Committee Hearing, February 25, 2004

040076 we've asked this question before, and I recall, I believe at last year's budget hearings or the year before, the response to that question from the City Planning Commission was that actually we should prepare for and anticipate a smaller City and learn how to live in a smaller environment and we should just comfortably go into that good night, acknowledging that we will not grow and figure out how to downsize this environment. It seemed to be a plan for economic shrinking, not economic growth. When the discussion was going on, I wrote down a note to myself that we were on the verge of creating a municipal respite and that we just want to be comfortable as we die this slow death. I think that that kind of thinking is irresponsible and is an insult to the citizens of this City. So we have a challenge before us. And whether it's this round of hearings -- and the Councilwoman is to be commended for it -- or when we get to the 13 bills, which will just be a quite interesting day, whatever 109 02/25/04 - WHOLE - RES. 040076 Committee the bills are heard in, to listen to testimony and try to make very complicated decisions on at least of the bills that 5 have very serious components to them. 6 There might not be much debate about 7 the bill to do away with the real estate 8 non-utilization tax. We probably won't have 9 much of a fight about that. But I've had the 10 concern for some time with the switched around 11 budget process. As Councilman Kenney said, 12 normally we get it in January; now we're getting it in March. How we complete our job and our task is of great concern to me. So I think having these hearings at this time sets a framework for our future discussions. We had Mr. Vignola up earlier for PICA. I'll call it a low level accounting or economic dispute that's going on now, for instance, between the -- I don't mean to make it more than it is -- difference of opinion between the Controller's Office and let's say the Budget Office or the Mayor's Office on what these numbers are. What's the engagement, I guess, between the Controller's 110 02/25/04 - WHOLE - RES. 040076 Office and the Budget Office on the fiscal health or fiscal status of the City? Or are the two mutually exclusive, and you say what you say and the Administration says what it says and never the twain shall meet?

Let me just state for the record I've been disappointed with the availability of information from the Budget Office, to be pleasant about it and polite about it. My position has always been, these are the forecasts. This is the bases and the analyses that's done to get to that forecast that we have when the City presents its numbers. I think immediately we should sit down and go through our foundation for our analysis so they can go through their foundation so that there's no animosity. It's not like it should be a closed system and effectively this becomes some sort of a state secret as to where these numbers come from. Historically, governments have been pretty open. This is my third mayor that I've been Controller under. Lately though, I have been concerned. I don't have any 111 02/25/04 - WHOLE - RES. 040076 communication with the Finance Director at all, and so usually this work is done as a relationship between my budgetary analysis office directors and the people within the Budget Director's Office to try to find out what the differences are. Because to me it's not a question of being right or wrong. It's forecasting. And as you know, Councilman, forecasting is not 100 percent reliable. But when I say it's X and the Mayor says it Y, let's just get together and figure out -- you know, because maybe I've got to move a little bit and you've got to move a little bit, as an example. Because in the end we find out when the fiscal period ends. But it is in many cases, This is what I'm going to state and this is where I'm going to stand and I'm not going to tell you how I really got there and you can say whatever you want. Now, there could be a variety of reasons why the Administration announced that the deficit in the beginning of the year was $144 million forecasted and now they're down to 114. I don't know what the other reasons 112 02/25/04 - WHOLE - RES. 040076 are that they did that because they haven't confided in me. And I still don't know where the 114 came from in relationship to what we say it is. But it's not an open process that I wish it was. An example would be that if the Mayor of Philadelphia says there's $144 million deficit or surplus and any Councilmember wants to know where that number comes from, they have that absolute right, I believe, to get all the information that's available to justify what that number is. I think that that's the way government should be run. But that's not necessarily the communication that exists today between my office and the Administration.

This will be my last question, or I can couch it as a request, similar to Mr. Vignola. When the budget comes in, will the Controller's Office take the FY '05 budget and the Five-Year Plan, look at the recommendations of the Tax Reform Commission and formulate an opinion as to what the impact 113 02/25/04 - WHOLE - RES. 040076 on the stated budget and Five-Year Plan would be if the 13-bill package were adopted?

I'm more than happy to do that. I'm not going to answer like Vignola.

I'm stunned with the response. I can't formulate another question.

Yes, I will do that.

I'd appreciate it. That would be very helpful to us. This will require a significant amount of analysis.

If the choice is between finding out whether petty cash slips are sequentially numbered in a City that has an operational deficit and will continue that way unless we make changes, or is spending my talent pool of employees to come up with an analytical discussion that you can use and other Members of Council can use as you look at the Tax Reform Commission's recommendations and comparison to the Five-Year Plan, everybody that works for me is under your disposal, every Member of Council. 114 02/25/04 - WHOLE - RES. 040076

Thank you. Thank you, Madam Chair.

Thank you.

We need a five-minute break for the stenographer and then we'll call on Mr. Jonathan Stein. (Brief recess.)

We're back in session. Our next witness is Commissioner Jonathan Stein. Good afternoon. Thank you for your patience.

Good afternoon. Thank you.

Do you have prepared testimony?

Well, I gave to Mr. Green, I believe, some written remarks I had gotten published. And they may be being distributed.

Are those that were in the Daily News?

Yes. I've had a number of my reviews published in various papers and 115 02/25/04 - WHOLE - RES. 040076 I feel that might be a succinct way of having them for you. Good afternoon, Madam President. I'm Jonathan Stein. Most of you know me as General Counsel at Community Legal Services, but I was also appointed by Madam President as a member of the Philadelphia Tax Reform Commission this past year. I had a particular interest in joining the Commission's work. I embrace the general thrust of the Commission's directions as to how to support economic development growth in the City as well as tax equity. I also was concerned that there might well be a number of voices in the City that might not get heard on this Commission. And in viewing who was pressing and lobbying for a variety of measures, I thought that that didn't necessarily reflect the entire City, and there were community organizations, there were voices that needed to be heard if we're going to engage in a major public debate on allocation of scarce tax dollars in this area. And indeed, I was a dissenting 116 02/25/04 - WHOLE - RES. 040076 member of the Commission. Although, as I'll make clear in a few minutes, I did not dissent from all the recommendations. In fact, I hardly embraced many recommendations of the Commission. But because the Commission had made no provision for publishing or presenting dissenting views in its final report, I particularly welcome this opportunity. And I certainly took the opportunity to make my views known in these various hotbeds, the Inquirer, Daily News, Philadelphia Sun and City Paper, which you have before you. On the first day I participated in the Commission I made a point about the complexity of what we were facing. The issue is what does support economic growth and population coming here and staying here in the City. And my concern was that if you just looked at one factor or one tax or a couple taxes, you weren't taking a realistic, honest, complete view of tax policy and tax reforms. Because the reality, as Mr. Vignola said this morning, just a couple hours ago, is that these taxes are one piece of the puzzle. And 117 02/25/04 - WHOLE - RES. 040076 if you're just looking at one piece and you're making decisions that affect hundreds of millions of dollars of City revenue looking at one piece, you're not really, I think, doing justice to the issues before us. I made a point of the need for the Commission to commission research that would look at the variety of factors that everyone in this room knows affects population and business. And they include not only the various taxes before us, but also schools, quality of the labor force, our transportation system, public safety and crime, the cost of insurance and a number of factors that are very real. They have play every day. This is not an impossible task to do. The District of Columbia's Tax Reform Commission just a few years earlier had taken on a very similar task and they did commission research that did an honest job at looking at the multi-factors that deal with economic development and population growth. This Tax Commission in Philadelphia chose not to do that. I never, I think, really received 118 02/25/04 - WHOLE - RES. 040076 an adequate response as to why they chose not to do that. But they made the decision and that decision is reflected in their recommendations. Their decision was to commission research and look at just tax factors, or we commission existing research where you essentially play out what happens when you cut a wage tax, a business privilege tax and what supply side economic consequences are there; how much money is freed up. And with using a formula or model, what good consequences come from freeing up that money.

The people who did that research for the Commission readily admitted, but you don't see it very prominent in the Commission report, unfortunately -- it may be in the foot notes someplace or it's not even in a foot note -- that essentially that kind of research has an inherent bias of not looking at all the variables and all factors that effect population and growth. They also made the qualification that their predictions don't hold water if services are cut. If the infrastructure of 119 02/25/04 - WHOLE - RES. 040076 transportation, social services, fire, police, and the rest are adversely affected by your tax cuts, then all bets are off. Then all these predictions about thousands of jobs won't happen. That you'll find in some foot note of an economist. You won't find that very prominent in the final report. I'm here in fact to say that's reality. That's a factor that needs to be taken into account and that qualifies the whole package of recommendations that's before you. Now, this is not to say that taxes are irrelevant. I don't want to be in a corner which says that this tax debate is irrelevant and taxes are not relevant. The real question is how relevant the tax is, how much weight and consideration do we give to taxes in relationship to other things, like a good work force that can work in jobs here. And that is part of the picture which I think was absent. And there was a kind of tunnel vision, and I think people had a rationale for that, to look solely at the tax picture and tax side. 120 02/25/04 - WHOLE - RES. 040076 I think what we are hearing this morning, some excellent questions from City Councilmen -- I know Councilman Goode asked them this morning -- were questions about economic growth. Where is the total picture, where is the total policy on economic growth. Because unless we have that total picture we can't just tinker with a tax here, a tax there. The consequences obviously for major tax cuts are serious for the budget. And I know that's in debate this morning, some of which came out in Controller Saidel's statement. But there is a serious shortfall for the City when you have a major tax cut as proposed. A tax cut beyond that of what the Mayor already has in the pipeline, which as I understand is something like $364 million of tax cuts, are already in the pipeline that are unquestioned. And my concern was that in the shortfall, not only are potential essential services endangered, but the remedies that the Commission came up for the shortfall are essentially other taxes. Increase the sales 121 02/25/04 - WHOLE - RES. 040076 tax base to deal with the shortfall. And they even say we can even increase the real estate tax. And I'm not sure that was prominently enough mentioned by -- maybe it was not even mentioned by anyone who spoke yesterday. The idea of cutting a business privilege tax and a wage tax and then saying, well, we'll have a shortfall that can be made up by increasing real estate taxes --now, this is on of the Tax Commission report, Volume 1 -- that has serious consequences. I don't think this Commission seriously looked at what happens when you cut the wage tax in a broad way. And remember 40 percent of that comes from suburbanites, and those are people who are not represented by people in this Chamber. When you cut the wage tax broadly, cut and really end the business privilege tax and then say, well, that gap can be made up because housing values will go up, assessments will go up and indeed real estate taxes will go up, is that a formula for growing the City, for keeping the population here, for attracting people to a City where one of our 122 02/25/04 - WHOLE - RES. 040076 great things about the City is the livability, affordability housing in the City for many, if not for all?

So I think there are sides to this Commission report which need a fuller airing and assumptions that somehow by cutting taxes on the wage and business privilege side and raising them on the real estate tax as a consequence, that there's something good about that. I would suggest respectfully that increasing real estate taxes or an increase in real estate tax is not healthy for the City. It's not health for low income people. It's not healthy for middle income people. There's no provision here for really dealing with the impact on either middle income or low income people of a real estate tax increase. Seventy percent of homeowners and renters in the City earn less than $20,000 a year; 70 percent. And that 70 percent also pays over half their income for housing. And if you're going to institute any tax cutting that's going to have an effect of raising real estate taxes, you're going to increase homeless people, you're going to increase suffering and hardship on 123 02/25/04 - WHOLE - RES. 040076 low income people and indeed on middle class people as well. Now, another key element that was missing in the Tax Commission report is an area of progressive tax policy. Now, this is not some new deal thing or something from another century. This is what is called fairness and equity in tax policy. It's having people pay according to their ability to pay. And in terms of the wage tax, we have an enormously regressive tax which impacts on lower income people in a horrific way, and yet the Commission report did not do anything to make the wage tax more progressive, short of simply cutting it for everyone a bit equally, whether you earned $15 or $25,000 a year or whether you earned $50,000 a year or $500,000 a year or $5 million a year. The cut is the same. That's not progressive tax policy. When City Council set up the Commission it explicitly said in the ordinance that was approved by Council, that a guideline for the Commission should be tax equity in apportioning tax burdens. And one would have 124 02/25/04 - WHOLE - RES. 040076 hoped that this Commission, which comes maybe once in a hundred years, would say something to make the wage tax more progressive, and it failed. It certainly said, well, let's do a better job of helping lower income people draw down Earned Income Tax Credit and the state tax forgiveness, and that's great and that's wonderful and the City should be pumping some money there because there may be up to $150 million of federal and state tax rebates or credits that should come into City residents that's not happening and the City would be smart to help people get that money down. But there's not any recommendation that makes the wage tax more progressive. There was in City Council -- it was Councilman Cohen's bill, which a majority of Council one point passed would provide that kind of progressivity. It would say that the wage tax would have the same or similar exemptions as are in the state income tax. That would inject progressivity in the wage tax. Now, there's no magic formula for how that's done. There are formulas that can make 125 02/25/04 - WHOLE - RES. 040076 it a bit more costly or less costly. You can set the line at 200 percent of poverty, which the state income tax does. You can do it at something less than that at poverty or even less than poverty, but the principal is important, that if you are working and in poverty or working at close to poverty, you should have recognition in City tax wage tax policy that you should get a break. There should be a recognition that you're having difficulty putting food on the table, paying a utility bill and surviving. And we should have progressivity on a wage tax to do that.

Now, I distributed two items, which may have got to your desk earlier in the year, which was research commissioned by the Keystone Research Center, and they provided the first economic analysis that's ever been done on why a targeted wage tax cut for lower income people should be adopted on economic grounds. Because what they looked at are a number of factors, including how much consumer demand for local businesses, Philadelphia neighborhood businesses, is created by having 126 02/25/04 - WHOLE - RES. 040076 a wage tax cut that's targeted to lower income people, not a broad across the board tax where those 40 percent of suburbanites or commuters get a cut, but a tax that in fact benefits largely or almost solely Philadelphia people, who will largely or solely spend that money on Philadelphia businesses. They won't, as the economic analysis shows, put a chunk of that aside for savings or for their trip to Cancun or wherever they're not spending that money. And so there's a good economic rationale to say, a targeted wage tax cut -- and it can be as small as this Council wants to enact -- it doesn't have to be grand like the federal or the state income taxes do. It could be a small step in the right direction, but it would ensure that that money is spent in Philadelphia by Philadelphia people and by the neediest people in the City. I urge the Council to consider that as this tax debate continues. Let me spend just a few more minutes on a couple of other points. On the whole wage tax cutting matter, I think it certainly 127 02/25/04 - WHOLE - RES. 040076 is prudent for this Council to tune into what the Governor is doing. If the Governor is going to press a gaming tax as well as a small increase in the state income tax, which is a progressive tax, and that will produce a significant cut in the wage tax, might it not be prudent to embrace that, work to make that happen and then use that to advertise that we are going in the right direction on tax cutting. The Mayor is already cutting wage and business privilege taxes by over $360 million in the next five years. The Governor's proposal will add to that, and that puts you in good stead in my view that you're in the wage tax cutting business and that you value that as well. And I think what's going on at the state level certainly needs to be incorporated into the debate here. I should say a couple of words about the fact that although I did dissent from the Commission's report, I did heartily embrace a number of its recommendation. I mentioned one significant one, which was having City support efforts to help lower income people draw down 128 02/25/04 - WHOLE - RES. 040076 Earned Income Tax Credit, EITC, and state tax forgiveness. There's an estimated -- and I can't personally vouch for it, but we're told that there's an estimated total of about $150 million in federal and state rebates that should come to Philadelphia residents, but because of the paperwork, the burdensomeness, the fact that there's very little free tax assistance, people don't claim that money. And the City would use its money in a real smart way to help groups help people draw down that money. I also embraced pretty much all of the recommendations to reform the real estate tax assessment system, not to increase real estate taxes, but to reform the system as to how assessments are done. It's a system that discriminates against low income and minority residents. It has lots of problems of fairness and arbitrariness and really needs to be turned on its head in a major way. Also, although I really was not a great enthusiast for the land tax, I have to say that I was brought around by studies and 129 02/25/04 - WHOLE - RES. 040076 analyses that the land tax and the small steps toward the land tax that the Commission recommended over years is a smart decision. 5 It will benefit the large majority of 6 residential homeowners and will give a message 7 to speculators and people who just leave 8 property vacant.

I can say one in our 9 neighborhood, the Toll Brothers Naval Home 10 Site, which has been left vacant for a long time now, that it would be a tax message to people who leave property vacant that there's a price to pay for that, and that that's not what our City needs. Our City needs development, and a land tax is a way of giving the right message to have a more pro-development side to the City. There are a number of other recommendations there in the real estate area that I think are really very important that I also adopt as well. I'd like to sort of conclude there. I know Shelly Yanoff, who was to follow me, has had to run. I know she left a very brief statement with you, and in its last sentence she concludes -- and her concern is City 130 02/25/04 - WHOLE - RES. 040076 services. She concludes that our City does need a better and more efficient tax system, but we also need to maintain and increase our services to make the City a place where families and industries want to live. We cannot risk diminishing vital services on hope. And the hope she's referring to is really the speculation, the supply side assumptions that cutting the wage and business privilege tax in a major will get us $46,000 jobs or whatever down the road. She says we cannot risk diminishing vital services on hope. We need to build our communities with hope and also with support as well. That's how she concludes her testimony, and I'd like to sort of conclude mine with that as well. Two in one.

Thank you very much, Mr. Stein. Are there any questions from Members of the Committee? The Chair recognizes Councilman Nutter.

Thank you, Madam 131 02/25/04 - WHOLE - RES. 040076 Chair. Mr. Stein, thank you for coming in. The one thing I guess I've been -- we haven't had a chance to talk about this. I know that you voted against the TRC report, although just here in your closing comments you made reference to a number of the recommendations that you agreed with. Are there any recommendations that you disagreed with of the recommendations that were made?

Well, I thought I made that clear. Frankly, if they were provisioned for a written dissent, which generally takes a place in many democratic forums in our country where a dissenting view is allowed to be published, I probably could have delineated in greater specificity as opposed to op ed columns, which enormously abbreviated my complete views, but because I wasn't afforded the opportunity of actually providing a written dissent --

Why was that?

Well, I guess you can ask the Chairman of the Commission, Ed 132 02/25/04 - WHOLE - RES. 040076 Schwartz. It was clear before the Commission's report was published that I had dissenting views and I can just say there was no provision in the report for a written dissent. But your question, I guess, just a minute ago was, do I disagree with things in the Commission, and it's absolutely correct. I have enormous skepticism and I don't think the case was made for the major wage tax cut and the elimination of the business privilege tax as critical to population and business growth. I might have come to that If --

What do you think is going drive population and business growth?

Well, I think there is a variety of factors that are known to drive it, and it not only includes taxes. As I said earlier, it's not only taxes, but it's also things like quality of schools, quality of our labor force, quality of our transportation infrastructure.

I understand 133 02/25/04 - WHOLE - RES. 040076 that, but that wasn't within their charge.

Well, yes and no. You know, charges are not absolutely in stone or black and white. The charge was very similar to that of --

Mr. Stein, the charge was very clear and it was in black and white. It was in a question on the ballot and it was written in an ordinance and a resolution. It could not have been more clear.

The charge was the same as in D.C., and when the D.C. Commission on Tax Reform looked at these issues, they said, we have to parcel out what drives business development and population. Because if you just put all your eggs in one basket of hundreds of millions of dollars of City revenue in the future that goes into one tax cut and put all your bets there and saying, that's going to be the key to future economic growth, but the affect of that is --

It's not one tax cut. There were 13 bills involved. 134 02/25/04 - WHOLE - RES. 040076

Excuse me. If you undercut other services that the City has to provide or your school system or your transportation system that businesses need and people rely on, you undercut what you're trying to go.

Do the bills require a cut in service? Can you tell me any services that have been cut as a result of the wage tax --

Councilman, you're missing my point.

-- the wage and business tax cuts that have been made since 1995.

I think you're missing my point, Councilman. I'm not suggesting that the ordinance suggested any cuts. My only point is that if you take a fair and objective look at what are the factors that promote business, that promote population growth, there may be a dozen that you and I would both agree with in this room. And the question is, do you single out one or two or three of them 135 02/25/04 - WHOLE - RES. 040076 and put all your bets on that and commission research that only looks at two or three and ignore the other seven or eight?

What are the other seven or eight?

Well, they include schools, the quality of our labor force, our transportation system, the cost of insurance of various kinds, and public safety and crime. Now, everyone in this room knows that those impact on population and business growth. And to have a tunnel vision that ignores those factors and just looks at a wage tax or a business privilege tax is not a very objective mutual way of trying to get answers to questions. Now, it is one way, and the people from Wharton or the economists who did research in this area went that way, but they were candid enough to admit that, hey, there's a bias in what we're doing. There's a bias because we are X-ing out, excluding these other variables that every economist knows comes to play in this equation. What that 136 02/25/04 - WHOLE - RES. 040076 leaves me with, Councilman, that gives me skepticism to say I can't wholeheartedly run with the crowd and say, here's a silver bullet that will bring prosperity and population to the City.

Let me at least put on the record -- and I understand and appreciate your viewpoint. There may yet to be a commission created to look at the larger, broader issue. But this is the question that was on the ballot, "Shall the Philadelphia Home Rule Charter be amended to provide for the creation, appointment, powers and duties of an independent Philadelphia Tax Reform Commission which would recommend methods to reduce the taxes of Philadelphia residents, workers and businesses in an equitable manner in order to enhance Philadelphia's ability to compete with other jurisdictions in attracting and retaining new residents, businesses and jobs based upon the Commission's comprehensive analysis of taxation in Philadelphia?" That was their charge.

That was the charge. 137 02/25/04 - WHOLE - RES. 040076 And there's also a City Council ordinance 3 beyond that, which is not irrelevant, is it not? The City Council ordinance behind that spoke about specifically -- and was adopted unanimously, I believe, and signed by the Mayor -- spoke about factors about promoting economic development and business growth and population retention growth in the City, as well as the guideline that you're familiar with that deals with tax equity and apportioning tax burden. You can't put a whole ordinance in a one sentence referendum, as you know.

I'm certainly aware of that because I think we adopted that language at your request in the resolution, which did not require the Mayor's approval. Resolutions are passed by this Council. That was the ballot question. I guess where we end up with all of this is everything I've heard, both before and today, seems to be primarily focused on the wage tax as it relates to low income residents. Councilman Cohen had a bill on 138 02/25/04 - WHOLE - RES. 040076 that, and I've supported him in those efforts. I have been anticipating or expecting that the bill would come back. I don't know why it hasn't come in, and I haven't talked to the Councilman about it. But if that is the issue, then it seems to me that whenever the time comes, if the bill gets in, if that's the goal here, then maybe we'd have a debate about bills, instead of 13. I guess I'm not 11 clear, I guess at the moment, as to what the 12 point is. 13 The Commission issued a report. You 14 didn't like the report, although you like some of the components of the report. You want to keep talking to us about wage tax and its impact on low income people, which I understand and would like to do something about. But I guess I would also suggest to you that if I could have the things the way I'd like, which is rare, I'd rather figure out how to get more jobs in Philadelphia so that low income people can move out of the low income category and then they won't have to worry about if there's an exclusion for low 139 02/25/04 - WHOLE - RES. 040076 income people. They'll have a better job.

I don't disagree with that. The question is, how do you get there? The interesting questions earlier before I spoke -- and they may have come from you, Councilman Goode, and Councilwoman Tasco I think asked it as well -- was where is the economic development policy of the City? And can we not put things in that larger setting. Maybe with that tax reform, business and wage tax, it was a component of that. But the difficulty is that when you have a Tax Reform Commission that just looks at taxes in relative isolation, you're going to get some skewed results. And if the City is going to not collect $200 million between '04 and '08 and another $145 million the year after, and who knows how much further, because this Tax Commission decided, unlike --

Not collect those dollars for what?

Those are the revenue shortfalls that they predicted. In fact, they didn't even go out to 2015. I mean, most 140 02/25/04 - WHOLE - RES. 040076 budget estimates would go beyond five years to at least years. That's what Congress does. 4 This Commission didn't do that, so we don't 5 even have numbers of how many more hundreds of 6 millions of dollars the City would lose in the 7 longer run if you take it beyond five years. 8 But the question is, are there -- those are 9 scarce dollars. And the rosy assumptions made 10 by the supply side economic theory here is that we put all our bets on saying those hundreds of millions of dollars will get us 46,000 jobs -- and who knows whether any low income people could even qualify for those jobs, but let's put that aside. But those 46,000 jobs will come down the road. Now, query, if that money or some of that money went to improve schools, kept college graduates here, improved the transportation system, did other quality of life improvements that we know are relevant to business and people, that's a competing consideration.

Well, Mr. Stein I would suggest to you that that's kind of what we get paid for. 141 02/25/04 - WHOLE - RES. 040076

That's what you get paid for.

That's for us to make those decisions. That's not for the Tax Reform Commission. They were asked to do a specific job. And from my perspective they did their job for the narrow issue of making recommendations to reduce the tax burden on residents, businesses and people who work here. That was the charge. I think they have responded. Whether I like all of their proposals or not or whether you like all of their proposals or not, I think they did their job. The issues that you're talking about are critically important to this City. They're recommendations. We get to make all of those other decisions that you're talking about. Some we make for ourselves. Some will come in the form of aid form an aid from the state. Some will come in the form of aid from the federal government. But the Tax Reform Commission doesn't get to implement anything.

I realize that. Just to give you a concrete example. The D.C. 142 02/25/04 - WHOLE - RES. 040076 Commission found in its research that labor force availability and quality were more important for economic growth than tax cuts or tax inducements. Now, if that's true here in Philadelphia too, that the availability of a skilled work force, an educated work force that can do their computer stuff and math and all that is more important than a broad tax cut.

I don't know if we want to compare Philadelphia to Washington, D.C. For a whole host of reasons. According to the Brookings report, 50 percent of the residents of Washington, D.C., have a college degree. Unfortunately, what they don't mention is that many of the people in Washington, D.C. didn't grow up in Washington, D.C. We have a much higher resident bred population here than the City of Washington. And they've got the capitol police and a whole host of other issues down there.

I'm not saying we're D.C.

They don't have 143 02/25/04 - WHOLE - RES. 040076 to do a few things that we do.

I'm just saying that what the D.C. Commission did, and what our Commission did not do, is that they at least asked the right questions and commissioned the right research. We didn't even want to know the answer to the question, because the answer already --

I can't comment on what the Commission did or didn't do. I wasn't on the Commission.

Well, that's why I'm here to tell you what the Commission didn't do. They didn't commission that kind of research.

Let me mention one last thing and then I'll be finished. With regard to the issue of dissent, which I certainly believe in, Section 4-900, Letter B, the last section of that section 22 says, "The Commission shall also publish and distribute with its report any minority report adopted by three or more members of the Commission." 144 02/25/04 - WHOLE - RES. 040076 I think that's the provision. Were there three or more members who wanted to issue a dissent.

In that situation they would have had to done a dissent. There was no prohibition on publishing my views as a dissenter of one. They were not under a mandate, you're correct. If they wanted to, they did not have a mandate.

It says, you'll publish and distribute with its report any minority report adopted by three or more members of the Commission. Were there three or more members of the Commission who wanted to issue a minority report?

No. 18

Okay. So at least by way of the Charter provision and what we passed and what the voters approved, you were not prevented from issuing a minority report, you didn't meet the standard of the ordinance.

Well, however you want to cut it. I'm not making an issue of that, 145 02/25/04 - WHOLE - RES. 040076 Councilman. I had views. They weren't published.

You're an attorney, so I know for you words have meaning and process has meaning. And so when we try to craft, as inexperienced as we may be in the creation of law, when we create something, we do it for the purpose of trying to make sure that it works. Now, if there's an internal process or some issues between and among members that don't allow something to happen, whatever that may be, that's one thing. But it's important to me as a legislator that if I write something and the voters approve it, I want to make sure that it's followed. So it is important to me that if three or more members of the Commission wanted to issue a minority report and they were prevented from doing that, then we'd be having a public hearing about that issue. That's how serious it is to me. So if you tell me that you weren't able to do it because only one person wanted to do it, that's a different issue. So what people 146 02/25/04 - WHOLE - RES. 040076 could have done or should have done or would have liked to have done is very different to me than if you tell me that four people wanted to issue a minority report, and somehow someone prevented them from doing it. That's a problem. Because I wrote it, and I wanted to make sure that people had an opportunity to have something to say.

But I never said that.

Well, that's the way I took it.

Well, then I'm glad you asked the question and I'm glad I'm here to clarify it. I was a dissenter of one. The Commission weren't under a legal mandate, you're correct. There was no legal provision that said they must publish my views. You're correct. There are other parts of that ordinance on tax equity -- and I'm glad you also shared my concern earlier with Councilman Cohen's bill, that in the same resolution that you went to great effort to enact and draft that provision on tax equity and apportioned 147 02/25/04 - WHOLE - RES. 040076 burden was a key element as a guideline of the Commission. I repeatedly cited that provision of your resolution and the City Council resolution to say, we have to look at the wage tax to make it more progressive and we must take one step in that direction. Any step in that direction would be appropriate and that's in part of my dissenting.

That was one of many amendments that was made in order to try to get this done. So as I laid out that there was some issues that the Mayor had a concern about, there were issues that you had a concern about, there were issues that Councilman Cohen had a concern about, there were issues that other Members had a concern about. Almost everybody had something to say, and if you're the person trying to bake the pie, then you've got to try to make sure that all the ingredients work together. And I think, at least that part of it, we tried to be as accommodating as possible. It happens on the tail end of it. That's the wonder of independent commissions; they act 148 02/25/04 - WHOLE - RES. 040076 independently.

I respect your efforts at the front end of it and also the Council President's efforts as well in terms of appointees the Commission, including myself on the Commission. I'm here to say at the tail end, I have some serious problems with how the report came out.

I can appreciate that. Thank you.

Thank you. Are there any other questions from Members of the Committee? The Chair recognizes Councilman Rizzo.

I'm glad that Councilman Nutter pushed you a little bit to clarify exactly the rules. We all live with rules around here. You have them too, I see. But did you ever ask to be able to present your dissenting opinion, even though you were prohibited? Did you ever suggest, Counselor, that you could do this and were you told no?

I made no formal request 149 02/25/04 - WHOLE - RES. 040076 of the whole Commission. I did make some informal inquiries and it didn't appear that there was any likelihood that there would be an actual printing or publication of my dissent.

If I asked you to provide to the Chair that opinion, would you be able to do that?

Well, yes, I could. What I attempted to do is I've distributed -- and it may be on your desk or come to your desk -- my views as they were published in various newspapers in op ed columns which generally reflect, although in a very shortened way, my views.

I heard you say that. But if in fact we asked you to provide to the Chair that opinion, would you be able to do that?

Yes, I think I could.

Could you do that?

Yes.

I appreciate 150 02/25/04 - WHOLE - RES. 040076 that. President Verna, I think that that dissenting view should become part of the record when it's presented.

Certainly.

Thank you.

Thank you. Thank you, sir.

Thank you very much, Mr. Stein. Mr. McPherson, who is our next witness?

Phillip Lord, Tenant Action Group.

I believe the Members of Council do have a copy of Mr. Lord's testimony. Please identify yourself for the record and proceed with your testimony.

My name is Phillip Lord. I'm executive director of the Tenants' Action Group of Philadelphia. Tenant Action Group -- we call it TAG -- is a 30-year-old tenants' rights organization. I also had the privilege 151 02/25/04 - WHOLE - RES. 040076 of being on the advisory board for the Tax Reform Commission. We educate and organize tenants in order to improve rental housing. That's our goal. We are interested in this report for several reasons. One is than tax reform can help alleviate the tax burdens that are passed on to tenants. It can provide incentives for landlords to make repairs and it also can reduce the tax burden in general for low income persons, which is important. It's for those reasons we've come forward today. We'd like to say that it was difficult to respond to this report, in part because in looking through it there was -- we couldn't find any reference to residential tenants in the report. There are several references to homeowners, but there's no 20 reference to residential tenants, who are 40 percent of the population. So the impact of this report on tenants is not totally clear to us. But there are a couple of aspects that we want to comment on. We're very interested in the land 152 02/25/04 - WHOLE - RES. 040076 value taxation. We think that might be a benefit in the sense that there's a lot of dis-incentives for landlords to make repairs and if there's a land value taxation at least increased taxes won't be a disincentive for improving rental property. We're concerned that there will not be dis-incentives. So the land value taxation may be a good idea for improving the situation here. We think the wage tax reduction should be targeted, as was testified several times before. We believe that it's not a lot of money for the individual, even though it may be important to the City in terms of dollars, that the major impact will be felt by people in the lowest income brackets. Those people really should get the benefit of that reduction. So our concern is that particularly low income tenants have more money to spend on their rental costs and that might be facilitated by a targeted wage tax reduction. Finally, we've also raised some concern regarding the inclination to use real 153 02/25/04 - WHOLE - RES. 040076 estate taxes instead of wage taxes to fund City services. We're concerned that an increase in real estate taxes will result in a pass-through to tenants. Now, there may not be an increase, but in fact if it does happen, that results in increased rents. Increased rents affect the attractiveness and affordability of living in Philadelphia. The businesses that are coming in are going to bring in employees, perhaps. These employees are not all going to be looking for home ownership opportunities. Many of them are going to be looking for rental opportunities, particularly because they're coming here briefly or for the first time. We think that trying to reduce wage taxes in deference to increasing real estate taxes or at least placing a bigger burden on that may be a misdirected policy for that reason. So those are our concerns. We'd like actually more analysis to be done about the impact of this whole proposal on tenants in Philadelphia, who are, like I said, 40 percent of the population not 154 02/25/04 - WHOLE - RES. 040076 reflected in this proposal or in the resulting policies that might come out of it.

Thank you. Was Shelly Yanoff with you?

She was unable to stay, so her testimony is in writing and submitted to you that way.

Was it submitted to the Chair? Because I don't have a copy of it and I would like the stenographer to have a copy of it.

She left copies.

Are there any questions for this gentleman? Thank you very much. Mr. McPherson, who is our next witness.

The next witness is Al Taubenberger from the Greater Northeast Philadelphia Chamber of Commerce.

Good afternoon. Thank you for your patience. Please introduce yourself for the record and proceed with your testimony. 155 02/25/04 - WHOLE - RES. 040076

Good afternoon. My name is Rosemarie McManaman. I'm Chairperson of the Greater Northeast Chamber of Commerce, which represents 1,000 member businesses in the Greater Northeast Philadelphia region. I'm grateful for the opportunity to testify today to what our organization believes is an issue of paramount importance, not only to our members, but to all citizens of the City of Philadelphia, tax reform. The Greater Northeast Philadelphia Chamber of Commerce was proud to hold one of the seats on the historic Philadelphia Tax 15 Reform Commission, which as you know was created by Philadelphia voters by a four to one margin. Our President, Alfred W. Taubenberger, served as one of the two vice chairs on the Commission, as well as a member of the three of the four working groups. Mr. Taubenberger's efforts paid personal dividends for our chamber. After his experiences on the Commission he returned to us energized and educated about the immense challenges before us. We believe that Philadelphia cannot enjoy 156 02/25/04 - WHOLE - RES. 040076 economic prosperity without serious and substantial tax reform. Doing business as usual is no longer an option. Unless the City can effectively reduce the high overall levels of taxation, our future as a competitor for business dollars is uncertain. As all of you know, economists agree that local taxes have a significant impact on economic growth. For this reason, taxes have their strongest impact on local communities. This is what our members have told us. Philadelphia tax structure is oppressive. Our chamber is composed of many so-called mom and pop businesses. These are small business owners who are both excited and frustrated by the challenges of doing business in Philadelphia; excited by the prospect of utilizing their talents to grow, expand and profit in respective businesses; frustrated by a tax structure that is complicated and onerous. Our members are well aware that Philadelphia is one of the highest tax cities in the nation. We are well versed on the negative impact that raising taxes has on economic 157 02/25/04 - WHOLE - RES. 040076 prosperity. First and foremost, our members would like to see the complete elimination of the so-called business privilege tax. This tax is particularly difficult for our membership since it requires them to pay a tax on their gross receipts, whether they have made a profit or not. Many of these small start-up businesses do not realize profitability until their third year, if they can stay in business that long. And please allow me to go on record in opposition to even the name of such a tax. The Greater Northeast Philadelphia Chamber of Commerce and, I am sure, many others do not accept the view that it should be a privilege to do business in Philadelphia. While this may not the literal meaning of the term, the connotation is unmistakable. Instead, let's work to foster an entirely new and fresh business friendly attitude within the City. We can start by changing the name of the business privilege tax until its eventual demise. In fact, we agree with the Philadelphia Tax Reform 158 02/25/04 - WHOLE - RES. 040076 Commission's recommendation 23, incrementally eliminate the business privilege tax by fiscal year 2015, and quite frankly, the sooner the better. Second, we need more information and education about Philadelphia's tax structure. Small business owners do not have the time it takes to address complicated tax problems without the benefit of a coherent, consistent source of information. We agree with the Philadelphia Tax Reform Commission's recommendation 2, establish a taxpayers' advocate. Now, the baker on Castor Avenue and the florist on Frankford Avenue and the tailor on Academy Road and the deli owner on Bustleton Avenue, all of them will know exactly where to go for help with their tax problems.

Right now our membership has told us horror stories of inadequate customer service, snappy or incorrect answers to their questions or confusing forms with no reference or contact telephone numbers. Lastly, our Chamber not only recognizes the seriousness of the problems, 159 02/25/04 - WHOLE - RES. 040076 but the difficulties in implementing solutions as well. Tax reform may be something all of us agree upon and yet none of us believe it can or should occur overnight. However, we accept that by reducing local taxes will have a significant positive impact on our local economy, than to sit idly by while our businesses close shop and our residents flee to the suburbs is both reckless and irresponsible. Philadelphia is a great City with a wonderful history and unique traditions. One of the best ways to market our City is by promoting a new business climate, and the first step to creating this new business climate is through tax reform. The Greater Northeast Philadelphia Chamber of Commerce urges to accept this challenge, and as we have done since our founding in 1922, we stand ready to assist in their efforts. Thank you very much.

Thank you. Are there any questions from Members of the Committee? 160 02/25/04 - WHOLE - RES. 040076 (No response.)

Seeing none, I thank you again. You were very patient today.

I'm Al Taubenberger, President of the Northeast Philadelphia Chamber of Commerce and Vice Chairman of the Philadelphia Tax Reform Commission. Really, on the top 10 reasons for tax reform it's the creation of jobs, jobs and jobs because quite honestly, a good job at a good wage is better than any government program coming out of either Harrisburg or Washington. But our tax climate is so poor that it really drives folks away. Really, all you have to do is really take a look at the facts. I'm going to just quote a couple things out of the report itself. Philadelphia has an unusually high reliance on business and personal income tax. Among the nation's 20 largest cities, only three taxed the net income of corporations; New York City, Philadelphia and Detroit. And 161 02/25/04 - WHOLE - RES. 040076 Detroit's 1.2 percent corporation income tax is being phased out with complete elimination scheduled for the year 2009. Philadelphia is the only major US City to levy a tax on both business, net income and gross receipts. The gross receipts portion of the business privilege tax is between six and nine times the average rate leveled in suburban Philadelphia, depending on the industry. It does vary a little bit. But quite honestly, the local income tax rate levied on residents exceeds 1.5 percent in only three of 240 municipality jurisdictions surrounding Philadelphia. Among the top largest cities 16 in the country, only eight levy local income 17 tax; 4.3 is Philadelphia's local income tax 18 rate for residents. It is the highest in the 19 nation. Among other major cities with local 20 income tax, the median rate is 2 percent, less than half of Philadelphia's current tax. Philadelphia's tax on non-residents' income currently is 3.88 percent. It's higher than any other City in the United States. The next highest local commuter tax is 2.25 162 02/25/04 - WHOLE - RES. 040076 percent, and that rate is imposed in Dayton, Ohio and Youngstown, Ohio, all within Ohio. This sort of atmosphere is so poor that no one would think to come here for sure. And those that are already here are certainly looking to leave. And not always the largest companies, but very, very small companies. There are three in our Chamber that I'd just like to point out that started in Northeast Philadelphia. Because the spirit of entrepreneurism is here in this City, no 13 question about it. Letter B Mailing Company, they mail out bulk mailing and letters and so and so forth, mostly for advertisement purposes and fund-raising purposes. They started in a basement. As soon as they were up and running they moved to Bensalem. The Russian Market newspaper, formerly on Bustleton Avenue, employs about eight people. They saw the tax structure here. They're now in Feasterville. Mickey Bear (ph), he has an insurance company, Bear Associates, one of the former presidents of our Chamber, been in Philadelphia for years. He is now in Bucks 163 02/25/04 - WHOLE - RES. 040076 County. And a personal friend of mine, A.L. Verna Company -- no relationship, I understand -- but still formerly in South Philadelphia for 85 years importing garlic, nuts and dried fruits took their company to Vineland, New Jersey. That's jobs, and that is a shame. 8 It is absolutely a shame. 9

Do they 10 still have a business -- is it Delaware 11 Avenue, Councilman? 12 MR TAUBENBERGER: A.L. Verna, they 13 were on 2nd Street. 14

Second and 15 where? 16

I think right 17 below Federal. He's a personal friend. He 18 sits next to me at the Philadelphia Flyers. I 19 asked him long ago if there was a 20 relationship --

We're not related, but I do know the gentleman and I thought they were still in the City.

No. They are now in Vineland, New Jersey saving significant tax 164 02/25/04 - WHOLE - RES. 040076 dollars. If you ever would like to have him speak to you, they will be glad to do so and tell you why they left. It's really economics and dollars.

Thank you.

That is all. That's my testimony.

Are there any questions from Members of the Committee? Again, you've been here all day and I want to thank you for your patience today and all the work that you did on the Commission.

It's our pleasure and our duty. President Verna, thank you for holding these hearings.

Gabe Bevilacqua. Good afternoon. Thank you for coming in.

Good afternoon, Council President Verna. It's my pleasure to testify today. I do have extra copies of my testimony with me. I'll leave them on the table in case others are interested. 165 02/25/04 - WHOLE - RES. 040076

We have them.

Thank you. Council President Verna and Members of City Council, I offer my thanks and appreciation for this opportunity to testify on tax reform. On behalf of the 13,000 member Philadelphia Bar Association, I thank you for your leadership and your commitment to our City. The Philadelphia Bar Association has been an integral part of the Philadelphia community for 202 years now. Indeed, it is hard to imagine Philadelphia without Philadelphia lawyers. And we wear the title, Philadelphia lawyer, proudly, as does our Mayor, various Members of City Council and so many other distinguished Philadelphians. We see ourselves as partners with the Mayor and Council in helping to ensure a bright and prosperous future for our great City and its citizens. We commend the Mayor and Council for your continuing commitment to the courts and the justice system. Today, we are here to talk once again about taxes. It has been 166 02/25/04 - WHOLE - RES. 040076 observed that the power to tax, attributed to United States Chief Justice John Marshall involves the power to destroy. And he added the power to destroy may defeat and render useless the power to create. Though Marshall uttered these words in 1819 they remain particularly relevant to tax policy generally and to Philadelphia's tax situation today. Taxes can choke and destroy economic growth and taxes can actually prevent the creation of businesses and jobs. Misplaced or unbalanced taxation can preemptively strike at the heart of our local economy. Taxes levied had in one area or tax breaks selectively granted effect every other segment of the economy. That's why it is important to take a broad view of local tax policy and look at everything in context. Wage, net profit, real property, business privilege and other taxes must be viewed in the aggregate. So it is not my intention today to go into minute detail regarding the recommendations of the Tax Reform Commission. I will simply reiterate that generally we 167 02/25/04 - WHOLE - RES. 040076 support those recommendations. We understand that any tax legislation will involve many details and technical considerations as the legislative process unfolds. Accordingly, the members of our Bar Association's tax section 7 are available to assist in any way that they can as this process moves forward. For now, we continue to urge the City to restructure its tax system. Studies have time and again shown that the City's tax structure is one of the principal reasons why businesses leave Philadelphia, do not expand here or never locate here. A recent study by the Pennsylvania Economy League came to this very conclusion. These studies are confirmed by our own anecdotal experiences, as well as those of our clients. In dealings with our business clients in the region, lawyers have repeatedly heard businesses express their concerns about the City's tax structure, and we understand those concerns. Regrettably, the current tax structure actually encourages lawyers to follow their clients out of the 168 02/25/04 - WHOLE - RES. 040076 City. And over the past years, our surveys show that Philadelphia law firms have been opening satellite offices in surrounding counties at an accelerating rate. Yet incredibly the area's major law firms, including many national and regional power houses, have continued to maintain their headquarter offices in the City. Clearly, the firms would rather not leave. They would rather remain Philadelphia lawyers. But as the City's tax structure continues to drive businesses and workers out of the City, how much longer can this last? One study shows that a Philadelphia family of four earning $40,000 annually can save $816 per year by moving out of the City. That's significant. This worker migration also limits the available talent pool for employers.

We urge the City to address the inequality that is inherent in the business privilege tax and correct the overtaxation of professional firms that are organized as partnerships. Specifically, the City effectively taxes partner income at a combined 169 02/25/04 - WHOLE - RES. 5 percent for residents. If the proposed slot machine legislation passes and wage tax rates are reduced, the disparity between how partners in a service firm are taxed and how employees of a corporation are taxed will grow even larger. 7 percent rate of tax is a major factor in the large shift of service sector jobs from the City to the suburbs. Let me emphasize that given today's computer and networking technology, the fax and the modem and the computer, law firms and other service firms no 20 longer need to be located in the City. They are highly mobile and can work virtually anywhere. Due in large part to the City's tax structure as it applies to partnerships, many firms have in fact left the City, either 170 02/25/04 - WHOLE - RES. 040076 entirely or in part by expanding suburban offices. It is difficult to determine the extent to which new firms have chosen to locate in the suburbs rather than the City as a result of the City's tax structure. A study released in January 2003 by the Central Philadelphia Development Corporation explains that Pennsylvania suburbs have enjoyed a robust 34 percent rise in professional service jobs between 1990 and 2000. The study goes on to note that Philadelphia added no new commercial office buildings in the 1990s. By contrast, the Pennsylvania suburbs have added 12 million square feet of space, the equivalent of 10 Liberty Place Towers, surpassing Center City in total space in the process. Had 12 million square space been developed in Philadelphia the City would have received approximately $64 million per year in real estate taxes, $150 million a year in new annual business and wage taxes, and would have generated between 156,000 and 240,000 more hotel room nights per year in business travel. If Philadelphia had 171 02/25/04 - WHOLE - RES. 040076 added just half the amount of office space, the City still would have realized over $100 million annual in new tax revenues. The problem faced by professional service firms stems from the City's taxation of partnerships relative to its taxation of other forms of business entities. Many professional service firms operate in partnership form for various reasons. Significant tax and non-tax restrictions exist to limit their ability to convert to non-partnership or corporate form. In light of such restrictions and faced with onerous taxation by the City, firms have, as the CPDC has recognized, explored alternatives such as relocating outside of Philadelphia. The City has suffered and continues to suffer as a result. As you may know, the Philadelphia business privilege tax, or BPT, applies to that's conducted within the City, regardless of form of organization. For example, corporation, partnership, sole proprietorship, LLC. The BPT consists of two tax bases; a tax 172 02/25/04 - WHOLE - RES. 040076 on gross receipts and a tax on net income. With regard to the tax on net income, taxpayers pay at the rate of 6-and-a-half percent on income attributable to business done within the City. By regulation, the City's Department of Revenue has directed that businesses conducted in partnership form may not deduct payments made to partners even where partners perform a significant level of service on behalf of the partnership. , shareholders. No 16 apparent policy supports this treatment. For the reasons we encourage the Council to consider the inequity presented in this situation, and resolve to propose to the City the allowance of a deduction by partnerships of payments made to partners who participate in the operation of their businesses. The top 22 Philadelphia law firms employ about 8,500 in Philadelphia, pay nearly $44 million annually to the City in taxes. 173 02/25/04 - WHOLE - RES.

040076 These same firms pay nearly $70 million annually to lease percent of all the office 4 space in Center City. 5 I'd like to emphasize those numbers. 6 The top 22, only the top 22 Philadelphia law 7 firms, lease 14 percent of the office space in 8 Center City. Most of the law firms in this 9 City are small and medium sized. You can do 10 the math yourself. Consider that our 11 membership is almost 60 percent solo and small 12 firms, not the top 22 law firms. And consider 13 that these firms also lease space in Center 14 City, and you can see that the legal services sector accounts we believe for between 25 and 30 percent of the lease space in Center City. The City's tax structure impacts these small and medium-sized firms, as well as the large firms. Taxes effect everyone; small business, large business, families, laborers, professionals. It makes no sense to pick one group or one class or one segment against another. The power to tax involves the power to destroy business, jobs and economic vitality or the power to create a growing, 174 02/25/04 - WHOLE - RES. 040076 vital economically vibrant City and region. Philadelphia must now choose. And on behalf of the Philadelphia Bar Association, I want to thank you and say once again we resolve to work with you and provide whatever help we can as Philadelphia addresses these important issues. Thank you, Council President Verna.

Thank you. Your testimony was very informative. Again, I appreciate your coming in. At this time the Chair recognizes Councilman Rizzo.

Thank you, Madam Chair. Counselor, thanks for coming here today. The legal profession, from what I understand, is not the only profession that is experiencing what you described, parts of companies leaving the City, satellite offices. I know of corporations in the City, that on a Friday afternoon, the Mayflower van backs up and moves a floor of a corporation to Bala Cynwyd, to Paoli. Many of these companies 175 02/25/04 - WHOLE - RES. 040076 that say their corporate headquarters are here, the minute that they employ or promote a manager of a particular unit within that company, they empower them in many cases to move their operation, whether it be a real estate department or a purchasing department from Philadelphia to an office suite out in Paoli. It's happening regularly here in the City of Philadelphia. My question to you is -- let's just use a number. Twelve lawyers, a firm decides to open a satellite office. Do they employ two more lawyers or do they take two of the 12 and relocate them outside the City? What is it scenario that you described? Are they a hiring additional people or just relocating and we're losing that tax base here in the City?

Councilman Rizzo, it's my experience that what they're doing is relocating lawyers from Center City to their satellite offices. Let me say that I'd like to make two points in this regard. One is the velocity of this change is accelerating. It 176 02/25/04 - WHOLE - RES. 040076 was something that was tenuous and explored very timidly in the late '80s and the early '90s when the satellite offices for all of the major Philadelphia law firms were established in the neighboring suburban counties. That timid approach to relocation no longer exists. We are seeing an acceleration, almost a business plan of expansion in the counties. It's very important to recognize that once you break that threshold and you begin that exodus, it accelerates. It's clear to me as chancellor of the Philadelphia Bar Association looking at our institutional law firms, the 15 largest law firms, establishing these offices. 16 These offices are very profitable and they're 17 all growing and they've all moved into new and 18 expanded space. But they move whole 19 departments out of Philadelphia. I know one 20 firm very intimately that moved their 21 corporate department out of Philadelphia. 22 Now, can you imagine? Now, this is the business nerve center of a large Philadelphia law firm now out in Berwin, not in Philadelphia any longer. The firm still 177 02/25/04 - WHOLE - RES. 040076 thinks of itself as a Philadelphia law firm, but the facts are that the legal services industry is not immune from what's happening to businesses generally and to individuals generally.

This is something that I've been concerned about for a long time. I've even said to the Commerce Department they really have to start focussing because little companies in themselves are leaving Philadelphia in the disguise of a corporation. The one that I know of, the first 50 employees left on a Friday night and they reported to their new location in Paoli on Monday morning. No one noticed that move because it was hidden in a major corporation. And what occurred, the employees of another department within that said, well, if they went to Paoli, why can't we? So about two months later more people of a, as an 22 example, purchasing unit went to Valley Forge. 23 Two months later 25 more. No one realizes 24 that that building that I'm discussing has 25 vacant space in it today because 200, 300 178 02/25/04 - WHOLE - RES. 040076 people within just the last year have left Philadelphia. But no one is paying attention to that piece of business retention. These young executives live in the suburbs in many cases. They want the shortest commute possible so they establish their operation in the suburbs because -- it was described earlier I think by Governor Schweiker -- the technology today doesn't care whether you're in Costa Rica or India or Valley Forge or Paoli. And we really need to do something to prevent that flight that I just describe and you described.

I wholeheartedly agree. And let add one other observation on behalf of the Philadelphia Bar Association. We work through committees through our sections. The analysis is not my analysis. This is the considered judgment of the Association's members expressed through the tax section and the deliberation of our board of governors. So this is not a personal statement of my own, but it is really a cry for help from the legal services community in 179 02/25/04 - WHOLE - RES. 040076 this City.

Thank you, sir. Thank you, Madam President.

You're welcome. Are there any other questions? The Chair recognizes Councilman DiCicco.

Thank you, Madam President. Good afternoon, Mr. Bevilacqua. I'm going to attempt to ask a question and try to get it out correctly. In your testimony you speak to the partner income rate at being 6.7 percent and you also state that but the City taxes compensation paid to employee-owned owners of businesses operated as corporations or sole proprietorships at a rate which is the minimum -- or the maximum -- City wage tax. I'm just not clear. Does that mean that if you as an attorney or a firm are representing clients who -- you have a case that is a non-Philadelphia case, is that what you're talking about here, that the tax for the 180 02/25/04 - WHOLE - RES. 040076 purpose of whatever your compensation was for the purpose of representing that person, assuming that client was a non-Philadelphia resident, you're showing that as income.

My point here is that there is no deduction for an unincorporated association for the payments made to the members or the partners in that association. I think the question of where the money is earned, if it's earned in Philadelphia, whether or not it's for a client that's a national client headquartered in Seattle, it's still taxed in Philadelphia. And the real point of the testimony is that this disparity between partners and shareholders, because of the limitations on liability and other limitations, lawyers have not fled to a different form of business entity. They have maintained their partnerships and unincorporated associations. And so being taxed at 6.7 percent without the ability to deduct that payment is really creating an inequity which is driving partnerships to consider other alternatives. 181 02/25/04 - WHOLE - RES. 040076

Are you familiar with any role of the recommendations of the Tax Reform Commission and do any of their recommendations address this issue?

The recommendation with respect to the elimination of the business privilege tax we wholeheartedly address. Yes. This is a separate issue, but eliminating the tax really cuts ugly tree at the base.

But absent elimination of that tax, what would be your recommendation?

We would certainly urge Council to consider -- I mean, there is no policy reason to allow deductions for shareholders for law firms that are in a corporate form and not for unincorporated associations. That's something that can be addressed as an interim solution.

Has there ever been any recommendations to this Administration or any other Administrations about this issue and developing a different 182 02/25/04 - WHOLE - RES. 040076 form, if you will, or a way of taxing or reducing this tax that you know of?

I'm not aware.

I would appreciate it if you had some recommendations that you would submit them to the Chair in the form of possible legislation, if that's okay.

We're happy to work with you.

I think it's something we need to look at.

Definitely. And I'm just wondering if the Commission considered that at all. Mr. Schwartz, can you approach the table, please? I'm certain that you did hear Mr. Bevilacqua's testimony. Was this discussed at all during the Commission consideration?

Well, I can further check because I did not go to all the meetings of the business committee where this would have, in fact, been discussed. I think the general thrust was to pick out the tax changes 183 02/25/04 - WHOLE - RES. 040076 that we thought would make the most difference in the City and have the most dramatic impact and acknowledging that they will cost money, not to include everything that might in fact benefit people in the City in terms of reducing taxes. And I have a feeling that the answer will be here, that with a proposal to eliminate the business privilege tax and the proposal to move quickly for single sales factor this year, that they felt that was what would have the biggest impact. I'll give you another example of something we didn't do that's come up. We did not propose lowering the real estate transfer tax, because, again, we felt that this would cost more money for a marginal impact. Now, I sat on a committee just the past couple of months where there was somebody there who was very concerned about that particular omission on our part. So I'd have to go into more detail as to whether they looked at it. I will say that all of the committees were quite thorough, and the business committee was particularly thorough. And so if it's not 184 02/25/04 - WHOLE - RES. 040076 there, it's because they looked at it and they may have thought if all other things could happen, we could do that. But in fact the most important thing was the elimination of the business privilege tax in that sequence and a couple of the other things having to do with partnerships that also made it into the report. We're sorry, but we didn't do everything.

It wasn't meant to be critical. We were just concerned whether it was brought up.

Again, I'm not on the business committee. I would be astonished if something that was a serious concern in the business tax system were not raised in that committee. I can check with Stewart Weintraub, who chaired it very ably. So it never came to a serious discussion in the group because that was the job of the committees to kind of filter out what was there. And then of course we did have three months -- we issued the preliminary recommendations in August. We had another 185 02/25/04 - WHOLE - RES. 040076 shot in September. There was a public hearing about it and we went all through the City. This was something that really never came up in a way that it really jumps out at me as some of the other things would.

I think, Madam President, what was probably discussed -- and obviously not having sat on the Commission -- is the general consensus that we need to do something with the business privilege tax. And in this case, since it's a specific entity, business entity, meaning the legal world that we have in Philadelphia, is that I think the time it will take us in the best scenario to begin those gradual reductions, entities such as the legal profession may not be willing to stick around that much longer because they have the ability -- again, this isn't critical of the Commission by no means -- is that we need to look and see if there's a specific type of tax recommendation reduction that we can do that would address this very issue.

I have to acknowledge 186 02/25/04 - WHOLE - RES. 040076 -- Brett is here. He also was on that committee. I have to acknowledge with the business taxes --

I'm sorry. I don't mean to cut you short, but it's my understanding that this was addressed by the Commission. Councilman Nutter, I believe you have the report in front of you.

Recalling this, we do in fact have a provision that permits companies in partnerships to deduct the cost of their employees, which is currently not there, but Brett was on that committee and would be able to speak more clearly on that issue.

The recommendation to allow partnerships to deduct payments to partners is an integral part of the Tax Reform Commission recommendations. We would initially start off with allowing a 50 percent deduction, phase that in over five years until it becomes 100 percent deduction. And then of course the entire business privilege tax would 187 02/25/04 - WHOLE - RES. 040076 be eliminated over years. 3

I wasn't sure whether 4 this was the same thing. 5

Is that 6 recommendation number 19? 7

If someone hands me a 8 copy of the report, I'll be more than happy to 9 show you exactly what page. 10

Brett has memorized most of this, but some of the numbers of the recommendations still confuse him.

Indeed, recommendation number on . 15

That's one of 16 the bills. 17

Mr. 18 Bevilacqua, were you aware of that? 19

I was.

Why don't you take a copy of his testimony.

I'm sorry. I believe that does address his issue. At 100 percent it completely eliminates the differential between the time that it started to phase in 188 02/25/04 - WHOLE - RES. 040076 at 50 percent and at 100 percent obviously there would still be a differential as the gap closes. In fact, this was a recommendation that came to us from the Bar Association and we were thrilled to put it into place.

And that's one of the bills that were introduced? 9

Absolutely. 10

I'm glad we cleared 11 that up. 12

I'm happy 13 that we questioned that. Very good. Thank you. Any more questions?

For Mr. Bevilacqua, one, thank you again for coming in. I don't know if I received a copy of your testimony, but there was a statistic that you gave -- I don't want to mess it up -- did you say that the legal community represented like 14 percent of the leased space in Center City?

It's more significant than that, Councilman. The 22 top Philadelphia law firms account for 14 percent 189 02/25/04 - WHOLE - RES. 040076 of the leased space in Center City. Our membership is approximately 60 percent solo and small firms. So we extrapolate that the numbers here in terms of the legal services sectors' leases in Center City is anywhere from to 30 percent. 8

One, that is 9 obviously significant, to say the least, that 10 one industry would represent that much of the 11 office space. And the Bar was very, very 12 helpful in 2002 with regard to Bill 92 13 restoring the wage tax cuts. And I would love 14 to have an opportunity to talk with you 15 further out of this environment. I guess I 16 would only encourage you -- and I know you 17 know this -- I mean, the legal community plays 18 a quite significant role, not only in its 19 professional work and how you service any one 20 of us that might need the service, but the 21 legal community has a wide range of 22 relationships with many Members of this 23 Council, and I would strongly encourage you, 24 certainly as the chancellor and all of the 25 other leadership, to make your voices heard 190 02/25/04 - WHOLE - RES. 040076 whenever the debate specific to the bills comes about. I think that this is an environment in which friendships and relationships beyond hello and good-bye and how is your day hopefully would compel many members of the Bar to talk with us as elected officials and the Mayor in a way that conveys a seriousness and commitment to getting something done, and that message is conveyed in the strongest possible terms in the way that I know the Bar knows how to communicate with people. Many of us take this issue very, very seriously and I think it's time for all of us to roll our sleeves up and try to maintain relationships and friendships. But some serious work needs to be done. I think that the presence of the Bar Association and its members -- I know everybody is busy and they're working, they're serving clients and all of that, but when we get into the meat of it, I think an hour or two possibly spent over here at that time would be very, very helpful.

Well, you have my 191 02/25/04 - WHOLE - RES. 040076 commitment to do everything that I can as chancellor to inform and educate, not only the large firms that I know are following this issue, but all of our members, how important this is for the economic well-being of the City that they all love.

Thank you. Thank you, Madam Chair.

The next witness is Joshua Vincent from the Center For the Study of Economics.

Good afternoon. I'm Joshua Vincent. I live in the City of Philadelphia and I also am the director of the non-profit foundation in the City. We just signed a five-year lease to stay in the City, so we're in it for the long haul. I'd like to thank Councilwoman Tasco for introducing this resolution. Some of our work in land value taxation, most of our research has been in District 9 and we've done an intensive study of North 5th Street, and I just want to thank you for this. As the director of the center, I've 192 02/25/04 - WHOLE - RES. 040076 worked and testified in front of the Philadelphia Tax Reform Commission since its inception by City Council and passage by the voters. I'm here to urge the thoughtful but expeditious adoption of the program hammered out by the PTRC, over a year's worth public meetings, hard work and analysis. The arguments and discussions at PTRC meetings in the community and at their offices were very wide ranging. They covered every aspect of the local tax structure that could be changed. Representatives from all parts of our City participated, rich, poor and in between, from Center City to Mount Airy to North Philadelphia and there was a real sense of excitement, hope and optimism that at last the voices of all Philadelphians would be heard as one. The PRTC's recommendations encourage business and enterprise while at the same time protecting our most vulnerable citizens. The recommendations balance desperately needed services with the recognition that freeing labor and capital to work is the only option 193 02/25/04 - WHOLE - RES. 040076 for a City that competes at a disadvantage with the suburbs, Delaware, and New Jersey. The concern about services is noble. I had the privilege of assisting Channel on 6 a presentation that was filmed on Monday night in a story about real estate tax delinquency. We assisted Channel 6 and Ed Goppelt of Hall Watch also assisted Channel 6, and I can say that if I can find some of the worst tax delinquents in the City by driving around in my Dodge Neon, then so can the City. If only the City would act. The tens of millions of dollars that are being lost annually, I believe can more than replace any revenue loss by the PTRC plan. Now, my field of expertise rests in one part of the PTRC's recommendation, the land value tax. The land value tax would be implemented gradually over a decade's time. It would serve as a proven buffer for poor, working and middle class homeowners if increased tax rates on property to a place other taxes were implemented. It would finally end the punishment regular people get 194 02/25/04 - WHOLE - RES. 040076 for fixing up or building homes and small businesses. And I ask everybody to think about it. A KOZ for everyone, not just the big dogs, and for that the PTRC is to be exist. Now, land value tax could of course be rescinded at any time, but it wouldn't be, and I don't think there's any longer a justifiable reason for not giving this program a chance. Essentially the land value tax -- I will repeat very briefly what I've been saying many times over the past three years. It's a program that will down tax buildings and up tax land. If we're going to rely more on the property tax, then it has to be imposed in such a way that people that do for the City are rewarded and not punished and those that do not do for the City are given an incentive to do something. Essentially that has been the message of the land value tax. I'm very pleased that the Philadelphia Tax Reform Commission saw fit to listen to experts and elected officials from all over Pennsylvania that have actually used this program, have 195 02/25/04 - WHOLE - RES. 040076 seen that it works, have seen that it brings development back into center cities, Harrisburg being the best example, Allentown being an up-and-coming example. The land value tax provides tax relief for those neighborhoods and those homeowners and those tenants that are most in need of consideration.

Want to thank you very much for inviting me.

Thank you. We appreciate your coming in to testify. Are there any questions of this witness? The Chair recognizes Councilwoman Tasco.

Thank you very much. Are you familiar with the City's Revenue Department? They have staff going door-to-door to the various businesses checking on their taxes and, I guess, license.

Actually, no. As far as businesses go, I was looking at North 5th 196 02/25/04 - WHOLE - RES. 040076 Street, and we were looking at the tax delinquency records that are now available to the public. We did see places that were in arrears just on property tax. I don't have access to the other taxes. Five or six years in some cases. That's all I really know about it.

If one of the problems we have is collections, even if we go to the land value tax, what does it mean if we don't collect the taxes?

Interestingly, the Tax Reform Commission did their own report on what would happen to currently delinquent properties and what would happen if there was a switch to land tax, and I don't have that chart with me or that mini study with me. I know that Mary Brown, who is a staff economist for PTRC, did such a study, and the impact is surprisingly small. I will make sure to get that to you by late this afternoon to your office.

The impact is small up or down or not at all? 197 02/25/04 - WHOLE - RES. 040076

The impact would be there would be more tax liability not collected if we go to a land value tax for certain types of property. But of course the argument and the experience in the other Pennsylvania cities is that overall collections increase because if you stop emphasizing the building for your tax, people start appealing their taxes less, and so you actually get more revenue by de-emphasizing buildings. That's been the experience of the Pennsylvania cities that used this.

Thank you.

Thank you. Any other questions of this witness? (No response.)

Again, thank you very much for coming.

The next witness is Mr. Fred Murphy from the Center City Residents Association.

Good afternoon.

Thank you for having me 198 02/25/04 - WHOLE - RES. 040076 here. I am here representing the Center City Residents Association. We had done our own study of the tax system. We started it before the TRC was formed and I was involved. I basically wrote that report. Just to give you a sense of my interest in this, I also served on the advisory board for the Tax Reform Commission. Now, the first question is, why taxes. We have to ask, why are we doing this. It's really part of our collective responsibility as a civil society. We who live in Center City have accepted our responsibility for this, otherwise we might have moved to the suburbs, taking our jobs and incomes with us. So we're not here as anti-tax. We're here in terms of responsible taxes. And how we frame the issue at CCRA was we're concerned about the efficiency of taxes, the cost to collect, the ease of enforcement, compliance. These are important issues. The equity, are they fair to all parties? What is the tax incident? Does this create a culture of cheating? And then the economic 199 02/25/04 - WHOLE - RES. 040076 distortion, the location decisions, the investment decisions, and the effect on growth and prosperity. In terms of tax efficiency, the real estate transfer taxes are quite efficient except for potential side payments. The wage tax is efficient to collect. But what's terribly inefficient is the personal property tax. That's now gone. But then there's the school income tax, which has probably a very low compliance rate. The business privilege and net profits tax have compliance problems because of the way in which the way companies can operate invisibly in this City. So in terms of tax equity, what are the equitable City taxes? Well, I'll leave that a question mark. But we observed a lot of inequities. The housing assessments are inequitable. The wage tax winds up being inequitable, even though it's a flat tax, because it drives so many people from the City, and people who have incomes and can afford to move have chosen to not to pay it by moving out. Special abatements and tax 200 02/25/04 - WHOLE - RES. 040076 expenditure deals are examples of inequitable arrangements. And our members experience something when they to the housing reassessment process, the appeal process, and they found that basically it was a group of old palls handing out deals to people who were willing to show up, and it was really an unfair process. The power to impose high taxes equitably is now gone because technology has given people and organizations the flexibility to leave the City, and what I see as a business school professor, leave the country. Now, economic distortion is a Significant factor in designing taxes. Almost no tax creates distortions at low levels; however, the magnitude of city taxes has turned the City into the hole in the economic donut. What's not distorting is a land value tax, because that's just a willingness to pay for an existing item, and so the value is discerned by just market transaction. What is distorting are wage taxes, real estate taxes that include the 201 02/25/04 - WHOLE - RES. 040076 value of improvements, sales taxes, and as we heard earlier, the business privilege and net profits tax. Now, the goal of tax reform from our perspective should be to grow the City economy, which means provide jobs for current residents, attract new residents and also what's interesting and forgotten in this, but through good tax reform, you can increase the revenues from middle and upper income taxpayers while lowering the tax burden on current residents, especially the poor. Let me give you an example. Because I live and work in the City, my City taxes are percent of my take-home pay. And you 17 essentially get one day a week out of me. 18 This calculation is very simple because of 19 deductions for 401K plans, medical co-pays, 20 and all of this, the actual share of our paychecks that we take home has gone down.

And the effect of that is that we get essentially half our paycheck. We're getting four-and-a-half percent wage taxes and the bump up in the real estate taxes has been 202 02/25/04 - WHOLE - RES. 040076 significant too, so the combination is percent of my paycheck. That's a big number. Now, as I was involved on the Tax Advisory Commission, I read the e-consult report, and one of the key findings is that the City regains any lost tax revenues in just a few years and the stimulus to growth adds jobs, increases the population and everyone gets a tax cut, including the poor. Now, what's interesting and left unsaid in the report, but follows from their model, is that by doing the tax cuts, the City collects more revenue from middle and upper income taxpayers and the poor pay less. It's a product of the model The analysis makes sense when you look at the income distribution patterns of the residents in the City and the residents in the suburbs. The City is the holding point for the poor residents who can't afford to move out. The kinds of increases that that model points to can only come from one group, the middle and upper income taxpayers. What's important is that there are 203 02/25/04 - WHOLE - RES. 040076 all sorts of income distribution effects to taxes. The City winds up getting more tax revenue the higher the family income. The cost of each taxpayer or each family declines with family incomes because these people are more able to take care of themselves. You reach a break-even point at a reasonable income level, and what you want to is, you want to grow the middle and upper income taxpayers where you make a profit. And that's what tax reform will do as proposed by the Tax Reform Commission. So in sum, a critical point of the Tax Reform Commission is that the populace who are saying don't cut the taxes are actually cutting off their noses to spite their faces. The tax cuts actually provide more revenues. This is one thing that Jonathan Stein never understood in the discussions that took place in the Tax Reform Commission. Now, where can the funds for the tax cuts come? Hopefully, the state will do its thing. But most importantly it can come from reductions in City expenditures. 204 02/25/04 - WHOLE - RES. 040076 I'm a professor at Temple University in the business school. I teach how to manage operations. When I use examples in class of what not to do, I use my experiences with City government. In truth, if you believe we have the most efficient and effective City government in the world, there is no room for a tax cut. But I ask anyone in this room who believes this to raise his or her hand. So what we concluded in the CCRA report and is carried over from the deliberations of the TRC is that the current system is inefficient, it's unfair and corrupting and has wounded the City economy. We conclude that some taxes can be eliminated because gains are small and the collection costs are large. This actually happened with the personal property tax. The methods of collection can change to lighten the time burden on taxpayers. Literally this past year when I had some consulting income and was filing my business privilege taxes, I couldn't figure out what to do. I had to call up and ask someone there. There is truly no 205 02/25/04 - WHOLE - RES. 040076 information that helps taxpayers properly fill out their forms. And so you can't just shift taxes around without serious cuts because the current tax system is a cancer in the City. And another important aspect is that cutting taxes is not about taking money from programs such as child services to appease the rich. From my perspective, a child born 10 years from now is as real as a child born five years ago. That child just doesn't have a name. Without tax cuts now, there will be future services for that child born 10 years from now.

The real choice is between keeping inefficient services now and providing for a future child born into need, which we could then provide for if we had the lower tax rates, the better revenues and higher employment for everyone. My conclusion is that the Tax Reform did a thorough, responsible job. Take their advice and implement their plan. Thank you.

Thank you 206 02/25/04 - WHOLE - RES. 040076 very much, Professor Murphy. Does anyone have questions of the professor? (No response.)

Thank you very much. Our next witness is Josh Sevin. Good afternoon.

Good afternoon. Thank you, Madam President. Thank you Members of Council. My name is Josh Sevin. I'm an economic development consultant by profession and also a board member of a civic group called Young Involved Philadelphia. YIP, as it's known, is a three-year-old grassroots non-profit that aims to increase civic engagement among young Philadelphians and to facilitate reforms to help create a better Philadelphia. It's funny. I was remarking as I came over here, I was here about two years ago testifying on the same topic, and it made me think even though young is part of the title of this group, none of us are getting any younger, as these 207 02/25/04 - WHOLE - RES. 040076 hearings may be kind of familiar. And that actually kind of goes to the theme of what I wanted to speak about today. I'm not going to speak to policy or anything technical. Again, you've been at plenty of hearings and I'm sure the folks in this room have either looked over the actual Commission report or have had staff do so because it's really a quite thorough document. I hadn't planned it this way, but I'm going to start my remarks this afternoon on a more personal note. I spent much of this morning at Pennsylvania Hospital with my father, who has been experiencing heart problems. His heart rate has been almost twice what it should be and there's a team of doctors and concerned family members working to get it under control. Thankfully, after a successful procedure this morning, he's going to be okay, but going through such a scare inevitably makes one ask some very big picture questions. How much time do I have left to do the things that matter, to do the things that need to get done? What have I been letting 208 02/25/04 - WHOLE - RES. 040076 slide? What am I putting off today that I might regret tomorrow? And while usually brought about by moments of crisis, these are the kinds of questions that we should be asking ourselves everyday. And so, for the Members of Council that are here, I put this question before every one of you. Are you going to pass up the most promising opportunity for meaningful tax reform that this City will see for a long, long time? Because as you review the ambitious and promising set of proposals that emerged from the hard work of the Tax Reform Commission, each of you on Council must take the time to recognize just how important an opportunity and responsibility that you have before you. It will not come again for another generation. Now, how can a claim like that be made, that this is your one shot for about a generation? Well, take a look at where we stand after years of sustained public focus on this issue. All of you have been involved in it. Over the past decade we've had an 209 02/25/04 - WHOLE - RES. 040076 unprecedented amount of smart research and thought put forth about the nature of the problem and the need for tax reform. The glib call to cut taxes without addressing budgetary needs and realities, but reasoned explanations about how we can restructure our tax system, while maintaining collection levels in order to stem economic decline and encourage growth. This in turn has sparked an unprecedented amount of public discussion and concern about the issue, not something we usually kind of excel in this City, but it really has happened around this issue, leading to an overwhelming citizen vote in 2002 to create the Tax Reform Commission. And then when it first met, I think really pretty much no one thought that the array of stakeholders appointed to the Commission would have ended up recommending such an ambitious and new onset of reforms, let alone by a vote of 14 to one. But what the Commission went ahead and did was put its head down, studied City tax issues extensively, deliberated intensively and ended up really providing an inspiring 210 02/25/04 - WHOLE - RES. 040076 example of how such a diverse group representing so many different interests can reach consensus on such a complex issue.

It's really an mazing foundation upon which Council can and should build. So here we are in 2004. No more studies. No more election year delays. You've just been handed a workable negotiated solution by a thoughtful representative group of citizens appointed by the Mayor and this Body. Now is the time for true leadership on City Council. If you have questions or concerns about the Commission's recommendations, don't be satisfied with just criticizing. Don't just throw your arms up in the air and say the problem has been around for too long and it's too hard to reach a workable solution. The Commission has disproved that. Members of this Body should follow the Commission's example, deliberate and then legislate. It's kind of a shame, I guess, the testament of who from Council has actually been here these past two days because a lot of 211 02/25/04 - WHOLE - RES. 040076 this message, it's meant for all Members of Council, and in some ways I think I'm kind of preaching to the choir here talking about the real importance of the issue right now and the need for leadership. But that really is a message that needs somehow, whatever the forms of communication are or aren't on this Body right now, to reconvey to the rest of this Body. Because to speak the brutal truth, the members of YIP and other young Philadelphians have more time remaining in their tenure than the Members of this legislative Body. And every day that you postpone tax reform that is in the best interest of the health of Philadelphia, the harder you're making it for those who follow you. You have a great base to work on here. I really urge this Council here to really tackle it. Thank you very much for your time and your attention.

Thank you for your testimony. Does anyone have any questions of our witness? 212 02/25/04 - WHOLE - RES. 040076 (No response.)

I do hope your father has a very speedy recovery. Thank you for coming in. Our next witness.

Our next witness is Madeline Shikomba.

Please give your name for the record.

Madeline Shikomba. It's spelled S-H-I-K-O-M -B-A. I'm a Philadelphia resident and I have been a life-long resident. I was surprised when I read the article in the Philadelphia Inquirer regarding the proposal made by the Reform Commission. I congratulate them on making some needed reforms, requests for needed reforms, and I praise them for some of it, such as quarterly payments for real estate tax, and they said provide incentives for people to pay their taxes early. The thing that caught my attention, that bothered me very much, which I have a 213 02/25/04 - WHOLE - RES. 040076 problem with, was where it says they want the adoption of assessment practice principles directing the Board to assess property at 100 percent market value and implementing a property tax buffering program. Sounds nice on the front end. But in the back end where I come from, assessing me at 100 percent of my property value will force more and more people in my income bracket out of this City. Right now in my neighborhood, which is Southwest Center City, property values have skyrocketed through the roof. If I didn't already live there, I couldn't even afford to buy there. And you're saying assess me at 100 percent of my property value? I couldn't afford to stay there. I wouldn't be able to afford the taxes because I'm a senior citizen on a fixed income. Inflation right now is wiping out my income so fast it's ridiculous. This City is one of the highest cities in terms of taxes, between the City and the state and federal government, of which I contribute my fair share for over 34 years or more working time, has not benefited me one 214 02/25/04 - WHOLE - RES. 040076 bit except in terms of services which I am entitled to receive. This gentleman over here talked about the tax system. This tax system has never favored me or people in my income bracket. It has always favored the rich from the time of inequity. Inequity from that time until now, the rich have always been favored when it came to taxes. You talk about building the pyramids and the skyscrapers. The majority of people who built those things can't even afford to rent an office in there. They alone can't even afford to find a place to live. Who does it benefit? I have an article here right now concerning the skyscraper they want to build. Who will pay for it? The skyscraper at 17th and JFK Boulevard hinges on getting a huge tax break. This is being declared a Keystone Opportunity Improvement Zone, thus freeing its prospective tenants from most City and state business taxes for the foreseeable future. Now this is supposed to help revitalize the economy here. 215 02/25/04 - WHOLE - RES. 040076 The developers have been paying con games with you politicians for years. They get tax breaks. As soon as the tax breaks are ready to expire, they're getting ready to leave the City and cause a crisis, as they call it. And what's available in the City? Oh, we don't want them to leave. So what do you do? You give them more tax breaks. And so they stay. Why not? Tax break after tax break. But who pays for those tax breaks? They're not paying anything. It comes down to me and to all the other working poor out here. We pay. We subsidize their living so that they can live in a skyscraper on 17th Street. Comcast don't need my money. They're making enough. But I need my money, but you keep taking more and more out of my pocket so you can subsidize their skyscrapers, subsidize their rebates. It's about time you stopped that. Give me a break. Don't assess me at 100 percent of my value then call yourself setting up a buffering zone. A buffering zone to benefit who? It ain't going to benefit me. It's 216 02/25/04 - WHOLE - RES. 040076 going to benefit those who already got the money. I'm tired of it. I have another article in here about who pays when it comes to the tax benefits, written by Cecil Johnson called, Perfectly Illegal. " That is, the rich pay less in taxes than we do. Case in point. Somebody makes $600.

10 percent out of their income is $60. That leaves them $540. What about Bill Gates? 10 percent out of his. So he loses a billion dollars. He's got $9 billion left. I could afford to live off of that, but I can't afford to live off $540. So you say, well, he paid more than me. Well, he's got more than an I do. We've got to look at where people are coming from. They're not paying their fair share. I'm subsidizing Bill Gates. The more he makes the less I get. So I'm asking you, when you come to looking at this here property tax, you give us consideration. Stop chasing us out of the 217 02/25/04 - WHOLE - RES. 040076 City. More and more houses are becoming vacant. Why? Because people can't afford to stay in them. And who's replacing them? They got a new phrase now, affordable housing. Another name for that? Urban removal. Affordable housing is $103,000. Who can afford that? Not me. So I call it urban removal. That's pushing the poor folks out. So you push us out to become imported labor into the City for the rich. I'm tired of it. You and City Council have got to start helping us. We need your help. We put you in office. The rich may have donated money to your political things so you can run for office, but it's our votes who put you in there. We're asking you to listen to us for a change. Secondly, I do favor a cut in the City wage that the Tax Reform Commission has asked for. That's great. No problem with that. But again, I'm getting back to real estate taxes. Please help us. Stop building the palaces and the castles and the skyscrapers for the rich and start thinking about the lowly poor. 218 02/25/04 - WHOLE - RES. 040076 Thank you.

Thank you, Madeline. Are there any questions of Ms. Shikomba? (No response.)

Madeline, I think Mr. Schwartz would like to respond to some of your comments.

It is to put on the record what our recommendation is in relation to the market value issue, because a lot of people read that and assumed that we were recommending a 30 percent tax increase in effect. The recommendation is in fact to move to a system where people would see the market value of the property. But we fully understand that in order to do that without creating this huge tax increase, there would need to be a negotiation between the Mayor, the Council and the Board of Revision of Taxes to lower the tax rate to 70 percent of what it is now. And if we do that, there's still 219 02/25/04 - WHOLE - RES. 040076 going to be some interesting developments, because as we know, if assessments are widely out of alignment it will have different impact on different people with the lowest income people in that circumstance, even if these disparities continue, will benefit. Because as you've seen from the research that was presented to you, the lower income people are the ones whose real estate taxes are the highest. Now, the buffering proposal was made in the context of what happens when assessments increase. It had nothing to do with the 30 percent marketing. There again it was an attempt to get tax relief. If somebody is living in an area that begins to have a hot real estate market, such as we had in Center City a couple of summers ago, then they're going to get assessment increases that will be difficult to handle all at once. So we talk about buffering that increased payment over a three-year period, not just in one year. To come back to the basic point that was started that really got me up, apart from 220 02/25/04 - WHOLE - RES. 040076 all the comments, was in fact that we propose moving to market value so that people can see what the Board of Revision of Taxes says their property is worth. Let me just make a side comment. I was just talking to somebody the other day who said, well, their property was valued at $100,00 -- I'm making the number up -- and she said, that's about 70 percent of what we think it's valued at. I looked at her and I said, that's exactly what they've done. But the fact that you don't know that works against you. Because if you see that, then you're going to think you're getting a break from the Board of Revision of Taxes, even if you're not, and you don't appeal. So we make that recommendation in the interest of clarity and truth, but it only works fairly to help people if at the same time the Council and the Mayor agree to lower the tax rate to roughly 70 percent. So that needs to be clear. I don't think it was clear from the way the newspapers reported it.

I've never seen taxes 221 02/25/04 - WHOLE - RES. 040076 lowered in my life since I've been here. I've seen it go up and up. And seeing the clear value of my house is not helping me to pay the taxes. So you spread it out over three years. What's to say in three years I can still pay it?

Well, as I say, all I'm talking about is what in fact the recommendation -- in fact, I will go so far, since it's our recommendations, we would oppose merely moving to market value without changing the rate back down. That's not what we're recommending, period, whatever has happened in the past with taxes. That's not our recommendation. Our recommendation is to move toward honesty and clarity and what people understand and reduce the tax rate accordingly. If we can't do that, then of course we've got a problem.

The Chair recognizes Councilman Rizzo for a point of information.

Mr. Schwartz, I think it would be helpful to explain it. 222 02/25/04 - WHOLE - RES. 040076 You're not breaking new ground here. This is something that's done as close as New Jersey. Part of the process each year is the adjustment of the rate based on the need. So I believe that it would be helpful if you would explain that this is how it's done.

Yes. I think that in fact we learned that we're an exception.

We are the exception?

We are the exception. We make it much more complicated and confusing for people.

I believe we would not have as much delinquent taxes if people could pay quarterly because it's more palatable to pay on a quarterly basis than it is to get a tax bill -- and I have to commend the Revenue Department. I thought last year it was a coincidence when I paid my taxes, real estate taxes, prior to the discount. The check cleared in two days, so somebody is doing something right over at the Revenue 223 02/25/04 - WHOLE - RES. 040076 Department. Because similarly, I paid the tax -- what's today, Wednesday? I dropped the check in the mail on Monday and it's cleared today, so someone over at the Revenue Department in association with the post office is doing a good job of moving those checks through the Revenue Department. They're clearing quickly. Nancy Kammerdeiner, congratulations on getting those checks cashed.

That's good. But I've just really come back to say the specific recommendation that we're discussing was to lower the rate as we give people honest value. Let me just add one other thing. The land tax, which we're not going to get into in any detail here, our view is that the land tax in fact will reduce the absolute tax burden on low income homeowners and homeowners in general, and then pass that tax burden on to speculators and others who own vacant property and are doing nothing with it. So that will provide another source of tax relief and reduction on the real estate side to 224 02/25/04 - WHOLE - RES. 040076 existing homeowners. And on the Controller's web site, there's a whole tax calculator that shows you how this works. And people living at the level that we're talking about here would gain some benefit from that.

I'm sorry. I would like to agree with you, but I really don't. The reason being that if you look -- Even if you reduce it down to 30, you still pay more than a tenth.