We have hand delivered letters to Council's office, Council person's at large office, requesting funds to be diverted back to recreation centers, particularly Barrett Playground in Logan. We are asking for immediate change in the decision to close Barrett Recreation Center at Logan. This is the only recreation center in Logan, the only one in our community. The impact to close Barrett Center 307 Whole - 5/12/04 - Operating Budget in our community would be devastating. This is the site where our children have quality programs. The center have after school programs, computers, gymnastics, exercise equipment used by the community. Summer camps are held here. Our basketball courts and fields are utilized as well. Adults use this center for activities as well. We have community meetings, rallies, et cetera, at the center. Seniors, foster parents, day care providers, as well as nearby schools without yards bring their children daily to use this site. We are asking these residents, especially the ones that were displaced, due to the sinking home area, to not travel out of our community to another community and use their facility. Barrett... It is extremely imperative to maintain community programs at Barrett which is indeed -- enhances the quality of life in Logan. 308 Whole - 5/12/04 - Operating Budget These types of services prevent crimes by children who have over -- who otherwise would be idle. They are not going to travel over a mile to use a facility in another community. Why should they? This is the only site where the 49th Division, 22nd and 14th have -- hold their elections. There is no new growth in the Logan community. There are no new developments in the Logan community. And therefore, we are overwhelmed with the little services that are provided there, and we're fed up with it. The first major devastating impact that happened in Logan was the sinking homes. Our State Representative, Council Office, Marian Tasco, stands by our efforts not to close Barrett Recreation Center. Our community stands by our efforts by signing petitions and speaking -- and having me speak in front of you today. We hope that you listen, and pray 309 Whole - 5/12/04 - Operating Budget that you make the right decision to stand by our Logan residents, by not closing Barrett Recreation Center. Thank you ever so much for your time.
Thank you so much, Miss Muchison. I know that you have been here all day. I go out and you come on. But thank you for coming down to testify. I just want to say to my colleagues that the Barrett playground is in an area that has suffered for many, many years from the tag of being the sinking home area. And there are a not a lot of resources in that area. We are working very hard with Let's Love Logan, and the other programs, Ad Hoc Logan, and the various community programs there to help, you know, improve the quality of life in 310 Whole - 5/12/04 - Operating Budget the Logan area. They work very hard to provide programs at Barrett. And there is no other recreation center around the corner, as purported by the Recreation Department, as they try to close these recreation facilities down. I have stated my frustration about the process or lack thereof in establishing what -- and not having a criteria how you're closing these recreation facilities. One day I have no recreation facilities on the list in the Ninth Councilmanic District. Then I look up and there are several on the list, with no 17 conversation. And how they came to the conclusion that the site should be closed just boggles my mind. I don't have a definitive analysis and a criteria upon which these recreation centers have been targeted. And I think it would be awful to close any of the centers that they have targeted in the District because we have so 311 Whole - 5/12/04 - Operating Budget few in the Ninth Councilmanic District. And they are not close to each other. And to close the one in Barrett, the Barrett Recreation Center, would be criminal, so -- and would be a disservice to those people in the Logan community who use that facility, and to the children in that area who have no place else to go. So thank you so much for coming down to testify.
May I state one other point? As the speaker from the Recreation Commissioner has spoke, there were renovations done, renovations under way as we are speaking.
Now why are we on the list to be closed? It does not make sense. There's activities every night there. Children have nowhere to go. Every night there. We stand by our children, and I hope you do the same. 312 Whole - 5/12/04 - Operating Budget
Our next witness. MR. McPHERSON: Is Mr. Crawford.
Good afternoon, Mr. Crawford. Please identify yourself and proceed with your testimony.
My name is David Crawford. Madam President, I had so much fun Monday I just had to come back. I want to give some testimony live, and I also want to submit written testimony of my partner, Steve Mullen. Steve is unable to be here because of a prearranged commitment. Steve has written testimony on the question that came up on Monday as to whether a passage of a set of tax reductions would have a negative impact on the City's credit rating. Steve's view is that it would not, 313 Whole - 5/12/04 - Operating Budget contrary to testimony that came from the Administration. So I'm submitting that testimony, and reporting that Steve would be available to talk with any Council members who have questions about it at some other time. As for my testimony, I wanted to address some questions that were raised by Chief of Staff Wilkerson and others regarding E-Consult's estimates of the stimulative effect of the tax reductions proposed by the Tax Reform Commission. Five quick points. Well, four quick points and one that takes a little longer. We followed a well-established method for making these sorts of calculations. We based the calculations on econometric models which were, in turn, based on historical data on tax rates and revenues. We did not, as some questioners suggested, assume the size of the impacts of tax rates on revenue. Rather, we allowed the historical data to tell us what 314 Whole - 5/12/04 - Operating Budget the relationships have been in the past, and we used those relationships to project the future impacts of proposed changes. This is how virtually all public policy analysis is conducted. Our approach even allowed the possibility that we would find impacts whose directions contradicted economic theory. I'm pleased to say that we didn't find any such, but the method did not stack the deck. Second, we looked at the impact of each changing tax rate on its own base and on the base of other taxes. For example, our investigation revealed that Wage Tax cuts can be expected to cause increases not just in the Wage Tax space, but also in the property tax base. We measured these effects, what we call own effects and cross effects, for all of the tax rates, and those are built into our calculations. Third, in addition to looking at historical relationships between tax rates 315 Whole - 5/12/04 - Operating Budget and tax bases, we also looked at relationships between tax rates and employment, which is the source of the employment projections that were submitted to the Commission. Fourth. Now I have to get slightly technical. Our models focused on Philadelphia's share of national activity, not on the absolute level of such activity. For example, we looked at Philadelphia Wage Tax base as a percentage of total wages earned in the United States. We focused on shares for two reasons. First of all, because Philadelphia competes nationally for business and household location, its share of the nation is a good indicator of its relative growth and success. And second, by using the local share, we have effectively controlled for national trends in growth and inflation. Thereby, we avoid attributing changes in the Philadelphia tax bases that would result from inflation or other 316 Whole - 5/12/04 - Operating Budget general trends. We avoid attributing those to changes in the City's tax rates. Fifth and finally, on Monday Miss Wilkerson expressed concern that the size of the supply side response that E-Consult had estimated was, quoting her written testimony, more than five times as great as the model developed for the country's largest state by one of the leading economics departments in the world. I want to bring to the attention of Council that in 1997 the New England Economic Review which is published by the Federal Reserve Bank of Boston, contained an article by Michael Wezelenkow, in which he surveyed the evidence from dozens of studies of the impacts of taxation on the economic development all over the country.
Professional Wezelenkow pointed out, as did Councilman Kenney on Monday, that the size of the response to tax changes depends on the size of the region considered. Professor Wezelenkow goes on to say 317 Whole - 5/12/04 - Operating Budget that responses to tax changes within a region tend to be at least four times as big as the response between regions. Ms. Wilkerson's comparison of E-Consult's estimates of impacts in Philadelphia with existing estimates for California should be viewed as enhancing, not undermining, the credibility of the E-Consult estimates, because our estimates are entirely consistent with the results of a large body of mainstream economic analysis. I'd be happy to try to answer any questions.
Thank you. Are there any questions from members of the Committee? The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Mr. Crawford, you had some opportunity to... you and/or other members of your firm, to look at the financial 318 Whole - 5/12/04 - Operating Budget situation in Philadelphia, not just in a snapshot form; but you... the company did work for the Philadelphia Tax Reform Commission, I think, at their request; is that right?
That's correct. And before that, for the Controller's Office.
For the Controller's Office. Okay. And part of your work ended up in one of the volumes of the Tax Reform Commission work?
And at the present point in time when you were here the other day, you've heard a significant amount of testimony from a variety of perspectives, either supporting or proposing the Tax Reform Commission's proposals. Is there anything that you've heard in your professional opinion that would 319 Whole - 5/12/04 - Operating Budget dissuade you, either from the time of your work at the Tax Reform Commission last year or you did some work with the 21st Century Review Forum, which was this year, the committee put together by the Mayor. Is there anything that you've heard that tells you that the Tax Reform Commission plan would not work?
No. I haven't learned anything that changes my view that the Tax Reform Commission hit it right. You know, what's happened since that time, since I worked there is, we've got a clearer picture of the budget. I think the picture we're looking at today is pretty much the picture that the 21st Century Review Forum was looking at. I don't think there's a lot of news since then. No, I have not heard anything that deters me from my opinion that the package 320 Whole - 5/12/04 - Operating Budget put forward by the Tax Reform Commission is the right way to go.
Tell us a little bit about the 21st Century Review Forum work. What was the context? There was a subcommittee as a part of one of the five --
Yes. There were committees and then subcommittees. The Forum was made up of five committees, one of which was the Program Evaluation Committee. That's the committee on which I serve. Then the Program Evaluation Committee had five subcommittees, one of which was on the subject of tax reform.
The others were NTI, Education, Services for Children, and whichever one I'm forgetting. My work was largely focused on the tax subcommittee which was chaired by Dr. Jerry Nowack.
And the 321 Whole - 5/12/04 - Operating Budget conclusion of the subcommittee was what?
Well, with regard to the Tax Reform Commission, we reviewed their recommendations, we considered their recommendations, and developed an understanding of them. And at the end, we were quite comfortable endorsing all but one of the recommendations which was a sort of technical inside baseball kind of recommendation, number seven.
Do you have any recollection, and was there any... Did the 21st Century Review Forum just pretty much rely on the work that was done by the Tax Reform Commission, in terms of financial analyses or kind of a rounding of the numbers?
Well, we did -- we did rely heavily on the Tax Reform Commission's work. But as one of the committee members, Ed McBride of P.E.C.O. said at one of our meetings, it was now time for somebody else 322 Whole - 5/12/04 - Operating Budget to look at the product of the Tax Reform Commission and try to evaluate whether the recommendations were sensible. So it really was an attempt to take a fresh look at what they had -- at what they had recommended.
And I guess lastly, from the Tax Reform Commission report, in conjunction with the work that you did, I'm looking at a chart on that indicates that the Commission recommendations, if implemented, would have an FY '05 impact of $17.1 million. Do you have any -- I know that that work was a while ago, but do you have any recollection of those figures?
I do remember those figures, Councilman. But I should point out that E-Consult did not make those computations. Those computations were made by the Tax Reform Commission. And as I understand, they in turn relied very heavily on the financial analysts in the 323 Whole - 5/12/04 - Operating Budget Administration to make those calculations.
Okay. You're available for any other questions or issues that may arise that members may have, with regard to these matters or your work?
And I know you indicated you have Mr. Melon's testimony. He couldn't be here, with the schedule conflict. But his testimony tries to speak to the issue with regard to rating agencies and their views of what we may do.
That's right. His testimony is entirely focused on the issue that Finance Director Davis raised, about the possible impact of changing legislation on the credit rating in the City of Philadelphia.
Okay. Maybe my last question will be this one. There's been a great amount of expression of concern, with regard to a more doomsday like scenario, out of the work of the Tax 324 Whole - 5/12/04 - Operating Budget Reform Commission or even the comments or statements made by the 21st Century Review Forum. Do you share any of those doomsday scenarios, if we start on a path of significantly changing the tax structure of the City, while at the same time conducting ourselves in a way that requires annual review of all of our actions?
No. I don't see any likelihood of any sort of doomsday scenario if the package were to be enacted. As you point out, I don't think anybody is talking here about locking in rates for five years or ten years. There was a lot of discussion about that Monday. But I have never heard anybody say we need to absolutely lock in tax rates for five years or ten years. What we're talking about is putting a schedule in place, knowing that if it's... if it goes off the track, we can come back and amend it. I think only a fool would try to... I guess Mr. Gore 325 Whole - 5/12/04 - Operating Budget learned about lock boxes. I don't know that you would try to lock in tax rates for a ten-year horizon, with no possible recourse to readjust them. But it strikes me that that's a straw man sort of argument that's come up, that -- because as I read the Tax Reform Commission, they didn't propose it. They didn't propose locking these things in. The subject never even came up with the tax subcommittee of the 21st Century Review Forum. I don't think any of us were contemplating that there would be some absolute lock-in. So given that you're not doing an absolute lock-in, I don't see it being risky at all. In fact, you're talking in the first year about... about very, very small changes. So, no, I don't see a potential for doomsday. And I guess I would also point out, in the interest of completeness, that if you don't do anything...
Well, that was 326 Whole - 5/12/04 - Operating Budget going to be my next question, because I'd like you to give us your perspective on the cost or the impact of doing nothing.
Well, if you don't do anything, I don't think doomsday would be the right metaphor, because it's going to be slow in coming. Doomsday suggests something immediate and abrupt, but... (A Councilman said something, away from the microphone, not reportable.)
Well, no, it's probably dooms decade, Councilman, that if... You know, what you're going to see if you keep this current tax package in place, I think, is a continuing decline of the City economy. I said in my testimony on Monday that the choice really that was before this Council was between trying to really turn things around in Philadelphia or just managing its decline. I think if you don't do something, it's going to continue to decline, which means as each year goes by, there's going 327 Whole - 5/12/04 - Operating Budget to be less economic activity in the City. There's going to be -- Even with the current tax rates, there's going to be less tax revenue. There's going to be less ability to provide services. And that would be a true disaster. Unlike many people who advocate cutting taxes, I believe in government, and I believe in the value of government services. And I think the real concern about doing nothing is not in the '05 budget. It's in the '10 budget and the '15 budget, when Philadelphia just simply will not be able to provide even minimal services. It's not going to happen abruptly. It's not going to... We can't say it's going to happen tomorrow. But I think it's going to happen. It's already happening.
The Chair recognizes Councilman Ramos. 328 Whole - 5/12/04 - Operating Budget
Thank you, Madam Chair. Thank you, Mr. Crawford, for taking time again today to share your insight, and given that you have done this for a long period of time. In the work that you did in support of the TRC and the -- I believe it's in the TRC report -- E-Consult said, and I quote, our greatest concern regarding the revenue impacts of reducing the gross receipts and Wage Tax rates is whether the City can increase its property tax revenues in proportion to the predicted rise in property values associated with tax reductions. The question is whether the City will resist the inevitable pressure to slow the growth and assessments and/or lower the effective property tax rate as property values rise, end of quote. Do you remember that?
What do you think 329 Whole - 5/12/04 - Operating Budget about that? Don't we need Philadelphians to absorb or 30 percent increases in 4 real estate tax bills to get these 5 recommendations to work? 6
Over time... If you 7 look at the whole package together, over 8 time -- 9
-- one of the 11 fundamental principles is that there's 12 going to be an increasing reliance on 13 property taxes as a share of total revenue. 14 As the relative size of wage and 15 business taxes shrink, the relative size of 16 property taxes is going to increase. 17 And I testified on Monday, and I 18 believe it just as strongly today, that 19 this Council should not launch cuts of 20 business and wage taxes unless you have the resolve --
-- unless you have the resolve to allow property tax revenues 330 Whole - 5/12/04 - Operating Budget to go up.
Do you think Philadelphians will need to absorb to 30 5 percent increases in tax bills to get these 6 recommendations to work? 7
That could be about 8 the right... It sounds a little high, but 9 it could be about the right ballpark. 10
Could be right. 11 That's a lot. That's a lot to absorb. 12
Well, I mean, the 18 package -- the package is going over, like, 19 ten years. 20
Well, that's a follow-up question. Is that over a ten-year period or is that...
I'd have to go back 331 Whole - 5/12/04 - Operating Budget and look. And I will. I don't know over what period. Let me remind you what I said in --
I mean, it's -- 11 it's -- it's -- it's -- it's tiny in the 12 first -- in the first period. 13 You need to keep in mind that 14 compared to the overwhelming majority of 15 cities, Philadelphia's property taxes are a 16 very low percentage of its total taxes. 17 If you set yourself up to make an 18 apples to apples comparison, it's a little 19 hard to do because some cities have the 20 School District in and some don't. So, what we did was, we took the School District out of our numbers and compared them to other cities. When you do it on that basis, Philadelphia is getting about 21 percent of 332 Whole - 5/12/04 - Operating Budget its tax revenue from property taxes. The average of major cities is 40 percent. So Philadelphia has made an historical decision or there has been a historical evolution that has brought us to the point where property taxes are a relatively small part of our revenue stream and Wage and Business Taxes are a relatively large part. And that's exactly the way you want to design a system if you want to strangle a City, because the supply side impacts of high business taxes are going to be much more significant than the impacts of high property taxes. It is much easier for business and jobs to move away from the City than it is for the property.
Can you get us specific information? Because your first answer, when I posed the question, was that it was about right. Then when my good friend and colleague, Councilman Kenney, jumped in, 333 Whole - 5/12/04 - Operating Budget then we got into whether this was over a ten-year period or not. Can you... I mean, you --
I mean, this is something that you've made very clear in your statement, that unless -- you know, unless this happens, you shouldn't -- that we shouldn't then do this.
That's right. And let me just repeat what I said in response to Councilman Nutter's question. We didn't toss the plan out. That was done by the Finance Office of the City. Those numbers are their numbers. I didn't make those calculations. And I would assume that they have made their calculations with professional integrity. But backing off from the numbers and looking at the big picture, one of the fundamental underlying philosophies of the Tax Reform Commission is a shift from business and wage taxes to property taxes. 334 Whole - 5/12/04 - Operating Budget And I think it's important that everybody understand that. Whether you like it or don't like it, I think it's important that everybody understand it.
Now, a lot of this also is based on real property tax reform that's coming from Harrisburg. I was up last night watching some of that debate go on. You know, the business of slots is also in play here. Isn't that a big part of getting tax reform funded? Isn't that a big part of it? We need this real property tax reform to really happen through the state with these slots, for this to really be able to do a significant reduction in our tax structure.
We made two sets of projections: One, that assumed no change in state taxes; and another that assumed the package of reforms that Governor Rendell had put in play at around the time we were doing the work. Virtually all of the discussion that 335 Whole - 5/12/04 - Operating Budget you've heard of our work in the last several days is based on the scenario in which there is no state tax reform. If there is no state tax reform, then you are looking at the shortfall in -- the shortfalls in revenues that people have been -- that people have been talking about. If you assume that there is some sort of significant state tax reform, of the sort that Governor has proposed, that flips you into the other scenario in which you can... our projections show that you can run the decreases, in fact the accelerated decreases of the Wage Tax without reducing revenue, that there's going to be enough in that -- there's going to be enough in that deal to fully offset, in fact, more than fully offset.
Just one last question, Madam President. I just want to engage you in this because you know a whole lot more than I do in this -- in this field. 336 Whole - 5/12/04 - Operating Budget What's your thinking of why we should go first, instead of us waiting until the state... you know, see what happens with the state proposals?
-- and we have to be valiant. I understand all of that, but why --
-- you know, why should we go first? Why shouldn't -- Why can't -- Why shouldn't we wait until the state... you know, see if we get slots, and see if we get this real property tax relief?
My answer is, you should go as far as you can without state tax reform and do that now. If the state tax reform comes through, you can do more. And in fact, the Tax Reform 337 Whole - 5/12/04 - Operating Budget Commission, I think anticipating the ambiguous political environment, gave two different scenarios of tax cutting, one to be implemented if there was no tax reform, the state tax reform, and a more aggressive cutting regime if there were tax reform. So, my advice to the Council is the to take that less aggressive package that the -- that the Tax Commission proposed. And then, if something like what the Governor proposed happens, then you could move on to the more aggressive form.
Well, is your last statement a statement as our consultant or is that a statement as an officer in E-Consult? Because you're saying that we should now... Because you are our consultant now, I believe, right? At last I got a letter --
So you're here in 338 Whole - 5/12/04 - Operating Budget public testimony suggesting to me that I should take the... run with the tax reform package.
The answer to your questions are the same. I give you... As my client, I give you my honest opinion.
I've discovered over my consulting career that that's sometimes cost me engagements. But I have always told my clients what I think because I think that's why you hired me. So the question that I give you as consultant is also my -- my personal view as an economist.
Thank you. Thank you for your answers. MR. McPHERSON: Councilman DiCicco. COUNCILMAN DiCICCO: Mr. Chairman, thank you. Good afternoon. I would just like to go back to the comments concerning the 339 Whole - 5/12/04 - Operating Budget real estate tax. (Alarm rings.) COUNCILMAN DiCICCO: Fastest five minutes I've ever had. And you agree that it would not be posed by Mr. -- Councilman Kenney, that it would not be an immediate increase, and we spread out. And I know you don't have all of the facts and figures in front of you. But the would ten years be a reasonable amount of years where you think that increase would be spread out, could be spread out? I mean, I'm not going to hold you --
Yes. Yes. In our projections, what we assumed was that the effective property tax rate would remain the same, and you hold the line with that effective tax rate as property values go up. So there's no increase in tax rates, but there would be an increase in property tax revenue as the value of the properties increased. 340 Whole - 5/12/04 - Operating Budget COUNCILMAN DiCICCO: So if we used the ten years, and we take that percent 4 increase, it's two percent a year. 5
It's even less when 6 you take into account compounding, correct. 7 COUNCILMAN DiCICCO: I'm going to go 8 high. 9
That's right. 10 COUNCILMAN DiCICCO: I'm going to go 11 high. 12
That's right. 13 COUNCILMAN DiCICCO: And the reason 14 is last year when we were... Was it last 15 year? I even forgot. Last year or the 16 year before, when tens of thousands of City 17 residents received an overwhelming increase 18 in their real estate taxes in one fell 19 swoop, if you will. 20 What I heard from my constituents -- And I conducted four or five town meetings across my District; and literally several thousand people attended those meetings cumulatively -- was that most people realized that, like everything else in 341 Whole - 5/12/04 - Operating Budget life, the cost of living increases, and there's certain taxes that will go up, although we don't like that to happen, but that's the reality of it. The message that was clear to me was that people understood that because government, like all of us who have a budget, the cost of doing business increases. And they were willing to accept minimal incremental increases spread out over a period of time. So, kind of answering Councilman Ramos's questions that he posed to you, is that... And I'm not in favor of tax increases, but realizing that some -- You're shifting. It's going to have to come from somewhere. I don't think that 20 percent over 10 years -- it could even be longer, maybe a little bit less, but I don't think less than ten years, is all that something that would be that significant, in terms of causing some negative effect on the 342 Whole - 5/12/04 - Operating Budget population about, here goes my real estate taxes, and I'm getting out of town, because, you know, when you get a 600 -- when you get a two -- one, two or three hundred percent increase, as many of them did last year, that is reason for concern, when you're paying in Society Hill which is a neighborhood I represent, and you're paying $6,000 a year, and you get a bill 11 that now says you're going to be paying 11, or 20,000, that's shock and awe. 13 But those folks all said, you know, 14 point or two a year spread over the course 15 of ten years or so is acceptable and understandable. So I just wanted to clarify that, and again, to kind of answer a little bit about what Councilman Ramos was talking about. The other thing I wanted to mention, picking up on Councilman Nutter's statements to you about the effect... if we don't do something now, I posed some questions myself to the Administration the 343 Whole - 5/12/04 - Operating Budget other day about doing something dramatic. And I think now is the time to do it. When we talk about, if we don't do something now, the continual decline in the revenues and businesses and jobs in the City will continue, it's not as simple as that, as least for me. And that's where I need for you to kind of clarify it. We can look at a percentage of job reduction over a year or two or five or ten years, but it really doesn't hold to any specific formula, because isn't it kind of like the snowball effect? When... The more... Every year that you lose some, you actually lose more because it kind of... you know, one business is losing jobs, less revenue is coming in, and another business starts reducing. And then all of a sudden that little snowball becomes a larger snowball, and then it's a huge snowball that basically wipes you out sooner. We've been playing with this notion 344 Whole - 5/12/04 - Operating Budget for years that we're in trouble and the City has got to do something different. If not, we're not going to maybe function as a City any longer. But when people walk the streets and see things happening, for the average person, they don't get it. They don't see it, because they see police, they see fire personnel out there. And they just keep thinking, well, maybe it's political rhetoric. Maybe it's really not as bad as it is, when in fact those of us on the inside, who deal with this every day, understand what it means. And five or ten years out it may be worse than it has been for the last five years in decline. Does that make sense? Do you agree that --
Yes, it does make sense. COUNCILMAN DiCICCO: -- it can actually be much more dramatic over the last five years or the last ten years.
It certainly could 345 Whole - 5/12/04 - Operating Budget be. I mean, I'm convinced that with the current structure, you're looking at ongoing decline. You raise the question of might there come a tipping point where that -- where the rate of decline could accelerate. And the answer is yes, that could happen. You could get into a sort of a death spiral scenario because, remember, as your economic engine shrinks, the needs of your population are not going to shrink as fast. So there's going to be more and more demands. So you get into a sort of a scenario where, you know, would the last business to leave Philadelphia please turn the lights off. COUNCILMAN DiCICCO: Right.
So, yes, it could accelerate. I can't, as I sit here, tell you that it definitely will or when it will, but I think it's a reasonable scenario. COUNCILMAN DiCICCO: That none of us 346 Whole - 5/12/04 - Operating Budget can say, you're right. None of us have a crystal ball to look into the future. But if history has proven anything to us, it's certainly not going to make things better and it progressively or I think accelerates the problems that we have today going forward. Thank you. I don't have any further questions. MR. McPHERSON: Councilman Nutter.
Mr. Crawford, to follow up on an area where Councilman Ramos was, do you know of any other major city in the Commonwealth or any other major city across the country that has the array of taxes that we have in Philadelphia and/or the apparent over reliance on a wage tax to fund its operations?
No, I don't. I think it's pretty clear that Philadelphia is an outlier, in terms of the structure of its tax. It may not be an outlier so much in the level but it certainly is an outlier in terms of the structure. 347 Whole - 5/12/04 - Operating Budget
And would you agree or disagree with the statement that because of both the array of taxes that we have in contrast to other cities, and an over reliance on a wage tax, that may require us to do a fairly significant reworking of our tax structure because we're dealing with an array of taxes that most other cities don't have to contend with in the first place?
Yeah. That's correct. Because other cities don't have these structures, it makes them more dangerous for us. And I would further argue that the comparisons you have to worry about most are the comparisons not with other cities but with your close-by neighbors; that, you know, big tax differences between the City of Philadelphia and the surrounding counties in both Pennsylvania and New Jersey are, you know, truly dangerous. If you think about a business deciding to locate, say that they're 348 Whole - 5/12/04 - Operating Budget already sold on the idea of coming to this general area. There are a number of things that they can get anywhere in that area. They can get the work force. They can get the weather. They can get the transportation network, basically. So, what is going to affect the choice? Once you've decided to come to the Philadelphia metropolitan area, what's going to affect the choice about where in that area to locate? Well, it's going to be the differences. It's going to be the things that make Delaware County different from Philadelphia, or make Burlington County, New Jersey, different from Bucks County, Pennsylvania. And once you get within the area, the glaring difference, the glaring disadvantage of Philadelphia is the tax structure.
Okay. Thank you. Thank you, Madam Chair. 349 Whole - 5/12/04 - Operating Budget
Thank you. The Chair recognizes Councilman Clarke.
Thank you, Madam President. Good afternoon. Just in response to your statement about job retention, and you referenced New Jersey, although you did reference the surrounding counties. Do you have an idea as to why some of the larger corporations recently opted to re-up their leases in Philadelphia, as opposed to moving to Camden, given the significant size of the incentive package that was put on the table by New Jersey and they opted to stay in Philadelphia?
I don't know the entire story. It is certainly true that we fared well in the last round of major corporate leases that were -- that were up for renewal, and that we did retain significant numbers. I don't know... I'm not privy to the decision processes of those companies, 350 Whole - 5/12/04 - Operating Budget and I also don't know what arrangements may have been made with those companies, in terms of incentives to stay. So, I really can't answer the question.
Okay. Well, I mean, I asked that question because you just referenced our potential inability to retain jobs. And those are significant leases that were re-signed. And from all accounts, public accounts because I, like you, was not privy to the discussion in the room. But in all accounts, the financial package that was put on the table by New Jersey was three, four times what we offered, at least what people are telling us that was offered, because we sometimes find ourselves not being able to be the fly on the wall. And you have no sense of why that happened.
I don't know about those particular cases. You know, different cities are going to have different reasons for being in 351 Whole - 5/12/04 - Operating Budget Philadelphia. And those different reasons are of different importance to different firms. The fact that you retain a significant number of large employers is good news, undeniably, but it doesn't say that you're going to maintain employment levels. You know, the trend is pretty clear that overall employment in the City is declining. Now, holding on to a Cigna or another big group is a way to slow that decline or maybe even offset some of it. But I don't think we're -- I don't think we should take too much comfort in those new leases. We should not take so much comfort that we will decide not to -- not to dramatically change our tax structure.
I agree with you, in that we should not take comfort. My question was pretty much in response to your statements, and the implication that as a result of our tax 352 Whole - 5/12/04 - Operating Budget structure -- And I do believe we have to do something about our tax structure, as much as anybody else in this room. It's just simply a way about getting there that the implication -- COUNCILMAN DiCICCO: Point of information, if I can.
The Chair recognizes Councilman DiCicco. COUNCILMAN DiCICCO: Not to interrupt the conversation, but I'm familiar with Cigna because the building that they're relocating to is in my District, moving out of your District, no 16 reflection on you, Councilman Clarke. And one of the reasons, I think the primary reason that they stayed, in addition to the financial package that we put together, and this Council supported the TIF, as you know, for that relocation project, is the fact that this company started in the City over 200 years ago, and they actually felt a very moral obligation.
Councilman, I 353 Whole - 5/12/04 - Operating Budget think you're talking about Ace.
I believe, Councilman -- I think Councilman Clarke is talking about Cigna. COUNCILMAN DiCICCO: Apologize.
Thank you, Madam Chair. I want to add to that. Part of the of what I read, at least, is the fact that you said we shouldn't have comfort with that lease. And I agree also with that because I believe part of the decision was based on the fact that it disrupts... You know the word I'm trying to use.
Disruption. 354 Whole - 5/12/04 - Operating Budget
Yeah, disruption That would have occurred. And also they also indicated about people have to be relocated, et cetera. So, I don't think it was -- their decision was entirely based on just what they got out of a lease. At least that's my interpretation of what I read. Thank you.
I actually agree with Councilman Rizzo. I mean, the reality that there are a number of factors for people when they make these decisions. And, you know, not to suggest that Philadelphia is ahead of everyone else in some of those other areas. You know, obviously our educational system needs to be improved, and we need to increase our quality of life. I guess I only want to ask those questions in response to your statements; and two, understanding that there are 355 Whole - 5/12/04 - Operating Budget significant other issues that relate to decision making, it could be, and as Councilman Rizzo said it, the part that tipped the scale was people just simply didn't want to move their desk across the water. Hopefully, everyone feels that way. Another question. There was an issue that I talked about the other day about this... I didn't think I have it here... was the budget-based tax system that was the recommendation of the Tax Reform Commission. I'm trying to... I want to see. I may not have the corresponding bill.
Number 7, right. Number 7. I voiced some concerns about that in earlier testimony. And from what I see, there have been references to it several places throughout the Tax Reform Commission's report, that potentially our ability to raise the necessary revenues, to ensure that we have 356 Whole - 5/12/04 - Operating Budget a balanced budget, pretty much reflect on our ability to either lower or increase the rate on our real estate. And at that time I voiced some serious concerns that it could potentially create a substantial increase in real estate revenues for the City that would essentially be on the backs of the people who live here and work here, who operate businesses here. And I wasn't in the room, but I think you may have referenced a certain potential percentage of increase. And I don't know over the time period. But based on my minimal analysis of some of this information, it appears that a substantial amount of the burden on this whole reform package will be shifted from the business and wage earners, a substantial amount who live outside of the City -- and we're trying to get the numbers, as it relates to the number of people who live and work in the City. We're trying to find what the now 357 Whole - 5/12/04 - Operating Budget resident's savings will be. That essentially will be put on the backs of individuals who live in the City. And I'm somewhat concerned about that. And if that is the case, I'd like to have the public understand that there's a real potential of substantial increases in their taxes on the real estate side.
I don't think you were in the room a few minutes ago when I was addressing this, in response to another question. It is certainly the case that one of the underlying organizing principles of the Tax Reform Commission's package is that over time, over many years, over ten years, there will be a shift in the structure of Philadelphia's taxes, so that the City will rely less heavily on business and wage taxes and more heavily on property taxes. If it does that, it will move us to a structure that is much more consistent with other cities in the country, and it would be a move in the direction consistent 358 Whole - 5/12/04 - Operating Budget with what most economists would argue that what a city should try to do is move taxes away from those activities that are most mobile, that can leave the City the most easily, and toward those activities that are less mobile. That does mean that over time there will be an increase in real estate taxes. But a couple of considerations. Number one, it's likely to be very slow, this transition. And the second thing is that many, not all, but many of the property owners in Philadelphia are also wage earners or small business people. And while their property taxes may be increasing, they will be enjoying reductions in wage taxes or business taxes. So, in terms of the big picture, many people will not be hurt as much as you might think, when you first say, oh, my God; property taxes are going to go up. Now, let me rush to point out that there is a group that gets left behind. 359 Whole - 5/12/04 - Operating Budget There are property owners who are not wage earners and not small business owners. And there is going to be... There may be some challenges. And the Tax Reform Commission in its wisdom put in some safeguards and buffering ideas about how to soften that blow.
But for lots of people there's going to be a reduction in wage and -- or business taxes that will offset the increase in property taxes.
Have you done an analysis on the wage owners? And I know this is somewhat tedious, the wage -- the non-resident wage owners and the resident wage owners, that would simply allow you to determine the percentage of individuals who would, in fact, live in the City that could potentially get substantial or minimal 360 Whole - 5/12/04 - Operating Budget increases in real estate versus those individuals who live outside of the City who would not -- that would not impact them, although they would get reductions in wage tax?
That is knowable. I don't know -- I don't -- And I think it's in the report that E-Consult gave to the Tax Commission which is now in Volume III, but I can't summon that number up from memory. It is known. The City knows what percentage of the tax base is from non-residents and what percentage is from residents?
I know that. I know. My question -- And if I didn't form it right, I'm sorry.
My question is, when you did your analysis, the... I guess because you were consultant to the Tax Reform Commission?
And supported the documents. When you did your analysis, did you take into account the percentages of non-residents versus residents, in analyzing the recommendations...
In modeling the potential impacts, we did look into the issue of differential effects of residential and non-residential. And it turned out that, in terms of measuring the overall supply side impacts, it didn't really matter. If you broke it out separately, you got pretty much the same answers than if you broke it out -- than if you didn't. That doesn't mean it couldn't be done and shouldn't -- and, you know, it could be done for the questions that you're asking. We weren't asking that question. We 362 Whole - 5/12/04 - Operating Budget were trying to just capture the overall supply side effect. And what we learned was, it didn't really matter whether you looked at it separately or together for that question. But it may well matter for other questions. COUNCIMLAN CLARKE: Yeah. I mean, all right. It does.
You're talking to a politician. Where a person lives is always relevant.
So let me understand. I guess the bell didn't ring, so I guess I'm going to keep talking. Your analysis that real estate revenue will not grow in a substantial level immediately, is that based on... What? I mean, we recently -- And I know a lot had to do with the interest rates, and 363 Whole - 5/12/04 - Operating Budget some other factors, where we had -- and we were wrestling with the issue in Council over the last couple of years about substantial increases in individual's real estate tax bills. And I saw, frankly speaking, a more aggressive increase in real estate values, subsequently taxes, than I've ever seen in job growth. And my concern is that, as aggressive as we are recommending that these tax cuts come into play, I don't think that the job growth will in any way, shape or form meet the potential growth in real estate taxes. Do you believe that to be the case? Do you really think that, you know, under this particular strategy, that the job growth will be that aggressive that will then create an environment where you will not have to increase the rate to meet our budget projections?
I think over the long haul, yes, there will be growth. And it's 364 Whole - 5/12/04 - Operating Budget not just jobs. There will be growth in general business activity and growth in property values. But let me argue just a little bit with the premise to your question, in that we're not talking about dramatic changes out of the blocks. We're not talking about a huge reduction in business or wage taxes in the first year.
So over time the cuts in business and wage taxes that have been recommended will get larger, though there's a cumulative effect of them, so they do become big.
But we're talking about locking -- We're talking about locking in those reductions. We're not talking about a plan. We're talking about a tax...
Well, I addressed that a few minutes ago, again, I think while you were out of the room. But I have -- I'm not aware that anybody is seriously suggesting any absolute lock-in of tax rates. I think that there was a lot of discussion about it Monday, but if you go back and look at the Tax Reform Commission report, they said, here's what we think you should do to reduce taxes. They didn't say lock it in. They didn't say you can't come back and revise it.
When the -- When the tax subcommittee of the 21st Century Review Forum looked at it, we never thought that we were talking about some sort of automaton tax policy that was going to be put in place for ten years. So, I'm not aware that anybody has made that 366 Whole - 5/12/04 - Operating Budget suggestion. I know some people have opposed the idea, but I have yet to see anybody who's recommending it. So, I'm not sure who those people are arguing with. You know, what you're talking about here is enacting a schedule of changes you intend to make in the tax rates.
No; I do understand that. But I also understand that you can pass a bill, another bill, in a year or two years or three years. One of the, I think, big appeals of the approach that the Tax Reform Commission suggested is that you can proceed slowly. And if you get off track, you can fix it. They're not talking about... You're 367 Whole - 5/12/04 - Operating Budget not falling off a cliff. You're not dramatically changing rates overnight, so there will be an opportunity for the Administration and this Council to monitor how it's going, and make corrections if it's not... if it's not going as anticipated.
We'll go to the second-go around because we have other Council members that want to be recognized.
Madam President, I've learned if the bell doesn't ring, you keep talking.
I know. The bell did go off. The Chair recognizes Councilman Kenney.
Thank you, Madam President. Mr. Crawford, is the Tax Reform 368 Whole - 5/12/04 - Operating Budget Commission recommending that we raise real estate tax rates?
Okay. And the only way real estate tax rates go up, as I understand it in this City, is that the City Council of Philadelphia raises those rates; is that correct?
So the only increase in property tax revenues as a result of --
Chair recognizes Councilman Nutter for a point of information.
I'd only answer that, Councilman, the taxes of residents in real estate have gone up every year since we've been here.
We're talking 369 Whole - 5/12/04 - Operating Budget about rates.
Just on the rate issue, the Reform Commission is not recommending we raise real estate tax rates. And the only way that real estate tax rates get raised is by us raising them. It's a safe statement.
So the increase -- The increase in potential property tax revenues comes about as a result of the increase in property values.
An increase in property values. And in the event that an increase in property values skyrocket in this City, we do have the ability under state Constitutional amendment that was passed... God, I guess back in 1983, '84, to give relief, if we want to, if we need to, to 370 Whole - 5/12/04 - Operating Budget long-term owners like you describe who don't have income or don't -- aren't working and getting the benefit of the wage tax reductions and don't own businesses. We have the authority, and hopefully at the time the capacity, through a revival in our private sector economy, to give those kind of tax relief to long-term residents who may be experiencing astronomical rises in their real estate taxes -- not their rates, the value of their homes, in the event we need to protect them. So, if I were to pass or we were to pass these rates, these 12 or 13 recommendations, and I'm the average homeowner in the City, do I have to be fearful of losing my home as a result of increased real estate taxes?
I get the impression that somehow there's this belief out there, this view out there, that somehow this passage of these bills, 371 Whole - 5/12/04 - Operating Budget reducing wage and business taxes, are going to drive people to the poorhouse, and they're going to have to sell their homes because they can't pay their real estate taxes. I don't think that's -- that's... I don't think it's accurate, and I don't think it's a fair characterization. Because we've had, as Councilman Nutter said, increases in property taxes as a result of increase in assessments and increase in property value, even in an economy here in Philadelphia where we're losing jobs and residents. If -- If -- If theoretically we pass this, and property tax values -- property tax -- property values go up and taxes go up as a result of that, it would be great to have additional job growth and residential retention and attraction in addition to the increase in property values, which all could be accomplished, hopefully, and I think reasonably, with the passage of these reform recommendations. Is that a misstatement? 372 Whole - 5/12/04 - Operating Budget
Secondly, if I'm -- Theoretically, if I'm an 800 -- If I'm a C.E.O. of an 800-person company in Cleveland, and I'm looking to move to the Philadelphia region -- it's one of the regions I'm examining -- what are some of the issues in my due diligence would I examine to determine whether or not it makes sense for me to bring those 800 jobs to the Philadelphia region or in any region?
Well, there are a number of considerations. I think you would be interested in the work force that was available in the area, the area broadly defined. It wouldn't have to be the City of Philadelphia.
But the work force in the region. Because it's well known that workers move across the county lines. Most businesses would be thinking 373 Whole - 5/12/04 - Operating Budget about where the customers were. Often businesses want to be close to their customers. They would be thinking about a variety of lifestyle issues, about where people want to live; and they would be thinking about -- In fact, they'd have a fiduciary responsibility to think about the impact on their tax liabilities associated with choosing one venue over another. It's not... You know, it's not the only consideration that would come up in location. But as -- as I was saying earlier, once you get -- once you get a firm interested in the area, then the choice of the location within the area...
My question -- My question is what -- Philadelphia -- Based on those set of -- those set of standards or criteria, the Philadelphia region fares pretty well, I would think, as a region.
When it comes to 374 Whole - 5/12/04 - Operating Budget the consideration of moving that Cleveland firm to Philadelphia with 800 employees. Is that a fair statement?
Now, within the region, what sets Philadelphia apart from that pretty attractive, positive region? What happens to Philadelphia when that view starts to get microscoped down to the specific region, and making a choice between Gloucester, Burlington, Montgomery, Chester, Delaware or Bucks and Philadelphia Counties? What happens to Philadelphia in that analysis?
As the microscope focuses, the tax differences get larger and more important, because that's an important dimension in which there really are differences across the region.
So in addition to trying to scrimp, and fight, and push and save the companies that we have here already, with varying degrees of innovative 375 Whole - 5/12/04 - Operating Budget tax incentives, changing our tax situation and status in Philadelphia would take all the need for that TIF, KOZ, KOIZ, KOEZs, whatever the letters are, would diminish the need for that, and would also put us on a better level playing field with the five or six or seven county SMSA around us. Is that safe?