Committee Hearing, February 24, 2004 (part 1)

Thank you all very much. Madam President, thank you for calling these hearings. Good afternoon I am Al Taubenberger, I'm President of the Northeast Philadelphia Chamber of Commerce. It's a private business association of nearly 1,000 members, the greater, greater majority of which, 85 percent or higher, are small employers, 1 to 5 or single shop owners, very much middle class. I'm very honored, as well, to be elected Vice Chairman by this Commission. While most of you already know and supported the creation of the Philadelphia Tax Reform Commission, I want to provide a brief statement on our mission and operations for the public record. The Commission was established as an independent public body of the City by the 122 032404 - WHOLE - RES. 040076 Home Rule Charter amendment with over 80 percent of the voters supporting our creation. We were made up of members, 4 appointed by 5 the Mayor, 4 appointed by the City Council 6 President, 1 appointed by the City Controller, 7 and 6 appointed by business and community 8 organizations. Our work was guided by a 9 23-member Advisory Committee of educational 10 institutions and nonprofit and community 11 organizations. We held approximately 150 12 hours of public hearings, round tables, town 13 meetings, Commission and working group 14 meetings to reach our conclusions, testimony 15 and Commissions' research for over 30 experts in government, the nonprofit and private sectors of academia directed our work. To effectively sort through the massive amounts of research material and policy options presented to us, we created small working groups to focus on specific areas of taxation. These groups were the real estate working group, the business working group, wage tax working group, revenue and spending working groups. All of these groups 123 032404 - WHOLE - RES. 040076 presented recommendations and rationales for their recommendations to the entire Commission for consideration in August, 2003. These recommendations were reviewed, debated, and in some cases amended presented to the entire Commission again in October as an interim report that was adopted to 1. 9 We have Chairs from each group who 10 will go over specific recommendations and take 11 questions. And I thank you very much. 12

Thank you. 13 The Chair recognizes Councilman 14 Rizzo.

Mr. Chairman, I understand just by your report that there was a descending vote?

Yes, there was.

Who was that?

That was Jonathan Stein.

Who is scheduled to come in tomorrow to testify.

Thank you,

Good afternoon, 124 032404 - WHOLE - RES. 040076 Madam President and Members of Council. I'm Andrew VandenBrul, a proud member of the Philadelphia Tax Reform Commission. I served on the Commission's business tax working group, and it's in that capacity that I am here before these now six members of the Committee of the Whole today. I'd like to thank you for your interest in the Tax Reform Commission's proposals and also encourage you to share our comments and commentary and dialog with your colleagues. Currently, Philadelphia's business taxes do a number of things but, first, they chase jobs and residents from the City. Secondly, they discourage employers from locating in and families from coming to Philadelphia, and also they leave scars of decay on every neighborhood of the City. Philadelphia's leadership now has before it a well-reasoned and achievable plan to fix what is wrong with our current tax system. This comprehensive and unified tax package provides both City Council and the Mayor with an historical opportunity to 125 032404 - WHOLE - RES. 040076 dramatically reduce the wage and net profits tax, gradually phase out the business privilege tax, including the onerous gross receipts tax, insure that real estate taxes are levied in a way that is understandable and fair, promote business growth and increase residency throughout the City and create jobs throughout the City and increase investment in each community. Having worked tirelessly with my fellow Commissioners and Advisory Committee Members to craft a package of fiscally and socially responsible tax reform recommendations, I ask you to pass the Commission's entire package because Philadelphia, quite simply, cannot afford to allow the current structure to further debilitate this vibrant City. It is uncontested that Philadelphia's tax burden is higher than that of any of its competing jurisdictions. We tax what others do not tax. What we tax, we tax higher than others. And what we tax, we tax unfairly. It should, therefore, not come as a 126 032404 - WHOLE - RES. 040076 surprise that the City has difficulty competing for and retaining residents businesses and jobs. Substantial evidence from econometric analysis, surveys, and abundant anecdotal evidence indicates that the City's high tax burden has significantly reduced the size of it's economy. Philadelphia's unusual high reliance on business and personal income taxes is far more damaging to the economy than more traditional revenue structures. 5 percent for the 10 largest US cities. 3 percent elsewhere. The gross receipts portion of the business privilege tax which has received much criticism is higher than the average southeastern Pennsylvania suburb. Only three of the nation's largest 20 cities tax the net income of corporations, and one of those is 127 032404 - WHOLE - RES. 040076 now phasing out the tax. So we're finding ourselves standing alone with this onerous and outdated tax structure. Recommendations for business changes in the Commission's final report include changes to the net income portion of the business privilege tax. The first of those is to adopt what is called single sales factor apportionment. This recommendation takes the current apportionment methodology which includes components of property, payroll, and sales, and eliminates the property and payroll components. The results is full reliance on the sales factor to determine what portion of the business' income is subject to the Philadelphia business privilege tax. This takes away the bias towards reducing your Philadelphia taxes by reducing your property and payroll in Philadelphia, as those are no 21 longer factors. For most Philadelphia-based businesses, this change to single sales factor would result in an immediate reduction of their business privilege tax on net income. Conversely, however, net income tax on 128 032404 - WHOLE - RES.

040076 out-of-City business would likely increase for those that are already taking advantage of the City's market for goods and services, thus defraying at least a portion of the cost. So this recommendation is immediately, at least partially, self-funding. And we've talked about other aspects of funding and we can get into those a little further. The second recommendation on the net income portion of the business privilege tax is to grant un-incorporated business -- and these are partnerships, limited liability companies, and sole proprietorships which, again, tend to be the smaller businesses. These would grant those un-incorporated business a deduction for payments made to their partners, members, or sole proprietors when they calculate the business privilege tax. The object of this recommendation is to level the playing field between incorporated businesses and un-incorporated businesses. Right now, incorporated business are allowed a deduction for the salaries that 129 032404 - WHOLE - RES. 040076 they pay to their employees. However, un-incorporated business who pay income out to their partners and their members are not allowed that deduction. The recommendation is to initially allow a 50 percent deduction for such payments and further increase the limit by 9 percentage points in each subsequent year 10 until we get a hundred percent deduction allowed. And the results of this recommendation is to tax un-incorporated business owners similar to other employees by deducting compensation from the business privilege tax and instead subjecting them to the net profits/wage tax. Importantly, by phasing in the deductions, the Commission retains its commitment to a fiscally responsible approach to tax reform. Further, the fiscal impact of this recommendation is narrowed by other complimentary recommendations such as the phase out of the business privilege tax in its entirety, which I will touch on in a moment. The third recommendation for the net 130 032404 - WHOLE - RES. 040076 income portion of the business privilege tax is to lengthen the net operating loss carry-forward period. Right now, companies that lose money in one year are allowed to carry those losses for it for up to three years. Obviously, in this downturn in the economy, we've seen the effects this can have on businesses that made money a few years ago and maybe losing now and certainly have high hopes of making money again in future. They should be entitled to those net operating losses to smooth out their income over a longer period of time. Currently, the City's carry-forward period is only three years, at which point those losses expire. These losses are especially important to cyclical businesses but also to start-up technology, biotech businesses, those businesses that the City through its other economic development efforts are actively trying to recruit and develop in the City. Right now, Philadelphia's three-year NOL carry-forward period leaves it far behind nearly every other jurisdiction, including Pennsylvania, 131 032404 - WHOLE - RES. 040076 Delaware, and New York who all have a 20-year carry-forward period, and even New Jersey which now has a seven-year carry-forward period. Extending the carry-forward period from 3 to just 10 years would remove one barrier for attracting and retaining these vital start-up and technology business, many of which emanate from the City's great research universities. Further, the 10-year carry-forward period does coincide with eventual phase out of the business tax, as we've proposed it. There are a couple of administrative reform recommendations that touch on the issue of fairness and equity. One is to change the current payment structure, to move from one estimated payment -- on April 15 right now companies have to pay for next year's tax, a hundred percent of it right now -- and move to a two-payment system.

Obviously, this is a cash flow issue, not only for the City, but for the businesses that have to pay for the privilege of being in Philadelphia and then pay ahead of time when they could otherwise 132 032404 - WHOLE - RES. 040076 use that cash. The second one is to unify the statutory refund and assessment periods. This, again, is a fairness and equity issue. Right now, the Department of Revenue has six years to sue for collections of unpaid taxes, and none of us dispute the need for those who have taxes properly due to pay those. However, the Department has six years to sue for back taxes; taxpayers only have three years to seek refunds. Now, this is as much a perception issue as anything else. This certainly creates a perception of a business unfriendly atmosphere when the City has three more years than the taxpayer to resolve these issues. The Commission is proposing to unify the assessment and refund period of three years -- and again, this does not in any way infringe on the Department's ability to sue for collection of taxes that were properly determined to be due, it just have not been paid. And here's the big recommendation on the business privilege tax that I've been 133 032404 - WHOLE - RES. 040076 alluding to and you've seen in the report. And that is the incremental -- I stress incremental -- elimination of the business privilege tax over years. The Commission 6 is proposing to gradually eliminate both the 7 gross receipts portion of the tax and the net 8 income portion of the tax. And all the 9 specifics are laid out in the report issued to 10 Members of Council. The Commission agreed with the projected reductions in the gross receipts taxes that are currently laid out in the Five Year Plan and have followed on by suggesting that we continue to reduce the gross tax beyond that until it is eventually phased out over 10 years. 5 percent over the next 10 years. The combination of the business privilege tax's high rate and the imposition of the tax on both net income and gross 134 032404 - WHOLE - RES. 040076 receipts make it unique among local business taxes and clearly a significant competitive disadvantage when attracting or retaining businesses to Philadelphia. To put Philadelphia on equal or, hopefully, better footing with is suburban neighbors as well as neighboring states, we feel this tax must be eliminated. The Commission's proposal, again, uses a phased approach to remain fiscally responsible and to allow the anticipated economic forces of business and employment growth to take hold as sources of supplemental revenue. By enacting these business tax changes in conjunction with other components of the Commission's overall tax package, we believe that Philadelphia will grow, will create jobs, and retain more businesses in the City. Econometric analyses indicate that enacted these recommendations as part of a comprehensive tax reform package will create more than 47,000 jobs in Philadelphia by 2010. And I believe we have some experts that will 135 032404 - WHOLE - RES. 040076 continue on this line of testimony today. By enacting these recommendations, we can stem of tied of business loss in Philadelphia and once again open the City business growth, job creation, retention and vital new investment in neighborhoods throughout the City. Again, I appreciate everybody's attention and will be happy to respond to questions.

Thank you. The Chair recognizes Councilman Goode.

Thank you, Madam President. Commissioner, the Commission proposes to phase out the business privilege tax over a 10-year period up until 2015. By phasing out both the gross receipts and the net income portion both gradually over that period. What would be the financial and economic implications of phasing out one portion before the other? In other words, phasing out the gross receipts portion over a five-year period and then phasing out the net 136 032404 - WHOLE - RES. 040076 income portion.

Well, I believe that through the research that we had performed by Econsult, they had taken a look at the mix of proposed reductions, whether it's on the gross receipts tax, the net income tax, the wage tax, and the proper mix. I don't know that the report, as issued, anticipates one versus the other.

I didn't say one versus the other. I said one before the other.

It certainly have an impact we did not address in the report.

The question is, what are the financial and economic implications of phasing out the gross receipts portion and then the net income portion? Gross receipts over five years and then net income over the following five years?

I don't know. It's certainly something that we can address. The issue, I guess, would be the effect that -- this is econometric analysis. I wish I could 137 032404 - WHOLE - RES. 040076 do this. The next panel is clearly going to discuss this. I think that it's right for us to respond to this. I just think that we have the economists who can speak to that issue.

Thank you.

Any other questions? (No response.)

Thank you very much.

Good afternoon. My name is Brett Mandel, and I chaired the Tax Reform Commission's Real Estate Tax Working Group, and I will summarize its recommendations here that deal with real estate. The assessment system reform recommendations dominate our real estate tax recommendations. Recommendation one would separate the property assessment and appeals process. To address citizens' concerns about the impartiality of appeals, we would create a seven-member Property Assessment Appeals Board of which qualified individuals appointed by 138 032404 - WHOLE - RES. 040076 the Mayor would be separated from the Board of Revision of Taxes. The current system of Court of Common Pleas judges appointing the BRT would continue. Recommendation No. 2, we would establish a taxpayers advocate. This would be a new position in the government, nominated by the Mayor and approved by City Council to advocate for property owners and appeals, improve the public understanding of the assessment and appeals process, monitor the quality of the assessment process, and review both the BRT assessment practice principles and the Appeals Board's practices and procedures. Recommendation No. 3, we would establish accurate land structure values for all property parcels. As real estate assessments are integrated to an equitable and well-functioning local tax system, we would establish accurate land and structure values for all property parcels in Philadelphia through more comprehensive and accurate data collection. This effort could funded by the 139 032404 - WHOLE - RES. 040076 City's Productivity Bank, other savings related to proposed changes in the real estate tax or through a one-time sir charge on real estate tax bills. In recommendation No. 4, we would adopt a set of assessment practice principles that the BRT should adopt, publicize and annually update. It would include a requirement that all assessors be state certified, a commitment not to create or preserve inequalities by artificially capping assessments, a commitment to annually reassess all properties to reflect every increase or decrease in value, a commitment to continually improve the quality of the data collected about the condition of each property, a commitment to increase reliance on computer modeling and information management systems, a commitment to incorporate advanced regression technics, computer calculated neighborhood indices, GIS mapping, and computer-assisted mass appraisal products, and finally a commitment to provide more information about how assessments are performed when assessment 140 032404 - WHOLE - RES. 040076 notices are sent out. Recommendation No. 5, we would eliminate fractional assessments. The BRT should assess properties at 100 percent of market value instead of the current goal of 70 percent, removing an extra layer of complexity from the process and making it easier for property owners to evaluate accuracy of their assessments. Other proposed changes to the property tax system would guard against unreasonable increases in property tax bills as a result of this step. For example, Recommendation No. 6, we would implement the property tax buffering program to allow for gradual adjustment to any future changes in a property's assessed value, the Commission rejects all types of phasing caps and freezes in favor of recommending a three-year averaging program wherein the real estate tax is levied on the average of the assessed property value from the past three years. We would then adopt a budget-based property tax system. It will be a system of budget-based property taxes beginning in 141 032404 - WHOLE - RES. 040076 Fiscal Year 2006 where we would shift from a assessment-driven system to a budget-based system.

The Commission recommends creating a system of budget-based property taxation by legislatively obligating the Mayor and City Council to determine all annual real estate tax rates after setting the budget and reviewing, thereby maintaining a steady revenue stream under control of local government. This system would end of revenue windfall that currently occurs when property assessment rise and the real estate tax produces more than originally projected in the budget. This recommendation will be effective beginning in FY '06. We favor the phasing in of land value taxation in Philadelphia. Land value taxation should be phased in until at the end of 10 years, 50 percent of all real estate tax revenues are generated from a tax on the value of land, which would be an increase from the current 22 and a half percent, and 50 percent 142 032404 - WHOLE - RES. 5 percent. To achieve this target, the tax imposed upon structures would gradually be reduced and the tax on land would be gradually increased. The Commissioner reviewed extensive research and testimony demonstrating that land value taxation maximized the economic development goals when implemented in conjunction with other types of tax and policy reform. Therefore, land value taxation complemented by the other recommendations of this Commission would be consistent with the Commission's mission to improve the City's competitiveness in a fiscally and socially responsible way. The Commissioner also confirmed the practicality of accurately assessing land values and determined that the issue of tax delinquency would not threaten attempts to impose land value taxation in a revenue neutral manner. Land value taxation which encourages maximizing land's potential, will 143 032404 - WHOLE - RES. 040076 encourage private investment in the City and help reduce blight and abandonment. We also recommend a series of property tax relief recommendations. For example, we would expand the efforts to address property tax ability to pay. Although the net worth of all property owners increases when values rise, those living on fixed incomes often find the corresponding increase in property taxes difficult to afford. Therefore, the Commission developed this following recommendation to address this concern. First, we would implement a quarterly payment system, allow homeowners to pay in four installments for the fiscal year instead of one lump sum. This system would save the City millions of dollars in borrowing costs as a result of tax revenues starting to be collected at the beginning of the fiscal year. This savings, incidentally, is not countered in any of our estimates of the cost of the Tax Reform Commission's, so take this off the top. 144 032404 - WHOLE - RES. 040076 Additionally, we would apply tax payments to the City's current year of tax liability. Applying any payments received to this year's liability would help low-income, elderly residents qualify for the State's property tax rebate program even if they have outstanding tax delinquencies from past years. Finally, in this recommendation, we would consider developing a low-income property tax relief program similar to what we have in the Water Department, the water relief assistance program, to freeze delinquent tax, real estate bills of low income homeowners and provide a tax credit or incentive to remain current in their bills. We would also advocate for increased property tax relief from the Commonwealth of Pennsylvania. We would advocate that the Commonwealth should join 31 other states in providing low income property owners with an income tax credit calculated as a percentage of their property taxes paid in excess of a certain percentage of household gross income. That's referred to as a circuit breaker 145 032404 - WHOLE - RES. 040076 program. Additionally, we would hope that the State would raise the maximum eligibility requirements for participation in low income property tax relieve programs.

We would complement all of this by increasing awareness about the tax relieve programs that we do have. Right now, we found that certain taxpayers don't know about the programs that we do offer, so we would expand informational property tax outreach programs and provide additional counseling for low income tax delinquent property owners. In terms of the split between residential and commercial rates, right now the Pennsylvania Constitution obliges us to tax uniformly. We would suggest that we should advocate for a change in the Pennsylvania Constitution to allow for variable real estate rates, which would mean that we could tax real estate for commercial purposes more or less than real estate for residential purposes. Consultant research requested by the 146 032404 - WHOLE - RES. 040076 Commission indicated that commercial and industrial land owners are less sensitive to increases in the real estate tax than to other types of business taxes. Therefore, other business taxes could be more quickly reduced if a higher tax on commercial or industrial real estate was levied. With regard to the real estate transfer tax, while we recognize it is one of the highest in the country, in the current economic climate, we recommend that other taxes receive priority for scarce resources available for tax reduction and therefore recommend that we do not reduce the real estate transfer tax at this time. Although we do recommend technical changes to the real estate transfer tax. We recommend that the changes would restrict a taxpayer's ability to structure real estate transactions to avoid being subject to the tax, most specifically. And finally, with regard to real estate, we would eliminate the real estate non-utilization tax. This tax, which is designed to penalize the owners of unused, 147 032404 - WHOLE - RES. 040076 deteriorating property has never been collected. In fact, after its adoption, its Constitutionality was quickly challenged and the Court barred the City from collecting the taxes. Rather than allowing this uncollectible tax to remain on the City's books, the Commission would recommend eliminating and relying on the implementation of land value taxation and increased enforcement efforts by the Department of L&I to achieve the goal of placing pressure on owners of under-utilized and deteriorating real estate property to improve their properties. The Chair of our working group on wage tax was not able to be with us; that's Ray Jones. So with your permission I will summarize our wage tax recommendations as well.

Please do.

To begin with on the wage tax, we would adjust the wage tax and earnings tax rates on January 1st. To promote greater tax system simplicity, the Commission 148 032404 - WHOLE - RES. 040076 recommends that the City adjusts these rates the first of the Calendar year instead of the first of the fiscal year. This current timing has resulted in an undue compliance burden for businesses that are required to file annual wage tax reconciliation forms with the Department of Revenue and for individuals who are required to file annual earnings tax reconciliation forms. The change in effective date of the rate reductions will ensure that the requirements to file wage tax and earnings tax forms imposes no significant additional reporting burdens on individual business. The big recommendation with wage tax would be to accelerate local income-based tax reductions. The Commission recommends that City accelerate its program of incremental reductions in the local income-based taxes, the wage tax, the earnings tax and then profits tax, to more rapidly improve the competitiveness of the City's tax structure. The Commission recommends that without any Commonwealth assistance, by 2014, the rates will be reduced to an equal rate of 3.25 for 149 032404 - WHOLE - RES. 040076 residents and 3.25 percent for non-residents. However -- and this apropos of Councilman's Goode's question -- if the City does receive support from Harrisburg for additional wage tax relieve, we would have adopted a more aggressive program that would cut the resident rate to 3.0 percent in 2014 and the non-resident rate for 2.5 percent. That would reflect the fact that if were getting assistance from the Commonwealth, we should help City residents and suburban residents at the same rate. If we are not getting assistance from the Commonwealth, we would help residents more quickly than non-residents. With regard to low income tax relieve, as Commissioner Schwartz mentioned in his conversations with Councilman Cohen, we did lot of discussion about low income relieve and determined that the best we could do locally was, one, provide jobs for low income residents, so that's why most of our recommendations are geared to create job growth. 150 032404 - WHOLE - RES. 040076 Additionally, the Commission recommends that the City support expanded efforts to promote participation by low income Philadelphians in federal and state programs designed to reduce the tax burden on low income households, including the federal earned income tax credit and the tax forgiveness program under the Pennsylvania personal income tax. Specifically, the Commission recommends that City invest at least a million dollars per year in the campaign for working families to support additional outreach to low income households, free and low cost tax preparation services, a new focus on expanding participation in tax forgiveness programs at the State level. As a final recommendation, we do note the other taxes of the City that we decided not to touch. And specifically, the Commission recommends that the sales tax, the parking tax, the amusement tax, the vehicle rental tax, the hotel room rental tax, the liquor sales tax, the mechanical amusement device tax and the hotel use and occupancy 151 032404 - WHOLE - RES. 040076 taxes rates not be reduced at this time. We concluded that if the comprehensive analysis of all taxes imposed in Philadelphia, the Commission has reserved our scarce resources for the taxes that are really hurting the City. These taxes, while not so many people love them, should receive a secondary priority. Those are the recommendations of the real estate tax group and the wage tax group. I'm more than happy to answer any questions you might have.

Are there any questions from Members of the Committee? (No response.)

Let me, on behalf of my colleagues here, thank you, Council President Verna and the Councilmembers who are here, for joining us in this initial presentation. There's, obviously, a lot here. There are issues involving, for example, the land tax that we didn't get into. Let me suggest that as you need information, we need to structure sessions like this in which some 152 032404 - WHOLE - RES. 040076 of the more complicated proposals that we have can be given a full airing. We have a reasonable amount of time between now and the end of nay when the final budget is passed. We do hope that that budget reflects the first year of the recommendations that we are making to you today. Thank you again.

I believe there are two other panels to testify. Thank you very much, Mr. Schwartz. Mr. Dwyer, are you going to be the first to testify? Please identify yourself for the record and proceed with your testimony.

Good afternoon, Madam President and Members of City Council. Thank you for the opportunity to appear before you today. My name is Christopher Dwyer. And for the past, year I was Executive Director of the Philadelphia Tax Reform Commission. In that capacity, I recruited professional staff, volunteers and consultants whose research, with support with academia, the business community and government, supported the 153 032404 - WHOLE - RES. 040076 Commission's deliberations. Under my direction, our staff prepared the Commission's findings and recommendations, drafted implementing regulations and legislation and reviewed the consultant research included in the Commission's final report. Today, I will discuss the Commission's research with specific attention to tax reform's fiscal impact, its expected economic benefits and potential strategies for lessening the plan's impact upon the City's finances. Although the Home Rule Charter prohibited the Commission from recommending spending reductions, cost savings, or service reductions, the Commissioners took seriously the Charter's mandate to shape fiscally and socially responsible tax policy. They considered the budget impact every step of the way and supplemented their 28 core proposals with suggestions for financing tax reform and other ideas that would complement the tax reduction package.

(Inaudible) 154 032404 - WHOLE - RES. 040076

I'll step back. Yes, the Home Rule Charter amendment that created the Commission, that specific language stating that the Commission shouldn't recommend spending reductions, cost savings or service reductions to finance tax reform -- because the Commissioners considered the fiscally and socially responsible aspect of the Charter so important, they did consider the budget impact in ever scenario that they looked at. So the budget numbers were always factor in considering different scenarios. And aside from the tax reform recommendations, we have sections of our report that include financing ideas that policymakers could grapple with and also complementary recommendations that the City might use to work together with tax reform. So they're not part of the formal tax reform recommendations, but we did submit ideas for your consideration. I wanted to mention the three major pieces of original research that the staff either performed or commissioned during the past year. These three research projects were 155 032404 - WHOLE - RES. 040076 done in the context of a thorough review of existing economic literature, quantitative analysis done by the staff, and input from experts, government officials, and citizens. The three research projects were, one, staff survey with the assistance of the City Revenue Department where we looked at a random sample of mostly small and medium-sized businesses in neighborhoods throughout the City. We wanted to provide an independent look at the concerns of smaller businesses outside Center City to ensure that they were given equal weight with those of larger downtown firms. We supplemented that study with some focus group research by Dr. Alexis McGill, visiting instructor in African American Studies at Wesleyan University to ensure that the voices of the smallest businesses and minority-owned businesses were heard as well. Among the most notable findings of this survey were that for profound and substantially equal anger about both the business privilege tax and the wage tax, and 156 032404 - WHOLE - RES. 040076 that included both the gross receipts and net income portions of the business privilege tax. Both were widely seen and about equally seen as creating a high burden, as unfair, and as too complicated. All three of the questions that we asked. Those two taxes or three taxes, if you think of the business tax as having two parts, those were the ones of most concern. " And dramatically we found that just a fraction, 12 percent, of the businesses we surveyed indicated they would increase activity in Philadelphia in the future. And percent told us they were planning to 23 decrease or eliminate activity here. So again, these were neighborhood businesses in a variety of industries throughout the City, not 157 032404 - WHOLE - RES. 040076 just central business district. Our two other most significant research projects, and these were both commissioned research projects by consultants to the Commission, are Econsult Corporation's report on choosing the best mix of taxes for Philadelphia. This is how we responded to the requirement of doing an econometric or economic impact analysis of the tax reductions. And Richard Voith from Econsult Corporation joins us today and he'll talk about this in more detail. And the third significant research project, also commissioned by us, was by University of Pennsylvania doctoral student Kevin Gillen who's also with us today, called Challenges and Solutions to Real Property Assessment Uniformity in Philadelphia. It was a hard look at the real estate assessment system in the City. And indicated that property assessments here incorrect and unfair compared to other cities and with the rest of the region. So just to summarize our principle 158 032404 - WHOLE - RES.

040076 research findings before I turn it over to our consultants, first of all, on the fiscal impact which the Charter asked us to assess, the fiscal impact on the City budget, in other words, the revenue impact is as the Chair stated earlier just over $17 million in fiscal year 2005. But I should note that because of the wage tax cuts that were introduced earlier this year under Councilman Mariano's bill, those were already going to cost about $5 million. So that $17 million impact is already reduced to 12. And then I would also say that on the business privilege tax, we used the most conservative assumptions possible. So, in fact, we probably are about $4 million over on that side of the equation. 1 million in the first year. In fact, it might only be about 8. Those impacts rise to about 35 million in '06 on an annual basis; 56 million in '07; 84 million in '08. And if we assume that the City would have made no change to the current reduction program, we would be looking at a fiscal impact of 142 million in 2009. 159 032404 - WHOLE - RES. 040076 In terms of the economic impact, which we were also asked to look at by Charter, we were able to measure quantitatively what might occur from wage tax and the gross receipts portion of the business privilege tax cuts. That's what we were able to measure. And we found that growth in the private economy would lead to new tax revenues through 2009 of an estimated $450 million. The important caveat there is that that's the total tax impact. A hundred thirty-seven million of that would constitute new monies for the School District, not the General Fund. But the overall number is 450 million. And this is a conservative and limited estimate because it doesn't incorporate the expected positive impact of single factor apportionment, equalizing the playing field for partnerships and, in fact, the reduction in the net income portion of the business privilege tax. But all the non-econometric evidence indicates those would have positive impact as well. So, you weigh that against the fact 160 032404 - WHOLE - RES. 040076 that the 450 million is just an estimate. The 47,000 new jobs is just an estimate as well. But in many ways it can be seen as conservative. And as I said, economic forecasts are only estimates and, as a result, the Commission did research strategies policymakers could consider to cope with fiscal impact not addressed by growth in the private economy. These included both recurring and one-time options, both local and regional. They're discussed in detail in a section of the report called Financing Tax Reform, and they include maximizing revenue from existing taxes, fines, negotiated agreements and new sources, while at the same time minimizing operating and debt service expenditures to the extent possible. And of course, we also discussed state-wide and regional tax and funding reform options that either have already floated or could be considered. As a last resort, the Commission acknowledges that the City could consider 161 032404 - WHOLE - RES. 040076 increasing the revenue it receives from certain smaller, less economically harmful taxes and shift some of the tax burden from taxes on personal and business income to the property tax base. The Commission found that in the context of the elimination of the major local business taxes and dramatic wage tax reductions and a strong property tax equity and relief program, such changes might be appropriate and manageable. I appreciate the opportunity to speak with you today. I would be happy to either answer your questions at this time or move on to the researchers.

Thank you very much. Are there any questions of Mr. Dwyer at this time? (No response.)

Thank you. Please identify yourself for the record.

I'm Richard Voith, I'm 162 032404 - WHOLE - RES. 040076 Senior Vice President and Principal of Econsult Corporation, a small firm based in University City. Good morning, Madam President and Members of City Council. Thank you for the opportunity to discuss the issue of Philadelphia's tax structure. Last year Econsult was retained by the Philadelphia Tax Reform Commission to conduct an econometric study of the likely impacts of potential changes in tax rates of the City of Philadelphia. Econsult's report on that study was published as a supporting document when the Tax Reform Commission released their report. The dominant view among policy analysts regarding the effect of inter-jurisdictional differences in taxes and services is that businesses, population, property values all decline in areas offering unattractive mixes of taxes and services. That is, businesses and populations will vote with their feet when confronted with a tax structure and service levels that are not 163 032404 - WHOLE - RES. 040076 competitive with surrounding areas. As a result of this phenomenon, the relationship between changing local tax rates and local tax revenue may not be represented by a simple formula where one multiplies the new rate times the old tax base. When a tax falls by X percent, the tax revenue may not necessarily fall by X percent. Rather, most economists believe that tax revenue is likely to fall by less than X percent. For example, a decrease in a local wage tax is expected to result in more jobs and more wages and salaries. Economists refer to such a phenomenon as the supply side effect. Now, there's a lot of debate, read skepticism among economists of whether federal taxes have supply side effects. There's really widespread agreement that local taxes do have supply side effects, and it's for the simple reason it's much easier for an employer to leave a City or a person to leave a City than it is to leave a country. Now, while economic theory clearly establishes the direction of the impact of 164 032404 - WHOLE - RES. 040076 lower local tax rates on tax bases, it really doesn't establish the size of the effect. When a tax rate falls by 50 percent, for example, its corresponding base should increase, but by how much? If the base increases by a hundred percent, the tax revenue would be unchanged. If the base increases by less than a hundred percent, tax revenue is going to fall. So the purpose of our study, really, was to shed some light on this issue by conducting an econometric analysis of historic data to estimate the size of the supply side effect, if any, relating to changes in Philadelphia's wage tax, property tax, and gross receipts tax rates. We then used those estimates as the basis for a simulation model that we could use to assess the likely impacts of tax changes. Now, our econometric evidence really yielded consistent evidence that reduction in tax rates expand the base of the particular tax being reduced. If you cut the wage tax, wages and salaries in the City tended to rise. 165 032404 - WHOLE - RES. 040076 Changes in wage taxes and gross receipts tax rates also have cross base effects. That is, that when you reduce the wage tax rate or, let's say, you reduce gross receipts tax rate, it generates greater wage and salary growth so the wage tax base actually gross in response to a cut in the gross receipts tax. Finally, reductions in both the wage and gross receipts taxes significantly increase employment in the City of Philadelphia.

We analyzed the implication of the Tax Reform Commission's proposed phase reductions of the wage and gross receipts tax rates and found that together, by 2010, they resulted in additional 47,000 jobs, increased total wages and salaries generated in the City by 9 percent beyond the currently expected level, increased property values for commercial and homeowners alike by 11 percent beyond the currently expected level, and they reduced the cumulative tax revenues available to the City, this is again in 2010 accumulatively, by $164 million. These results suggest that there are 166 032404 - WHOLE - RES. 040076 large private gains associated with reduced tax rates. They also suggest that the City will need to be able to find $164 million in savings over the next five years to finance the tax cuts while keeping City services at least in their current level. Our work has an implicit assumption that the service levels in the City of Philadelphia are unchanged, despite the change in tax rates. I strong encourage City Council to find ways to improve efficiency of the City government so that you actually can get the private gains associated with the tax reductions. Finally, I'd like to encourage City Council to support Governor Rendell's efforts to reform taxes at the state level. Our analysis shows that the Tax Reform Commission's proposed combination of state and local tax reforms would produce even more jobs, more growth in wages and salaries and more property value increases basically with no reduction in total City revenues. That is, state tax reform would provide enough extra 167 032404 - WHOLE - RES. 040076 dollars to cover the reduced collections of local taxes. With or without state tax reform, I urge the Council to implement the recommendations of the TRC. And thank you very much for the opportunity to speak with you on this issue. If you have any questions, I'll be happy to entertain them.

The Chair recognizes Councilman Goode.

Thank you, Madam President. Mr. Voith, I want to ask the same question I asked the last panel that they actually deferred to you on the matter of reducing or phasing out the business privilege tax over 10 years and phasing both the gross receipts and the net income portion at the same time versus the financial and economic implications of phasing out the gross receipts portion over the first five years and then the net income portion over the next five years.

Okay. I'll take a stab at it. 168 032404 - WHOLE - RES. 040076 The gross receipts tax and the net income tax do affect somewhat different businesses so that those businesses that are most adversely affected by the gross receipts tax would obviously be better off.

Mr. Voith, but my question is really actually the financial implications. And I don't actually need an answer today. You can take a stab at it. I'm not necessarily asking what business would be benefited by it. I'm really interested in if you actually looked at Bill 040023 that introduced into City Council that would phase out the gross receipts portion over five years; and then if you look at the second five years and phased out in that income portion equal graduations, what would be the difference in terms of financial and economic implications?

I'll give half an answer. We actually in our work for the Tax Reform Commission never looked at the net income tax from an econometric point of view, so I can't give you a good answer there. But 169 032404 - WHOLE - RES. 040076 with respect to the five-year phase out of the gross receipts tax, we could do easily and would be happy to do a simulation and provide you with that number.

Thank you.

Thank you. The Chair recognizes Councilwoman Tasco.

The jobs would be as a result of cut, what areas, what kind of job growth are you looking at? What kind of businesses? Is this an increase in the number of employees in existing businesses or businesses coming back into the City? How did you calculate the 47,000 jobs.

We don't have a good answer to that question. We do know a little bit about what industries those jobs would more than likely come in. They would show, we believe, disproportionately in the service economy and to some extent the fire insurance and real estate sector. We believe, although we do not have econometric evidence on this, is that a lot of those jobs would be resulting 170 032404 - WHOLE - RES. 040076 from two things: One is that less incentive for existing businesses to leave, Number One; and Two, for existing businesses to grow internally within the City. It doesn't all have to come from new firms moving in. And lastly, the 47,000 jobs is a number that's relative to what we would expect in the future. And remember our expectation about the future employment levels in the City of Philadelphia is given our current trends are somewhat of a decline, so we'd expect in 2010, which the numbers we're speaking to -- and I can give you an exact perhaps -- for employment to have declined by 15 or 20,000 jobs by then. So that we would expect that our 47,000 number to be above that projected decline by 47, though the total increase in the number of jobs in the City is not 47,000 more than there are today, but rather 47,000 more than we would have expected it to be five years future, if that's a help. One of the aspects of our econometric analysis basically that falls out of it was basically what the actual trend in 171 032404 - WHOLE - RES. 040076 employment levels in the City is. And it is a slight downward trend. We are continuously losing jobs. So our 47,000 growth is against where we would be five years from now giving that declining trend.

I'm not an economist, so I can't figure it out. Wilson, figure that out for me. It seems like so we wouldn't be getting 47,000, we would be retaining some and cutting the loss of some of the those jobs.

A certain amount would be growth but, in fact, if we do nothing now with the econometric analysis says is that we're going to continue on with our relatively modest slight decline. If we do the tax reform, what our analysis suggests is that we're going to get growth and we're going to get an additional 47,000 jobs from what we thought we would have been in the future. It's not going to be 47,000 more than we are now, it's going to be some number somewhat less than that.

How many 172 032404 - WHOLE - RES. 040076 of them are net new jobs? I'm sorry, Councilwoman. I would just like to get to how you're getting 47,000. How many net new jobs?

I can't tell you that number off the top of my head, but let me see if I -- it's probably 38,000 net new over where we stand right now. I can get you that number precisely. Something on that order.

I think we would be interested in how to you get to the 47,000.

I can get you that.

And are you assuming that the savings in the cut of the City wage tax or the business taxes would go to grow the company and, as Councilman Cohen asked, would it go into the pockets of workers? I know the worker would have a benefit because the wage tax they pay, the portion of the employer pays, what would happen -- are you assuming that that would go into the pocket of the worker or would it be 173 032404 - WHOLE - RES. 040076 used to grow the business?

There are two ways of reducing the taxes actually and affecting people. One is that in the case of wage taxes, they have to pay less out of their pocket so you get a little bit more. It's not a big number. The bigger way that I believe tax reform affects workers incomes is by making an incentives for firms and households not to leave the City and, hence, creating a demand of labor so it keep their wages higher. And I think that's the bigger effect. It keeps wages higher and it creates more jobs, and that's the bigger effect rather than just the money left in their pocket because you've lowered the rate. Because if you look at the lowering rate, it doesn't put that much money in their pocket. The big incentive is to keeping the jobs in the area. That should be very helpful for modest income working residents of Philadelphia because it's going to raise the demand for their services.

I had another 174 032404 - WHOLE - RES. 040076 question I didn't write it down. You can go to Michael. I'll come back. I couldn't think of my other question.

Councilman Nutter.

Thank you, Madam Chair. Just a couple questions. As we move through this process and you listen to some of the comments that are made, there seems to be almost two voices coming from within the same government; that on the one hand, we have to change our tax structure, make the City more competitive, reform the crazy array of taxes that we have and reduce the overall tax burden. That was, obviously, the charge of the Tax Reform Commission. On the other hand, it all gets obliterated by, "Well, we can't afford to do this." Can you comment on the "We can't afford to do this," and then I have possibly a further request. I know the Commission itself may technically be somewhat disbanded, but I know the staff is still around and the 175 032404 - WHOLE - RES. 040076 Commission members have I think in the positive sense ignored that particular provision of the Charter amendment. But to the first question, what's your reaction to the "We can't afford to do this" statement.

Councilman, one of the key things about understanding tax reform is what we're actually measuring it against. And what concerns me about not implementing some form of tax reform in the City of Philadelphia is that the City of Philadelphia is systematically losing residents and losing businesses. That's the trend. And it's not a terrible trend. We're not doing terribly. It's just that we're slightly off. We're continually declining. If you don't do tax reform, the outcome isn't being where we are now, it's being behind where we were. So it is my belief that if you invest -- and I'm using the term investment -- if you invest in rationalizing the tax structure and lowering rates and invest in a slightly more efficient 176 032404 - WHOLE - RES. 040076 government, then you can actually put the City in a position where it will grow. One thing, we tend to take the current as where we're going to be five years from now, and that would be a very bad decision if we had done that years ago. 8 We're, in fact, much more worse off than we 9 are now because we've had subsequent years of 10 relatively small declines that accumulate to 11 be relatively large. But I think that the key 12 to tax reform is changing the trend and 13 ultimately, down the road, I think it will 14 payoff economically for the private sector and 15 ultimately economically for the public sector. 16

But can we 17 afford it? 18

It strike me -- and I am 19 not the budget expert that you really need to 20 consult, but if we're talking about a deficit of -- a loss and accumulative of 164 million over the years through 2010, that is a relatively modest amount of money relative to the overall cumulative size of the City budget over five years, which has to be over 177 032404 - WHOLE - RES. 040076 $16 billion. So I would think that we should be able to find those resources. And the other aspect is that the phase-in of the program should really help the ability to forward it, Number One, and take risk away in case you need to make adjustment midstream.

Let me ask Mr. Dwyer and then I want to come back to Mr. Voith. Mr. Dwyer, through the three volumes of the report, and I've looked through each, is there a -- did the Tax Reform Commission -- and I know the numbers are always moving on us so it's difficult at any one point in time. But even if it were against the current fiscal year budget and the remaining, I guess, four years what we passed last year as a five-year plan, have you looked to put on -- I guess it would be a very large spread sheet over -- I mean, some of the proposals have us still taking certain action, say, in 10 years. If you looked at projected revenues, projected expenses, costs of various tax cuts 178 032404 - WHOLE - RES. 040076 anticipated if we're going to look at supply side effects, I mean, have you taken all of the numbers and tried to reduce them to a spreadsheet that shows what we have, what we would do, and what the bottom, bottom line would be on a year-by-year basis over the next 5 to 10 years? If we did the whole -- I mean, the general call maybe from a third voice within the government or outside of the government, do all 13. So in an all-13 package, all the bills go through, has anyone taken pen to paper or computer to circuit board or whatever and tried to look the total impact of the 13-bill package over the next 10 years on a year-by-year basis?

We're done it over the five years of the Five Year Plan that we're living under now, plus taking it out one more year even though the Mayor's plan hasn't been submitted, using the assumption that the same tax reduction program would continue. But we did the fiscal impact and the economic impact separately. We were asked to do both. On , we did the fiscal impact, that's Line 179 032404 - WHOLE - RES. 040076 1; Line 1, , I believe a figure of 5.5.

I like a guy that knows where his stuff is in his own report. A man after my own heart.

That's where we added up the fiscal impact numbers. And then we did a pretty lengthy appendix that described how we got there. Because, as I mentioned, right from Day One, the Commissioners wanted to consider different scenarios, fiscal responsibility, so everything they looked at, particularly on the business privilege tax side, went to the Department of Revenue for some analysis on their part, further analysis on our part. So given the Five Year Plan we have now, it's the four or five numbers I mentioned earlier that begins with 17.1 million in 2005. And then 34.9; 56.4 --

I got that. That's a small chart on . What I'm asking you --

Yes, but it's based on a big one. It's based on one that essentially measured -- our assumption or our finding 180 032404 - WHOLE - RES. 040076 after a lot of research was that the real estate tax recommendations, many though they are, should be revenue neutral. So in the end when we talk about fiscal impact, it's a combination of wage cuts BPT cuts and a corresponding net profits rise because some who are paying BPT on net profits will now only be paying net profits. So there is an underlying spreadsheet. The reason it only goes out for five years on a ten-year program was, in part, because of the Five Year Plan and in part because our economists advised us that really to go even five years out is to some degree speculative. And to go 10 years out, it might be illustrative, but so many things may change that it wouldn't be appropriate to put a lot of stock in numbers beyond 2008, 2009. So, yes, we did the big spreadsheet and we aggregated it and we described it in the appendix, but we didn't formally -- although we ran scenarios, we didn't formally present anything past 2009.

Could you attempt to do something like that and get it 181 032404 - WHOLE - RES. 040076 to the Chair? I think we're probably going to be talking about these issues at least one more time so...

Well, certainly, I can provide you the spreadsheet that we did that goes out to 2014-15. I do have to say, the reserve staff and in fact myself are no longer on the staff, but we will] get you the information and continue to be responsive.

I appreciate it. One last question, which will take you into slightly dangerous territory. The page after the chart which starts Part 6, 67, talking about financing tax reform. Mr. Voith talked about the Governor's proposal for property tax reform or reductions in 66 counties and then wage tax reduction in Philadelphia County. I know the number is supposed to on the resident side at least, I think, go to three eight something. Do you recall what the total dollar amount we're anticipating under the latest version of the Governor's plan? Does anybody recall what that number is? 182 032404 - WHOLE - RES. 040076

When we were doing our research that was $170 million, but I can't be sure if that's still the number. That was the first year. And the numbers after the first year were not actually provided at that time. There was an assumption that there would be growth because of the rate having gone down, but that was the only number -- that's the only year for which I remember having a number.

Three would be growth because of what?

Well, the --

Growth and the number coming to us from the Commonwealth? I guess I assumed that number would stay the same.

My impression was that there was going to be -- we used a constant $170 million number, I've been told, in doing our analysis. And anyway, the two scenarios, the two wage tax scenarios with and without the Governor's plan, we outlined those rates on 183 032404 - WHOLE - RES. 040076 and 64.

With regard to those dollars, if the number is still 170 -- and we know obviously things change a fair amount in Harrisburg or at times the Governor has to make other decisions and might have to, for whatever reason, possibly reduce the number. But for today's discussion, let's agree that it's $170 million. Did the Commission give any thought to or any consideration to the prospect of taking $170 million and not immediately dumping it -- I don't mean to characterize it that way -- placing it in the General Fund and then get the immediate rate reduction, which I'm sure when the final bill is done we'll be required to reduce the rates to the commensurate level, otherwise you probably won't get the money. But again, when I loot at your section here, 6, and you talk financing tax reform and there's another section in one of the other volumes that talks about a variety of ways of financing tax reform, did you give any analysis to taking the $170 million and using 184 032404 - WHOLE - RES. 040076 that as a steady income stream and generating what is probably a fairly significant amount of bond proceeds and using those dollars to even more dramatically lower the wage tax?

We did review the spreadsheet your office prepared that you discussed with us at our public hearing in May. Separately from that we commissioned Public Financial Management to look at the possibility of borrowing two finance tax reduction. And we simply used three different borrowing scenarios of 100, 200 and 300 million dollars. In the end, the Commissioners -- at a certain point, the Commissioner decided not to continue to research a bond financing approach. And so we didn't really marry those two at any point in our research because by then, after having reviewed the spreadsheet, your spreadsheet, and reviewed PFM's analysis and deliberated, they had decided not to go as bond financing. But had they not, I think that certainly it's something we would have pursued further. So we looked at bond financing, but not the 185 032404 - WHOLE - RES. 040076 particular scenario you mentioned.

I understand. Is that a viable scenario or is it inappropriate or something that we shouldn't look at or consider without locking ourselves into anything while we're in a discussion?

I think Richard Voith wants to add what I said and maybe answer this portion.

The $170 million that comes from the State, if it was used to immediately lower wage taxes and then we put the Reform Commission's reductions layered on top of that, what we see when you do is that for the entire horizon the City is in surplus over what it would have been otherwise because of the economic growth. That notion suggests that there is room to lower wage tax further if the supply side estimates are correct. Without further beyond what's in the report for the Rendell scenario, even without even thinking about bond financing --

But what you're suggesting is, if I'm hearing it right, you 186 032404 - WHOLE - RES. 040076 take the Commonwealth money first.

Right.

Get your new rate.

Right.

And then base your further cuts in the wage tax on the new rate subsequent to the first drop.

Right. And when we did that, we found that the City revenue structure was always greater than under the current scenario of no change in state and local taxes. So that suggested there is room for steeper cuts. We did not assess that. And whether you want to do that by somehow fixing the income stream through bonding might be appropriate. It might not. It would have to be, I think, more seriously considered.

Right. I mean, obviously the danger is if create that pool of dollars and live on those dollars over some period of time based on an even dramatic reduction, whenever that pool -- whenever the bond proceeds run out, you've got to make sure 187 032404 - WHOLE - RES. 040076 that all the other things that you think may happen catch up to you or you end up with a problem five, six, seven years down the road.

That's exactly true. That's one of the good things about the way the Commission has structure its reform, is it allows you to actually see how you're going on. One caveat about everything here is that the City economy doesn't function in a vacuum. There was a long discussion earlier about sort of growth and jobs in the City has been declining but it does grow sometimes. And it typically grows the most when the nation as a whole is growing the fastest.

Right. Thank you. Thank you, Madam President.

The Chair recognizes Councilwoman Tasco.

You began your discussion a lot of your analysis has been done in comparison to counties around Philadelphia in terms of taxes and the tax 188 032404 - WHOLE - RES. 040076 rates being lower and some of the taxes that we charge business privilege and taxes are not levied in some of the surrounding counties. Given the fact that these counties are increasing in their growth, where do you project they may be in the future in comparison to Philadelphia? Because they have to now provide services that they had not previously provided. How do you think we'll look in comparison to them in a few years?

Two things. Most of our analysis wasn't really concerned with suburban rates. But what you've raised is a really good point, and I think it's a real opportunity for the City because you are absolutely correct in that the tax burden as reflected in the earnings taxes that are being imposed have been increasing in the suburbs, and that's narrowing our gap between the two. And I think that's really the key. So it's a good thing for the City, and I think it makes the chances of the City's economy and the City's residents prospering better. I think that given the kind of analysis that we've 189 032404 - WHOLE - RES. 040076 done, we have not really incorporated explicitly into our econometric analysis the changing -- which is actually a really a recent phenomenon of the changing earnings tax profile of suburban counties. So that's not really directly in our work.

But wouldn't it be helpful to us as we deliberate to have some comparison to the surrounding counties? Because that's where we're losing our businesses and our people to the industrial sites outside of Philly and the growth and businesses outside of the City, what impact does that growth have on tax bases there and so it becomes a selling point for Philadelphia for companies to stay in the City.

As I said, we specifically in our analysis didn't, but there have been analysis that show the changing tax patterns between City and suburbs. And in fact, the suburbs are -- and the gap between the City and the suburban tax rate has been declining, both because of they've had rising taxes and we've had a good improvement, 190 032404 - WHOLE - RES. 040076 somewhat of an improvement in taxes in the City. We've been doing the right thing. I think that's all working in our favor and I think the Tax Reform Commission just furthers that. But I agree with your point that it becomes a selling point if they have to raise their taxes more. The gap is still very large, though. It's basically 4 percent earnings tax versus 1. That's a big gap.

Right, but then there are other taxes, their property taxes. Looking at their taxes, total tax burden and not just the wage tax, what is the cost of doing business in the suburbs as opposed to doing business in Philadelphia and also the ability to workforce at your hands as opposed to people trying to go get to the suburban areas to go to work because of the lack of transportation? So a lot of that comes into play when you -- particularly for Philadelphia when we're trying to sell us as the place to come and do business, all of those things could be taken into consideration.

I completely agree. 191 032404 - WHOLE - RES. 040076 There are many, many factors that are affecting the overall competitiveness of the City and the City has real advantages. I live and work in the City. I agree with you completely.

So we're not really doing a good job of selling Philadelphia.

That's part of it, but we do have a tax structure problem, too.

Well, I agree with that, too. But as Bruce said earlier, there are many factors involving why people don't stay, why they leave, and all of that a part of looking at the tax reform and looking at all the other factors are very important. It's not one isolated thing.

We were just asked to focus on one, but that's absolutely right.

I understand. Thank you.

Thank you. Any other questions? Mr. Kevin Gillen. 192 032404 - WHOLE - RES. 040076

Good afternoon to Madam President and Members of City Council. Thank you for the opportunity to appear before you today and share the results of my research with you. Last year, I was asked by the Philadelphia Tax Reform Commission to update the results of some existing research I had performed while a graduate student at Wharton. " There are good reasons why among the array of taxes levied by this City, the administration of the property tax in Philadelphia deserves special attention. Unlike wage, sales, or business receipts taxes, the property tax is not a function of directly observable variables. For every taxable parcel in the City, an explicit value must be assigned by the assessing authority. This is a particular challenge in a city like Philadelphia. Not only must City assessors 193 032404 - WHOLE - RES. 040076 estimate values for an old and very heterogeneous stock of real estate, but the low turnover rate of this stock combined with the lack of arm's length prices in many areas of the City means that these assessors must perform this task for a very large number of properties and with few sales comparables to guide their task. The resulting lack of assessment uniformity can lead to substantial inequities at the household level and sub-optimal revenue collection at the City level. To measure and characterize the degree of assessment uniformity in Philadelphia, my analysis utilized an extensive data set of home sales that were merged with the City's property roll data. With this data, I employed a set of statistical tools that are advocated by the International Association of Assessing Officers. The IAAO, as I will hereafter refer to it, is an international industry group that sets the guidelines for the accurate, fair, and uniform administration of property 194 032404 - WHOLE - RES. 040076 assessments. For the purpose of my research, I followed their suggested targets for assessment uniformity. In the interest of brevity, I will confine my testimony today to a summary of my results rather than an exposition of how I obtained them. Those parties who are interested in greater detail may download my full report from the Tax Reform Commission's web site. That said, my findings are as follows: First, Philadelphia fails to meet acceptable industry standards of appraisal accuracy for every category of property, from single family housing to vacant land. In Table 1, I compare overall assessment error in Philadelphia to industry guidelines. Column 2 of the table states the average assessment error for each category of property which is measured by a statistic called the coefficient of dispersion. Column 3 in the table gives the suggested target of accuracy for that category. And the last column states the percent of Philadelphia properties that meet 195 032404 - WHOLE - RES. 040076 these targeted guidelines. For example, examining Row 1, we find that the average single family home in Philadelphia is either over or under assessed by approximately 34 percent of its value. The IAAO suggests that the average assessment error for older urban areas like Philadelphia should be no more than percent of value. 10 By this guideline, just a little over 50 11 percent of all Philadelphia homes meet 12 acceptable industry standards of appraisal 13 accuracy. And the same is roughly true in the 14 second row for multi-family properties like 15 hotels and apartment buildings. The results only get more austere after that. For commercial, retail, and industrial properties in the City, only a third are valued within satisfactory professional standards of error. And although vacant land is typically considered the most difficult type of real estate to value and thus has a more relaxed standard of accuracy, it has the highest overall level of assessment error of any category of property in 196 032404 - WHOLE - RES. 040076 Philadelphia. Only percent of all land parcels in this City are assessed within acceptable industry levels of accuracy.

5 I understand that these are very 6 dramatic claims and, as such, I sought 7 feedback on them from academic colleagues as 8 well as City officials. They suggested to me 9 that even among older US cities with a varied 10 and heterogeneous stock of real estate, 11 Philadelphia was especially so and therefore 12 should not be held to as high a standard. 13 To examine if this was true or not, 14 I collected similar data on assessment 15 uniformity from other municipalities. The 16 next chart displays this information and 17 compares overall assessment error from 18 comparable US cities to Philadelphia. From 19 left to right, this chart ranks each city for 20 which recent data was available in descending 21 order. The red bar represents Philadelphia's 22 position in this ranking. The only city which 23 surpasses Philadelphia with a higher overall 24 level of assessment error is Buffalo, New 25 York, and even then by only a slight margin. 197 032404 - WHOLE - RES. 040076 It should be noted that Buffalo is an de-industrialized city that has suffered decades of population loss and a so-called brain drain of young educated professionals. This past year its fiscal condition became so dire that the State of New York imposed a control board with veto power over all city contracts. Perhaps that situation sounds familiar. Moving from left to right across the chart, we can see that New York City has a slightly less level of assessment error, followed by our neighbor of Camden, New Jersey. But after that, the remaining cities all meet and even exceed the same international guidelines for property assessment uniformity. Even comparable cities like Pittsburgh, Baltimore, Chicago, and Boston, which share many similarities with Philadelphia in terms of a distressed and aging housing stock, managed to more than surpass the suggested assessment accuracy target of 20 percent. It was also suggested to me that 198 032404 - WHOLE - RES. 040076 even these cities were not directly comparable to Philadelphia because our housing stock is on average one of the oldest in the country. But if this is true, it should also be true for the region as a whole. After all, the region's housing stock ranges from tenements of Chester City to the row homes of Norristown to the farmhouses of Bucks County to the gilded aged mansions of the main line. So to investigate regional variation in assessment accuracy, I collected transactions and property roll data for all suburban townships in the Delaware Valley and computed the same comparable statistics for each one as I did for Philadelphia. The results are displayed in the next chart. This map color codes each township of the five-county area by the magnitude of its overall assessment error. The darker the shade of green, the greater is the average error in property assessments. Philadelphia can be readily observed as the dark green polygon in the lower right-hand corner. From this map, it can be inferred 199 032404 - WHOLE - RES. 040076 that some municipalities do indeed fail to meet the generally accepted guidelines for assessment uniformity. For example, the townships of Upper and Lower Darby, Tinicum and Chester City are among them. In addition, some of the more rural areas of Bucks and Chester Counties have higher than average assessment errors. However, all those townships that fail to meet these targets do so by a much smaller margin than Philadelphia. And overall, Philadelphia still has the highest degree of assessment error of any municipal jurisdiction in the region. It naturally follows from this analysis that there is a valid question of who are the possible winners and losers in this. If overall assessment error in Philadelphia is indeed high, then it is worth examining if they are also biased. In other words, we want to know if every single property in the City of Philadelphia has an equal probability of being over-assessed as being under-assessed.

To determine if this is true or not, I 200 032404 - WHOLE - RES. 040076 computed the relative degree of over or under-assessments for each submarket in the City and compared its value to the City-wide average. The results are displayed in the next chart. This map color codes each census tract in Philadelphia by the degree to which it is on average over-assessed or under-assessed. Orange neighborhoods are over-assessed, while purple neighborhoods are on average under-assessed. The darker the shade of orange or purple, then the greater is the degree of over or under-assessment. There is a very clear spacial pattern of assessment in Philadelphia. In the neighborhoods of North and West Philadelphia, the data state that many homes are assessed at several times their actual values. In Center City, the Northeast, Overbrook and the Northwest, homes on average are assessed at significantly smaller fractions of their actual values. When compared to industry guidelines, the magnitude of regressivity in Philadelphia is 6 times larger than what is 201 032404 - WHOLE - RES. 040076 described as international standards of assessment uniformity. As such current assessments are redistributing wealth from the orange neighborhoods to the purple ones. Please allow me to repeat that. The current administration of the property tax in Philadelphia is redistributing wealth from orange neighborhoods of the City to the purple ones. Since we also know from the data, as well as from our own knowledge of the City's landscape that the neighborhoods of North and West Philadelphia are disproportionately populated by relatively lower income persons who occupy comparatively lower value dwellings. This suggests a very disconcerting conclusion. Not only are Philadelphia's property assessments erroneous, they are also inequitable. In all fairness, it should be pointed out that although this may be undesirable, it is really not all that unusual for this to be the case for large cities. The reason for this result has to do with the dynamics of the housing market. For those 202 032404 - WHOLE - RES. 040076 more affluent neighborhoods which are appreciating in value, the systematic nature of the reassessment process ensures that assessments will tend to lack actual home values. This growing gap between assessed values and market values results in these homes being assessed at lower fractions of their value. Conversely, the opposite dynamic is typically at work in those neighborhoods which are stagnating or declining in value. These areas of the City tend to have a lower overall level of home sales as owner occupants are locked into their current homes due to their shrinking equity margins. Since assessments are usually adjusted upwards and only rarely downwards, the low turnover rate of housing in these neighborhoods leave appraisers with very few comparable sales to which then can calibrate their assessments. The net result of this process is that assessments lag market values in appreciating high priced neighborhoods and assessment remain persistently high in declining low-priced neighborhoods. 203 032404 - WHOLE - RES. 040076 Consequently, the regressivity of the property tax can become more pronounced over time as these trends continue. But if this is indeed true for most US cities, then we may also ask how Philadelphia does in comparison to these cities. Again, using recent data on comparable US cities for which it was available the next chart displays the degree of regressivity in the administration of the property tax for each city. As in the previous bar chart, cities are ranked from left to right by the magnitude of their regressivity with the red bar representing Philadelphia's position. Although assessment practices in each city for which data was available indicates that these cities are indeed regressive, none are as regressive as Philadelphia.

Even the mismanaged and financially distressed cities of Buffalo and Pittsburgh still manage to do better by comparison. And those cities that do not meet industry guidelines still fail to do so by a much smaller margin than Philadelphia. 204 032404 - WHOLE - RES. 040076 In conclusion then, the results of my research found that the administration of the property tax in Philadelphia is neither accurate, uniform nor equitable. Not only are average assessments erroneous, they are biased against occupants of lower valued dwellings. Further research which is detailed in my full report found that one possible reason for this is that we fail to make full use of the technologies which are available to us and we also do not collect detailed property level data with which assessors can calibrate their valuations. Since the release of my report several months ago, the Board of Revision of Taxes has announced they are taking active steps in this direction, and I believe they are to be commended for doing so. The implications of these findings for the issue of tax reform being considered by the City are strong. Namely, they indicate that if current assessment practices in Philadelphia continue to prevail, then the City will fail to participate in the upside 205 032404 - WHOLE - RES. 040076 gains of attracting new businesses and residents into the City. The arguments being advanced by the Tax Reform Commission in favor or reducing other taxes in the City are implicitly and importantly dependent on the effective administration of property assessments. If a reduction in the overall tax burden does indeed attract households and businesses to relocate to Philadelphia, the fiscal benefits which are forecast to accrue to the City will be in the form of increase property tax revenues that result from rising property values. But it is absolutely necessary for accurate assessments to effectively capture these potential upside gains. If the projected increase in property tax revenue fails to materialize in order to offset the cuts in wage and business taxes, the budgetary consequences could indeed become calamitous. As such, I would encourage the Council to keep this in mind as it goes forward with the discussion of this very important set of issues. 206 032404 - WHOLE - RES. 040076 Thank you for the opportunity to share my work with you today, and I will be to take any questions at this time.

Thank you. Are there any questions of this witness? (No response.)

Thank you, gentlemen. Your testimony was very informative. Our last panel, Mr. Jack Hunter and David Thornberg. Good afternoon. Please identify yourself for the record and proceed with your testimony.

My name is Jack Hunter, certified public accountant, office in Philadelphia, member of the Philadelphia Chapter, Pennsylvania Institute of CPAs.

Proceed with your testimony, please.

Good afternoon. As an active member of the Advisory Committee to the Tax Reform Commission, I observed the hard 207 032404 - WHOLE - RES. 040076 work and I think excellent results were produced for months of work. I became active as a representative from the Pennsylvania Institute of CPAs because a lot of my clients are located in Philadelphia. Over the years, I've heard discussions, complaints, not many good things to say about the tax structure in Philadelphia. So I thought this was a good opportunity for me to show my clients that I was active on their behalf in helping to devise a revised tax system. I believe that the Tax Commission's proposals, taken as a whole, will be good for business and will, in fact, result in the suggested results of the Commission, that is, higher revenues despite lower rates. I urge the Council to consider this and act on it. Thank you.

Thank you Mr. Hunter. Mr. Thornberg.

Good afternoon, Council President Verna, Members of Council, distinguished guests. I am David Thornberg. 208 032404 - WHOLE - RES. 040076 I serve as Executive Director of the Pennsylvania Economy League here in southeastern Pennsylvania. As you know, the Economy League is a private sector led civic organization designed to improving the region as a place live, work, and do business. Leaders from 68 of the region's leading companies and universities sit on PEL's Board. While we may be best known to some of you as advocates for reducing the wage tax, the League has played a critical role in several other key efforts. Working with partners in the civic and economic development corporate, PEL has spearhead the Knowledge Industry Partnership, the nation's first and most ambitious effort to attract and retain our educated young people. Working with the Reinvestment Fund and 10,000 Friends of Pennsylvania, the League led the Metropolitan Philadelphia Policy Center which produced Flight Or Fight, a little book that serves as a clarion call to the region that brought into focus the twin challenges of urban blight and 209 032404 - WHOLE - RES. 040076 suburban sprawl and how public policies like our tax structure have contributed to both. Over the last few years, PEL sponsored a number of forum on issues such as attracting young people to the region, increasing our openness to immigrants and capitalizing on the economic power of its creative and cultural assets. In all of these efforts, there's one constant: Philadelphia's tax burdens and tax structure stands as a significant barrier to the economic growth of the City, growth that would provide jobs for our college graduates, growth that would lessen the push on young families to leave the City for suburbs, growth that would create a new wave of entrepreneurial opportunity that opens up our City to best and brightest the world has to offer. Unless that system is changed and the City's tax burdens dramatically and fairly reduced, the City will continue to lose jobs and investment, lose population and become less competitive both within the region and against national and international 210 032404 - WHOLE - RES. 040076 competitors. In past testimony to this body, I would at this point dive into the numbers, into the analysis about the harm that our tax burdens and tax structure have brought to this City. I'm not going to go there today. That ground has been plowed and plowed and plowed again. Between the fine work of the City Controller's Office, the Tax Reform Commission, City Council staff, the Mayor's Office, independent researchers from the Federal Reserve, the Wharton School, the Center City District, Temple University, and yes, the Economy League, I think the harmful effects of our tax situation have been demonstrated way beyond any reasonable doubt. That debate, in my mind, is over. Now it's time to look forward to a fresh set of ideas about taxes that we think could have a significant and positive impact on the City's economic future. In November 2002, with their approval of the creation of a Tax Reform Commission, almost 80 percent of 211 032404 - WHOLE - RES. 040076 Philadelphia's voters delivered a message loud and clear that the time had come for major tax reform in the City of Philadelphia. I will confess that some of us at PEL were skeptical at the time. Weren't blue ribbon commissions simply a tactic to make tough issues go away? Wouldn't the Commission's report simply take its place in the bone yard of dusty reports that have come before it? Wouldn't the panel produce a weak report with only a vague sense of what should or could be done? I'm pleased, very pleased to say we that were wrong. The Tax Commission has done a remarkable job. The Commissioners have developed a comprehensive and physically responsible set of recommendations for reforming the City's tax system to better serve the City's residents and businesses.

A key reason for this success is that as much as any group that I have seen assembled, this group represented Philadelphia in all its diversity. Between the Commission and its Advisory Board, on which I was honored to serve, every major business, labor, civic, 212 032404 - WHOLE - RES. 040076 advocacy and community organization that had an interest in taxes was represented. Furthermore, the Commissioners did an admirable job in reaching out to their fellow citizens through public meetings, surveys and through an active communications effort. Over months of sustained hard 9 work and with the assistance of an able staff, 10 the 15 members of the Commission rolled up their sleeves and went to work for the future of the City they all love. The Commission ordered reports by top experts to answer questions about the best mix of taxes for the City economy, how to fund tax cuts issues surrounding real estate tax uniformity, and the needs of the business community. The Commission held several well-attended public hearings as well as neighborhood meetings across the City and heard input and testimony from a broad and diverse group of citizens. Most important, Commission members spent literally over 10,000 hours on this effort, hours taken from their businesses and their families in pursuit of a proposal to change 213 032404 - WHOLE - RES. 040076 their City for the better. And they succeeded. The result of their efforts is a carefully thought-out plan to create for the City a tax system that better meets the needs of its residents and businesses and maintains a balanced budget and essential services. The Commission's package will provide the City with a more equitable property tax system, help the City attract and maintain jobs, and bring prosperity to our City's neighborhoods by keeping well-paying office jobs within easy transit reach. Most important, by gradually eliminating business taxes, accelerating wage tax reductions and adopting a budget-based property tax system, it will bring Philadelphia back into line with our peers. Philadelphia will no longer be quite so different from the rest of Pennsylvania or other big cities or other locations within the region. The program is balanced, incremental and responsible. And it comprehensively addresses all three of the charges given to 214 032404 - WHOLE - RES. 040076 the Commission in the resolution approved by the voters. Decrease tax burdens, promote fairness and equity and improve competitiveness. Those familiar with PEL will not be surprised to learn that we believe that Tax Reform Commission's recommendations could have gone further and could be implemented faster than recommended. Nonetheless, PEL and our Board of Directors stand fully behind the recommendations, as published. At its December 11, 2003 meeting, PEL's Board of Directors voted unanimously and enthusiastically to endorse the package in its entirety. We believe the Commission's 10 months of research and debate bolstered by over a half million dollars of City tax dollars for staff and research support has looked into the issues from all angles. We have no reason or inclination to advocate anything other than what the Commission recommends in their report. PEL urges the Council to treat as a whole and pass as a package the 13 bills 215 032404 - WHOLE - RES. 040076 before it that embody the recommendations of the Philadelphia Tax Reform Commission. This is a rare moment of opportunity, the opportunity to reverse with a stroke of a pen the 75 years of well-intended but misguided tax policy, begun, you'll recall, when the wage tax was implemented as a temporary solution to the fiscal challenges of the great depression that has weakened and eroded this City's economy. The Tax Reform Commission's proposal is the best, most creative, most comprehensive, most thoughtful tax reform plan that has been advanced in anyone's memory.

And I would urge you to give the City, its residents, its neighborhoods and its businesses a fresh start on the road to growth by making these proposals into law. Thank you for the opportunity to speak with you. I'll be happy to answer your questions.

Thank you. Are there any questions Members of the Committee? (No response.) 216 032404 - WHOLE - RES. 040076

Gentlemen, thank you very much. Joyce Wilkerson was here earlier. I believe we all have a copy of her testimony. We will] give a copy of it to the stenographer so it will be made part of the record, since she was here twice and left. I don't see any need to read it into the record. I think we can just give the stenographer a copy and it will be made part of the record. (Testimony attached.)

This Committee stand in recess until tomorrow at 10:00 a.m. I would also like the record to reflect that Resolutions 040082, 040083, and 040084, which were scheduled for a public hearing this morning has been continued until the call of the Chair because we lacked a quorum. So that will be listed for another day with the hopes that we will have a quorum to consider the three resolutions. Thank you all very much for your patience. I thought the day was very interesting and very helpful. 217 032404 - WHOLE - RES. 040076 (Council adjourned at 2:30 p.m.) - - - - 218 C E R T I F I C A T I O N I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of February 24, 2004, were reported fully and accurately by me, and that this is a correct transcript of the same. RE: COMMITTEE OF THE WHOLE _________________________ Lisa C. Bradley, RPR