businesses         may lose money each year or make
that responded were majority white-        small profits. It is a large burden for
owned, while 7 percent of businesses       our company that has a large amount
responding were majority African           of gross receipts and small profit or
American-owned, and 5 percent were         loss. Cash flow is a problem and this
majority Asian-owned. Four percent         is a double tax for our business that
of respondents were majority               has a small profit margin. The net
Hispanic owned, and 94 percent were        income portion is high enough at 6.5
majority non-Hispanic owned firms. A       percent.”
small percentage of survey                      A number of survey respondents
respondents reported they were not         cited taxes as having an important
sure about the race or ethnicity of the    bearing on their decisions about
majority of their firm’s owners.           whether to stay in the city or remain in
     There is a correlation between        business. One respondent wrote, “I
race and ethnicity and firm size among     am seriously considering moving both
the respondents. While 55 percent of       of my companies outside the city to
all survey respondents employed            avoid the city wage tax and gross
fewer than 20 workers, 78 percent of       receipts tax.” Another wrote, “The
Asian-owned firms and 83 percent of        high amount and number of taxes are
African-American-owned firms               contributing to my decision of
employed fewer than 20 workers. All        whether to stay in business.”
of the Hispanic-owned respondents
fell into this firm size category.
Appendix F                                                                                                                                                                                            105

     A business and professional                                                                                                 The distribution of the responses is
services company with between 250                                                                                                presented in Figure F.1. The
and 499 employees wrote that, “Doing                                                                                             responses suggest that the gross
business in Philadelphia with the                                                                                                receipts portion of the Business
current wage tax structure makes it                                                                                              Privilege Tax, the Wage Tax, and the
difficult to recruit individuals who                                                                                             net income portion of the Business
have other choices where they are not                                                                                            Privilege Tax impose the greatest
impacted by this tax.”                                                                                                           economic burden on Philadelphia
                                                                                                                                 businesses.
Survey Results                                                                                                                       62 percent of respondents
    In the survey, respondents were                                                                                                  indicated that the gross receipts
presented with a list of major                                                                                                       portion of the Business Privilege
Philadelphia taxes and asked to                                                                                                      Tax imposed a large burden on
indicate the level of economic burden                                                                                                their companies;
the tax imposes on their business.                                                                                                   58 percent of respondents
Respondents were allowed to indicate                                                                                                 indicated that the Wage Tax
that the tax imposed a “large,”                                                                                                      imposed a large burden on their
“moderate,” or “small” burden, or to                                                                                                 companies; and
indicate that the tax was “not a                                                                                                     56 percent of respondents
burden.” When respondents left                                                                                                       indicated that the net income
answers blank in this section of the                                                                                                 portion of the Business Privilege
Survey, it was assumed that they felt                                                                                                Tax imposed a large burden.
that the corresponding tax created no
appreciable burden on that business.

Figure F.1: Burden of Philadelphia Taxes on Respondents

                             100%
                                                                                                                                                                                               Not A Burden
                             90%

                             80%                                                                                                                                                               A Small Burden
 Percentage of Respondents




                             70%                                                                                                                                                               A Moderate
                                                                                                                                                                                               Burden
                             60%
                                                                                                                                                                                               A Large Burden
                             50%

                             40%

                             30%

                             20%

                             10%

                              0%
                                                                      Business Privilege




                                                                                                                                                       City Sales Tax
                                                           Wage Tax




                                                                                                                                                                        Real Estate Transfer
                                                                                                             Use and Occupancy
                                                                                           Net Profits Tax




                                                                                                                                     Real Estate Tax
                                    Tax - Gross Receipts




                                                                      Tax - Net Income
                                     Business Privilege




                                                                             Tax




                                                                                                                    Tax
                                             Tax




                                                                                                                                                                                Tax
106                                                              Philadelphia Tax Reform Commission

    Respondents were next presented                                 The survey next asked, “Are you
with a list of major Philadelphia taxes                         currently considering increasing,
and asked to indicate for each whether                          decreasing, or eliminating your
they believed the tax was “too high,”                           business activity (investment or
“unfair,” or “too complicated.” The                             employment) in the City of
responses to this question are                                  Philadelphia?” Respondents were
presented in Figure F.2.                                        allowed to indicate “increasing,”
    Overall, the gross receipts and net                         “decreasing,” “eliminating,” or “no
income portions of the Business                                 change” in their business activity. Fifty
Privilege Tax, and the Wage Tax, had                            percent of respondents indicated no
the largest number of responses                                 change in business activity, 23 percent
indicating the tax was too high, unfair,                        indicated they were decreasing
or too complicated. More respondents                            business, 15 percent indicated they
indicated the Wage Tax was too high                             were eliminating business, and 12
than any other tax. The most unfair                             percent indicated they were increasing
taxes, according to the respondents,                            business.
were the gross receipts and net                                     Respondents were next asked to
income portions of the Business                                 indicate whether they believed this
Privilege Tax, the Use and Occupancy                            statement: “The Wage Tax requires
Tax, and the Net Profits Tax. The                               you to pay your employees higher
gross receipts and net income portions                          salaries or compensation in order to
of the Business Privilege Tax were the                          attract workers who have the option
taxes most often cited as too                                   of working in the suburbs.”
complicated.                                                    Respondents were allowed to indicate


      Figure F.2: Problems of Philadelphia Taxes


                   W ag e T ax


                U se and
            O ccupancy T ax


                 R e a l E s ta te                                                          T o o H ig h
                T ra n s fe r T a x                                                         U n fa ir
                                                                                            T o o C o m p lic a te d
           R e a l E s ta te T a x



             N e t P ro fits T a x



             C ity S a le s T a x


          B P T ( N e t In c o m e
                   T ax)


               B P T ( G ro s s
              R e c e ip ts T a x )

                                      0   50     100                 150       200   250

                                               S u rve y R e sp o n d e n ts
Appendix F                                 107

“yes,” “no,” or “not sure.” 76 percent
of respondents indicated yes, 14
percent indicated no, and 10 percent
indicated they were not sure.
     Of the respondents who indicate
that they were not forced to provide
additional compensation due to the
Wage Tax, 40 percent are in the
healthcare industry, a considerably
higher proportion than the 11 percent
of total survey respondents that are in
the health care sector. This may reflect
the high degree of concentration of
the health care sector in the city,
which may mean that the labor market
for health care workers is effectively a
city market, rather than a regional
market. The manufacturing sector
seems to be strongly affected by the
Wage Tax: 90 percent of
manufacturing employers responded
that the wage tax does force them to
pay more to compete with the
suburbs.
     The survey results suggest a
correlation between firm size and the
degree to which firms are forced to
pay higher salaries to compensate for
the Wage Tax. Fifty-seven percent of
companies with one-to-four
employees responded that the Wage
Tax forces them to pay higher salaries.
Nine out of ten of the largest
companies responding to the survey
indicated they did believe they were
forced to pay their workers more to
compensate for the Wage Tax. One
possible explanation for this pattern
of responses is that larger companies
are hiring workers from a regional
labor market, while smaller companies
are hiring workers from a more
localized, city labor market.
108                                      Philadelphia Tax Reform Commission




 Appendix G: Legal Barriers to Tax
 Reform
The Uniformity Clause of the                  In 1825, Pennsylvania’s debt was
Pennsylvania Constitution is the         $6.3 million, and by 1837 it had grown
keystone around which the                to $24.3 million. By 1853, Philadelphia
Pennsylvania courts have built an        alone carried a debt burden of $7.5
impressive body of law impeding local    million, an amount greater than that
tax reform efforts. Originally           of the entire state only 25 years
conceived and adopted as a necessary     earlier.4 To pay for this development,
guardian against discriminatory taxes    the General Assembly authorized
that favored selected corporations,      extensive real and personal property
today the Uniformity Clause hinders,     taxes. The favorable tax treatment
and often prevents, local government     granted large corporations sparked
response to modern economic              controversy and taxpayer lawsuits.
realities.                               Pennsylvania’s citizens were
                                         frustrated: inequitable taxation and
Background                               economic legislation created a system
     Economic discrimination in the      that increasingly burdened the
mid-19th century provided the catalyst   majority while benefiting a wealthy
for adoption of the Uniformity           minority dominated by the railroad
Clause. Public debt increased rapidly    companies. Taxpayers challenged the
to fund large-scale construction         Commonwealth’s right to enact
projects and development of              special legislation and enter into
Pennsylvania’s infrastructure amid an    special contracts relieving railroad and
era of substantial, often publicly       improvement companies of taxes
financed, private development of the     imposed on other corporations, its
railroad industry. 1 While state and     authority and that of local jurisdictions
local taxes were rising to pay the       to incur debt, and the general
municipal debt, the state granted        unfairness of the tax system.5
railroad companies and                        Prior to the Civil War, the
“improvement” companies that             General Assembly addressed, in part,
performed public and private             these tax inequities with legislation
construction generous exemptions         effectively repealing the tax
from tax.2 The railroad and              exemptions granted in these legislated
improvement companies were               charters. In 1859, it enacted the “Act
incorporated under charters that were    to Equalize Taxation Upon
individually approved through            Corporations,” which the state tax
separate acts of the General Assembly.   collector interpreted as superseding
Each “specially” legislated corporate    the tax exemptions in the corporate
charter included tax provisions that     charters. The affected railroads and
effectively exempted the chartered       improvement companies filed lawsuits
company from tax.3                       in which they unsuccessfully alleged
Appendix G                                                                        109

state legislative interference in            substance of the uniformity clause, the
contracts in violation of Article I, §10     delegates addressed the primary issue
of the U.S. Constitution. 6 During and       that led to the call for a convention—
after the Civil War, the state grew and      economic discrimination through
developed more rapidly, renewing and         special tax, lending, and investment
increasing the problem of special            legislation. Indeed, the issue of special
legislation.7 Although the General           charters approved by the legislature
Assembly again enacted a law taxing          was of such magnitude that several
all corporations, and the resulting          provisions limit state and local
lawsuits were once again unsuccessful,       financing of, or investment in, private
the issue of inequitable local property      businesses,11 and two identical
taxation was not yet resolved.               provisions, one entitled “Power to tax
Meanwhile, railroads were confiscating       corporations not to be surrendered,”
private land, receiving preferential         and a later one entitled “Taxation of
judicial treatment, and causing              corporations,” prohibit the state from
uncompensated economic and, at               entering into any contract or making
times, physical injury to ordinary           any grant by which it would suspend
citizens.8                                   or surrender its authority to tax any
                                             business.12 With the ratification of the
Constitutional Convention of 1873–           Constitution of 1874, Pennsylvania’s
1874                                         appalling history of discriminatory
      Against this backdrop of distrust      taxation ended and the small
of the General Assembly and growing          businesses and ordinary citizens of
fear of the power wielded by the large       Pennsylvania finally received
railroads, Pennsylvania citizens             protection from tax laws that only
approved a referendum calling for a          benefited the powerful.
constitutional convention. In 1873,
the state’s fourth Constitution              Judicial Interpretation of the
Convention set about the task of             Uniformity Clause
drafting reforms that would limit                 Judicial interpretation of the
public debt, prohibit special contracts,     Uniformity Clause provided the
and require a fair tax system.               intended protection in the decades
      In 1874, the citizens of               after its adoption. However, since
Pennsylvania ratified a new                  early in the 20th century, it has
Constitution containing extensive            impeded government policies to
state and local tax and finance              provide economic assistance, through
provisions designed to eliminate             personal and business income and
current, and prevent any future,             property tax relief. The Uniformity
special legislation.9 With a broad           Clause contains the seemingly simple
stroke of the pen, the convention            mandate that “taxes shall be uniform,
delegates opened the new article on          upon the same class of subjects...” in
tax and finance with the clear mandate       order to pass constitutional muster.13
that, in Pennsylvania, taxes were to be      Yet, those 10 words have prevented
fair, providing that “All taxes shall be     Pennsylvania and its local
uniform, upon the same class of              jurisdictions, like Philadelphia, from
subjects, within the territorial limits of   adopting tax measures that their
the authority levying the tax.”10            elected representatives believed were
Without further elaboration of the           grounded in sound social and
110                                       Philadelphia Tax Reform Commission

economic policy. The courts define        state. As the Pennsylvania Supreme
the boundaries of each “class” so         Court emphasized when deciding the
broadly that the poor are not a class,    third, and final, constitutional
the elderly are not a class, areas of     challenge to tax legislation designed to
economic blight are not a class.          help the poor: “whether or not these
Consequently, tax legislation favoring    tax preferences serve some useful
these groups could not be enacted         social policy, the fact remains that
until the constitution was amended to     unequal burdens are being imposed on
authorize the General Assembly to         similar privileges in violation of the
exempt them from tax.14 The most          Uniformity Clause.”18
recent example is Pennsylvania’s               Consequently, constitutional
policy decision to provide state          amendments were necessary before
personal income tax relief for its        the State was authorized to enact new
poorest citizens. After the Supreme       laws, to allow local jurisdictions to
Court found the provision                 provide property tax relief for
unconstitutional, the Uniformity          veterans, the elderly, disabled, infirm
Clause had to be amended through a        or poor, or to offer property tax
lengthy ratification process that took    abatements to encourage development
several years, followed by new state      of deteriorating property.19
legislation to amend the tax code to
provide the intended relief.15            The Uniformity Clause as a
      At the local level, a township’s    Deterrent to Tax Reform
exemption of residents earning less            The Tax Reform Commission was
than $600 from a $10 occupation tax       challenged by City Council to propose
resulted in the court’s striking down     a creative solution to the problems
the entire tax as a violation of the      endemic to Philadelphia’s tax
Uniformity Clause because those           structure. The Commission has
residents earning more than $600 were     proposed a solid, well-researched plan.
victims of economic discrimination.16     However beneficial those reforms may
The very disease that the Uniformity      be, at least one recommendation, the
Clause was intended to cure was           land value-tax proposal, carries the
invoked against those it was intended     threat of constitutional litigation.
to protect.                               Although land-value taxation has
     The courts may declare that the      existed in certain areas in Pennsylvania
legislature has the authority to          since 1913 and continues to be used in
distinguish between classes of            to this day in several major
taxpayers if such distinction rests       Pennsylvania cities, its
upon well-grounded considerations of      constitutionality under the Uniformity
public policy,17 yet, no case has found   Clause has never been litigated. Given
that a tax is uniform based upon the      the body of law holding that real
government’s social, economic or tax      estate cannot be divided into classes
policy. The judicial interpretation of    for purposes of taxation, its
the Uniformity Clause created an          constitutionality remains in question.20
impassable barrier to state and local     Consequently, the Uniformity Clause
policy-based tax laws designed to help    could present a potential barrier to the
the weakest segments of society, the      Commission’s policy-driven tax
poor, elderly, and infirm, and the most   initiative.21
economically distressed areas in the
Appendix G                                                                        111

     The recommendation to amend            technological advances expose the
the Uniformity Clause to permit             actions of public officials to more
imposition of different tax rates on        scrutiny than was possible in the 19th
residential and commercial real estate      century. Community leaders and
and phase-out the Use and Occupancy         organizations provide oversight that
Tax remained a secondary                    adds another level of protection. The
recommendation because it is                abuse of power that created
specifically precluded by existing          preferential, economic discrimination
judicial decisions interpreting the         that benefited the railroads and
Uniformity Clause.22 Constitutional         improvement companies is held in
amendment procedures will take at           check more in the 21st century than
least two to three years to secure the      was possible even in the 20th century.
necessary amendment.                        The economic protectionism
     A third reform, researched but         advanced by the judiciary’s strict
never proposed, would have exempted         construction of the Uniformity Clause
either businesses operating at a loss or    is not needed in this modern era.
all businesses from a threshold level of         Other contrasts between the 21st
the gross receipts portion of the           and 19th centuries present even more
Business Privilege Tax. This potential      compelling arguments for the removal
reform was clearly unconstitutional.        of this barrier to change. In this new
Multiple judicial decisions hold that a     century, the competition for
tax that sets a threshold level of          businesses and demands of a growing
income or revenue as the standard for       elderly and impoverished population
the tax’s applicability, or one that, in    require creative solutions to funding
effect, creates any type of graduated       the necessary services without driving
tax structure, violates the Uniformity      businesses and working citizens away.
Clause.23 A threshold level exclusion       Pennsylvania and its local jurisdictions
from gross receipts tax would have          must be nimble. Philadelphia must be
created a class of unprofitable             nimble. It cannot wait several years to
businesses that, merely due to their        enact a change that, in the wisdom of
profitability, would have been exempt       its elected representatives, is required
from tax. It also would have created a      for the survival and progress of its
graduated tax system based upon the         business and individual constituents.
ratio of gross receipts tax paid to gross   Interstate and intrastate competition
receipts.                                   to attract businesses and the best and
                                            the brightest young people will not
Balanced Economic                           wait while Philadelphia asks
Discrimination as Policy Tool               Harrisburg, and Harrisburg asks the
     The Uniformity Clause grew out         rest of the state, for permission to act.
of rampant abuse of power by the                 In the past six years, legislation to
General Assembly, local elected             amend the Uniformity Clause to
officials, and the powerful railroad and    eliminate the uniformity requirement
improvement companies that                  entirely has been introduced twice in
dominated the Pennsylvania economy          Harrisburg. Whether total elimination
during the 19th century. Modern laws        or an amendment adopting a more
better protect citizens and businesses      workable provision is the best solution
from secret deals benefiting large          cannot be resolved in the interest of
corporations. Communication and             local tax reform alone. But the
112                                         Philadelphia Tax Reform Commission

discussion, and call for change, most
certainly must start there. The debate
on amendment must engage
government, business and community
leaders, members of the judiciary, and
Pennsylvania’s citizens. The
Uniformity Clause has not been
revisited, except to add specific
exemptions, since 1874. The time is
ripe for a call to change, and no city is
better positioned to lead those efforts
than Philadelphia.
Appendix H                                                                  113




 Appendix H: City Income Tax
The Tax Reform Commission                broader range of income categories
considered, but ultimately did not       than the four existing income-based
recommend, a proposal to replace the     taxes, adopting a City income tax may
four existing personal income-based      potentially allow the City to generate
taxes—the Wage Tax, the Earnings         the same level of revenue as currently
Tax, the Net Profits Tax, and the        at a lower tax rate.
School Income Tax—with a single               Third, adopting a City income tax
City income tax (CIT).                   could make Philadelphia’s tax
     The Commission considered           structure more progressive. By
different types of local income taxes    expanding the tax base to include
(both of which would require changes     categories of unearned income that
in local and state laws):                are not currently taxable in
     Proposal 1: A local income tax      Philadelphia, this change would shift
     could be administered by            more of the tax burden toward high-
     Pennsylvania’s Department of        income households that generally
     Revenue. This tax would be levied   receive a higher proportion of their
     on the same base as the state       income from these currently untaxed
     Personal Income Tax (PIT).          income categories. Furthermore, state
     Proposal 2: A local income tax      administration of a City income tax
     could be administered City          would increase the feasibility of
     Department of Revenue. This tax     implementing a low-income tax
     would be levied on the same base    forgiveness program. It would reduce
     as the PIT, with one exception—     the cost of administering this type of
     the definition of taxable           program and insure that the City
     compensation would be the same      adopts the state’s definition of the
     as the definition now used under    poverty class, thereby avoiding the
     Philadelphia’s Wage and Earnings    possibility of a Constitutional
     Taxes.                              challenge.

                                         Arguments Against a CIT
Arguments For and Against a City             There are three major arguments
Income Tax                               against creating a City income tax.
                                             First, broadening the income tax
Arguments For a CIT                      base could have a negative economic
    There are three major arguments      impact on Philadelphia’s economy. By
for creating a City income tax.          increasing the tax burden on
    First, a City income tax could       households with types of income that
potentially lower the costs of tax       are not taxed under any of the existing
administration for the City and the      income-based taxes, some households
burden of compliance for taxpayers.      may be encouraged to leave the city.
    Second, because the tax would be         Second, the shift to a City income
levied upon a base that includes a       tax could decrease the stability of the
114                                        Philadelphia Tax Reform Commission

City’s tax revenue stream. Because         Pennsylvania Intergovernmental
unearned income tends to be more           Cooperation Authority (PICA)
sensitive to cyclical economic trends      Bonds
than earned income, the tax revenues            Until the PICA bonds are
would be more sensitive to the             satisfied, the City is legally required to
business cycle.                            transfer to PICA the dedicated
     Third, many economists believe        revenue from the first 1.5 percent of
that local governments should avoid        the Wage, Earnings, and Net Profits
substantial income redistribution          Tax rates. Eliminating these taxes and
though progressive local taxation.         replacing them with a City income tax
Over the long term, local                  will require bondholder approval or,
redistributive policies may encourage      more likely, approval by the insurance
middle-class and wealthy households        companies that guaranteed the bonds.
to leave the city, leading to a            The PICA statute would have to be
substantial decline in the tax base.       amended to permit dedication of a
Because of Philadelphia’s high poverty     portion of the proposed City income
rate and the degree of City                tax to servicing the PICA debt.
responsibility for poverty-related
public services, the City’s current tax    Net Profits Tax
and spending regime is already                  The Net Profits Tax currently is
substantially redistributive—adopting      imposed at the entity level to
a City income tax may exacerbate the       guarantee that nonresidents pay the
problem.                                   tax upon the appropriate tax base, to
                                           minimize disputes regarding the
                                           proper allocation of the net profits
Legal Issues                               between resident and nonresident tax
                                           rates, and for efficient compliance and
State Enabling Legislation and             administration.
City Ordinance                                  If the City adopted a City income
     Adoption of a City income tax         tax, state legislation would be required
would require state enabling legislation   either to enable it as a separate tax, or
that authorized the City to levy this      to incorporate the Net Profits Tax
tax upon residents and upon the            into a City income tax. Before a
income of nonresidents earned in the       determination can be made of the best
city or resulting from the operation of    framework for the Net Profits Tax, a
a business or sale of property located     careful, thorough analysis of the
in the city. The enabling legislation      impact of each structure would be
and the implementing city ordinance        required—with particular attention
would have to be carefully drafted to      paid to the level at which this tax is
avoid any constitutional challenges by     imposed.
nonresidents under the federal
Commerce Clause, the federal
Privileges and Immunities Clause, or
the state Uniformity Clause.
Appendix H                                                                      115

School Income Tax                                When calculating the revenue
    Under state Act 46, the City has             impact, both scenarios were
an obligation to authorize and levy the          reduced by $25.5 million, the
School Income Tax. In order for the              estimated increase in revenue
City to replace the School Income Tax            resulting from the full taxation of
with a City income tax, Act 46                   net profits. This was done to
requires the City to obtain state                avoid “double counting” the
enabling legislation and to adopt a              increased Net Profits Tax revenue
City ordinance specifically providing            that will result from the
for the allocation to the School                 Commission’s Business Privilege
District of all revenue attributable to          Tax recommendations.
items of income currently subject to             These revenue estimates assume
the School Income Tax.                           that Philadelphia would not have a
                                                 low-income tax forgiveness
                                                 program modeled after the state’s
City Income Tax Revenue Impact                   program. This type of program, in
                                                 the year 2000, would have reduced
The Commission estimated the net                 City income tax revenues by
revenue impact of a City income tax if           approximately $38 million.
it had been levied at a rate of 4.5885           These revenue estimates assume
percent in calendar year 2000 (this rate         that there will be no change in tax
is the average of the fiscal year 2000           compliance and enforcement.
and 2001 resident Wage Tax rate). The            These revenue estimates do not
results of this analysis are presented in        take into account the fact that
Figure G.1. It is important to note              there may be a significant
that these estimates are based upon              administrative cost to the City
the following assumptions:                       associated with collecting a City
     These revenue estimates do not              income tax. However, the
     take into consideration the                 Commission notes that New York
     potential economic impact of this           State retains two percent of the
     proposal. Although much research            revenues generated by the New
     has been conducted on the                   York City’s Income Tax as a
     benefits of a tax rate reduction,           collection fee. The commission
     there is no quantitative research           assumes that this arrangement
     analyzing the impact of the type of         reflects the true cost of tax
     base expansion that would occur if          collection and that costs of
     a City income tax were adopted.             administering a Philadelphia
     Because no reliable data exists on          income tax could be similar.
     nonresident rental income and           The Commission’s analysis suggests
     capital gains associated with selling   that if a locally-administered City
     property located in or doing            income tax had been levied on city
     business in Philadelphia, the           residents at a rate of 4.14 percent in
     nonresident revenues are assumed        fiscal year 2003, it could have
     to remain constant and the              generated approximately the same
     following scenarios only calculate      level of revenue as was actually
     the impact of an increase in the        collected that year from city residents
     resident tax base.                      under the Wage, Earnings, Net
                                             Profits, and School Income Taxes.
116                                        Philadelphia Tax Reform Commission


 Figure G.1: Estimated Net                 Need for Further Research
 Revenue Impact of City Income Tax
 (without cost of administration)          Ultimately the Commission
                                           considered, but did not recommend,
                         Revenue           the proposal to replace the City’s four
        Proposal
                          Impact           existing income-based taxes with a
        1—State                            single City income tax.
                       $6.2 million
      Administration                           However, the Commission
                                           believes that this idea deserves further
         2—City                            consideration and suggests that the
                       $70.3 million
      Administration
                                           City continue to research:
                                               The amount of additional revenue
 Source: Tax Reform Commission Staff           that could be generated from
 estimate, based on data from the
 Pennsylvania Department of Revenue and        broadening the tax base—this
 City Department of Revenue.                   estimate should take into account
                                               the cost of administration and
The actual fiscal year 2003 resident tax       potential differences in
rate for these taxes was 4.5 percent.          enforcement difficulty under the
This suggests that one of the potential        current system and under the
benefits of a locally-administered City        proposed system;
income tax is a rate reduction of              The distributional shift in tax
approximately 0.36 percentage points           burdens created by the proposal—
for city residents (assuming that the          specifically the impact of
costs of administration are nominal).          increasing tax burdens on high-
    The difference in the revenue              income households (who would
impact of the two proposals shown in           be more heavily taxed) and
Figure G.1 is due to the fact that the         decreasing tax burdens on low-
Pennsylvania Personal Income Tax’s             income households (who could be
definition of taxable compensation is          eligible for tax forgiveness); and
narrower than the current definition           The likely effect of a City income
of taxable compensation under the              tax upon the economy—including
City Wage and Earnings Taxes. The              total city employment, resident
PIT excludes certain forms of income           income, and property values.
from its definition of compensation
that are taxable under the current City
Wage and Earnings Taxes, including
certain employer and employee
contributions for health and other
benefits. If the state administered the
City income tax, the City would be
forced to adopt the state’s definition
of taxable income.
Appendix I                                                                   117



 Appendix I: Tax Exemptions for
 Low-Income Philadelphians
The Tax Reform Commission                 Economic Growth
considered several proposals to                Those arguing in favor of low-
exempt low-income workers from            income wage tax exemptions claimed
local income-based taxes.                 that each dollar of wage tax reductions
     While considering these proposals,   targeted at low-income households
the Commission remained cognizant         has a larger economic impact upon the
of its obligations under the              city than one dollar of across-the-
Philadelphia Home Rule Charter. The       board wage tax cuts.2 This argument is
Charter mandates that the                 supported by the following
Commission “analyze each [City] tax       assumptions:
to determine…whether and to what               Because the poor, on average,
extent that rate of the tax may be             spend a higher percentage of their
decreased in a fiscally and socially           overall income, they are more
responsible manner… The                        likely to quickly spend the money
Commission’s work shall be guided by           they save through the tax
the principle that Philadelphia’s tax          exemption.
structure should enhance and improve           Because poor people are more
Philadelphia’s ability to compete with         likely to spend their money within
other jurisdictions…and the principle          the city, their spending habits do
of tax fairness and tax equity…”1              more to stimulate the local
     The issue of tax exemptions for           economy and increase tax
low-income workers was particularly            revenues.
complicated for the Commission                 A higher portion of targeted Wage
because this issue presented a direct          Tax cut dollars will benefit city
conflict between the primary goals the         residents and therefore stimulate
Commission was obligated to                    the city economy.
consider—competitiveness and equity.           Because wealthy households are
     Given the City’s limited capacity         more likely to use local Wage Tax
to increase operational efficiency and         payments as itemized deductions
generate new revenues, the                     on their federal income tax
Commission believes that the                   returns, a larger percentage of
revenues available to finance tax              across-the-board wage tax cuts
reform are limited. Every additional           will “leak” out of the city though
dollar spent on tax reductions targeted        higher federal income tax
to low-income workers means one less           payments.
dollar available for “across-the-board”   Those arguing against low-income
tax rate cuts for all taxpayers. Hence,   wage tax exemptions believe that tax
the Commission faced a choice             policy affects the local economy by
between tax cuts targeted at low-         influencing the location decisions of
income workers and across-the-board       businesses and residents. They argue
tax cuts for all workers.                 that the effect of tax cuts on location
118                                        Philadelphia Tax Reform Commission

decisions is economically more             burden on poor households. In the
significant than the effect of tax cuts    long-term, the economic growth that
on consumption. They also argue that,      will result from the Commission’s
because low-income households are          proposed package of broad based tax
less mobile than higher income             reform will benefit all city residents,
households, across-the-board tax cuts      including low-income city residents.
will have a greater effect upon            Assuming low-income residents are
location decisions than low-income         provided with the skills that the city’s
tax cuts. Finally they argue that the      future employers demand, they will
research supporting the exemptions         benefit substantially from the new job
was flawed and incomplete because it       opportunities created by tax reform.
failed to even consider that any new
jobs would be created thereby.             The Commission’s Overall
     The Commission is not aware of        Package of Recommendations is a
any empirical research that estimates      Better Way to Promote Equity
the local economic impact of tax cuts          The Commission believes its
targeted at low-income families, for       overall package of tax reform
Philadelphia or for other local            recommendations promotes tax equity
jurisdictions. However, the                in a way that makes sense for
Commission is aware of a substantial       Philadelphia. Several of the
body of empirical research suggesting      Commission’s recommendations
that local tax rates have an effect upon   simultaneously ease the tax burden on
location decisions and local economic      low-income households, while
growth. Thus, the Commission               promoting competitiveness, neutrality,
concludes that across-the-board wage       and economic growth.
tax cuts are more likely to result in          The Commission’s
substantial impacts on city economic           recommendation to reduce Wage
growth than are tax cuts targeted at           Tax rates will benefit everyone
low-income workers.                            who works or lives in
     The Commission therefore                  Philadelphia—including low-
believes that the choice between low-          income families.
income tax cuts and across-the-board           The recommended reduction and
tax cuts is a choice between economic          eventual elimination of
growth and vertical equity. Based on           Philadelphia’s Business Privilege
its review of empirical research, the          Tax will promote economic
Commission believes that cuts in the           growth in the city, thereby
Wage Tax rate for all residents and            increasing job opportunities for
nonresidents are far more likely to            low-income families and
result in substantial long-term                enhancing the City’s financial
economic growth in Philadelphia than           capacity to provide services to
an equal dollar amount Wage Tax cut            residents, including low-income
targeted to low-income workers.                families.
     The Commission believes that the
long-term interests of poor
Philadelphians are better served by tax
changes designed to promote
economic growth than by tax changes
designed to directly reduce the tax
Appendix I                                                                    119


   The Commission’s                        forgiveness program under the state
   recommendation to improve               Personal Income Tax provide millions
   property assessments will increase      of dollars of tax credits to low-income
   tax system progressivity and            households each year. However,
   correct current assessment              approximately $150 million in annual
   patterns—which assess lower             state and federal tax credits are
   value properties, and properties in     unclaimed by low-income
   low-income neighborhoods, at            Philadelphians. Because it believes in
   higher rates, on average, than          the importance of these programs, the
   higher value properties and             Commission has recommended that
   properties in high-income               the City make a significant investment
   neighborhoods.                          in increasing participation in these
   The recommendations to                  programs, thereby assisting low-
   implement a quarterly Real Estate       income families to receive the federal
   Tax payment system, tax                 EITC and state tax forgiveness
   buffering, and expanded “ability to     benefits to which they are entitled.
   pay” programs are all designed to
   decrease the burden on taxpayers.

State and Federal Income Tax
Relief
     The Commission believes that the
primary responsibility for promoting
an equitable distribution of income
and welfare in society falls to federal
and state government, not local
government. This belief is supported
by a body of economic theory and
evidence.3 Because of household and
business mobility, localities that
attempt to shift tax burdens from
poorer households to wealthier
households in a significant way are
likely to, over the long term, see their
high-income populations dwindle. The
reality of local government
competition suggests that local
governments should aim to align tax
burdens with public service benefits
received by households, rather than
their ability to pay.
     The Commission recognizes that
at the federal and state level there are
well-established programs to
redistribute income though income
tax credits. The federal Earned
Income Tax Credit (EITC) and the tax
120                                        Philadelphia Tax Reform Commission




 Appendix J: Economic Growth
 Acceleration Bonds
In considering how to manage near-         Bonds” would be a new hybrid
term revenue shortfalls expected to        instrument resembling, to varying
result from new tax reductions upon        degrees, three existing models:
businesses and individuals, the Tax        traditional deficit bonds, economic
Reform Commission studied the              development financing, and bonds
possibility of borrowing to                issued to fund certain operating
compensate for lost tax collections. In    initiatives.
addition to hearing testimony and               The Commission learned that
reviewing written materials on the         while rating agencies have repeatedly
subject, we retained Public Financial      expressed reservations about each of
Management (PFM)—a government              these non-traditional forms of
financial advisor, investment manager,     financing, a substantial market of
investment consultant and strategic        buyers exists. The rating agencies
consultant—to evaluate the feasibility     therefore have singled out areas of
of issuing debt to finance municipal       concern for buyers of these securities.
tax cuts.                                       Unlike securities to fund lasting
     The Commission requested this              capital projects, deficit and
research starting from a skeptical              operating bonds fund one or a few
perspective on issuing bonds to                 fiscal years’ activity, so their
finance planned deficits caused by tax          repayment schedules are
reduction. Our members cited the                mismatched to the useful life of
recent poor economic climate, which             the project.
has made it difficult for many local            Deficit financing is often
governments to balance budgets;                 interpreted as a potential sign of
concern about Philadelphia’s general            underlying, long-term fiscal
obligation credit rating; and                   distress.
uncertainty about whether the supply-           Economic development initiatives
side response to tax reduction would            may not yield sufficient growth to
be able to fund both the revenue losses         justify issuing the securities, while
and the new debt service attributable           crowding out basic services.
to such bonds.                             In looking specifically into the
     Commission consultants found no       possibility of Philadelphia issuing debt
exact precedent for this type of credit,   for new tax cuts, the Commission
noting that “[O]ur research…has not        asked PFM to model three financing
found any prior cases where bonds          scenarios: $100 million, $200 million,
were issued at a time of budget            and $300 million in eight annual 10-
balance to finance an expected             year revenue bond issues that would
temporary period of deficits caused by     exactly fill a particular year’s budget
planned tax revenue reductions.” Such      shortfall. The credits would be
“Economic Growth Acceleration              secured by existing over collections of
Appendix J                                                                    121


PICA’s portion of the City Wage Tax,       side gains from tax reduction possibly
the 1.0 percent City Sales Tax, or         not materializing, resulting in a need
both, and would become more                to raise taxes or cut services. The
manageable to repay after fiscal year      Commission therefore decided not to
2008, when the amount of debt              recommend for consideration the
service on the PICA bonds is               option of financing any portion of its
expected to fall. The costliest of the     recommended tax cuts by issuing
three scenarios would provide deficit      additional municipal debt.
reduction of between $17.2 million
and $68.8 million per year from fiscal
year 2005 to 2012, with annual debt
service payments beginning in fiscal
year 2006 that rose to $44.8 million by
fiscal year 2013 and declined
thereafter.
     Although it appears that such tax-
exempt bonds to finance tax cuts
could be issued at a reasonable cost
and would likely receive high ratings
because of their strong security
features, the Commission was unable
to resolve the likely impact upon the
city’s general obligation credit rating.
On the one hand, Philadelphia’s
ratings, at investment grade only since
the early 1990s, are the lowest among
the six largest U.S. cities, while its
outstanding debt ratio is the highest
among the 10 largest cities. Balancing
out these concerns are the city’s
reputation for strong budget
management and state financial
oversight.
     While reassured by its consultants
that such securities would be
purchased and rated highly, the
Commission decided that the
incremental, phased nature of its
program should guarantee modest
enough revenue losses that they can
be managed without resorting to the
public debt markets. The Commission
also found that the credit community
shared its concerns about deficit
borrowing in general (particularly with
regard to Philadelphia’s general
obligation rating), and about supply-
122                                       Philadelphia Tax Reform Commission




 Appendix K: Assumptions Behind
 Fiscal Impact Estimates
When estimating the fiscal impact of      revenue projections are based on these
the Commission’s recommendations,         fiscal year revenue receipts.
the, relevant comparison is between           In order to create a base from
(1) the tax revenue projected to result   which to project the impact of the
from the Commission’s                     recommendations on the Five-Year
recommendations, and (2) the tax          Plan, the fiscal revenue receipts were
revenue projected in the City’s Five-     converted into the return data format.
Year Financial Plan, Fiscal Year 2004 –   Relying on the fiscal year 2002
Fiscal Year 2008 (the “Five-Year          Business Privilege Tax revenue data
Financial Plan”). The revenue             received from the City Office of
projections relied upon by the City in    Budget and Program Evaluation (the
the Five-Year Financial Plan are based    “Office of Budget”), and the April 15,
on actual revenue collected on a fiscal   2002 Business Privilege Tax return
year basis, projected forward.            data obtained from the City
                                          Departments of Finance and Revenue
                                          Research Office (the “Research
Determining the Taxable Base for          Office”), a base tax year was created
the Net Income Portion of the             from which all revenue projections
Business Privilege Tax                    were calculated. The method used to
                                          create this base tax year was presented
Several of the Commission’s               in detail to, and approved by, the
recommendations make structural           Office of Budget.
changes to the formula used to
compute taxable net income. Before        Single Sales Factor Apportionment
calculation of the impact of these        (Recommendation 18)
structural changes could be made, and         The fiscal year 2002 Business
before calculating the impact of          Privilege Tax return data was provided
eliminating the Business Privilege Tax,   by the Research Office and reported
it was necessary to determine the base    the Net Income Tax and Gross
of the net income portion of the          Receipts Tax portions of the Business
Business Privilege Tax.                   Privilege Tax, broken down by
    Business Privilege Tax returns are    industry classification. The raw data is
filed on a calendar year tax basis. The   contained in a flat file of 2002 return
returns for a particular tax year are     information created by that office and
stored in one file in the City’s master   the Mayor’s Office of Information
data bank, regardless of the year in      Services. The Research Office
which they are filed. However, the        identified the taxpayers that
City books its revenue on a fiscal year   apportioned their net income between
basis. The Five-Year Financial Plan       Philadelphia and other jurisdictions
                                          and adjusted the taxable net income
Appendix K                                                                      123


on the return to take into account          Privilege Tax returns filed by
single factor apportionment. This           unincorporated firms that also filed
endeavor required a substantial             Net Profits Tax returns. A
commitment by the Research Office           comparison of the Net Income Tax
staff to the development of the flat        paid by unincorporated businesses
file and of the methodology used to         that also filed Net Profits Tax returns
project the impact single sales factor      indicated that the full 60 percent
apportionment would have had the            credit was utilized to offset Net
Net Income Tax reported on 2002             Profits Tax liability. This information
Business Privilege Tax returns. As          formed the basis for calculation of the
described above, this information was       reduced Net Income Tax credit, which
used in conjunction with the projected      results in the increased Net Profits
growth factors employed by the City         Tax revenue that offsets the costs of
in the Five-Year Financial Plan, to         the package of business tax
determine the impact of single-sales        recommendations.
factor apportionment on projected
revenue for fiscal years 2004 through       Lengthen the Business Privilege
2009.                                       Tax Net Operating Loss
                                            Carryforward Period
Unincorporated Business                     (Recommendation 20)
Deduction of Partner, Member and                 The Commission recommends
Sole Proprietor Payments                    extending the net operating loss
(Recommendation 19)                         carryforward period from the current
    In order to calculate the impact of     three years to 10 years. This
Recommendation 19, the Research             recommendation has no impact on
Office designed search criteria that        the Five-Year Financial Plan because the
reported, and aggregated by industry        first year impact will be in fiscal year
classification, taxpayers that filed both   2009. In that year, taxpayers will be
Business Privilege Tax and Net Profits      allowed to deduct net operating losses
Tax returns due on April 15, 2002.          from the prior four years. The City
The report isolated the portion of the      Department of Revenue and the
Net Income Tax base that would be           Research Office could not obtain the
affected by this recommendation. The        raw data on losses that were carried
report included the Net Income Tax          forward for three years and then
both as reported on the return and as       expired before being utilized because
adjusted for single-sales factor            the data bank storing the return data
apportionment.                              does not track net operating loss
    The report also showed the value        history.
of the 60 percent Net Income Tax                 The Commission requested net
credit deducted from the amount of          operating loss historical data from the
Net Profits Tax that otherwise would        Pennsylvania Department of Revenue,
have been due. This information was         Bureau of Research (the “Bureau of
used to ascertain whether the actual        Research”). This information is
credit claimed by taxpayers on their        captured at the state level on the state
2002 Net Profits Tax returns equaled        Corporate Net Income Tax return.
60 percent of the Net Income Tax            The Bureau of Research could not
reported on the 2002 Business               provide the raw data requested. The
124                                          Philadelphia Tax Reform Commission

data reported would not necessarily be       estimates were based on the following
that of Philadelphia taxpayers because       assumptions:
many businesses file their returns               The net income base and gross
from addresses other than their                  receipts base of the Business
operating locations. In addition,                Privilege Tax will grow 2.0 percent
calculation of state and City taxable            in fiscal year 2003, 3.5 percent in
net income, while similar, is not                fiscal year 2004, 4.0 percent in
identical. Therefore, the net operating          fiscal years 2005 and 2006, and 4.5
losses reported would not be useful in           percent in fiscal years 2007, 2008,
any projections.                                 and 2009. Tax Revenue
    The Research Office, working                 projections in the City’s Five-Year
with the Commission staff, designed a            Financial Plan are based on the
method for determining the annual                same assumptions for the period
fiscal impact of the current three-year          from fiscal year 2003 through
loss carryforward period. That                   fiscal year 2008.
method requires creation of a flat file          The revenue impact was measured
of all return data for each year, and            relative to a baseline scenario
further substantial programming and              wherein the City implements the
database searching to produce a report           cuts in the gross receipts portion
of the net operating loss carryforwards          of the Business Privilege Tax
actually used to reduce tax liability that       (hereafter the “Gross Receipts
year.                                            Tax”) projected in the Five-Year
                                                 Financial Plan through fiscal year
Incremental Elimination of the                   2008. City Council has adopted
Business Privilege Tax                           an ordinance setting these rate
(Recommendation 23)                              cuts through fiscal year 2008.
    The revenue impact of the                    The baseline scenario assumes that
incremental elimination of the                   the Gross Receipts Tax rate in
Business Privilege Tax did not require           fiscal year 2009 will remain at the
any calculations or assumptions                  2008 rate of 0.15 percent.
beyond the assumed tax base growth           The Commission also estimated the
rates and baseline tax rates set forth       fiscal impact of its Business Privilege
above.                                       Tax Recommendations on Net Profit
                                             Tax revenues, through fiscal year
                                             2009. This estimate was based on the
Estimating the Fiscal Impact of              following assumption:
the Business Tax                                 An unincorporated taxpayer that is
Recommendations on Business                      also subject to Net Profits Tax
Privilege Tax and Net Profits Tax                currently deducts 60 percent of
Revenues                                         the tax paid under the Net Income
                                                 Tax from its Net Profits Tax
Once the Business Privilege Tax base             liability. Consequently, any
was determined, the Commission                   reduction in the Net Income Tax
estimated the fiscal impact of its               liability of an unincorporated
proposed Business Privilege Tax                  taxpayer that is also subject to Net
reform through the end of fiscal year            Profits Tax will reduce the value
2009. The Commission’s fiscal impact             of the 60 percent Net Income Tax
                                                 credit. Because the credit is a
Appendix K                                                                       125


    reduction in tax liability, not a           reality, the Commission estimates
    deduction from the taxable base,            that a minimum of 20 percent of
    every $100 decrease in Net                  these distributions will not qualify
    Income Tax liability will result in a       for deduction. By not taking this
    $60 increase in Net Profits Tax             factor into account in its revenue
    liability. As a result, the increase        impact estimates, the Commission
    in Net Profits Tax revenue                  insures that its estimates err on the
    attributable to recommended                 side of overstating the projected
    decreases in the Net Income Tax             fiscal costs rather than
    are deducted from the impact of             understating them.
    the Business Privilege Tax cuts to
    produce the net impact of the
    Commission’s business tax               Wage and Earnings Tax
    proposals on the City’s Five-Year
    Plan.                                   The Commission estimated the fiscal
The Commission estimated the fiscal         impact of its recommendations to
impact of the recommendation to             reduce income-based tax rates
allow unincorporated businesses to          (Commission Recommendations 25
deduct payments to partners,                and 26). Behind these estimates are
members and sole proprietors through        the following underlying assumptions:
fiscal year 2009. This estimate was             It is assumed that the base of the
based on the following assumption:              Wage and Earnings Taxes will
    The Commission chose a                      grow 3.5 percent annually from
    conservative approach that                  fiscal year 2004 through fiscal year
    maximized the negative revenue              2006, and at 3.75 percent annually
    impact. Not every unincorporated            from fiscal year 2007 through
    business will be permitted to claim         fiscal year 2009. Tax Revenue
    the deduction. The deduction will           projections in the Five-Year
    be available only to                        Financial Plan are based on the
    unincorporated taxpayers that               same assumptions for the period
    actively engage in performing               from fiscal year 2004 through
    personal services, other than               fiscal year 2008.
    services required to monitor                It is assumed that the resident and
    passive investments. Payments will          non-resident portion of the tax
    not be deductible if made to                base will grow at the same rate
    passive investors in                        throughout the forecast period.
    unincorporated businesses that              The revenue impact was measured
    receive a return on their financial         relative to a baseline scenario
    investments, such as owners of              wherein the City implements the
    interests in unincorporated real            minimum Wage Tax and Earnings
    estate companies. The                       Tax rate cuts adopted by City
    Commission’s estimate of the                Council. These rate cuts were also
    impact of this recommendation,              used as the basis for projecting
    however, is conservative insofar as         revenues in the City’s Five-Year
    it assumes that all distributions to        Financial Plan through fiscal year
    partners, members, or sole                  2008.
    proprietors will be deductible. In
126                                         Philadelphia Tax Reform Commission

      The baseline scenario assumes that
      the same Wage and Earnings Tax
      rate cut will be implemented in
      fiscal year 2009 as is scheduled to
      be implemented in fiscal year
      2008.
Appendix L                                                                                               127




    Appendix L: Endnotes
Section 3: A Historical Overview of                         employees working in Philadelphia
                                                            rejected).
Philadelphia’s Tax System
                                                       7    Id.
1   Constitution Of The Commonwealth of
    Pennsylvania 1968, Art. VIII, 1.                   8    See Leonard v. Thornburgh, 489 A.2d 1349
                                                            (Pa. 1985).
2   Act of June 5, 1991, P.L. 9, No. 6.
                                                       9    Phila. Code §19-2803(1); §19-2804, City
3   Taken from remarks of Senator Salus, July               Pledge; Duration of Taxes added, 1991
    27, 1932, in the Senate of Pennsylvania.                Ordinances, p. 403, effective July 1, 1991.
    Senator Salus believed that the Sterling Act
    would be the “salvation of Philadelphia,”          10   In the City Code, the chart of Wage Tax
    as it would provide the City the ability to             Rates reports only the portion dedicated to
    take care of the unemployed, which the                  General Fund. Phila. Code §19-1502. The
    “Legislature of Pennsylvania ha[d] not                  PICA Tax 1.5 percent rate is imposed
    [then]tofore been able to do.” The Sterling             under Section 19-2803(1) of the Code.
    Act passed in the Senate with 47 ayes, and              For purposes of discussion of rate
    0 nays on July 27, 1932. The act passed in              decreases and resident and nonresident
    the House with 195 yeas, and 0 nays on                  rate differentials, both the Wage Tax and
    July 18, 1932.                                          the PICA Tax rates are collectively referred
                                                            to as the Wage Tax rate. However, the
4   Butcher V. City Of Philadelphia, 6 A.2d 298, 333        proposed legislation contains only the City
    Pa. 497 (1939) Challenge to constitutionality           Wage Tax figure.
    on grounds exemption and credit created
    lack of uniformity denied as such provisions       11   Murray v. City of Philadelphia, 71 A.2d 280, 364
    were severable.                                         Pa. 157 (1950).
5   Gupta, 1999. The Commission                        12   Act of May 23, 1949, P.L. 1669, as
    acknowledges the valuable contribution of               amended, 24 P.S. 584.1.
    the research performed by Anuj Gupta and
    the Pennsylvania Economy League on the             13   See, e.g., Davidson Transfer and Storage Co. v.
    history of Philadelphia’s Wage, Earnings,               City of Philadelphia, 3 Pa. D.&C.2d 58 (1955)
    and Net Profits Taxes.                                  (ruling on applicability of the Mercantile
                                                            License Tax to mutual and stock insurance
6   City of Philadelphia v. Schaller, 148 Pa. Super.        companies, Bell Telephone Company,
    276, 25 A.2d 406 (1942); City of Philadelphia           trucking companies, and taxicab owners
    v. Samuels, (1940); Application of Thompson,            doing business within Philadelphia);
    157 F. Supp. 93 (E.D. Pa. 1957), aff’d, 258             Abbott’s Dairies, Inc. v. City of Philadelphia, 87
    F.2d 320, cert. denied, 79 S.Ct. 317, 358               Pa. D.&C.2d 197 (1953) (ruling on
    U.S. 931 (1958); City of Philadelphia v. Kenny,         applicability of the Mercantile License Tax
    28 Pa. Cmwlth. 531 (1977), cert. denied, 434            to the wineries and ice-cream
    U.S. 923 (1977) rejecting yet another New               manufacturers doing business within the
    Jersey federal employee challenge and                   City).
    citing the long history of challenges
    rejected the state and federal Supreme             14   Act of November 16, 1967 (P.L. 504).
    Courts; Philadelphia v. Cline, 58 Pa.Super.
    179, 44 A.2d 610 (1945), cert. denied; Barnes      15   Bill No. 1175, approved June 12, 1969.
    v. Philadelphia, 328 U.S. 848 (1946) (further
    challenges by New Jersey federal
128                                                   Philadelphia Tax Reform Commission

16    See discussion of Use and Occupancy Tax         32   Act of May 23, 1949, P.L. 1669, as
      under School District Taxes, infra.                  amended, 24 P.S. 584.1.
17    The Pennsylvania Tax Increment                  33   Philadelphia Bulletin Almanac, 1950, 1969;
      Financing Act, Act of July 11, 1990, P.L.            City of Philadelphia Annual Reports 1983-
      465, no.113, as amended by the Act of                1985.
      December 16, 1992, P.L. 1240, No. 164.
                                                      34   Supra.
18    Phila. Code §19-2603, added, Bill No.
      980005 (approved April 2, 1998); Business       35   53 P.S. § 16101, Act of August 9, 1963,
      Privilege Tax Regulation 103, effective July         P.L. 640 Sec. 1, amended 1967, Nov. 16,
      1, 1998.                                             P.L. 500, Sec. 1, imd. effective. “The
                                                           council of any city of the first class may, by
19    Phila. Code §19-1303(5); added, Bill No.             ordinance, authorize the board of
      970274 (approved July 1, 1997).                      education of such school district to impose
                                                           taxes for the purposes of such school
120   Act of 1844, April 29, P.L. 486, providing           district on any persons, transactions,
      for taxation of intangibles; infra. at n.26 -        occupations, privileges, subjects and real
      28.                                                  and personal property, which may now or
                                                           hereafter be taxable by such city for
21    Act of 1887, May 13, P.L. 114 §1; 72 P.S.            general revenue purposes, except that no
      §4782.                                               such ordinance shall authorize the
                                                           imposition of a tax on the wages, salary or
22    Act of 1933, May 22, P.L. 853; 72 P.S. § §           net income of any person not a resident of
      5020-101 et seq. (West 1994 and Supp.                such school district.”
      2002).
                                                      36   The First Class City and School District
23    Act of 1842, July 27, P.L. 441.                      Corporate Net Income Tax Act of 1969;
                                                           Enabling Act of May 29, 1969; City
24    Richie, 37 Pa. Super. 190, 1908 WL 3788,             Ordinance approved June 12, 1969.
      p.2 (Pa. Super. 1908), citing Act of 1854.
                                                      37   Phila. Code § 19-1806; Ordinance June 4,
25    Act of 1865, March 14, P.L. 320; Act of              1970.
      1867, February 2, P.L. 137.
                                                      38   Phila. Code § 19-1806(2)(a) (CCH 2002).
26    Act of 1873, April 12, P.L. 715.
                                                      39   Philadelphia Use and Occupancy Tax
27    Act of 1933, May 22, P.L. 853; 72 P.S. § §           Regulations, § 1201, Definitions.
      5020-101 et seq. (West 1994 and Supp.
      2002).                                          40   John Wanamaker, Philadelphia v. School
                                                           District, 274 A.2d 524, 526-527 (Pa. 1970).
28    Act of 1937, April 28, P.L. 473.
                                                      41   Id. at 525. See also Lower Merion Township v.
29    Act of 1939, June 27, P.L. 1199.                     Madway, 233 A.2d 273 (Pa. 1967); Deitch
                                                           Co. v. Board of Property Assessment, 209 A.2d
30    Phila. Code § 19-1801.                               297 (Pa. 1967); Delaware, Lackawanna &
                                                           Western Railroad Co.’s Tax Assessment, 73 A.
31    Whether the City is authorized to reduce             429 (Pa. 1909).
      the rate of School taxes, provided it ensure
      that the District receive the requisite         42   Wanamaker, 274 A.2d at 527. See, e.g.,
      amount of funding, is not clear. However,            Madway, 233 A.2d at 278 (stating the
      the City clearly must refrain from violating         uniformity clause forbids the taxing of one
      the requirements of Act 46 when deciding             man’s land at a lower rate than another’s
      whether to amend taxes dedicated to the              simply because of the type of business
      School District.                                     conducted thereon).
                                                      43   Id.
Appendix L                                                                                           129



44   Id. at § 19-1806(3)(c). See also Id. at § 19-     54   757 A.2d 333 (Pa. 1998).
     1806(1)(d) (defining port-related activities
     as loading or discharging cargo to or from        55   1937 Ordinances, p. 391; Amended, 1985
     vessels conducted on piers, wharves, or                Ordinances, p. 570; amended, 1986
     marine terminal facilities in the port of              Ordinances, p. 304; amended, 1989
     Philadelphia and activities related thereto            Ordinances, p. 769.
     such as furnishing dockage, wharfage,
     truck and/or railroad car loading and             56   Bill No. 000612 (December 15, 1993), eff.
     unloading and storage of cargo which is to             July 1, 1994; Bill No. 000405 (March 19
     be loaded or has been discharged from                  1993), eff. July 1, 1993.
     vessels at a pier, wharf or marine terminal
     facility in the Port of Philadelphia).            57   1945 Ordinances, p. 16; 1951 Ordinances,
                                                            p. 331; 1953 Ordinances, p. 244; Amended,
45   Phila. Code. 19-1806(3)(b).                            1982 Ordinances, p. 865
46   Philadelphia Use and Occupancy Tax                58   Added, Enrolled Bill No. 1250, enacted
     Regulations § 201.                                     June 10, 1982; 1982 Ordinances, p. 1303.
47   See Phila. Code § 19-3203(2) (stating that,       59   Phila. Code §19-2400. Former Chapter 19-
     subject to the conditions set forth in §§19 -          2400 repealed and this Chapter added,
     3204 and –3206, a person or business                   1986 Ordinances, p. 962.
     subject to the realty use and occupancy tax
     authorized under § 19-1806, with respect          60   Phila. Code §19-2403.
     to local property located in the zone, may
     claim a 100 percent exemption from such           61   Phila. Code § 19-2701(1).
     tax).
                                                       62   Phila. Code § 19-2701(1).
48   1971, June 10, P.L. 154, No. 7, § 4. 53 P.S. §
     16134.                                            63   Phila. Code §19-2402.1; Added, Bill No.
                                                            990116 (approved May 6, 1999), effective
49   Bill No. 447 adding Section 19-1805 to                 July 1, 1999.
     Chapter 19-1800 of the Philadelphia Code,
     effective January 1, 1995, repealed a district    64   Added, Bill No. 990116 (approved May 6,
     tax on the retail sale of liquor products.             1999), effective July 1, 1999. Enrolled bill
     That tax, enacted in 1970, was stricken by             read "regional attractions, marketing
     the PA Supreme Court in United Tavern                  agency".
     Owners of Philadelphia v. Philadelphia School
     District, 272 A.2d 868 (PA. 1971), on the         65   Bill No. 000083 (approved March 28,
     basis that the tax was preempted by state              2000).
     taxation of liquor. Added, June 27, 1994
     Ordinances, p. 791. Section 4 of the              66   1945 Ordinances, p. 20, as amended; 1949
     Ordinance provides that it is to take effect           Ordinances, p. 1051; 1953 Ordinances, p.
     January 1, 1995.                                       242; repealed, 1993 Ordinances, p. 109.
50   Licensed Beverage Association Of Philadelphia     67   Phila. Code § 19-2102; 1976 Ordinances, p.
     V. Board of Education of The School District Of        543.
     Philadelphia, 669 A.2d 447 (1995).
                                                       68   Added, 1981 Ordinances, p. 881 (Chapter
51   Id.                                                    19-2200 was superseded by the Act of June
                                                            23, 1981, P.L. 98, Act No. 35, 75 Pa.
52   Id. at 1202.                                           C.S.A. § 9501 et seq.)
53   See the summary of the history of the             69   Id.
     Philadelphia Personal Property Tax in
     Report of the Board of Revision of Taxes,         70   Id.
     Philadelphia County (1940) at page 19.
130                                                   Philadelphia Tax Reform Commission

71   Summary Schedule of Tax Rates Since 1952
     (rev’d June 23, 2003).                           15   Haughwout and Inman, 2001.
72   68 Pa.C.S. §3100, et seq. Added, 1982            16   New York City, Independent Budget
     Ordinances, p. 838. Amended and                       Office, 2000. This study actually
     definitions added, 1986 Ordinances, p.                understates Philadelphia’s dependence on
     290. Tax held to be invalid by Multi-Family           the personal income tax, because it
     Counselor v. City of Philadelphia, 2 D&C 4th 1        excludes the portion of the City Wage,
     (Philadelphia Common Pleas, April 13,                 Earnings and Net Profits Taxes paid by
     1989)). Repealed, 1993 Ordinances, p. 110.            commuters, in an effort to measure the tax
                                                           burden on city residents only.
73   Kohn v. City of Philadelphia, 51 Pa. Super.
     635, 30 A.2d 673 (1943).                         17   U.S. Census Bureau, 1997. Note that
                                                           Philadelphia’s figure excludes taxes raised
74   §19-1502(3); Bill No. 030073 (became law              by the School District of Philadelphia and
     April 25, 2003).                                      includes taxes dedicated to the
                                                           Pennsylvania Intergovernmental
                                                           Cooperation Authority, to insure
Section 4: The Need For Tax                                comparability with the Census data.
Reform                                                18   Some cities levy business taxes based on
                                                           the number of employees. Chicago and
1    Wasylenko, 1997, p. 49.
                                                           Denver, for instance, levy a business tax of
                                                           $4 per employee per month. These taxes
2    Wasylenko, 1997. Another literature
                                                           are likely to be far less onerous than taxes
     review, Bartik, 1991, concluded that the
                                                           based on income and gross receipts.
     intra-regional elasticity is about -1.5.
3
                                                      19   Commonwealth of Pennsylvania,
     Central Philadelphia Development                      Department of Community and Economic
     Corporation, 2003.                                    Development, 2003.
4
     See Appendix F.                                  20   Commonwealth of Pennsylvania,
                                                           Department of Community and Economic
5    Pennsylvania Economy League, 2002.                    Development, 2003.
6    City of Philadelphia, Department of              21   Commerce Clearing House, Inc., 2003.
     Commerce, 2001.
                                                      22   City of Philadelphia, Department of
7    Center City District, 2001.                           Commerce, 2001.
8    City of Philadelphia, City Planning              23   The findings in Haughwout and Inman,
     Commission, 1998.                                     2001 are consistent with Econsult’s
9
                                                           findings in this regard.
     Government of the District of Columbia,
     2003.                                            24   There has been some consideration of
                                                           reinstating a commuter tax in New York
10   Vertex, Inc., 1998.                                   City in response to the City’s budget
                                                           deficit.
11   New York City Independent Budget
     Office, 2000.                                    25   Gillen 2003. While officials at the
                                                           Philadelphia Board of Revision of Taxes
12   Inman, 2002.                                          agree with the general conclusions of
                                                           Kevin Gillen’s research, they dispute the
13   Grieson, 1980; Gruenstein, 1980; Inman,               magnitude of the problems he identifies.
     1992; Luce, 1994; Inman, 1995.
                                                      26   Gillen 2003.
14   Haughwout et al., forthcoming.
Appendix L                                                                                             131


                                                        14   Pa. Constitution Art. VIII, §2(b),
Section 6: Financing Tax Reform                              amendments adopted between 1958 and
                                                             1985.
1
     Sorrell and Inman, 1981.                           15   Amidon v. Kane, 279 A.2d 53, 63 (Pa.1971).
                                                        16   Saulsbury v. Bethlehem Steel Co., 196 A.2d 664
                                                             (Pa. 1964).
Appendix G: Legal Barriers to Tax
Reform                                                  17   Equitable Life Assurance Society v. Murphy,
                                                             621 A.2d 1078, 1087. (Pa. Commw. Ct.
1    See Wade J. Newhouse, Constitutional                    1993).
     Uniformity and Equality in State Taxation
     1731-32 (2nd ed. 1984).                            18   Amidon v. Kane, 279 A.2d 53, 63 (Pa.1971).
2    Commonwealth v. Fayette County Railroad, 55        19   Pa. Constitution Art. VIII, §2(b) – (c),
     Pa. 452, 1867 WL 7562 (1867); Union                     Purdon’s Pennsylvania Statutes Annotated,
     Improvement Company v. Commonwealth, 28                 and Historical Notes thereto.
     Leg. Int. 309, 1871 WL 10880 (Pa. 1871).
                                                        20   See Kenney v. Keebler, 419 A.2d 210, 53 Pa.
3    Fayette County Railroad, 55 Pa. 452, 1867               Commw. Ct. 507 (1980); also, see: Anthony
     WL 7562 (1867).                                         Coughlan, Land Value Taxation and
                                                             Constitutional Uniformity, 7 GEO. MASON. L.
4    Kristin E. Hickman, The More Things                     REV. 261, 262 (Winter, 1999).
     Change, The More They Stay the Same:
     Interpreting the Pennsylvania Uniformity Clause,   21   See Report, Chapter Five,
     62 ALB. L. REV. 1695 (1999).                            Recommendation 8: Phase-in Land Value
                                                             Taxation.
5    Id.
                                                        22   Kenney v. Keebler, 419 A.2d 210, 53 Pa.
6    See id. at n.2.                                         Commw. Ct. 507 (1980).
7    Commonwealth of Pennsylvania. General              23   American Stores v. Boardman, 6 A.2d 826 (Pa.
     Assembly. Pennsylvania History: The Era of              1939), Saulsbury v. Bethlehem Steel Co., 196
     Industrial Ascendancy: 1861-1945. From                  A.2d 664 (Pa. 1964), Equitable Life
     <http://legis.state.pa.us/WU01/VC/visit                 Assurance. Society v. Murphy, 621 A.2d 1078
     or_info/pa_history/pa_history.htm.>                     (Pa. Commw. Ct. 1993).
     Accessed October 2003.
8    See railroad industry background in Appeal         Appendix I: Tax Exemptions for
     of State Line and Juniata Railroad Company,
     77 Pa. 429 (1875).
                                                        Low-Income Philadelphians

9    Pa. Constitution 1874.
                                                        1    Phila. Home Rule Charter, Art. IV,
                                                             Chapter 9, §4-900, approved by voters
10   Pa. Constitution 1874 Art. IX, §1.                      November 5, 2002.

11   Pa. Constitution 1874 Art. IX, §§4 – 14.
                                                        2    Herzenberg, 2003.
     Note, the original constitution contained          3
     two sections identified as Section 6.                   Ladd and Doolittle, 1982; McGuire,
                                                             1997.
12   Pa. Constitution 1874 Art. IX, §§3, 6
13   Pa. Constitution Art. VIII, §1.
132                                           Philadelphia Tax Reform Commission




 Appendix M: Selected Bibliography

Bartik, Timothy. 1991. Who Benefits           City of Philadelphia. Various Years.
   from State and Local Economic                  The Mayor’s Operating Budget in Brief.
   Development Policies? Kalamazoo,
   MI: Upjohn Institute.                      City of Philadelphia. City Planning
                                                  Commission. 1998. Summary of
Berg, Janine, John Tepper Marlin, and             Home Buyers and Home Sellers
   Farid Heydarpour. 2000. “Local                 Surveys: New Century Neighborhoods
   Government Tax Policy:                         Technical Report No. 4.
   Measuring the Efficiency of New
   York City’s Tax Mix, FYs 1984-             City of Philadelphia. Department of
   1998.” Public Budgeting and Finance            Revenue. 2003. Preliminary
   (Summer 2000): 1-14.                           Comparative Report of Revenue, City
                                                  and School District of Philadelphia.
Berube, Alan and Benjamin Forman.
   2001. “A Local Ladder for the              City of Philadelphia. Office of the
   Working Poor: The Impact of the                Controller. 2001. Tax Structure
   Earned Income Tax Credit in U.S.               Analysis Report.
   Metropolitan Areas.”
   Washington, D.C: The Brookings             Commerce Clearing House, Inc.
   Institution, Center on Urban and             2003. State Tax Guide All States.
   Metropolitan Policy.                         Chicago: CCH, Inc.

Central Philadelphia Development              Commonwealth of Pennsylvania.
   Corporation. 2003. Center City               Department of Community and
   Reports: Tax Policy, Job Growth, and         Economic Development.
   Neighborhood Transformation.                 Governor’s Center for Local
                                                Government Services. 2003.
Chernick, Howard and Andrew                     Municipal Statistics Online Database.
   Reschovsky. 1990. “The                       From
   Taxation of the Poor.” Journal of            <http://ctcoas01.state.pa.us/dced/
   Human Resources 25:712-735.                  MSS.mainmenu.show>. Accessed
                                                October 2003.
City of Philadelphia. 1993. Report of
    the Select Committee on Business Taxes.   Commonwealth of Pennsylvania.
                                                Department of Community and
City of Philadelphia. 2001.                     Economic Development.
    Supplemental Report of Revenues and         Governor’s Center for Local
    Obligations, Fiscal Year Ended June         Government Services. 2002.
    30, 2001.                                   Taxation Manual. Eighth Edition.

City of Philadelphia. Various Years.          Commonwealth of Pennsylvania.
    Five-Year Financial Plan.                   Department of Education.
Appendix M                                                                       133

    Financial Summaries of Annual               Burdens In The District of Columbia –
    Financial Report Data.                      A Nationwide Comparison, 2002.

Commonwealth of Pennsylvania.                Grieson, Ronald E. 1980.
  Department of Revenue. Various                “Theoretical Analysis and
  Years. Personal Income Tax Statistics.        Empirical Measurements of the
                                                Effects of the Philadelphia
Commonwealth of Pennsylvania.                   Income Tax.” Journal of Urban
  Pennsylvania State Police. 2001.              Economics 8: 123-137.
  Crime in Pennsylvania: Annual
  Uniform Crime Report.                      Gruenstein, John. 1980. “Jobs in the
                                                City: Can Philadelphia Afford to
Commonwealth of Pennsylvania.                   Raise Taxes?” Federal Reserve Bank
  State Tax Equalization Board.                 of Philadelphia Business Review
  2003. Certification of Market Values.         (May/June 1980): 3-11.
  From
  <http://www.steb.state.pa.us>.             Gupta, Anuj. 1999. “The Experiment
  Accessed October 2003.                       Continues: The Evolution of the
                                               Philadelphia Wage Tax.” Greater
Econsult Corporation. 2003. Choosing           Philadelphia Regional Review (Winter
   the Best Mix of Taxes for Philadelphia:     1999): 6-10. Philadelphia:
   An Econometric Analysis of the              Pennsylvania Economy League.
   Impacts of Tax Rates on Tax Bases,
   Tax Revenue, and the Private Economy.     Harden, J. William and William H.
   Report Prepared for Philadelphia             Hoyt. 2003. “Do States Choose
   Tax Reform Commission.                       Their Mix of Taxes to Minimize
   Philadelphia: Econsult                       Employment Losses?” National
   Corporation. See Volume III,                 Tax Journal 56: 7-26.
   Section 1.
                                             Haughwout, Andrew and Robert P.
Gillen, Kevin C. 2003. Challenges and           Inman. 2001. “Fiscal Policies in
    Solutions to Real Property Assessment       Open Cities with Firms and
    in Philadelphia. Report Prepared            Households.” Regional Science and
    for Philadelphia Tax Reform                 Urban Economics 31: 147-180.
    Commission. See Volume III,
    Section 3.                               Haughwout, Andrew and Robert P.
                                                Inman. 2002. “Should Suburbs
Glancey, David B. 2002. “PILOTs:                Help Their Central City?” In
   Philadelphia and Pennsylvania.” In           Brookings-Wharton Papers on Urban
   Evelyn Brody, ed., Property-Tax              Affairs, eds. William G. Gale and
   Exemption for Charities: Mapping the         Janet Rothenberg Pack.
   Battlefield. Washington, D.C.:               Washington, DC: Brookings
   Urban Institute Press.                       Institution Press.

Government of the District of                Haughwout, Andrew, Robert Inman,
  Columbia. Office of Research and              Steven Craig, and Thomas Luce.
  Analysis. 2003. Tax Rates and Tax             Forthcoming. “Local Revenue
                                                Hills: Evidence from Four U.S.
134                                      Philadelphia Tax Reform Commission

      Cities.” Review of Economics and   McGill, Alexis. 2003. Focus Group
      Statistics, 2004.                    Research on Philadelphia’s Business
                                           Community. Report Prepared for
Herzenberg, Stephen. 2003. “An             Philadelphia Tax Reform
   Analysis of Proposed Tax                Commission. New York City:
   Forgiveness in the Philadelphia         Alexis McGill and Associates. See
   Wage Tax and a Comparison With          Volume III, Section 4.
   Across-The-Board Wage Tax
   Relief.” Testimony before the         McGuire, Therese J. 1997.
   Philadelphia Tax Reform                 “Intergovernmental Fiscal
   Commission, October 10, 2003.           Relations and Social Welfare
                                           Policy,” in Ronald C. Fisher, ed.
Inman, Robert P. 1992. “Can                Intergovernmental Fiscal Relations.
   Philadelphia Escape its Fiscal          Boston: Kluwer.
   Crises with Another Tax
   Increase?” Federal Reserve Bank of    Melior Group. 2001. Key Findings from
   Philadelphia Business Review             Final Commerce Department Business
   (September/October 1992): 121-           Outreach Survey. Philadelphia.
   136.
                                         New York City. Independent Budget
Inman, Robert P. 1995. “How to             Office. 2000. Taxing Metropolis:
   Have a Fiscal Crisis: Lessons from      Tax Effort and Tax Capacity in Large
   Philadelphia.” American Economic        U.S. Cities.
   Review 85: 378-383.
                                         O’Cleireacain, Carol. 1997. The
Inman, Robert P. 2002. “Local Taxes         Orphaned Capital: Adopting the Right
   and the Economic Future of               Revenues for the District of Columbia.
   Philadelphia: 2002 Report.”              Washington, D.C.: Brookings
   Testimony before Philadelphia            Institution Press.
   City Council.
                                         Pennsylvania Economy League. 2002.
Inman, Robert P. 2003. “Should              “Pennsylvania Economy League
   Philadelphia’s Suburbs Help Their        Poll Finds City Residents Want
   Central City?” Federal Reserve Bank      Wage Tax Cuts.” From
   of Philadelphia Business Review          http://www.peleast.org/wagetaxp
   (Second Quarter 2003): 24-36.            oll-pressrelease.pdf. Accessed
                                            October 2003.
Ladd, Helen F. and Fred C. Doolittle.
   1982. “Which Level of                 Public Financial Management. 2003.
   Government Should Assist the             Analysis of Tax Cut Deficit Funding
   Poor?” National Tax Journal 35:          Options. Report Prepared for
   323-36.                                  Philadelphia Tax Reform
                                            Commission. Philadelphia:
Luce, Thomas F. 1994. “Local Taxes,         Public Financial Management. See
   Public Services, and the                 Volume III, Section 2.
   Intrametropolitan Location of
   Firms and Households.” Public         Rulison, Larry. 2003. “City Tops in
   Finance Quarterly 22: 139-167.            Business Tax Burden.”
Appendix M                                135

   Philadelphia Business Journal,
   October 10-16, 2003, p. 1.

School District of Philadelphia. 2003.
   Budget Document for the Fiscal Year
   Beginning July 1, 2003, Volume 1.

Sorrell, Robert and Robert P. Inman.
    1981. A Task Force Report to the
    Pennsylvania Tax Commission: Local
    Non-Property Taxation with Special
    Reference to the Problems of the
    Delaware Valley. Pittsburgh, PA:
    Pennsylvania Tax Commission.

Thornburgh, David. 2003.
   “Reducing Philadelphia’s Wage
   Tax: Investing in Growth.” In The
   Fight for Metropolitan Philadelphia:
   An Agenda. Philadelphia:
   Pennsylvania Economy League.

United States Bureau of the Census.
   1997. Finances of Municipal and
   Township Governments. 1997 Census
   of Governments, Volume 4,
   Government Finances.
   Washington, D.C.: U. S. Census
   Bureau.

United States Bureau of the Census.
   2003. Population by Poverty
   Status in 1999 for Counties: 2000.
   From
   <http://www.census.gov/hhes/p
   overty/2000census/poppvstat00.h
   tml>. Accessed October, 2003.

Vertex, Inc. 1998. City Business Tax
   Study. Berwyn, PA: Vertex, Inc.

Wasylenko, Michael. 1997. “Taxation
   and Economic Development: The
   State of the Economic Literature.”
   New England Economic Review
   (March/April 1997): 37-52

				
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