Thank you, Madam President. I would just address the panel and thank them for their testimony, but at the same time, Councilman Kelly I think made a very good point. Everyone 91 11/17/05 - WHOLE - BILL 050669, ETC. in this Council I believe wants to reduce the business privilege tax. The question is how long do we do it. We were talking years just two years ago, and we had 6 11 votes for that. We hopefully have at 7 least ten right now, because I think 8 we're in -- from what I can tell, we're 9 in a veto situation if we do the bill at 10 the five years. 11 But five years is a great 12 compromise over what we were talking about just two years ago. For me, it's very hard to swallow, because I like the 12-year commitment. And I would hope that if we do the five years, we also commit to a rolling five years, that every year we would come in and not wait until the five years runs out and find ourselves back in this position. We'd only be talking about one year each year being added to the four that are left. And so I believe we're talking about Councilmembers who very strongly feel that 12 years is what we should be 92 11/17/05 - WHOLE - BILL 050669, ETC. doing, willing to compromise down to five, other Councilmembers who think we should do it on a year-by-year basis, hopefully trying to get at least two of them to compromise on five to get something done, and I think that's your greatest task and ours in the discussions with our colleagues among us. To me, it's a huge compromise, to come from to five, and have faith 12 beyond that. But I would hope also that you would both work with the Administration and with Councilmembers who have not been for more than going one year at a time but have been in favor of business privilege tax reduction to try to sell that as a compromise coming the other way, and actually less years involved, only going from one to five rather than 12 back to five. I think we could have something here, because this is not a gap of between one and 12, but now we're at five years, and I hope we can do it, because 93 11/17/05 - WHOLE - BILL 050669, ETC. the Groundhog Day was a great movie, but it's not fun. Thank you.
Thank you. Are there any other questions or comments from members of the Committee? (No response.)
Gentlemen, thank you very much. I guess we're going to keep doing this until we get it right. MR. McPHERSON: Our next witness is Rob Dubow, Executive Director of PICA. Mr. Dubow, as they say, welcome home.
Nice to be back. Good afternoon, Council President Verna, members of the 94 11/17/05 - WHOLE - BILL 050669, ETC. Committee. My name is Rob Dubow. I'm the Executive Director of the Pennsylvania Intergovernmental Cooperation Authority, and with me today is Uri Monson, our Deputy Director. I just want to start by thanking you for inviting me to testify on the various bills before you today. In staff reports and issue papers, PICA has consistently called for the City to restructure and reduce its taxes in a way that does not threaten the General Fund's fiscal health. In addition, over the last several years, a series of analyses have shown that the business privilege tax inhibits economic activity in the City. The City's Five-Year Plans have recognized the importance of reducing the gross receipts portion of the BPT. The tax has been reduced each year since FY96 and it has now been cut a total of 48 percent. The net income portion of the tax, however, has not been reduced. 95 11/17/05 - WHOLE - BILL 050669, ETC. Despite the gross receipts tax decreases, the BPT continues to put the City at a competitive disadvantage. An analysis by the District of Columbia of the tax rates in the largest cities in each state showed that Philadelphia had the second-highest combined city and state corporate income tax rate, behind only New York City, and was only one of four cities with a gross receipts tax. Implementing the reductions included in any of the bills before you today would help reduce that competitive disadvantage. While the bills Council is considering today would make the City's tax structure more competitive, they would also come with a cost to the City's General Fund. The tax rate changes proposed in Bills 050669, 051063, 051064 and 051065 would reduce General Fund revenues by between about 30 million and 46 million as amended. 6 million through FY11, although 96 11/17/05 - WHOLE - BILL 050669, ETC. as amended only one year at a time would be enacted. Even with the bills' proposed reductions, however, BPT revenues would still exceed the amounts included in the approved FY06-FY10 Five-Year Plan, because higher-than-anticipated FY05 collections resulted in a BPT base that's larger than that found in the approved plan. The cost of the proposed bills should be considered in the context of the City's overall budget situation. On October 27, PICA released an issues paper that address the City's fiscal condition, and that might help provide some framework for the discussion of these bills. The paper reported that the General Fund ended FY05 with a fund balance of slightly over $96 million, nearly 70 million more than the amount included in the approved FY06-FY10 Five-Year Plan. While the paper said 97 11/17/05 - WHOLE - BILL 050669, ETC. that the larger-than-anticipated fund balance was a sign that the City's economy and its fiscal health were slightly stronger than anticipated, it also pointed out that there were reasons for caution, and among those reasons were that the fund balance remained well below the level recommended by the Government Finance Officers Association. That Association recommends that fund balances equal about five percent of revenues. In the City's case, that would mean a $173 million fund balance. The FY05 fund balance was as large as it was in part because the City received a $29 million reimbursement from the state in FY05 rather than in FY06. This was anticipated in the plan. So that early payment merely represented a shift between years. The largest single reason for the increase in fund balance was better-than-anticipated business privilege tax collections. The City 98 11/17/05 - WHOLE - BILL 050669, ETC. received $64 million more in BPT revenues than anticipated, but the BPT is a volatile tax that actually decreased in both FY02 and FY03.
And the plan has a number of risks, including costs of future labor agreements and awards, the potential that the City will not receive 81 million from PGW that's included in the plan, the threat that the City might not be able to achieve the $60 million in unspecified future government efficiencies that are included in the plan, the likelihood that reductions in federal funding will create revenue shortfall, and the strong possibility that the City will not be relieved of the financial responsibility for the Convention Center as quickly as the plan anticipated. With those cautions in mind, PICA delineated what it thought would be a fiscally prudent response to the higher-than-anticipated fund balance. Most importantly, the report said the 99 11/17/05 - WHOLE - BILL 050669, ETC. City needs to ensure that even after accounting for all substantial risks, the FY07-FY11 plan will be balanced. If the Administration and Council can clear the hurdle of being able to balance the FY07 to FY11 plan, they should use any projected fund balance to begin to cure some of the key long-term challenges facing the General Fund. Making the City's tax structure more competitive was one of the key challenges that the paper said should be addressed. The other actions PICA recommended were building a rainy-day fund, reducing the City's debt burden, reducing the City's unfunded pension liability and investing in the City's infrastructure. The proposed bills provide Council with an important opportunity to take a step towards addressing a key structural issue facing the City. The City's ability to reduce 100 11/17/05 - WHOLE - BILL 050669, ETC. the business privilege tax was made clearer earlier this week when the City released its quarterly report for the first quarter of FY06. The report showed that the Administration now projects that we'll end FY06 with a fund balance of over $142 million, which is $120 million higher than the amount forecasted in the approved FY06 to FY10 Five-Year Plan. The projected increased fund balance should enable the City to make important progress in attacking the structural problems it faces, including its uncompetitive tax structure. One goal of business tax reduction is to attract new business to the City. A demonstrated five-year commitment is more likely to influence businesses weighing the decision of where to locate as they consider a long-term commitment to the City. In addition, it's fiscally responsible to lock in five years of rate cuts since the tax reduction schedule 101 11/17/05 - WHOLE - BILL 050669, ETC. adopted by the City would be included in the next Five-Year Plan the City submits to PICA in the spring. That concludes my testimony. I'd be happy to answer any questions. I also attached a chart to the testimony that compares the pieces of legislation that we're considering today. It was done before the amendment, so it's slightly out of date now.
Thank you very much, Mr. Dubow. The Chair recognizes Councilman Kenney.
Thank you, Madam President. Mr. Dubow, the $96.2 million balance unanticipated in the, I think you said, $140 million --
How does that happen? Because part of my concern as it relates to our budget process in general is how -- I mean, I know in a 102 11/17/05 - WHOLE - BILL 050669, ETC. business budget, it's a real document that allows you to really plan and understand your business and make adjustments. Now, I guess in a budget the size of the City's, perhaps that's not a lot of money, but it's a lot of money in aggregate. What is our budget process? I mean, you've been on both sides of this now, so I think you can speak freely. How do we have a real budget process if we wind up going through the debate we went through last year or last budget approval about closure of basic City services and then comes the revelation that we have $100 million more than we thought we were going to have? What good is the budget process if we can't really have it as a guide to running this company?
Right. A big part of what happened last year and a big reason that the fund balance was so much higher than anticipated was that the 103 11/17/05 - WHOLE - BILL 050669, ETC. business privilege tax came in at a record-high level, much higher than it had ever come in before. And in fairness to the Administration, I think that would have been really hard to predict. And it comes in very late in the year and there are reconciliations you have to make between years. So I think if it had been anything other than business privilege tax, I would say, yeah, there's something to really think that there was something going on there, but I think the business privilege tax was kind of a rare case, because it comes in so late.
And then the other portion of it was the realty transfer tax.
Yeah, but by the end of the process, in the plan that was approved by PICA, that was up at 195 million, and it actually came in in the low 190's. That wasn't part of the 70 million. 104 11/17/05 - WHOLE - BILL 050669, ETC.
I'm sure having gone through the number of budgets you've been through, it's a frustrating process to have to go through what we go through last year relative to making really difficult choices and having the communities that we represent upset about libraries and rec centers and fire station coverage and everything when we get through this whole tortious process and, oh, by the way, we have an extra hundred million, sorry. So, I mean, it is an opportunity to do things like tax reform and others, but just as a comment, it's a frustrating process when it seems as if it's not a real -- we're not dealing with reality half the time.
Thank you. 105 11/17/05 - WHOLE - BILL 050669, ETC. Are there any other questions or comments from members of the Committee of Mr. Dubow? (No response.)
Mr. Dubow, thank you, and Mr. Monson. Mr. Dubow, you may hold a record of sorts as having testified here in so many different capacities. You're like a person that played on a national league World Series team and then you're on the American league World Series team. I mean, you're just all over the place.
I understand. I understand. So you have a confidence level about these numbers, and what I took from 106 11/17/05 - WHOLE - BILL 050669, ETC. your testimony was the five-year time range makes sense?
And I believe we've already had legislation that provided for five-year business privilege tax cuts.
Well, one, you're absolutely correct. We're in the middle of a five-year business privilege tax cut cycle right now.
Yes. We made a five-year guaranteed cut back in '03 that extended for '04, '05, '06, '07 and '08, which we're presently experiencing at the moment. So we have some experience and history with multi-year cuts for the business 107 11/17/05 - WHOLE - BILL 050669, ETC. privilege tax. You also produced some charts, as you are often one to do, with regard to the different measures before us. Do you have any particular opinion with regard to affordability of these different plans? Your testimony talks about one of $19 million, which you know there was an amendment made.
So probably now on the low end, it's the $38 million -- I'm sorry. There is one for 30 as well. But do you have any particular opinion with regard to a total cost of five years in the $30 to $40 million range?
I believe that costs in those range are clearly something that could be implemented and the City would be able to balance a Five-Year Plan with numbers in that range.
I didn't 108 11/17/05 - WHOLE - BILL 050669, ETC. hear the last part.
Thank you. The Chair recognizes Councilman O'Neill.
Yes, Madam Chair. I'm glad to see you two gentlemen are working together on this issue, as opposed to two years ago when you were on opposite sides of the fence. But you were working on opposite sides of the fence. That was very important. 109 11/17/05 - WHOLE - BILL 050669, ETC. But I would like it to, if you could -- I think it's on behalf of all of us. PICA could be a Board that just sits there and counts beans one way or the other, but I think this issue is so important that they've expressed themselves now for the third straight year, and if you could just thank the Board for being proactive in this way, while still showing a lot of restraint in terms of making sure that everything is being done in the best interest of the future of the City, which is their ultimate responsibility. It's very much appreciated. Thank you.
Thank you, gentlemen. Thank you very much. Good seeing you again.
Our next witness? 110 11/17/05 - WHOLE - BILL 050669, ETC. MR. McPHERSON: Joyce Wilkerson, Office of the Mayor.
Good afternoon. My name is Joyce Wilkerson. I'm Chief of Staff to Mayor Street, and with me is Sean McNeeley of my office; Dianne Reed, Budget Director; and Nancy Kammerdeiner, Revenue Commissioner. Thank you for the opportunity to present testimony on these business privilege tax rate reduction measures that are currently before Council. 1 billion in tax relief through wage and business tax reductions. This Administration supports responsible tax reform and manageable tax rate reductions. Our testimony and Five-Year Plan have made the numerous mention of our commitment to affordable tax cuts that allow the City to maintain service levels and enable the full economic value of the cuts, and we have signed into law legislation providing wage tax 111 11/17/05 - WHOLE - BILL 050669, ETC. reductions, gross receipt tax reductions, tax abatements for new construction and BPT credit. Unlike the Federal Government, this Administration has focused on both sides of the ledger in pursuing a tax cut policy. The Administration acknowledges that the higher-than-expected FY05 fund balance and tax collections provide an opportunity for further tax reductions beyond the wage tax and business tax rate reductions already planned or in law. The question is how much and when. 5 million in gross receipts rate reductions already included in the FY06-FY10 Five-Year Plan. We are open to input on whether this additional relief is provided on the gross receipts portion, the net income portion, or both. 2 million, 112 11/17/05 - WHOLE - BILL 050669, ETC. significantly higher than projected in the FY06 budget and FY06 to FY10 Five-Year Plan. The primary reasons include higher-than-projected BPT collections. FY05 collections totaled $380 million, $65 million higher than assumed, and a percent increase from 9 the prior year. The full revenue amount 10 was not known at the time the budget was 11 resolved, in part because the 132 12 million, or 35 percent of the total, was 13 collected in May and June, unlike a 14 typical year when 90 percent of the total 15 is collected by the end of April. 16 In addition, the Revenue 17 Department must process returns over the 18 summer and wait until the federal 19 extended filing deadline of October 15th 20 in order to determine the final amount 21 attributable to a fiscal year. Note that 22 the City Controller's 2005 Mid-Year 23 Economic Report stated that, "The BPT may be the most difficult tax for the City to predict," and actually forecasted a 113 11/17/05 - WHOLE - BILL 050669, ETC. decline in the FY05 BPT collections. Early reimbursement: The City received $29 million in TANF payment from the state prior to the accounting cut-off, earlier than anticipated. There's also been lower-than-projected personnel costs. Salaries and wages were $14 million lower than projected due to the workforce reduction program. In fact, salaries and wages declined from FY04 to FY05, the first such reduction in 11 years. The General Fund filled position level was 22,848 as of November 4, 2005, 8 percent lower than on November 21, 2001. The strong BPT collections are one reason that we support additional BPT relief. Another is the strength of our real estate transfer tax revenues. In working with the Pennsylvania Intergovernmental Cooperation Authority to balance the FY06-FY10 Plan, the Administration made technical amendments to the revenue projections which 114 11/17/05 - WHOLE - BILL 050669, ETC. increased the real estate transfer tax projections over the life of the plan with PICA approval. Real estate transfer tax revenue doubled from FY02 to FY05, an increase by 38 percent in FY05 alone. We testified during the tax hearings early this year that our practice had been to forecast a drop-off in real estate transfer tax revenue each year during this boom. Fortunately, that drop-off has not occurred. PICA's staff has been similarly conservative regarding real estate transfer tax revenue.
Our increase in the real estate transfer tax projection was made in cooperation with PICA, assuming that even if interest rates rise and the number of transactions drop, the increase in values in Philadelphia will sustain real estate transfer tax collections. Note that the City Controller's Mid-Year 2005 Report forecast a drop-off in the real estate 115 11/17/05 - WHOLE - BILL 050669, ETC. tax revenues from '05 to '06 $30 million less in real estate transfer tax revenues for '05 than was collected and 45 million for '06 than our current estimate of 200 million. The Administration was not alone in being conservative regarding the real estate transfer tax. Although we continue to forecast some drop-off in collection amount, the base going forward is now significantly higher than assumed in the adopted budget and plan. We believe this lends some support to additional BPT relief efforts. We'd like to caution, however, that the BPT and real estate transfer tax are now our most volatile taxes. Collections for both of these taxes have fluctuated more widely than the City's other tax sources in recent years, including fiscal years where collections declined. As the net income portion of the BPT has become a larger share of collections, this volatility has 116 11/17/05 - WHOLE - BILL 050669, ETC. increased since net income fluctuates more with national and local business cycles than total receipts. There is risk in using the strong performance of these taxes as the basis for multi-year plans. The City's program of incremental wage and BPT reductions was begun in 1996 on the premise that moderate tax reductions each year could be incorporated into a balanced City budget and that maintains City service levels by generating efficiencies and taking advantage of economic growth. The tax rate reductions were made on a year-to-year basis for the first seven years so that the Council and the Mayor had the flexibility to respond to changing circumstances. The Administration supports further BPT reductions on a similar year-to-year or pay-as-you-go basis for the upcoming FY07 to FY11 Five-Year Plan period, but not beyond. 117 11/17/05 - WHOLE - BILL 050669, ETC. The PICA statute was designed to promote long-term financial planning and fiscal stability in Philadelphia. Legislating beyond the PICA five-year window runs counter to this goal. Before I get into discussion of the individual bills, let me talk to you about why, as PICA recently said, happy days may not be here again. 2 million was produced through first operating surplus in four years, excluding accounting adjustments, since before the 2002 recession. Although it is nice to have reserves again, this is still lower than the '96 to '02 fund balance and lower than the level recommended by the Government Finance Officers Association or rating agencies. GFOA recommends an unreserved fund balance of 5 to 15 percent of annual revenues, which for the City would mean at least $172 million. Similarly, Moody's suggests an unreserved fund 118 11/17/05 - WHOLE - BILL 050669, ETC. balance of to percent. In 2003 before the recession took full effect on government finances, the cities with the highest credit rating from Standard & Poor's averaged an unreserved fund balance of over 30 percent of General Fund expenditures. More ominously, as we begin to prepare for the FY07-11 Plan, there are unfavorable developments that temper the good news on our strong tax collections and rebounding fund balance, including shortfalls in the DHS needs-based budget due to state and federal taxes, delays and state-wide gaming revenues and the assumed relief for the Convention Center, delays in implementing our Fire Department restructuring plan, an increasing prison population, and increases in utility and vehicle fuel costs. The PICA white paper on the fund balance did comment that tax reform was one prudent use of resources. PICA 119 11/17/05 - WHOLE - BILL 050669, ETC.
highlighted four other major prudent uses of resources, all of which we agree have merit and should be given consideration by Council. In particular, the condition of our pension system requires attention. The City shifted its pension funding policy to the Minimum Municipal Obligation required by the state beginning in FY04 after missing pension earnings assumptions for four straight years. Even with this change, the amount of the General Fund pension obligations increased $800 million from FY02 to '06 Plan and to the '06 to FY10 Plan. As a consequence, however, the funded liability has dropped from 77 percent before the shift to 59 percent currently, a situation that merits concern and dedication of resources, particularly in light of the pension defaults taking place around the country. PICA also pointed out a series of legitimate risks to the plan, such as the fiscal health of PGW, the cost of 120 11/17/05 - WHOLE - BILL 050669, ETC. labor agreements, the ability to continue to generate sizable work for efficiencies or target budget reductions with a dramatically reduced workforce. Given the current discussions around full valuation of real estate and the range of proposals at state and local levels to respond to impacts of full valuation, the ability to achieve the real estate tax projections in the Five-Year Plan is also at risk. As we begin to prepare for our next plan, it's important to keep in mind that the wage tax rate reductions will accelerate in FY10 and '11, and the low-income wage tax credits will take effect in those years. percent per year. 5 to 4 percent is larger than the reduction and allows for the wage tax collections to increase, as they have since the inception of the tax reduction program. 121 11/17/05 - WHOLE - BILL 050669, ETC. However, the weighted average wage tax reduction for the five years, beginning 2010, is 3 percent per year, nearly three times as large as the current reductions, and large enough to mostly offset growth in the tax base. When the low-income wage tax credits are factored in, wage tax collections are likely to decrease in each year. The current estimates of the impact of the low-income wage tax credits based on the most recent data available is shown in the table below. The combined effect of these accelerating rate tax reductions and credits will make it more challenging to balance each successive Five-Year Plan. Because we are entering into another Five-Year Plan cycle, our analysis of these bills takes into account FY11, which we'll continue to consider in our next plan. Our analysis is preliminary and based on a continuation of the growth rate 122 11/17/05 - WHOLE - BILL 050669, ETC. assumptions in our current plan modified for actual FY05 collections. We will revisit these assumptions in the course of preparing the next plan. Bill No. 040776 would eliminate the gross receipts portion of the BPT by FY10. The continuation of the gross receipts rate reductions already in the City's Five-Year Plan will eliminate this tax by 2020. So this bill would sharply accelerate this schedule. The bill is projected to reduce revenues by $162 million from FY07 to FY11. Given the other challenges in the plan and the existing tax rate reductions, the Administration considers this unaffordable and does not support -- I guess at the time it was a multi-year reduction. So we would have to revisit our analysis of that. Bill No. 050669 would begin rate reductions to the net income portion of the BPT, with slightly faster reductions in the gross receipts portion 123 11/17/05 - WHOLE - BILL 050669, ETC. compared to the plan through tax year 2010. 7 million from '07 to '11. And I guess there have been changes also in that proposed legislation, so we'll have to revisit those numbers, and I won't bother with what I've written here.
Consider what the rating agencies say about locking in tax reductions, as well as depending on optimistic revenue projections due to "supply side" effects, our bond rating is the second worst among largest cities, and Moody's and Fitch currently have us on a negative watch. In its most recent rating of the City, Fitch commented, "The Five-Year Plan shows fiscal 2006 and succeeding fiscal years maintaining the legacy of an over-reliance on economically sensitive revenue sparked by the set schedule of wage and business tax reductions. Economic benefits continue to lag expectations, while the reductions in recurring revenue is stressing 124 11/17/05 - WHOLE - BILL 050669, ETC. financial operations. " And hopefully when the new fund balance numbers are shared, the City will be able to hopefully make some progress with our rating, which would stand us all in good standing since we have large bond issues on the horizon. Bill No. 051063 would reduce the gross receipts portion of the BPT at a slightly faster rate than currently assumed in the plan through tax year 2010, while also reducing the net income portion of the BPT annually from tax year 2006 to tax year 2010. 5 million from '07 to '11 compared to the current plan. The rate reductions would require Council approval each year and extend only through the upcoming 125 11/17/05 - WHOLE - BILL 050669, ETC. Five-Year Plan. That element is key for the Administration. It's one thing to carry it as a projection in the Five-Year Plan. From our perspective, locking it in in legislation is unacceptable. Bill No. 051065 would reduce the net income portion of the BPT annually from tax year 2006 to 2010. The gross receipts portion of the BPT would continue to be reduced at the rate assumed in the plan, although this bill 14 would codify those reductions past the current cut-off year 2008. 9 million compared to the current plan rate reductions. The rate reductions would require Council approval each year and extend only through the upcoming Five-Year Plan period. The Administration views the latter three bills as within a manageable, if challenging, range, and we support in particular the year-to-year 126 11/17/05 - WHOLE - BILL 050669, ETC. provision. This concludes our testimony and are happy to answer any questions.
Thank you. Ms. Wilkerson, Mr. Dubow stated in his testimony, and I'm sure you heard it, that it is fiscally responsible to lock in five years of rate cuts since the tax reduction schedule adopted by the City will be included in the Five-Year Plan the City submits to PICA in spring. I think from your testimony you disagree with that assessment?
I think the numbers in the out year plans are all projections. The revenue numbers, the expense numbers are working numbers, and that to lock in the tax reduction numbers we think is imprudent. Things change from year to 127 11/17/05 - WHOLE - BILL 050669, ETC. year. There have been dramatic changes in some situations, and think that the approach the City has followed for the most part over the course of the last decade has allowed the City to have a reliable continuing tax reduction policy. We've done over a billion dollars in tax reduction, and think it's the more prudent way, particularly with costs, some costs moving around as unpredictably as they have. We have a new challenge with DHS, for example. We're probably looking at $10 to $20 million more annually as a result of the state's change in its funding policy. And so we're comfortable carrying accelerated tax reductions in the Five-Year Plan. We acknowledge that there has been substantial growth in the business taxes and in some of the other revenues, but think that it's not prudent -- we disagree with PICA on this point. We think it's imprudent to lock 128 11/17/05 - WHOLE - BILL 050669, ETC. it in. Another thing that needs to be a part of this conversation we believe before we lock in on taxes is what happens with the property taxes. The City has a figure in for property tax revenues. If there's any kind of -- there's a lot of talk now about capping the tax revenue. If we cap it and generate revenue below what's in the Five-Year Plan, I think even PICA would change its commitment to locking in or its position on locking in taxes as we move forward.
I don't know if Mr. Dubow is still here, but I think that's a statement that you've made and I don't know that he can speak for the entire Board.
We have -- I don't want to speak for Rob, but the numbers that we've shared are numbers that include fixed dollar amounts, revenue projections for the property tax, 129 11/17/05 - WHOLE - BILL 050669, ETC. and I'm just saying to the extent that any of those numbers move around, it impacts the ability to fund additional tax cuts.
Thank you. Councilman Nutter's light is on. I see he's in the back of the room.
We also have the ethics bills. The cost of the ethics bills impacts what otherwise would be an ability to fund more aggressive tax reductions in every year. We're projecting that at 10 million over the Five-Year Plan.
Thank you, Madam Chair. Good ethics is good government and sometimes it's a little costly. Thank you, Madam Chief of Staff, for that intro. Just a couple quick questions. Your testimony with 130 11/17/05 - WHOLE - BILL 050669, ETC. regard to Bill 050669 is as it was introduced; is that correct?
Yes. In my comments, I said we'd have to rework these numbers. I appreciate that they've changed.
Right. I understand. And I'm sure you're aware that Bill 050669 is an exact replication of Bill 040767, which was introduced on September 23, 2004 and was the subject of debate and a vote in this Council last spring. Do you recall that? And that bill was passed by Council and vetoed by the Mayor. Your testimony indicates that, on , "The bill is projected to reduce revenues by 19.7 million from FY07 to FY11. Based on our improved financial position and higher tax base, the Administration views this amount as affordable at this time." My question is, if you had the 131 11/17/05 - WHOLE - BILL 050669, ETC. financial information that you have now, had that information been available to you in the spring, would the Administration have supported the bill?
I think the Administration doesn't support multi-year cuts. I think we're in a position to do more. We acknowledge that, that there is more revenue, taxes have performed. We've managed to do more with cuts. We think that additional tax reductions are warranted. Assuming that we don't dig in substantially and reduce the property taxes, additional taxes are warranted. And there needs to be a conversation about how deep in year one and how you spread it out over the balance of the years and how you reflect it in the balance of the years, whether it's just carried in a Five-Year Plan or legislated. And I think it would be a wasted -- it's unfortunate when we end up missing some of the opportunity because 132 11/17/05 - WHOLE - BILL 050669, ETC. we can't reach agreement on this issue of how many years you do it once. I think we all need to redouble our effort this year to try to find some middle ground for doing what everybody wants to do. It doesn't make any sense not to do what everybody agrees on, and I think we ought to spend a lot of time trying to come up with a formula. I think Councilwoman Reynolds Brown and other members, Councilman Goode, are interested in trying to do something. The Administration has long supported business taxes. I want to remind people that we got into big trouble several years ago when we proposed shifting from wage tax reductions to business tax reductions, because we understand how important it is, but I think if we spend time over the next few months trying to work out the mechanism that everybody can live with that gives predictability to tax reductions and also gives the 133 11/17/05 - WHOLE - BILL 050669, ETC. Administration comfort that when the numbers fall off, when the expenses don't break our way, we have the ability to automatically react. I think it's worthwhile trying to find that vehicle now.
Well, I appreciate your comments, and I wouldn't necessarily characterize it as the Administration got in trouble a couple years ago when you recommended that we end the incremental cuts in the wage tax. I would say that it sparked a vigorous and lively discussion and that we've made tremendous progress since then, and you should take credit for starting that debate.
I think we missed an opportunity to do something important for business tax reductions.
I understand. But when you say that you're not particularly supportive of multi-year guaranteed cuts, I do have to remind you 134 11/17/05 - WHOLE - BILL 050669, ETC. that -- and that you want to seek this common ground around any number of proposals, whether bills that I've put in, Councilwoman Reynolds Brown, Councilman Goode, you'll recall that in 2004, the Mayor did sign a ten-year guaranteed reduction in the wage tax. That same year, we had a 12-year guaranteed reduction in business privilege tax, which was vetoed, passed by Council and vetoed. We subsequently came back with Bill 040767, amended it to have only a five-year guarantee. So we've moved from 12 years to five. That bill passed Council and was vetoed.
In the spring of 2003, the Mayor signed a business privilege tax bill with a five-year guaranteed reduction, which we 135 11/17/05 - WHOLE - BILL 050669, ETC. are in the middle of right now. In the current Philadelphia Code, there are guaranteed reductions in the business privilege tax through FY08, approved by this Council unanimously, signed by the Mayor in the spring of 2003. That has been our history.
Just in terms of the first wage tax reduction, as I recall, that was a tax reduction that was already legislated in Harrisburg, and so there was not --
That was already legislated in Harrisburg, and so there was not the opportunity, as I recall, to do other than five years worth of reductions.
What do you mean "legislated in Harrisburg"? The only thing Harrisburg is requiring is that gaming revenues be used to further reduce the wage tax.
I'll provide 136 11/17/05 - WHOLE - BILL 050669, ETC. you with the documentation of what I'm thinking about. As I recall, though, it happened in the year when the Administration had proposed not doing any wage tax reductions -- my memory fails me. I will go back and try to document what it is. But the Administration's position is that we support it one year at a time. When a vote comes to the Mayor 15-0, 17-0 and there's no support for an override, the Mayor will sign the bill. We think --
No. I've been down that road, too. I've had some 17-0's come flying back here.
Generally. This year we look to find middle ground with Council on this --
You moved off of that one. 137 11/17/05 - WHOLE - BILL 050669, ETC.
-- on this issue. We think that we've all worked hard to try to generate revenue. We've all worked hard trying to manage the government. When the business community has proposed additional means of generating additional revenue, we've taken those measures to heart. We're looking at raising over $40, $50 million from asset sales. That was something that came out of these hearings. We're more aggressive on revenue collections. Some of that came out of these hearings. And as a result of all of those measures, we have a fund balance. We believe that some portion of the fund balance ought to be spent on more aggressive tax reductions, and so we're willing to engage in that conversation and be flexible, as long as it reflects that there are substantial risks on the horizon.
Well, let me just say lastly, part of this is, when 138 11/17/05 - WHOLE - BILL 050669, ETC. you boil it down, if nothing happens, we still have two years of guaranteed cuts in the business privilege tax. Even as amended, 050669 only gives rates out through '11. So you're really just adding three years on. I'm not hearing that these figures, $38 million over five years, I don't think you've testified that is outrageous or unmanageable.
It doesn't appear to be. We are in the early months of putting the budget together, and one of the things that I think we've learned off the past is that when we try to project tax revenues too early, we tend to be too conservative. I think that --
What's the current estimated fund balance for FY06? I mean, we're a quarter into the year.
That's looking at revenues without looking at all the 139 11/17/05 - WHOLE - BILL 050669, ETC. additional expenses that -- without the changes in expenses. I think that we acknowledge that there's additional revenue. The Administration supports doing more for tax reductions. We're also cognizant of the fact that there are conversations going on about the real estate tax and that that also has to be a part of the conversation.
Okay. And we'll take that up next year. I guess lastly, and this will really be it for me. I mean, the one concept here that I think really has to be dispelled, which we proved last year, is even in multi-year guaranteed cut proposals, we are still 16 members of City Council who annually review our budget, along with the Mayor, and if something were to happen, there is nothing to prevent us under an extraordinary situation from taking an action to prevent an even worse conclusion. We are all responsible 140 11/17/05 - WHOLE - BILL 050669, ETC. people here, and we're elected to represent our constituents. And last year, we changed the tax structure and rate schedule on the wage tax, moving it from a July 1 guaranteed cut last year to January 1 of this year, which also generated additional revenue for the City of Philadelphia, which no one thought that we would do. We moved it back because that was the responsible thing to do. So I don't want anyone to be under some impression that we give up our legislative rights to make prudent decisions even with a guaranteed tax rate cut schedule as laid out. I mean, I think that there is this fiction out there that if we were to do something and even, in your words, it's a manageable number, it's over five years, revenue seems to be good here at the moment, if some cataclysmic event were to take place two or three years from now, I believe that this Council would be responsible, 141 11/17/05 - WHOLE - BILL 050669, ETC. and if the Administration came and said, We've got to take a second look at what's going on, the members would certainly be open to listening. So, I mean, we've gone from 7 years guaranteed proposal to five. We've 8 got revenues up, modest reductions. 9 These are still modest reductions as 10 compared to anything else that could be 11 out there. We could rally around one 12 particular proposal and put this issue to rest once and for all. (Applause.)
Yeah. The Administration is interested in finding a middle ground with Council. We believe that business tax reductions are important, that we ought to be able to find a middle ground that we can all agree on around the business taxes, also around the property taxes. The good thing about having the 142 11/17/05 - WHOLE - BILL 050669, ETC. conversation starting now is that we have enough time to take it all into account.
With regard to this issue, is there any proposed middle ground at the moment?
I think we're interested in talking with all the parties. I don't have something to put on the table. I know we've -- but I think there is an opportunity. In some years, there hasn't been the shared recognition that there is revenue there. I think usually we're fighting over numbers. The good news is, we're not fighting over that this year.
I think it's more the mechanism, and it would be a shame if that's allowed to be the impediment.
Okay. All right. Thank you. Thank you, Madam Chair. 143 11/17/05 - WHOLE - BILL 050669, ETC.
You're welcome. The Chair recognizes Councilman DiCicco.
Thank you, Madam Chair. Good afternoon. I apologize. I was either speaking to Councilwoman Tasco or Nutter earlier. On your testimony, you have five bullet points concerning the unfavorable developments. Delays in the state gaming process, which will slow our local tax share of revenue. I'm not clear on that.
The Five-Year Plan carries revenue. Initially I think it was beginning in FY07.
Okay. I know what you were going to say. The anticipated revenues from the gaming.
That's right. It keeps sliding back a year, and those are large numbers, 20 million.
144 11/17/05 - WHOLE - BILL 050669, ETC. Understand. And the delays in implementing our Fire Department restructuring plan, is that something that's still being considered?
The Administration was -- the Five-Year Plan had, I believe, a compromised figure. It wasn't clear how we were going to realize that number. It's mischaracterized here. We're currently enjoined by the court. The judge reversed the Arbitrator's award. That's now back in arbitration. So those numbers are no longer good numbers. And then the utility and fuel costs, our utility, our natural gas bill 18 is going up $5 million and the vehicle fuel cost bill is going up by a similar amount. So these are wild-card items that we're carrying in the budget right now.
I think it would be helpful if you can put some numbers to those items as well, 145 11/17/05 - WHOLE - BILL 050669, ETC. especially the prison population increasing, what those costs are estimated. That would help.
You're welcome. Are there any other questions or comments by members of the Committee? (No response.)
Seeing none, I thank you very much, and I would ask Mr. McPherson to please call our next witness. MR. McPHERSON: Jonathan Saidel, the City Controller.
Well, you don't look like Jonathan Saidel, but would you identify yourself, please.
Good afternoon. My name is Marissa Waxman. Controller Saidel sends his apologies that he can't join you this afternoon and asked that I 146 11/17/05 - WHOLE - BILL 050669, ETC. deliver his testimony.
Good afternoon, Madam President and members of City Council. I am City Controller Jonathan Saidel. I come before you today to support reform of Philadelphia's business privilege tax. The City's crippling loss of jobs and people requires us to make changes and think differently about how we organize our tax structure. Meaningful reform of the BPT should have three essential components: Gradual reduction of the net income rate, gradual reduction of the gross receipts rate, and these reductions should be legislated for at least the life of the current Five-Year Plan. There is often little debate when new spending initiatives are announced outside the scope of the City's annual budget process, but tax reform has been subjected to endless debate and 147 11/17/05 - WHOLE - BILL 050669, ETC. opportunities have been missed as a result. In the interest of time, I'm sure that I do not need to explain once again why and how the reduction of the BPT will improve the lives of Philadelphians. This topic has been covered in my 2001 Tax Structure Analysis Report, the recommendations of the Tax Reform Commission, proposals of the Mayor's 21st Century Review Forum and his Economic Development Blueprint. The benefits of tax reform and the reduction in the BPT rate have been championed by academics, community groups and business associations across the City. Given the vast amount of research and community support for the reductions to the net income and gross receipts portions of the BPT, I can only assume that this body's reluctance to move forward with reductions to both the net income and gross receipts portion of the BPT stems from a concern that the City cannot afford these measures. 148 11/17/05 - WHOLE - BILL 050669, ETC. As the City's financial watchdog, mandated by state law to analyze and opine on the reasonableness of the City's Five-Year Financial Plans, I can attest that the City can most assuredly afford these reductions to BPT rates without reducing the resources available for service delivery. I have long believed that we can afford tax reform through increased governmental efficiencies and the resultant growth in the tax base, but today there are even more obvious justifications for the affordability of BPT reduction. The City ended fiscal year 2005 with a fund balance of approximately 96 million, 70 million more than anticipated. Additionally, based on current collections, analysis by the Controller's office projects that revenues from the BPT over the life of the current Five-Year Plan will exceed the stated collections by a significant 149 11/17/05 - WHOLE - BILL 050669, ETC. amount, roughly a quarter billion dollars more than anticipated. I believe that even with BPT rate reductions, the City is likely to collect more than the amount of BPT revenues in the current plan. Given these two facts, there has never been a better time to adopt rate reductions. Failing to do so would jeopardize future expansion and job growth. At this moment in time, Philadelphia is experiencing expansion and we cannot afford to undermine the progress that has been made. The gradual, simultaneous reductions of both the net income and gross receipts portions sends a strong message to entrepreneurs that we are serious about making Philadelphia a location of choice for business. It shows a willingness to bring jobs and prosperity to our residents. We are the only major city to tax both net income and gross receipts. We are competitive with our suburbs and other cities 150 11/17/05 - WHOLE - BILL 050669, ETC. throughout the nation and world. Our future is bleak if we cannot compete. Phased BPT rate reductions will enhance our competitive position. By adopting reform measures, you are choosing to chart a positive course for Philadelphia. We have an obligation not only to the citizens of the City today, but also to the next generation of Philadelphians. Predictable, responsible BPT reduction is an opportunity to create a better future for Philadelphia.
Thank you very much. The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Just a quick question. I read through the testimony and I'm just really trying to understand other than generally supporting reductions, is the Controller 151 11/17/05 - WHOLE - BILL 050669, ETC. supporting any bill?
Let me get back to you. The Controller has actually been out of the country and only recently returned, and some of the bills were introduced after he left. So I can prepare a more direct response for you, have him prepare a more direct response.
Well, did he have an opinion about any of the bills before he left?
He was in favor of Bill 050669, as it was the main proposal that was going to be discussed today at the time when he left. That was the only bill slated for discussion, and because that met his three essential criteria of phased net income rate reduction, phased gross receipts reductions and the fact that it was legislated over five years. That bill was also subsequently amended 152 11/17/05 - WHOLE - BILL 050669, ETC. today.
I understand that. Well, do any of the other bills meet that test?
I haven't had a chance to review the ones that were amended today, but I do not believe that any of the other bills currently meet those three essential criteria.
I have not had a chance to confirm that with him yet, but I would be happy to prepare a response and forward it to the Chair.
Thank you very much. Any other questions or comments from members of the Committee? (No response.) 153 11/17/05 - WHOLE - BILL 050669, ETC.
Our next witness is Stanley Shapiro. Hi, Stan. Welcome.
Thank you. My name is Stanley Shapiro, for the record. Nice to be back here.
Not the happiest circumstance necessarily, but I'm here for One Philadelphia, and we have a panel of three speakers, one of whom is going to make a presentation. You also recognize Mr. Haver for sure. He is a member of One Philadelphia as an individual, and he's not speaking for the Administration today, but he will be speaking for One Philadelphia, and we're going to start off with Lance.
Good afternoon or almost good evening. 154 11/17/05 - WHOLE - BILL 050669, ETC.
My name is Lance Haver. I'm the Director of the Mayor's Office of Consumer Affairs. As most of you are aware, I am not speaking on behalf of the Mayor this afternoon, but offering my own testimony. I believe that before one can take a position on the bills before Council today, it is important to first understand the goals of the bills, then ask if the bill is passed will it achieve its goals. And with your permission, may I pass out the testimony? Because I do have a little chart that I would like everyone to have a quick look at. I am testifying under the assumption that the goal of these bills is to create good-paying jobs for Philadelphia citizens, and there is agreement with the opinion of the vast majority of economists that most new jobs will be created by small businesses and 155 11/17/05 - WHOLE - BILL 050669, ETC. start-up businesses. The question before us today then is, will the bills as written achieve this stated goal? If all we do is rely upon deep, broad-based tax cuts without provisions to rescind the cuts if they don't produce the desired goals, I fear the answer to that question is no, there is no guarantee that deep cuts will produce jobs. Here is why: Broad-based cuts give equal benefits to those companies that have already received tax breaks, as well as to those who carry too large a tax burden. Unfocused tax cuts put money back in the pockets of businesses that are cutting their workforce without creating an incentive to hire or rehire workers. The across-the-board tax cuts give the biggest companies the biggest savings. It begs the question, are all businesses of equal value to the City? Do we really want to give Wal-Mart the same tax cuts we give to a small 156 11/17/05 - WHOLE - BILL 050669, ETC. business, to a start-up? Is it our goal to put more money in the pockets of a multi-national corporation that fails to pay a living wage and places a greater burden on our tax base by refusing to offer affordable health insurance to its workers? Or do we want to help innovative start-up companies that offer promise and help small mom-and-pop stores that all too often Wal-Mart puts out of business? Don't our schools, our neighborhoods and even our neighbors need more help than the multi-billionaire owners of Wal-Mart? Don't Philadelphia families need more help with their heating bills than Sunoco needs to increase their record profits? I know that Philadelphia Forward states that the tax cuts will create jobs. Unfortunately, like many of those type statements, there is no 24 accountability to the public if the funders of Philadelphia Forward are 157 11/17/05 - WHOLE - BILL 050669, ETC. wrong. They advocate for bills that contain no projections of how many good-paying jobs will be created, nor do the bills they ask you to pass have any provision to rescind the cuts if new jobs are not created. It appears that Philadelphia Forward doesn't care if the bills do what they say they will. They simply want their funders to be excused from paying any taxes regardless of the effects, and that is a real danger. It is not just the possibility that the cuts will be of no use to citizens that I would ask you to consider. It is that the proposed cuts can hurt the City. If the jobs don't materialize and there's not a promise that they will, the cuts will take money away from the City's ability to improve the quality of life in Philadelphia. Our neighborhoods will lose service, our public facilities will weaken, and the City will lose some of its ability to 158 11/17/05 - WHOLE - BILL 050669, ETC. C. It seems to me that it would be far better to learn from our experience with the real estate market than to accept the unproven and unaccountable advice of Philadelphia Forward. To help the real estate industry, we created a tax abatement for new construction, not for all real estate. The abatement, at least in part, helped jump start the industry. Now the housing market is so hot that we have the opposite problem.
Real estate values and, therefore, taxes rising so quickly, that long-time residents are having difficulty keeping up. We could attempt to develop new businesses by adopting Councilman Clarke's approach of offering a three-year tax abatement to start-ups. We could do this by lowering the ten-year new construction abatement to seven years 159 11/17/05 - WHOLE - BILL 050669, ETC. and temper the skyrocketing prices of homes. This type of target tax cut based on a successful program, not an empty promise, doesn't place our City at risk, doesn't take money away from our neighborhoods, will give start-up businesses the same type of help we gave to the real estate industry. At the same time, it will relieve some of the pressure on the rising real estate taxes. We can assure that such an abatement does not hurt existing small businesses by creating a storefront exemption where the first $100,000 of sales is exempted from the gross receipts portion of the business privilege tax. This can be paid for by uninstituting a windfall profit tax on zoning changes. For example, if changing the zoning of a parcel of land increases its value, we should ask the beneficiaries of the windfall to pay a net profit tax on the increase. After all, if changing the zoning makes money, why shouldn't the 160 11/17/05 - WHOLE - BILL 050669, ETC. business pay its fair share of taxes on what they make? I know there are some members of the business community who make the argument that businesses should not pay any taxes, that they should receive City services at no cost. I suspect many of the people who hold these opinions are funding Philadelphia Forward. I admit I do not understand the logic behind such a claim, and hope the members of Council agree with me when I say everyone, everyone should pay their fair share of taxes, the rich and the poor, consumers and businesses. While I know reasonable people can argue about what everyone's fair share is, it is hard to accept a reasonable argument that businesses should have to pay nothing and the rest of us should have to pay more. I wonder who in Council Chambers today would check big business on the chart that's up there right now when asked the direct question, 161 11/17/05 - WHOLE - BILL 050669, ETC. who should not have to pay taxes, how many people in this room would check big business should not have to pay a single penny in taxes? Whatever decision you make, I hope at the very at least you will include stated goals in the bills. If you believe that cutting taxes are going to create jobs, put in the bill how many jobs will be created, and if those jobs aren't created, you should rescind the tax cuts. It is easy to make an empty promise. Council shouldn't make it any easier for people to break those promises. Thank you. We can take a vote. I was going to take a vote, but I don't think I have enough attention. If Council were paying attention, if the members were active, I would have a show of hands, how many people believe Wal-Mart shouldn't pay any taxes? One person? Not you. Everyone believes it, so then why should 162 11/17/05 - WHOLE - BILL 050669, ETC. we cut the business privilege tax? If everyone believes Wal-Mart should pay their fair share, why are we talking about cutting the business tax to zero? Why is that even on the table? We all believe everyone should pay their fair share. Everyone believes that. So why is it a reasonable proposal to say real estate taxes go up, business taxes go to zero?
And I've reduced my testimony to really a question, because I think part of the reductions we should have is perhaps reductions in tax reform rhetoric, and maybe that might be appreciated by people here as well. My question really goes to whether we want to eliminate business taxes for businesses like Comcast, Sunoco, Wal-Mart. Are these really the businesses that are going to run out of 163 11/17/05 - WHOLE - BILL 050669, ETC. the City, that really need the tax break that the arguments are being set forward? I included on this onehandout the public data published by Comcast and Sunoco as to what their revenue was in this past third quarter and what it was for nine months. Comcast had revenue of 5.3 billion, that's a B, billion dollars for the third quarter of 2005. The revenue for the first nine months of this year were 15.8 billion. Should they pay no business taxes? Sunoco, which has had windfall profits because of the various factors that we know about affecting the oil industry, their income has risen enormously in just the third quarter. They posted income of $357 million in just the third quarter of 2005. For the first nine months of 2005, they've posted income of $715 million. Do we want to pass legislation that says that Sunoco will pay no 25 business taxes? Do we really want to do 164 11/17/05 - WHOLE - BILL 050669, ETC. that? Can't we as rational policy people, of citizens of the City, as legislators be able to refine tax reform and tax reductions to those who we really think need it? If in fact the case has been made out for small start-up businesses, and those are the poster child of tax reform, can't we in good faith, in rationality say that's where we're going to focus and target a business tax cut and not allow the Sunocos, the Comcasts, the Wal-Marts to pay no business taxes, while your constituents are having their real estate taxes go up and while your constituents pay wage tax and other taxes, and these enormous businesses posting unprecedented profits and revenue that they've never had before, hundreds of millions of dollars, billions of dollars?
Yes, 165 11/17/05 - WHOLE - BILL 050669, ETC. sir.
The witness indicated that the real estate taxes are going up. When are they going up?
I won't assume they're going up, but I'm trying to contrast the fact that constituents who pay real estate tax and wage taxes will also have to learn that maybe these enormous corporations may be paying no 16 taxes, no business taxes as their profits soar through the roof. And the last point I make in this one-page handout is that although we don't talk about City services today and the needs of the City, because this is tax reform day, this is tax-cutting day in this session, there are major unmet needs in the City, and I've mentioned these in various testimonies that I've 166 11/17/05 - WHOLE - BILL 050669, ETC. made before Council, things like how long does it take to get an appointment on the City Health Center, how long does it take to get a housing inspection when your roof is falling down in the City. Should one wait six months, months? And if 8 so, can we reduce that number with some 9 surplus that the City has? Is not that a 10 priority we should at least be talking 11 about? 12 And the priority I talk about on this sheet is the one that each of you personally has knowledge of. There are thousands of PGW households without gas service. The number we came to for at least mid October was something like 27,000 households. That number will be going down a bit, but there will be thousands of PGW households facing the winter months. Tonight it's going to be 29 degrees in the City, and they have no 23 gas service. And one of the ways of getting them back on is to infuse in a smart way some additional City money, 167 11/17/05 - WHOLE - BILL 050669, ETC. married to LIHEAP money, married to maybe weatherization efforts to restore heating service to thousands of Philadelphia households. Isn't that a valid use for some of the surplus money, especially in contrast to money that will go to a Comcast or a Sunoco making record profits? If we're having a conversation, I think that should be part of the conversation, and I think that raises serious questions whether a blunderbuss approach to tax cutting is really appropriate or whether we can put our best thinking together to say who really in the business community, not the Sunocos, not the Comcasts, not the Wal-Marts, really could use a targeted tax cut that could really help the economy in the City. That's my testimony. Thank you.
Thank you, Mr. Stein. 168 11/17/05 - WHOLE - BILL 050669, ETC. The Chair recognizes Councilman Nutter.
Thank you, Madam President. I'll be very brief. Just a couple observations. First, Mr. Haver, you are well known to us. You are highly respected in your service before government and now during government. I would only make one either observation or recommendation. Should you plan to testify in the future in City Council -- this is only a recommendation. You're a grown person. You'll do whatever you want to do. But should you plan to testify in City Council in the future and if you are not here in your governmental capacity, I would strongly encourage you, one, to not put your testimony on City stationery; two, I would suggest that you might want to make sure that unless you've already cleared the time in your capacity as a private citizen, that you might want to make sure that it's on your time as 169 11/17/05 - WHOLE - BILL 050669, ETC. opposed to the government's time. I don't know whether you cleared your testimony or not. And as a private citizen, obviously you have a right to make whatever testimony you want, but it does create some amount of confusion, if not potential concern, with regard to the use of City stationery for private personal testimony. I only make that as a recommendation. Second, with regard to Mr. Stein, who you are also well known and well recognized in your capacity, and Mr. Shapiro, as a former staff person here, with regard to all of the issues that you raised, the subsidies that certain people need, the lack of either programmatic assistance or funding support, I would only suggest back to you that notwithstanding the very easy ability to talk about whether it's Comcast or Sunoco or Wal-Mart or any other mega company, I'm sure you're well aware that the overwhelming majority of 170 11/17/05 - WHOLE - BILL 050669, ETC. companies in Philadelphia are small businesses, they are not these large mega businesses, and these tax proposals are not being done company-specific. They are not particularly for the benefit of any of the companies that you've mentioned or any others, but, most importantly, if we could create more jobs here in Philadelphia, if we could grow this economy, then many of the people that you are seriously concerned about -- and I know that you are -- would have better-paying jobs, with healthcare benefits and would not find themselves, many of them, in the positions that you're talking about in the first place. So it really should not be an either/or situation. We're either going to create more jobs and have more Philadelphians working in those jobs at higher wages or we will continue to lose jobs and have people with lesser incomes. Those are basically the choices. There is not one shred of 171 11/17/05 - WHOLE - BILL 050669, ETC. evidence anywhere, even from the people who work for the Administration, who testified last spring, there is not ounce of evidence that the tax cuts that we've enacted over the past ten years have led to reductions in revenues. And, unfortunately, there continues to be the propagation of the fiction that cutting tax rates leads to less revenues and a reduction in services. We know that's not true. Everyone knows it's not true. And you can continue to talk about it as long as you want. That's the beauty of America, but it's just not true. Thank you.
If I may, Councilman, one of the things that I would then ask is that for your bills to include a provision that if the new jobs are not created, that we stop going down that direction. If it is true and it is proven, then there should be no objection to that.
Well, 172 11/17/05 - WHOLE - BILL 050669, ETC. that's the job of City Council. That's what we do. That's what we get paid for, and we evaluate that on a year-by-year basis.
The people who are advocating the cuts in the business privilege taxes are saying it will create jobs. How many jobs do they project it will create, and if those jobs are not created --
I don't know that anyone has come to the table and said, If you cut my business privilege tax, I will create jobs. This is a tax that affects every business in the City. Do you plan to go out and ask the neighborhood cleaner that if they don't create the additional jobs, that they should give it back? 173 11/17/05 - WHOLE - BILL 050669, ETC. I mean, look, I'm going to be as respectful as the argument warrants. That makes absolutely no sense whatsoever. It's across the board. It's an economy situation, local, regional and global in nature. And so to put a provision in a piece of legislation that says if X amount of jobs aren't created over a certain period of time, what? We should take the rates back to where they were?
We should stop cutting them, yes. If the program you've put in place is not working, why continue to use it?
I think the recent evidence indicates that actually in the past few years incrementally there has been some small job growth here in Philadelphia. Now, whether it's attributable to the tax reductions or not, there's one fact we know, it is indisputable, that over the last 40 years, Philadelphia has lost more people 174 11/17/05 - WHOLE - BILL 050669, ETC. and more jobs than any other major city in the United States of America, and the number one issue that is cited for that is the onerous tax structure here in Philadelphia. We have the highest local tax burden of any major city in the country. So if you want to keep doing what we've been doing, that's fine. Get a job over here, sit in one of these chairs and you can make that decision, but I'm not doing that.
I understand if you're looking for an answer. All I'm asking for, again, is that the bill 17 includes a provision that if it's not working, we stop doing it.
That's called an action of City Council. We don't need that in a bill. We're going to be responsible, but I appreciate your testimony.
Councilman, if I 175 11/17/05 - WHOLE - BILL 050669, ETC. can just add, I understand your point about your desire to have a tax cut that then grows jobs and I think you mentioned health insurance that we provide its employer. When you give this money away to Wal-Mart, that's going to have no 8 effect --
I haven't given any money to Wal-Mart. What are you talking about?
I'm saying when you have a business tax cut that doesn't distinguish the mom-and-pop stores, the start-up business from Wal-Mart or Sunoco --
Mr. Stein, you're a recognized attorney. There's a little provision I believe in -- I think it might be in the state Constitution. It's called a uniformity clause.
So maybe along with Mr. Haver's provision, that if 176 11/17/05 - WHOLE - BILL 050669, ETC. we don't create the jobs, we'll take the tax cuts back, we'll have a separate provision that says "and Wal-Mart gets nothing."
I'm not going to offer testimony, but I would want the comment --
Stanley Shapiro. I do want to comment that there are provisions in the business privilege tax statute and in the business privilege tax ordinance that distinguish between various kinds of companies. Now, granted, it does not now distinguish between various kinds of companies based on their size or based on their revenue. The fact is that the uniformity clause has not been construed to bar all kinds 177 11/17/05 - WHOLE - BILL 050669, ETC. of distinctions legislatively, and this Council might just -- it has done so in the past -- pass legislation, make it contingent upon an appropriate ruling in the event of a challenge. But that should not stop Council from making the distinctions that it believes are appropriate and should not require that Council in fact allow those companies which have no need for additional revenue to get that revenue because of a legal conclusion that's uncertain.
I appreciate your comments. I have no idea what you just said, but I know that you are sincere in your proposal.
Councilman, I think some of these distinctions could be reasonably made, and I think most people in this Chamber can distinguish the needs of a Comcast, Sunoco, Wal-Mart from the small businesses or start-ups, and I think you can ask your staff to try to 178 11/17/05 - WHOLE - BILL 050669, ETC. craft those distinctions that would be legal and upheld in the courts.
I mean, you mentioned health insurance. I just have to just follow up on that and then let other questions. But I'm thinking of a Wal-Mart who would eventually pay no 10 business taxes, when I think that will not have any effect on their providing health insurance to their employees or adequate health insurance and I think of what that sum of money would be, and you can probably over time find that out. And using that money for the City Health Department to bolster their services to uninsured people who are working-class people who don't have good health insurance, to my mind, might be a better way to use the money.
Maybe we should have used some of the money that we forgave for some of the recent festivities in the summer, with the Live8 179 11/17/05 - WHOLE - BILL 050669, ETC. Concert. Maybe we should have done that. Maybe you should have challenged any number of spending priorities over the last few years and ask them to be redirected to the Health Department. I don't remember that discussion here. I don't remember anybody coming to the table to question the hundreds of millions of dollars that have been spent on any number of things, good, bad or indifferent, but here we are now trying to help small, medium and large businesses in Philadelphia, to promote and grow an economy so that people can work in better-paying jobs with dignity, and now we're having -- and our entire tax policy should be a function of what happens with a mega corporation that is the largest retailer in the United States of America and what they're doing? I think you're possibly just in the wrong forum.
Councilman, if they are going to benefit as we can concede, 180 11/17/05 - WHOLE - BILL 050669, ETC. and it's not only one corporation, there are many --
And a flower shop and a cleaners and a grocery store and a whole host of other folks who are going to benefit. I appreciate your view --
No, not tonight. We're not distinguishing tonight. I would love to have that discussion with you some other day. We're not distinguishing tonight.
I respect your views today, but I would respectfully also say --
Maybe tomorrow's discussion should try to distinguish the Sunocos and Comcasts from the tailor store.
Thank you. The Chair recognizes Councilwoman Blackwell.
Thank you, Madam President. I want to thank these gentlemen for bringing this testimony to us. I think that when we talk about taxes, we should talk about all aspects thereof, who's taxed, who isn't and what our purposes are. It seems to me that when we talk about taxes, part of the reason we have this discussion is certainly to create more employment opportunities because we have new businesses and more businesses and all of that. I don't find this discussion out of order. I think it is to the point when we talk about who gets taxed and why and who it affects. I think that's why we're here, and that those are some of the issues that we as a body should consider as we deliberate these issues. 182 11/17/05 - WHOLE - BILL 050669, ETC. So I think it's important. I want to thank them for putting it on the table, and certainly consider all issues they raise absolutely pertinent to this discussion.
Thank you. The Chair recognizes Councilwoman Brown.
Good evening, gentlemen. You're now aware that a number of tax proposals have been put before this body to look at, and, of course, the challenge, as I indicated in my comments to the leadership of the Chamber, is to find a balanced place in the debate but ultimately in the action that we take, and now I will put you on the spot. If we end up at a place where we have what we have, one bill that seeks lock-in and another that suggests or actually it states pay as you go on a year-by-year basis, which means that allows us to take 183 11/17/05 - WHOLE - BILL 050669, ETC. a look at, do a gut check, if you will, and look and see where our current economic climate is and then based on where we are, take further action, imagine a circumstance where we have BPT bills before us. Pick one.
Let me just say that One Philadelphia has not been able to examine the separate bills, but, clearly, under that scenario, the bill 12 which is limited to a cut in just one particular year is far better than a bill 14 which would mandate cuts over a period of time, without examining spending obligations side by side. So there's no 17 question that a bill that does not mandate a continuation of cuts is preferable. I would also say, though, that any of these bills would best be considered in budget season, because we're looking only at one side of the ledger. People have talked about it and there's no need to go into great detail 184 11/17/05 - WHOLE - BILL 050669, ETC. again, but there are tremendous obligations what the City has. There are growing obligations because of increasing problems that the City has. The fact that some day down the road maybe hopefully we will get jobs out of continuous tax cutting is not going to keep people warm this winter. It's not going to keep them in their homes if their real estate tax bills go out of sight. It's not going to get them healthcare if the state and federal governments completely decimate funding to the City and state. We now have legislation in Harrisburg which would cap state funding at a very low rate, which might cost the City millions and millions of dollars. It's being deliberated in Harrisburg right now. There will be a vote on one of those bills on Monday in Harrisburg. We don't know what's going to happen. It could cost the City millions of dollars. It would be prudent, it seems to me, that 185 11/17/05 - WHOLE - BILL 050669, ETC. we consider tax cutting at a time when we also know what our obligations are and when Council's legislating on obligations, and that happens in the spring. But to answer your question, a one-year tax cut is certainly far better than one which cuts taxes for many years at a time, without review.
If I may, I would certainly recommend a targeted tax cut. If we are trying to help the start-ups and small businesses, we should structure the tax cuts to help them and them alone.
Targeted tax cuts. We can, again, give a three-year tax abatement to start-up businesses, learn from what we did with the real estate industry and help at least jump start that industry. We could do the same thing with start-ups by giving them a three-year or five-year tax abatement to 186 11/17/05 - WHOLE - BILL 050669, ETC. come into the City, start up. We could protect small businesses by having a homestead exemption for the first hundred thousand dollars. We can be creative and we can help the people we want to help. I don't think there's any argument from anyone that I know that doesn't say the business privilege tax has to be redesigned. It's an old tax. It should be looked at, but it doesn't mean it should be eliminated. It just means, in my opinion, that we ought to use it for the best way possible, to help the start-ups, to help the small businesses and to make sure the City has the revenues it needs to take care of our citizens.
Well, I'll finish where I started, and, that is, the challenge before us as a legislative body, in my view -- and I'm one of 16 -- is to come up with a balanced scenario where we indeed do what you suggest, protect or cushion City services, because 187 11/17/05 - WHOLE - BILL 050669, ETC. we really don't know what's going to happen months from now, let alone five 4 years, and yet be responsible in 5 acknowledging that we can do better with 6 this small business community because of 7 the substantial existing surplus. 8 Thank you for your testimony. 9 Thank you, Madam Chair. 10
Thank 11 you. 12 The Chair recognizes Councilman 13 DiCicco. 14
Thank you, 15 Madam Chair. 16 I was really debating whether I 17 want to get into this debate or not. I 18 just can't keep quiet, I guess. I've 19 learned that from colleague, who is 20 standing up right now. Thank you. 21
I think 23 Councilman Kenney did -- I'm getting an 24 e-mail from my legislative assistant. I think we did some legislation that gave 188 11/17/05 - WHOLE - BILL 050669, ETC. start-up tech firms a five-year some sort of a tax break or something, if I recall correctly. Start-up tech companies, didn't we do that?
I think at the end of those five years, some of them left, with all your good intentions.