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;

(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.

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
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(September/October 1992): 121- Outreach Survey. Philadelphia.
136.
New York City. Independent Budget
Inman, Robert P. 1995. “How to Office. 2000. Taxing Metropolis:
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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
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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
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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.
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United States Bureau of the Census.
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From
<http://www.census.gov/hhes/p
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Vertex, Inc. 1998. City Business Tax
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Wasylenko, Michael. 1997. “Taxation
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New England Economic Review
(March/April 1997): 37-52