COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING BEFORE THE COMMITTEE OF THE WHOLE - - - Tuesday, 2/12/02 10:15 a.m. Room 400, City Hall Philadelphia, PA - - - RES. 010700 - Authorizing the Committee of the Whole to hold hearings on the findings and recommendations of the City Controller's November 2001 Tax Structure Analysis report; and further authorizing the Committee to seek advice and recommendations on tax policy and tax reform from citizens, financial experts, economists, academia, business executives, and state legislative and executive branch officials. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN JANNIE L. BLACKWELL COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN JAMES F. KENNEY COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2/12/02 COMMITTEE OF THE WHOLE INDEX - RES. 010700 WITNESS PAGE Jonathan Saidel, City Controller.............. Councilman Frank Rizzo........................ 16 4 Panel 1 - The Case for Tax Reform Richard Voith, e-Consult Corporation........... 21 Anthony Campisi, Midlantic Business Alliance 27 Paul Tirjin, Burrill & Company................ 31 Anne Rubin, Greater Phila. Assoc. of Realtors 36 Andrew Terhune, Toll Brothers................. 38 Panel 2 - Phila. Needs Tax Reform to Compete C. Pizzi, Greater Phila. Chamber of Commerce 58 David Thornburgh, Pennsylvania Economy League 63 Paul Levy, Central Phila. Development Corp. 73 A. Taubenberger, N.E. Phila. Chamber of Comm. 82 Sam Katz, Greater Philadelphia First.......... 86 S. Weintraub, Esq., Phila. Chamber of Commerce 95 PANEL 3 - Philadelphia Can Afford Tax Reform Joseph C. Vignola, Executive Director, PICA... 124 National Endorsement John Barry, Tax Foundation.................... 161 Eric Schlecht, National Taxpayers Union....... 167 PANEL 4 - Land-Value Taxation Can Reduce Taxes James Tayoun, The Public Record............... 179 J. Vincent, Center for the Study of Economics 185 E. Schwartz, Inst. for Study of Civic Values 200 J. Densworth, 10,000 Friends of Pennsylvania 210 Prof. N. Tideman, Virginia Polytechnic Inst. 217 PANEL 5 - Land-Value Tax Promotes Development A. Hartzok Pennsylvania Fair Tax Coalition 221 B. Howells, Former Allentown City Councilman 227 3 2/12/02 COMMITTEE OF THE WHOLE INDEX - RES 010700 WITNESS PAGE PANEL 6 - Recommendations Make Sense for Phila. T.A. Spina, Former Phila. Revenue Commissioner 246 M. Rowley, Greater Phila. Hotel Assoc. ......... 249 Bruce Nichols, GPRAPA .......................... 253 B. Frank, Center City Proprietors Association .. 256 Tom Woodward, BlackRock Financial Management ... 259 Kay Mckenna, League of Women Voters ............ 270 Bob Hornick, Pa. Institute of CPAs ............. 271 Kevin Mazzucola, Automobile Dealers Assoc. ..... 276 Tom Dugan, E-Source ............................ 282 CITIZEN VOICES KEN FORD ....................................... 288 MELANI LAMOND .................................. 294 JEAN GENDRON ................................... 303 ANDREW HOHNS ................................... 304 CHRIS PATUSKY .................................. 310 ELI MASSAR ..................................... 313 ELIZABETH MASTERS .............................. 315 FRANCINE BRAITHWATE ............................ 318 JOAN SAGE ...................................... 327 PATRICIA LOWE .................................. 329 RICHARD BIDDLE ................................. 333 JACOB HIMMELSTEIN .............................. 336 BRUCE ANDERSEN ................................. 337 RALPH TREADWAY ................................. 340 SUE FOWL ....................................... 353 4 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Good morning, everyone. This is a public hearing of the Committee of the Whole regarding Resolution No. 5 010700. I would ask Mr. McPherson the please read the title of the resolution.
Resolution 010700, authorizing the Committee of the Whole to hold hearings on the findings and recommendations of the City Controller's November 2001 Tax Structure Analysis report; and further authorizing the Committee to seek advice and recommendations on tax policy and tax reform from citizens, financial experts, economists, academia, business executives, and state legislative and executive branch officials. (Witness comes forward.)
Please identify yourself for the record. and proceed with your testimony.
Good morning, Madam President, Jonathan Saidel, S-A-I-D-E-L, Controller of the City of Philadelphia. 5 2/12/02 WHOLE - RES. 010700 (TAX REFORM) (Applause.)
I come before you today to offer testimony on the findings and recommendations of my recently-released Tax Structure Analysis Report. I applaud City Council for focusing on this important subject. Philadelphia's high tax blunts the attraction the City's assets and makes tax reduction essential. I can think of few topics more critical than the ongoing effort to make Philadelphia a preferred place to live, work, and visit. I present for today panelists comprising neighbors, business owners, civic leaders, workers, academia, and officials from other cities: The first panel will discuss the general need for transform; A second panel will focus on the (indiscernible) that high taxes place on the City and its competitive disadvantage; A third panel will discuss land value taxation, how it works elsewhere, and how it would encourage development in Philadelphia. After the presentations by the panels, my 6 2/12/02 WHOLE - RES. 010700 (TAX REFORM) staff and I will be pleased to answer policy- related and technical questions about the report. In general, government taxes for two reasons: To alter behavior or to raise funds for services that the private marketplace cannot provide. But taxes are so high in Philadelphia that our need to raise revenue has altered behavior. It has encouraged residents and employers to flee. Philadelphia job growth lags behind the nation, competitive cities, and neighboring jurisdictions. More important, Philadelphia's population and job loss continued throughout 1990s. We should be growing like Boston, but we are shrinking like Detroit. These are clear signals that we must alter the local tax burden. To reform our onerous tax structure, my office produced a Tax Structure Analysis Report. If implemented, the recommendations of the Tax Structure Analysis Report will create jobs for Philadelphians, stimulate neighborhood revitalization, put money into the pockets of residents, and improve the business outlook for employers. Without change, we will continue to 7 2/12/02 WHOLE - RES. 010700 (TAX REFORM) transform into a city that is older, poorer, and fewer. Reducing taxes and changing our tax structure is crucial to efforts to attract employers to the City and provide jobs that will help retain working-class families. As part of the effort to produce the report, the Controller's Office staff directed round-table discussions with business groups representing the various sectors of Philadelphia's economy. In addition, I conducted a listening tour where I heard complaints about taxes from neighbors in every corner of the City. Business owners and citizens complained about the crushing cost of taxes, said the City services were not at a high level enough to justify the high cost of staying in Philadelphia, and protested that taxes in Philadelphia are too confusing. The City has many advantages, but the pull exerted by all that the City has to offer contrasts with the push of taxes and encourages firms and families to not locate within Philadelphia's borders. If recommendations to change how Philadelphia taxes can eliminate that push, the City will be able to better capitalize on its pull. 8 2/12/02 WHOLE - RES. 010700 (TAX REFORM) I am certainly not the only person to determine that the City's burdensome taxes place Philadelphia at a competitive disadvantage; I have before me a pile of reports that come to the same conclusion. Everyone in this room knows that it is true, and this is why we have to offer tax incentives to lure businesses to Philadelphia. 20 percent; and and eliminate the City net-profits tax. To shift taxes from wages and encourage development, I believe we have to change property taxes in order to shift taxes from buildings to land values to discourage speculation and encourage development and reduce the wage taxes to 4 percent for City residents immediately. We need to reduce the wage taxes in 9 2/12/02 WHOLE - RES.
375 percent for nonresidents by Fiscal Year 2007; we need to eliminate the need for businesses to double-pay business-privilege taxes in their second year of operations; we need to adopt a single-factor apportionment formula to determine business-tax liability to encourage firms to move to and remain in the City; we need to simplify and redesign our business-privilege tax forms; we need to implement a Philadelphia new-jobs tax deduction to encourage companies to create a new jobs; and we need to use technology and establish a taxpayer ombudsperson to improve relations with taxpayers. The need to reduce taxes is clear, but it is equally clear that the tax cuts can improve economic conditions without threatening the City budget. S. economy since 1992 and in the regional economy since 1993, Philadelphia did not see job growth until 1998, 10 2/12/02 WHOLE - RES. 010700 (TAX REFORM) after the City finally reduced taxes. 8 5 percent between 1995 and 2001. 6 The Manhattan Institute for Policy 7 Research concluded that the tax reductions in New 8 York City created 80,000 new jobs since 1997, or about for every jobs gained by that city during that period. The current economic downturn must not provide an excuse to avoid tax reform. While in the past, Philadelphia has been the canary in the economic coal mine, the City is demonstrating remarkable stability during this recession. This places the City in fortuitous position. After past recessions, the City was unable to grow, but because the worst effects of the national downturn have bypassed Philadelphia, we can take steps now to finally enjoy the full benefits of expansion. When I hear doubters say that they can't afford tax relief, I wonder how we were able to find money for stadiums or tax breaks for selective projects. I say it is time for tax breaks for the rest of us. Lower taxes and a less confusing tax 11 2/12/02 WHOLE - RES. 010700 (TAX REFORM) system for the men and women who live and work and create jobs across Philadelphia. Opponents of progress have argued that we will have to cut services to afford to implement our recommendations. They have said that the City can't afford tax reform, that tax reform may work in theory, but not here, and that the City's current economic-development strategy is working. We all know better. Without significant changes to the tax structure, we will continue to die slowly as a city. This is unacceptable. The City continues to lag economically and lose population under the current economic-development strategy. What we are doing today is certainly not working. Experience in Philadelphia and elsewhere shows that tax reform can stimulate local economic growth. In short, the City cannot afford not to reform taxes. Tax reform will promote economic growth; economic growth will mean more job opportunities for Philadelphians; more job opportunities will generate population growth. After decades of decline, the City will grow again. Instead of fighting over crumbs from a pie that is shrinking, 12 2/12/02 WHOLE - RES. 010700 (TAX REFORM) we can be sharing slices of a pie that is growing. My report identifies more than enough money to fund the tax cuts that we recommend without cutting City services. 5 million over the life of 2001 to 2006 Five-Year Plan. To pay for tax relief, my office counts first on the fact that the City is extremely conservative in its revenue projections; second on the fact that the City places money in the budget as reserve funding that can be reprogrammed; and, third, that the City has a higher-than-anticipated fund balance; and, finally, that a significant positive economic reaction will improve job creation in Philadelphia to increase tax revenues. 7 million to pay for the tax reform, 130 percent of the funding necessary, which provides us with a 30 percent cushion against contingencies.
The Controller's Office has made hundreds of millions of dollars worth of money savings and revenue-generating recommendations as part of our financial and performance audits. With the number of City 13 2/12/02 WHOLE - RES. 010700 (TAX REFORM) employees at its highest level in more than a connect, we can certainly do more to right-size the City government and find efficiencies. We will meet anyone who wants to publicly debate our numbers anywhere, in any format or form, and we will go house to house and debate in the living rooms of Philadelphians if necessary, but it will show that we must, and can, accomplish tax reform in Philadelphia. There may be alternative answers to the City's tax woes, and I encourage others to bring forth ideas for debate. While I believe the recommendations put forth in the Tax Structure Analysis Report makes sense as a package, each individual recommendation can stand on its own or in combination with any other. Enacting the entire package would be good; passing any individual recommendation would also be good. We must, however, agree on one thing: The status quo cannot be an option. Continuing to do what we are currently doing is a recipe for the continued deadline of our great city rather. I would rather fight than stand by idly and watch Philadelphia wither on the vine. 14 2/12/02 WHOLE - RES. 010700 (TAX REFORM) I call on you to draft and enact legislation to implement the recommendations of the Tax Structure Analysis Report and to pass a budget for the next fiscal year and the Five-Year Plan that incorporates these changes into projections for the future. I similarly call on you to urge the Governor of the Commonwealth of Pennsylvania and the General Assembly to implement the few actions required at the State level to accomplish these reforms. There may be a cost to reducing taxes, but there is certainly a cost not to reducing taxes. Without significant change of the City's tax structure, Philadelphia will lag behind its competitors and population will continue to decline. By reducing the cost of living and doing business in Philadelphia and improving a tax structure that impedes growth, we can make important strides toward making Philadelphia a preferred place to live, work, and visit. I would like to commend the Mayor for recognizing that the current tax-reduction plans are not doing enough to reverse Philadelphia's decline; I commend him for his proposal to 15 2/12/02 WHOLE - RES. 010700 (TAX REFORM) undertake more significant tax reform in Philadelphia; however, I believe that this proposed halting of the wage-tax cuts and enhanced gross-receipts tax will not fix Philadelphia's tax problems. First, this move will increase the City's over-reliance on wage tax and make it more difficult to significantly cut the wage tax in the future; second, we need to be cutting taxes more, not less; and finally, we must focus on businesses that export their services from the City. These companies are especially mobile and continue to leave Philadelphia. The gross-receipts tax is a minor burden for these companies. To attract and retain these business, we must dramatically reduce the net-income portion of the business-privilege tax and the hated wage tax. In the end, while I appreciate the Mayor's enthusiasm for tax reform, I believe that the elimination of the ongoing wage-tax decreases and the lack of a more comprehensive tax reform makes his proposal ineffective at best; and at worse, 16 2/12/02 WHOLE - RES. 010700 (TAX REFORM) damaging to the future of the City of Philadelphia. Let me again thank you, Madam President, for allowing me to be here today. We have a number of highly-respected men and women to come before you in panels, not only from the world of academia but from Allentown and Harrisburg, which are a part of our Commonwealth, and we will be available, my office and I, after the presentations, to answer any and all technical questions that you have. Thank you, Madam President.
Before we call our first group of panelists, it is my understanding that Councilman Frank Rizzo would like to make a statement. (Councilman Rizzo comes forward.)
Good morning. Good morning, Madam Chair, members of the Committee of the Whole, and guests. I'm Councilman Frank Rizzo, 17 2/12/02 WHOLE - RES. 010700 (TAX REFORM) and I'd look to read a few excerpts of the letters that I have sent to City Controller Jonathan Saidel regarding his Tax Structure Analysis Report. "I commend City Controller Jonathan Saidel for the initiative that he has taken with his Tax Structure Analysis Report. I wholeheartedly agree that now is the time to explore a tax reform plan that will not only change the way we do business as a city for the better, but will also make Philadelphia more attractive for residency and business, and more competitive with the suburbs and other major cities. "His recommendations for reduced business-privilege and wage taxes and the elimination of the nets-profits tax as well as a shift to greater reliance on the real-estate tax will certainly go a long way in helping the City of Philadelphia to reach its goals of increasing its tax bax and revenues and improving business and job opportunities in our city. "Our current perverse tax structure serves as a disincentive for people and businesses to either remain or relocate to the City of Philadelphia. Taxes should be fair, rationally 18 2/12/02 WHOLE - RES. 010700 (TAX REFORM) related to the purpose for which they are raised, affordable, and provide value for the money paid. By these standards, the City Controller's tax proposal will go a long way in improving our current tax structure. "Also, from a practical and economic- efficiency standpoint, it would not only make more sense, but would also be in our competitive advantage as a city in attracting new residency and business, to shift the tax burden to the owners of real estate, because the owners of real estate are either identifiable, benefit most directly from the City services -- fire, police, sanitation services -- and have an easy reachable asset to satisfy outstanding debts owed to the City. Utilizing market forces and efficiencies, landlords will pass those burdens onto tenants. His proposal to shift more of the tax burden to the owners of real estate is not only rational, but fair. "In the spirit of dialogue, it is a very important issue. I do have some concerns with the proposed bifurcation of the real-estate tax into a land tax and a building tax. First, taxing land at a higher rate than buildings is not fair. In this 19 2/12/02 WHOLE - RES. 010700 (TAX REFORM) context, "fair" refers to the benefit received for taxes paid. Owners of commercial and residential structures receive more benefits again by the way of fire, police, sanitation than owners of undeveloped land. If anything, they should pay a higher tax rate, not a lower one. Though, as a matter of economy and efficiency, I would recommend a simple, single tax rate on real estate buildings and land. "Second, there should be respect for property owners and their right to the quiet enjoyment of their property. The theory of taxing property based on its optimum use would, in effect, further infringe upon property owners' rights to use their land as they choose. Since the City would be coercing them with a higher tax rate to achieve what the City envisions is some better use of preferred use of the land. In the Controller's proposal, the City, through social engineering, would coerce the use of private property. "Finally, the effects of a land tax would not only be pro-development but also anti-green. For example, owners of land increasingly choose to set aside some of their property as green space for 20 2/12/02 WHOLE - RES. 010700 (TAX REFORM) such things as campuses, fields, woods, or gardens. The optimum-use land tax that has been proposed would deter land owners from using their property in such a manner. The incentives are contrary to the current trend towards creating green space. Also, the plan's incentives encourage maximizing development in the interest of maximizing revenue.
"Further, almost invariably, if you tax something, you discourage it. If the government taxes open space, it will discourage open space, which is anti-green and contrary to modern urban trends towards creating green space in an urban environment. In fact, this is contrary to the green-city strategy, which is the central part of Mayor Street's Neighborhood Transformation Initiative. "We want appropriate density for a city. But we don't want overdevelopment. " Again, I want to thank City Controller Jonathan Saidel for the initiative that he has 21 2/12/02 WHOLE - RES. 010700 (TAX REFORM) taken on tax reform in the City of Philadelphia. I greatly appreciate his opening the dialogue of this tax-structure issue, which is such an exciting and thoughtful tax plan. I share his vision for Philadelphia that it is attractive to and residents and competitive with the suburbs and other major cities. I look forward to working with the Controller and the Administration in the future to make this vision a reality. Thank you, Madam Chair.
Thank you, thank you very much. Would Mr. McPherson please call the first panel to the witness table.
The first panel is "The Case for Tax Reform": Jonathan Saidel, Richard Voith, Anthony Campisi, Paul Tirjin, Anne Rubin, Andrew Terhune, and Allen Woodruff. (Witnesses come forward.)
Good morning. Please identify yourself for the record and proceed with your testimony.
Good morning, Madam Chairwoman and members of Council. My name is Richard Voith. 22 2/12/02 WHOLE - RES. 010700 (TAX REFORM) I am Senior Vice President and Principal of e-Consult Corporation, an economics-consulting firm located at 3600 Market Street in Philadelphia.
Excuse me, sir. Do you have copies of your testimony, by any chance?
Prior to joining e-Consult last year, I was an economic advisor in the Regional Economics Group at the Federal Reserve Bank of Philadelphia. D. in economics at the University of Pennsylvania, and I have been a resident of the City of Philadelphia since 1981. " Now, the idea of a supply-side effect of 23 2/12/02 WHOLE - RES. 010700 (TAX REFORM) changes in tax rates tends to be a polarizing one. One camp seems to believe that there are no effects of taxes on the local economy; and hence, any reduction in tax rates takes funds away from the public treasury on a dollar-for-dollar basis. Another camp seems to believe that tax cuts are a panacea and that if local government would only cut taxes, there would be so much economic growth that the government would not have any loss in revenue. As is usually the case, reality lies between the extremes. All communities must impose taxes to generate revenue to pay for desired public services the residents in the community need. Whenever a community levies a tax, however, it can create incentives for businesses and households to avoid the tax, and at a national level, a very high marginal tax rate, it has been argued, may cause some people to work less and businesses to invest less. And at the state level, households and firms have an additional way to avoid taxes: They can move. Still, moving from state to state can be really costly for a business or a household. But at the local level, whether a 24 2/12/02 WHOLE - RES. 010700 (TAX REFORM) municipal level or a county level, it's much easier for firms and households to move to avoid taxes, and the easier it is to avoid taxes, the greater the negative impact of a tax on the economic activity and the tax bases. So increases in local tax rates are likely to just generate less revenue than one might expect had there been no impact at all on the tax base through moving. Similarly, a reduction in tax revenue will reduce tax revenues less than expected. The impact of tax rates on tax changes is what we're talking about here in terms of a supply-side effect, and is generated primarily by people's location decisions. Philadelphia's tax rates are relatively high compared to its suburban neighbors and have put the City at a competitive disadvantage. The wage tax, for example, takes two weeks' pay from the typical wage earner in the City of Philadelphia. A person can move outside of the City and effectively earn the same income and have an extra two weeks off each year. This is a powerful reward for moving across City Line Avenue. Philadelphia has made some progress in addressing its tax issues, and the Controller's 25 2/12/02 WHOLE - RES. 010700 (TAX REFORM) proposal is another great step in the right direction, but Philadelphia's tax rates remain destructively high. There's a significant amount of economic research that suggests that reductions in rates of Philadelphia's major taxes -- wages, property, and gross receipts and net income -- will reduce City revenue on a less than dollar-for- dollar basis. In other words, the rate reductions do spur economic activity, increasing the size of the tax base, so some of the revenues associated with a tax cut are recovered through economic growth. There remains legitimate debate, however, about just how large the supply-side effects are. In his studies on the effect of wage taxes on employment, Professor's Inman's research finds impacts that range from a relatively modest supply-side effect generating employment growth that will offset perhaps 10 percent of the revenue loss for a percent cut in the wage tax rate to a 22 large supply-side effect, implying over 50 percent 23 recovery in revenue losses year after year. 24 Now, at e-Consult, we've been extending 25 Professor Inman's pioneering research by looking at 26 1 2/12/02 WHOLE - RES. 010700 (TAX REFORM) better, cleaner, and more data in developing a consistent methodological framework to evaluate the revenue impacts of tax changes.
We are finding in our research thus far estimates that are consistent with Professor Inman's, but in general, the supply-side impacts that we are finding are in the higher range of impacts relative to Professor Inman's. And, in addition, we have been finding its reductions in one tax -- say, the wage tax in particular -- may have important effects on other tax bases, particularly the property tax. Increases in the wage taxes have a negative effective on property values and property=tax revenues in the City of Philadelphia. In summary, I believe that the high rate of taxation in the City of Philadelphia is probably causing significant contraction in the rate of economic activity in the City and is probably depressing property values, both commercial and residential. Our research further suggests that the wage tax is having the largest adverse effect on Philadelphia's economy; and, hence, reductions in this tax appear to have the largest gains in 27 2/12/02 WHOLE - RES. 010700 (TAX REFORM) terms of generating private activity as well as the greatest rate of recovery of lost revenue associated with the rate cut. The gross-receipts tax also adversely affect economic activity, but the supply-side gains associated with cutting this tax may not be as large as those associated with a cut in wage tax. I would urge this Council to seriously consider the Controller's proposal to restructure taxes, and in general, I believe that tax-rate reduction will be beneficial to both residents and firms in the City. Thank you very much for giving me this opportunities to present our testimony.
Thank you very much. I believe Mr. Campisi is the next witness.
My name is Tony Campisi. I serve as general manager to Midlantic Business Alliance and am an employee of the Administrators Incorporation, the association management company 28 2/12/02 WHOLE - RES. 010700 (TAX REFORM) for the Alliance. I thank you for this opportunity to present our views to Council. Steven Markowitz (ph), the Administrators' Chief Executive Officer, was unable to return this week, but I do wish to present his comments that were prepared for the previous hearing. In addition to managing Midlantic Business Alliance, our current client base includes other 11 associations and chambers of commerce for 17,000 12 business and more than 100,000 employees in the 13 greater Philadelphia metropolitan area. We 14 estimate that only 2300 of those businesses have 15 chosen to operate in the City of Philadelphia. There is a reason for that: The tax policies of this administration repel those businesses. At this time, while counseling hundreds of start-up businesses per year, we do not recommend the City as a cost-effective relocation alternative. We would sincerely like to do so. The adoption of the Saidel initiative could change that dramatically. The business community, while not ready to label the current administration as "anti- 29 2/12/02 WHOLE - RES. 010700 (TAX REFORM) business," has a strong sense that it is without direction or commitment to any meaningful plan to provide relief from a counter-productive tax agenda. The City Controller's tax plan is the first solid proactive attempt to position Philadelphia in a positive and, therefore, attractive light to current and potential businesses. We urge City Council and the Administration to adopt this plan and eliminate the perception that it is helpless in the face of continued erosion of Philadelphia's business base. One thousand new small and microbusinesses would mean a half a billion dollars in local sales. Increasing land taxes, while reducing the gross- receipts of the business-privilege tax, would create the environment for those businesses to look at Philadelphia as viable. The choices between contributors and producers. The Mayor's current position seems to indicate a preference for the former over the latter. If politics as usual continues, so will the flight of businesses. A Philadelphia economy that includes many new small businesses, supplying and supporting 30 2/12/02 WHOLE - RES. 010700 (TAX REFORM) those larger businesses that service the nation and the world can be accomplished, but those small businesses must feel that their importance is rewarded with an environment in which the cost of doing business is manageable. Small-business entrepreneurs also comprise the group most likely to reside where they work. Social programs and business-support programs do not exist in vacuums. Strengthening the position of the entrepreneurs who will bring businesses and jobs to Philadelphia will in time support the many worthwhile efforts to address housing and other quality-of-life issues for all who live here. That constitutes the testimony that was to be given by Steven Markowitz at the hearing scheduled for January 30th. 6 million employer firms in the nation. In the year 1999, the latest year for which information is available, 5 million of those firms, 90 percent of all employer firms in the United States, are very small businesses with under 31 2/12/02 WHOLE - RES. 010700 (TAX REFORM) employees. 5 trillion in sales and over $5 billion in payroll. These are the kinds of businesses that are being driven out of this city due to a tax structure that causes such migration. As noted in the last census, the City of Philadelphia continues to shed businesses, jobs, and residents, resulting in reduced influencing clout in Harrisburg and Washington.
The reversal 11 of these long-dominant trends affecting this city 12 begins with a tax structure that gives birth to 13 entrepreneurship and economic development instead 14 of discouraging these activities, which are crucial 15 for urban renewal. The Saidel tax reform plan will 16 lay the foundation for that rebirth. 17 Thank you. 18
Yes, I'm Paul Tirjin. Madam Chairman and City Council. Thank you for giving me the opportunity to be here this morning. I am a director with the venture capital firm Burrill & Company. We invest in biotechnology 32 2/12/02 WHOLE - RES. 010700 (TAX REFORM) and biopharmaceutical firms, and we have an office at 3701 Market Street here in Philadelphia. For the last years, I've been building 5 health-care and life-science companies in the 6 greater Philadelphia region, first as an 7 entrepreneur and then as a venture capitalist. I 8 attended high school on City Line Avenue, I went to 9 college and graduate business school in West 10 Philadelphia, and I chose to stay in Philadelphia 11 throughout my career. So I don't criticize 12 Philadelphia lightly; it's my home in the deepest 13 sense. However, our city has been in decline for 14 the entirety of my life, and I fear it may be in 15 grave trouble going forward. As you debate your options for building the economic base that supports the City of Philadelphia, please consider some of the following observations: First, virtually every major industry that the United States has participated in was either created here or dominated by firms here and then lost to other regions. Some examples are oil, coal, steel, railroads, rail cars, banking, ship-building, shipping, textiles, jewelry, 33 2/12/02 WHOLE - RES. 010700 (TAX REFORM) entertainment, retailing, and computers. There's little use in debating why or how we drove them out or lost them; they are gone and they're not coming back. But we must recognize the magnitude of the opportunity we missed to understand fully what we stand to lose today. S. for centuries, the last half-century included, and our birth rates and death rates have been within national norms throughout the period, yet we have experienced dramatic population loss. Again, those people have found new homes so no sense pointing fingers, but we can't ignore this problem. Our country has witnessed unprecedented cultural and technological change over the last half-century. Companies and workforces are mobile, and family ties no longer retain talent to a region. As a result, regions must constantly find ways to make themselves more desirable than other regions and eliminate factors that drive the employers away. Corporations and investors in corporations have a fiduciary duty to evaluate locations based 34 2/12/02 WHOLE - RES. 010700 (TAX REFORM) on criteria that includes the impact of local wage tax and corporate income taxes on returns to investors, as well as the recruitment and retention of their employees. Beginning in the 1980s, Philadelphia's taxes drove a substantial portion of its highest-paid workers to the west side of City Line Avenue, and then in the 1990s, out to Radnor, Conshohocken, and the Route 202 corridor. It would have been absurd to suggest in 1980 that a forgotten, delapidated ghetto called "West Conshohocken" would become a more prestigious and thriving economic center than Philadelphia; yet this is exactly what has happened in less than 16 years. 17 As the economy becomes increasingly 18 dependent on highly-paid, highly-skilled workers, 19 the penalty for creating jobs in Philadelphia gets 20 worse. The math is simple: At a 4 percent wage tax, every million dollars a company pays in wages costs another $40,000 in Philadelphia taxes. This tax goes away if you leave Philadelphia, freeing up $40,000 in cash for more employees, more equipment, office space, or net profit. 35 2/12/02 WHOLE - RES. 010700 (TAX REFORM) As the decay of abandoned portions of the City has expanded and the public schools have continued to sink so far below acceptable requirements for this new highly-skilled, highly- paid workforce, the dwindling benefits of being in a major metropolitan city have evaporated in Philadelphia into a negative.
Every day, we in the investment community must encourage the fastest-growing, best-paying employers to leave or avoid tax environments like the current one in Philadelphia. It is our fiduciary duty to pursue environments for the companies we invest in that are most fiscally advantageous to the company. Of course, all is not lost: Philadelphia still has a legitimate chance of retaining a world-leading position in several industries. I believe that my industry, life science, is one of them. However, we don't have many chances left, so bold moves must be made. Incremental Bandaid approaches to tax reform will continue to fail, as they always have. In my industry, this failure will cause us to lose out to other emerging life-science centers around the country, such as 36 2/12/02 WHOLE - RES. C. Please don't let another industry slip away. Thank you.
Good morning. My name is Anne Rubin. I'm here as the President of the Greater Philadelphia Association of Realtors and a partner in a company that has 11 offices in 5 counties, including Philadelphia. The Association of Realtors supports Jonathan Saidel's Tax Structure Analysis Report. We all know that the concept of lowering tax revenues is important for our City of Philadelphia to survive, as many have spoken before me. The business-privilege tax, the wage tax, the real-estate transfer tax are luring businesses and residents out of the City. The tax structure that is in place is neither business-friendly and especially our real-estate taxes are not very equitable. 37 2/12/02 WHOLE - RES. 010700 (TAX REFORM) We know that the trend can't continue for Philadelphia to survive, and we believe that this tax plan that the City Controller's Office has brought forward is very forward-thinking in its approach and out-of-the-box from what Philadelphia has been doing, and we really need to take a very serious look at this analysis and seriously consider the benefits that it can bring to us. I'd like to speak to one point that Councilman Rizzo made in regards to the green space, and it appeared clear to me in this analysis that the community gardens and parks would all be nonprofit and there would be no tax, so it does not inhibit the beauty of the green space that we want to continue to see in Philadelphia. In fact, it encourages it. So I think that there were some inaccuracies there from what I understood, to mention that. I'll make this brief -- there's lots of people behind me, but I just wanted to reiterate that we support the efforts to implement the progressive form of taxation and commend you all for your willingness to listen and to look seriously at what we can do in the City of 38 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Philadelphia with a plan like this. Thank you.
My name is Andrew Terhune, and I'm speaking here as a citizen of Philadelphia. I also happen to work for Toll Brothers, which has an interest in Philadelphia, with a property in southwest Center City. I'd like to say that I've read over my years many, many government and committee reports, and most of the ones I've read speak in terms of generalities and argue for solutions that at best could be described as wishful thinking or pie in the sky. I've read this report in its entirety, word for word, and if anybody here has not read this report or had their staffs read this report, I highly recommend it; it's extremely clear and very, very well-written, and it speaks to specific problems and support them with real data. And most importantly to me is that it proposes specific and workable solutions, and there are many here who are going to speak to those solutions, so I will skip 39 2/12/02 WHOLE - RES. 010700 (TAX REFORM) that, but I do want to say that I do support the general tone of this, and I think it's something that Council should very, very seriously consider. Now, much has been made about the Rendell Administration's turning the City finances around, and I wish to say this was no small achievement, and certainly Council had an awful large part in that. But for all it accomplished, it really just stopped the bleeding so that the patient, as it were, didn't die on the operating table. The cancer, which is Philadelphia's current, non-competitive tax structure, is still ravaging the body. Now, my wife and I have lived in Philadelphia since 1985; that makes me sort of a newcomer amongst many of you here, but it's longer than I have lived anywhere in my life. And ever since I came here, I have read study upon study, I've seen column upon column in the Inquirer and other papers on the subject of the City's declining population and job base. Without exception, all point to the City's noncompetitive and overly complicated tax structure -- and that's just a fancy way of saying 40 2/12/02 WHOLE - RES. 010700 (TAX REFORM) "high taxes" -- as a key reason people choose not to live within the City limits of Philadelphia. As an example, a colleague of mine at Toll Brothers recently relocated from the State of Colorado and rendered residence in Center City while he and his wife learned about the region and decided on where they might choose to live. A year later, he and his wife are now looking everywhere except Philadelphia, and this is largely due to the wage tax. As a well-compensated executive with one of the Delaware Valley's fastest-growing companies, he is exactly the kind of resident Philadelphia needs to attract and retain. And I'm sorry that we're not going to, it looks like. Now, I'd also like to discuss a little bit how this is relating to the Mayor's Neighborhood Transformation Initiative. The Mayor has said and, I believe quite correctly, that we need to attract more new market-rate housing to this city, and I couldn't agree more with him. However, developers build homes where they perceive the demand is; that's why today they're building largely in the suburbs because that's where people are choosing to live. 41 2/12/02 WHOLE - RES. 010700 (TAX REFORM) In order to make the Mayor's vision a reality, we need to take steps to make the City a more attractive to live. If the demand is there, the developers will follow, they will build those houses. Of all the issues that make the City less attractive than the suburbs -- and I don't want to downplay the fact that schools are an issue, we all know that -- changing the City's tax structure is the only change that the City Council can effect now for this upcoming fiscal year beginning in July. The other problems -- schools, crime, quality of life -- must be dealt with as well, but it will be years before we can feel or see the effects of these improvements. In contrast, changing the City's tax structure is something that we can do and put into effect today.
The effect of the change in these, I'm sure, will be immediate and long-lasting. When businesses, residents, and prospective residents see the City is on a course towards a new, more competitive tax structure, they will make their location and business decisions accordingly. Our job base will grow, and the City will prosper. 42 2/12/02 WHOLE - RES. 010700 (TAX REFORM) There is another certainty, however, and that is if we do nothing, the City's job base and population will continue its inexorable decline. Fewer residents and business will support the fixed infrastructure that we have, and cutting taxes in the future will be even more difficult than it is today. Finally, I would like to go a little bit beyond the Controller's report and make a suggestion that, I think, will further enable the City to cut taxes as well as make the City attractive to both residents and businesses. As part of its tax reform, the City should consider consolidating the City's tax base with that of the State. I am somebody who's fortunate enough to have to pay a number of the City taxes, and I have to do a wage-tax reconciliation form in addition to the wage tax, as my employer withholds, and I have to fill out form for School District income tax. I have to do a business-privilege tax form as an investor in the City, and that also entails my doing a net-profits tax. My wife has own business and is also required to do these forms as well. 43 2/12/02 WHOLE - RES. 010700 (TAX REFORM) If I were to live in the Cit of New York -- another city, as we all know, that has some tax issues -- at least I wouldn't have this problem. The City of New York consolidates its taxes with those of the state, it's one form, you fill out and send in one check, and the system is much more compact, easy to understand, and less burdensome and onerous on residents and businesses of the City. Doing this would reduce the paperwork as well as a number of tax forms, it would make for a simpler system, it would allow the City's Revenue Department to focus an other revenue sources and possibly to downsize, further saving money, and I believe it would democratically increase compliance. These findings were backed up by a study that was done for the last administration back in 1992 but never implemented, and I would ask that Council consider those as well. In summary, I think that the Controller and his department have done an outstanding job, producing a very readable, concise, and specific report, and I urge the Council to consider it very seriously in the upcoming fiscal year. 44 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Thank you.
Thank you very much. Our next witness? MR. MCPHERSON; Allen Woodruff.
Good morning. I run a small company up in the Port Richmond section. We build specialized textile machinery, which is sold around the world. In fact, we have one customer in the City of Philadelphia. When it comes to the gross-receipts tax, it's essentially a non-event; we usually pay a dollar or two, or some years, we have less than a dollar and aren't required to send it in, and I think probably we cost the City money in processing this tax. I also am chairman of an organization which represents a group of about 50 manufacturing firms in a 12 square block area called "Pride," and we're trying to improve the neighborhood in which we operate, and we've tried to attract some businesses. And, again, the wage tax proves to be the biggest impediment for people to come into the 45 2/12/02 WHOLE - RES. 010700 (TAX REFORM) City to relocate. It's psychological as well as financial. I, myself, have had trouble attracting an engineer for -- who, you know, living in the suburbs, they look at it and, you know, the wage tax is a big turnoff. I really feel that until the wage tax gets to probably about 2 percent and becomes sort of a non-issue that we're going to have that trouble and that problem, and I would urge that a lot of energy is put to seeing how the wage tax can be reduced as opposed to the gross receipts or some others. The gross receipts, while it is inequitable,and the sandwich shop where my employees buy their lunch is obviously paying far more than we are. What you have in my firm is, we are a net importer of money into Philadelphia in that we -- well, we just sold a machine ship to South America and in came a transfer to our bank from Brazil. You know, we bring money in from across the country and around the world, and the majority of it's spent on wages and supplies and services provided here in Philadelphia and in the Delaware Valley. So what you need to do is make it so that you can attract companies that bring money in, and 46 2/12/02 WHOLE - RES. 010700 (TAX REFORM) you're not going to do that unless the wage tax is lower. Thank you.
Thank you, Mr. McPherson. Just a quick question to the panel, but also a little bit of a comment. I know many of you were here, I think, about a week, ten days ago, and I just wanted to mention that, one, there was a hearing that had been scheduled maybe around about the same time earlier that particular day. There were a number of bills being heard that day, a couple of which were mine, and we had a few more witnesses than we anticipated. And so at least for my part, I do wish to apologize to anyone who was here at the other hearing, and directly to City Controller Saidel, for any delay that was caused as a result of a previous hearing going on. I recognize that your time is very important, and at least for my part, no disrespect was intended. There were some other education matters that we 47 2/12/02 WHOLE - RES. 010700 (TAX REFORM) were dealing with, and I regret that we went over our time, so I did want to in a more public apologize to you for that happening. The second thing is, I've listened to all the testimony, and I just wanted to get a better understanding of -- there are a variety of ideas out in the public about tax restructuring and tax reduction. Obviously today, we're here to listen to the Controller's proposal. There was a proposal made by the Mayor here in Council chambers during his budget address, and he talked about the need to reduce the gross-receipts tax and a proposal for next summer to cease the wage-tax reductions, and that there was contact with a variety of businesses and economists and other people around the City. And for this particular panel and maybe some others, I just wanted to get a sense from you of: One, what was your action to that proposal; two, were any of you either consulted or surveyed or asked about that particular proposal, and; three, based on your business experience, which, while many of us have had a lot of policy experience, we may not have direct business experience, I'd like to get your reaction to any of 48 2/12/02 WHOLE - RES. 010700 (TAX REFORM) these particular ideas as well as your suggestions. (No immediate response from panelists.)
The Mayor's Office did not contact the Greater Philadelphia Association of Realtors; to the best of my knowledge, the Mayor's Office did not contact any Realtors individually either to discuss this idea. I can tell you that without touching the wage tax from a real-estate standpoint, you are not going to be able to maintain the residents. It's a combination of the taxes and the schools, and if we don't -- we -- the schools are really a long-range thing, but if we don't seriously do something with our taxes, we are continually losing. The people that are moving into the City are either those that are required to live here; you know, the ones that are coming into the City are taking jobs and being required to live here, and that pool has been reduced now with the change in the school employees. And the others are the empty-nesters who want to be in Center City, and we've seen the 49 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Center City burst with real estate. I hope that that will last for a long time, but it's been cyclical, and we've seen this before. But families that are in the prime of their income earnings are leaving. You know, they say that those years from 35 to 55 are the prime time that people earn their monies. Those with --
Those are the groups that are heading out, and they're heading out fast. And as doing business in real estate, I have to say that the wage tax is equally as big an issue and consideration, and transfer tax, as the schools are. People are willing to send their children to private schools if they feel the schools are inadequate, but they don't have an alternative to the taxes.
Okay, thank you. Appreciate that. 50 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
While I represent only a single venture firm, the general consensus in the venture capital community is that the wage tax is fundamental to the issue of locating a business within Philadelphia limits. With a startup corporation, especially a high-tech corporation that requires a high-salaried workforce, there's -- the impact of the wage tax is much greater, the need to conserve tax is much greater, and the decision to locate is going to be much more heavily based on that. As soon as a company reaches eight to ten employees, we have a responsibility to encourage them to leave the City.
Because the same amount of money can go into more research and development, more employees, more rent, more equipment, more anything -- or more, you know, heaven forbid, more profit if they move outside of Philadelphia.
Do you find that you 51 2/12/02 WHOLE - RES. 010700 (TAX REFORM) have to pay a premium in terms of salaries to employees to compensate for the wage tax?
Absolutely. Well, unfortunately, there's a premium both because as to compensate for the wage tax, as well as the workforce that we're targeting doesn't want to work in Philadelphia because of other issues like the schools, like the urban bright, and so forth. So we have to pay a premium. And then on top of that, pay the wage tax, so the wage tax is compounded by the premium that we pay.
Councilman Nutter, I'd like to address this on two fronts: One as a partner in a small --
I know that you want to address it at least on two fronts.
Three fronts -- one, as a partner in a consulting firm with about 18 people. It is very clear we're in Philadelphia because we find it has quite a few advantages to be in 52 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Philadelphia. However, when we do hire, we do have to pay a premium to compensate for the wage tax. We are in the midst of attempting, which I think is going to fail, to hire a young person from the University of Pennsylvania. We're competing with another firm in Washington, and there is a premium that is involved simply to pay the wage tax. So I think that Philadelphia has quite a few attractions, but the wage tax does come in the premium for salaries, and there's just no getting around that fact. I have spent a fair amount of my previous career studying policies and how they affect patterns in metropolitan development -- I was a student of Professor Inman, who is the guru if we're talking about taxes in this area. We at e-Consult have been looking at the effects of the major taxes on their tax bases. We have definitely found that wage taxes are a very important detriment to private economic activity. When you cut the wage tax in Philadelphia, you do regain a significant amount of the revenue back from base growth as the economy grows. 53 2/12/02 WHOLE - RES. 010700 (TAX REFORM) And what new information that has never been circulated before is that -- and it's preliminary, but we are finding that the wage tax affects property values and, hence, the property-tax revenues and base. Less people want to live and work here, it depresses the values of commercial properties, it depresses the values of residential properties. I think another panel member has spoken very clearly that it affects the real-estate market. So I think accumulating evidence that the wage tax is very important. And to address the gross-receipts tax issue, the gross-receipts tax almost certainly matters, but it does not matter at the same scale that the wage tax matters. And one way to think about that fact is -- it's not exactly the same, but it's somewhat the same as the sales tax, and it's a quarter percentage point on sales taxes. It's not going to be as big an economic driver as the wage tax, which is like a huge elephant in the economy. Thank you.
I feel that, you know, 54 2/12/02 WHOLE - RES. 010700 (TAX REFORM) stopping the wage-tax cuts was sending the wrong message to the business community. I've been through some frustration in hiring people, and also, there was a potential a couple years ago of merging my company with another company and bringing it into the City, and one of things that that really was stumbling was that we had to retain some people -- this was a company out in Warminster -- retaining some people and, I mean, the tax, the wage tax was a big problem, was going to be a big problem.
Thank you The Chair recognizes Councilman Clarke.
Thank you, Madam Chair. Good morning. I, like Councilman Nutter, would like to, for those of you who were at the earlier hearing, would like to give my apology for the delay -- well, actually, the postponement of that particular hearing. I was somewhat involved in an issue that caused that to happen. So I'd like to say, on 55 2/12/02 WHOLE - RES. 010700 (TAX REFORM) behalf of myself, I'd like to offer my apologies to anyone who was inconvenienced on that particular day. First of all, I'd like to applaud the City Controller and all of you for being here today to bring this very important issue to the level that it should be to stimulate the discussion. Regardless where people come out on the issue, I think it's something that should be put in the forefront, and I agree, frankly speaking, with a substantial amount of what's being proposed here today, and would hope to be in a position to implement some of these very important initiatives. But I just wanted to talk briefly just talk about that was discussed earlier by Councilman Rizzo. A part of the City of Philadelphia that I represent, unfortunately, has a lot of vacant land, to be frank with you, so the impact on the vacant land would be substantial pro and con. Councilman Rizzo, in his earlier testimony, talked about greening initiatives, open-space initiatives -- that's one of the things that we've been focusing on both from a development perspective and also as a reuse initiative for property owners who have 56 2/12/02 WHOLE - RES. 010700 (TAX REFORM) vacant properties next to them, encouraging them to take those properties into ownership. And interesting, the information that you apparently have gotten -- ma'am, I forget your name.
Miss Ruben. -- with respects to the ownership of most of these community gardens are not, in fact, community development corporations; they are, in fact, private homeowners who have taken the initiative to get these properties into their ownership for, you know, gardening or for other types of open-space uses. We've actually encouraged that through legislation that was passed a couple of years ago, the vacant lot initiative. So that will be an impact on that individual property owner. one of the other things that I would like -- and I guess Mr. Saidel's staff should take into account, as a result of the lack of population and the declining population over the years, particularly in the affordable housing area, we have taken on an initiative that has decreased the density of new homes that we are building substantially. We are building the amenities with 57 2/12/02 WHOLE - RES. 010700 (TAX REFORM) affordable housing that people have in the suburbs: Giving people a front yard, a rear yard, Off-street parking. So I think that this particular land-tax proposal could have an impact on individuals who are either moderately-income or lower-income, so I would like to take that into account when we explore this initiative. So those are just a couple of things that I wanted to put into play as we continue this discussion, and I'd ask for Mr. Saidel to look at that initiative. It wasn't pretty much a question; it was more or less a is statement. Thank you, Madam President.
Thank you. I believe Mr. Saidel will be available at the conclusion at everyone's testimony today so we can ask whatever questions we have of him.
Thank you. Are there any other questions of the witnesses that are before us? (No further questions.)
Gentlemen, thank 58 2/12/02 WHOLE - RES. 010700 (TAX REFORM) you, and thank you very much, Anne. PANEL MEMBERS: Thank you.
Charles Pizzi, David Thornburgh, Paul Levy, Al Taubenberger, Sam Katz, Kevin Mazzacola. (Witnesses come forward.)
Good morning. Mr. Pizzi, I believe you're the first witness. Mr. Pizzi?
Madam President, good morning. I am here, Council President, with Stu Weintraub, who will take questions. He is chairman of our tax committee at the Chamber, and so I would like just to say that.
One other thing, Madam Council President. I have made some changes to my testimony, so we'll get you a revised version. For the record, my name is Charlie Pizzi, and I am President of the Greater Philadelphia Chamber of Commerce, and I come before you today, as in the past, to emphasize the need for immediate 59 2/12/02 WHOLE - RES. 010700 (TAX REFORM) tax relief in the City and to conditionally support the City Controller's plan to implement reform. In a recent consumer outlook survey conducted by the Chamber and Sovereign Bank, 72 percent of the participants felt that the number-one challenge in the City and region was taxes. We would take that a step further by stating that not only are taxes the number-one challenge, but taxes are the number-one deterrent to economic growth. Like it or not, our informed suburbanites do not recognize that a financially viable city means success in this region. I testified before this body a few months ago on the reasons for population loss in Philadelphia. I stated unequivocally that the number-one reason for population loss and the attendant revenue loss to the City was taxes. And due to our regressive tax structure, Philadelphia has lost its competitive edge. It is primarily for this reason that businesses and residents alike fled to our neighboring suburban communities, thus reducing our ability to provide needed services for the growing sector of our residents who live below the poverty line. 60 2/12/02 WHOLE - RES. " To find where the Philadelphia region's economy is growing, follow the exit ramps in Montgomery County. This exit-ramp economy is siphoning jobs and businesses from Philadelphia. In the past decade alone, over 81,000 white-collar jobs were created in the likes of King of Prussia, Conshohocken, Fort Washington, Plymouth Meeting, and Willow Grove. Some of these jobs could have been in Philadelphia. I would suggest to you that the time is now for the political encourage to stem the exodus and to create attraction of companies. This courage must be demonstrated by all of our elected leaders, not just one branch of government alone. " Well, the tax structure in Philadelphia is 61 2/12/02 WHOLE - RES. 010700 (TAX REFORM) not competitive and in order to be competitive, we must reshape taxation now. Therefore, I find it refreshing that a public official and the City Controller has finally come out and recognized that there is a problem here. I am aware that there are some areas of concern in this proposal and which I spoke to the Controller about -- in particularly on how the land tax may affect refineries and petrochemical industries, automobile dealers, and others in the City and whether the land tax can be fairly levied in a major urban area, because we know it already works in other providences in the Commonwealth. However, the Controller has consistently stated there is plenty of room for flexibility in his plan. The time to be heard and make suggestions is now. I do not think that a comprehensive tax reform in general is timely and should be viewed by all as a very positive step in the right direction. Certainly, it should be considered in conjunction with the school reform effort, which is currently under the microscope. On the 29th, the Mayor unveiled his 2003 62 2/12/02 WHOLE - RES. 010700 (TAX REFORM) budget proposal which aggressively attacked the gross-receipts tax, which I believe is very positive. However, he froze the City wage tax after 2004, or until the economy gets better. I would ask the Administration to rethink that policy prior to the 2004 budget year, which would give them all in all another year to determine that this wage tax is important. This said, we must be prepared to attack all of our taxes more aggressively in the future. Philadelphia has been moving ahead, but we do ourselves a great disservice when we allow taxes to create a barrier and chase away businesses and residents.
This creates a cloud over our great city that causes us to be viewed in a negative light. Tax reform sends the right messages to businesses, the residents, parents, our suburban neighbors, and in Harrisburg, which we are continually looking to to help us. Ladies and gentlemen, the time for political courage is now. Once again, the Chamber applauds the initiative of the City Controller for his ability to listen and be inclusive in preparing this document. 63 2/12/02 WHOLE - RES. 010700 (TAX REFORM) We all recognize the heroic deeds of our police and fire personnel who risk their lives out there and in particular in our country over the recent crisis at 9/11. Our city and our nation judge them to be heroes. We need you, our elected officials, to view your jobs in a similar way. We want you to be our heroes by saving our city from fiscal crisis, risking your career, if necessary, by taking the right step on tax reform, and ensuring a healthy and viable community for tomorrow. Thank you.
Thank you, Council President Verna and members of Council.
It's my pleasure to be with you here today, and I hope I can add a little more momentum and definition and focus to some of the decisions that you have in front of you. I hope you have the handout that I've prepared. It's entitled "City Taxes and Tax 64 2/12/02 WHOLE - RES. " And I wanted to begin with some reminders, I guess, from some other sources that we haven't heard from today about the nature and the challenge of the situation that we have in front of us of front of us. First is a quote from a report that was done about two years ago for the Pew Charitable Trusts as an assessment of Philadelphia's competitiveness. And the quote that is bolded and italicized in that report is simply this: That becoming fiscally competitive is the Mt. Everest of Philadelphia's problems before which the City's other issues are but foothills. I guess I would add there, lest that sounded like too overwhelming a challenge, it's important to remember that Mt. Everest has been scaled repeatedly, and that shouldn't put us off from this challenge in this city. Second is to go back to a report that I helped contribute to when this new mayoral administration came into office. Mayor Street asked us, a small group of volunteers knowledgeable about tax issues, to take a look at the City's 65 2/12/02 WHOLE - RES. 010700 (TAX REFORM) fiscal competitiveness and come up with some directional signals, and I think there was a very clear message in that report of the transition team: That the City must in fact achieve dramatic reductions in business and household tax burdens over the next eight years, and that we must do so by reducing the City's reliance on a city-based wage tax. So, again, other voices leading in the direction as those that you've heard today. And I think what all of this circles around is really two key points, that we're talking about how tax issues affect the choices that people make, both individual choices, people sitting around the kitchen table, trying to decide where they live, where they should send their kids to school; and decisions that business make, maybe sitting around their conference table or in their offices. The sum total of those choices over time really determines whether we grow or whether we don't grow as a city. And I think unless we find some other substitute for the positive benefits of growth, we've got to keep coming back to that issue of growth and the choices that people make that 66 2/12/02 WHOLE - RES. 010700 (TAX REFORM) affect those. Now the question is, there's always been a lot of debate about how much difference high taxes have made, and let me just review a little bit of the evidence over time. Professor Bob Inman has been referred to a couple of different times; he contributed greatly to a landmark study in the early '90s that suggested that the wage tax itself had cost the City between 100 and 165,000 jobs over a 30-year period. Keep in mind that the City's job base is on the order now of about 650 to 700,000. Second thing is -- and I know Paul Levy's going to speak in a minute about the Center City office environment, but it's pretty clear that much of that impact has been on our office-employment sector, and I think Paul's going to share with you some ways to think about office employment that really drive that point home. One bit of information that I picked up just recently, I think, really struck me as a very, very challenging comment on our office-employment sector. Essentially, and in a large measure, because of or tax situation, we have become, unfortunately, what I think people in the market 67 2/12/02 WHOLE - RES. 010700 (TAX REFORM) see as a Class B office market. But essentially, in our Class A office rents, the best space that we have in Center City, where we're employing a high-wage people, rents in 2001 were about $27 a square foot.
If you look nationwide, Class B office space, less desirable office space, is actually renting for more than our most desirable office space, and I think that's a clear indicator that there just simply hasn't been enough demand for that space over time. And if there isn't demand for that space, there's no employment growth in that environment, the wages don't flow, the people don't flow back to neighborhoods, and we end up exactly where you'd expect we would. Just one more sort of contributor to this conversation. There have been numerous surveys over time of asking people why the City's population has decreased, why jobs have left the City. I only cite one, a 1991 GPF said that suggested that the wage tax was second only to crime as a reason for leaving the City. Just a couple of numbers. What would the Pennsylvania Economy League be without a couple of 68 2/12/02 WHOLE - RES. 010700 (TAX REFORM) numbers. How bad is the tax situation now for middle-income households? And these, I would suggest, are households that are actively making choices about where they live and where they work. The regional median income is $47,000 a year. If you're that household and you're making a choice about where you live and work in this region, essentially, you pay about 50 percent more to live and work in the City of Philadelphia than you would in the typical suburb. That amounts to about $2400 a year in state and local taxes, all in, everything considered, everything that we could throw at that, and $2400 on an income of $47,000 a year, as you know, is a substantial, substantial hit. Turning to the business side, a gentleman offered some comments about the dealings that he has with life sciences and biotech firms. We have put together again an all and comprehensive model that assesses what it costs in the way of state and local taxes for a business to expand, and we've run that through a bunch of different businesses. When you look at a biotech firm, essentially it's on the order of twice as expensive from a state and local tax perspective to be in the City of Philadelphia 69 2/12/02 WHOLE - RES. 010700 (TAX REFORM) as it is to be in a typical suburb. It's kind of interesting relative to some of the questions that have been asked. We said, Well, what would happen if we totally eliminated the gross-receipts tax, not just reduced it a little more but eliminated it, and you can see that it actually would have very little impact on the tax hit on that biotech firm. It would take the City tax hit down from percent to 10 percent. 11 We played another "what-if," and said, Well, what would happen if we implemented all of the proposals that the City Controller has outlined in his report? And in fact, it gets us a little further, but still, you're at 9 percent in the City levels versus 6 percent in the typical suburbs. So I suggest that that's one way of looking at this question of how much impact the gross-receipts tax has and it's also a way of framing the Controller's proposal. You know, the Holy Grail in all of these discussions is often, What's the payoff? how do changes in tax rates accrue to people living in Philadelphia neighborhoods to job growth to Center City office rents, whatever we care about. One 70 2/12/02 WHOLE - RES. 010700 (TAX REFORM) thing that we looked at is just in the last five years, if Philadelphia's so-called new-economy firms -- and this is the biotech firms, life sciences, information services -- had grown at just the suburban rate, there would be 20,000 more high-wage jobs in the City than there have been. And, again, I know Paul will speak to this in a second, but it's really important to keep in mind that while we think of Center City office jobs, that Center City office jobs are really neighborhood paychecks. A couple comments about tax revenues and tax and base, and Dick Voith alluded to some of these earlier, and we've been working with Dick on this.
It is clear that a wage-tax cut will increase the wage tax base and there will be more wages in the City of Philadelphia. And no one disputes that; we dispute how much and how soon. And I think we're going to be able to help enrich that conversation in a short period of time. It's also probably true that a wage-tax cut will increase the property-tax base, meaning even if you kept property-tax rates the same, you would realize more property-tax revenues because of 71 2/12/02 WHOLE - RES. 010700 (TAX REFORM) that shift, because all of a sudden, it's more desirable to live and work in the City of Philadelphia. So with some degree of caution, of course, I urge Council and this administration to take those so-called base adjustments into account when we're making tax-revenue projections. Just a comment or two about the Controller's proposal. I would second or third those who have spoken before me. I think this is one of most thorough published analyses of city taxes that I've seen in the last years. I would 14 have been proud to have my staff and my 15 organization author this report, and I commend the Controller in his efforts. It is, however, a relatively modest proposal that narrows that household gap that I spoke about earlier only about -- by about $232. So I would suggest, if anything, I know the Controller is trying to do this within the strict confines of one fiscal year budget, I would urge that there's much more room to go to make this city more competitive. A focus on the wage tax, I think, again, 72 2/12/02 WHOLE - RES. 010700 (TAX REFORM) is well-placed; the point's been made before. A split-rate tax, I would second some of the thoughts that Mr. Pizzi had earlier. This could be helpful in terms of some of our blight issues, but we've got to approach it with a degree of caution. In conclusion, I think that the burden of proof, so to speak, is staggering that the City's economy will continue to lose ground with current tax structure and current tax burdens. It will continue to affect negatively the choices that households and businesses make about the City as a place to live and do business. The Controller's proposal, I would commend. I think it would achieve some modest progress, but I want to keep bringing this conversation back to what others have said before me, that the focus on the wage tax is the key, and unless we're unable to make significant headway in that, I'm not sure that our competitive situation is going to be much improved. Thank you very much.
Thank you. Our next witness? 73 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Good morning, Council President Verna and other members of Council.
My name is Paul Levy. I'm here as the Executive Director of Central Philadelphia Development Corporation, and I'm really delighted to have an opportunity to participate in this discussion I have prepared not printed remarks or text remarks, but a set of images that I think convey what I want to talk about. On the first page, we simply have, based on reach we've done and looking at published numbers, the effect of Philadelphia's recovery from the very severe recession that we began in 1989, 1990. And what you see in this chart is in about '95 or '96, private sector employment began to decline as we went into a process of revival, but unfortunately, the recession that began in March of '91 and then was compounded by 9/11 has obviously begun to cost us private-sector jobs. But if you look back at the causes of that revival on , clearly this city, this 74 2/12/02 WHOLE - RES. 010700 (TAX REFORM) administration and the prior administration, and Council made a series of major public investments in arts and entertainment facilities and in the Convention Center. And the very good news about those investments is that they have paid off dramatically. If you look at , you will see that from 1994 to 2000, hospitality jobs, hotel jobs arts and entertainment, restaurant jobs grew by 34 percent. It's been a very wise and strategic investment and one that has paid off. But if you look at the top of , at the top line, you will notice that office-sector jobs, the jobs in the towers just west here of City Hall grew not all during that period of time. If you look at the bottom pie chart and look at the City as a whole -- this is private-sector employment -- you see that health care and education clearly is our largest sector of employment in the City; business and professional services, the office jobs, are second; hospitality is third. What we've experienced is a very, very strong rate of growth in the hospitality-sector, 75 2/12/02 WHOLE - RES. 010700 (TAX REFORM) but if you turn and look forward in a couple of pages, you realize that it has not been mirrored in other sectors. What I want to emphasize on is, this is not an either/or choice. As a city, we need a balanced economy, one that has investment in arts and entertainment, in conventions. And clearly, hotels, theaters, and restaurants create an environment that attract business. And those hospitality industries generate work for architecture, engineering firms, and law firms. Similarly office tenants attract both corporate meetings and business travelers, so I'm not in any way arguing that it's one or the other; I'm suggesting it's both. If you look, however, at at the charts, you'll see again, looking back a little longer to 1990, that while we saw strong growth in hospitality, we had only modest growth in our largest sector, which is health care and education, and we actually lost jobs, looking back to 1990 in our office sector. So we had modest or growth in 50 percent of our economy, which has been the challenge that we face. 76 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Again, those office jobs, which I want to focus on, represent percent of all employment in 4 the City. 5 If you look to , it's a more 6 detailed look at the trends, and this mirrors what 7 some of the other people who have testified this 8 morning have said. 9 If, again, you look at hospitality jobs, 10 in '94 to 2000, they grew by 34 percent. Office 11 jobs grew not at all. 12 But if you look at the bottom of , 13 at the Pennsylvania suburbs, those very same jobs 14 which we did not grow in Philadelphia at all grew 15 by 22 percent in the surrounding counties; that is, 16 very, very strongly growth in Bucks and Montgomery 17 and Chester County. 18 Now, again, it's balanced. If you look at 19 , the hospitality and restaurant industry 20 provides very important entry-level and mid-level 21 jobs.
These are jobs that are supplemented by 22 TIFs, which are very good for the individuals but, 23 unfortunately, not captured by the wage tax. 24 On the other hand, the office-sector jobs, 25 as a higher-wage job, clearly generate a higher 77 2/12/02 WHOLE - RES. 010700 (TAX REFORM) volume of wage taxes. Now, I use the words "high wage" in quote s because if you look at the bottom of -- this is based on a survey we did of 39 downtown firms -- what you will see is almost two-thirds of the jobs in the office sector pay between and 8 $60,000 a year. Those are middle-class jobs, those 9 are working people's jobs that are in our office 10 sector. 11 If you turn to , we just list some 12 of those jobs that pay between 25 and 50,000 a year 13 in the office sector, and those are jobs that we 14 know that people across our city hold. 15 If you look at the bottom of , you 16 see some important statistics, because this is not 17 a downtown versus neighborhoods issue. Office jobs 18 are neighborhood jobs, and the people in our 19 neighborhoods who work in downtown office buildings 20 on average earn more than other people in those neighborhoods, which means they drive improvement, they drive retail sales in those neighborhoods. And there's a chart, which I actually have a larger version 'cause I realize this one is hard to read, but you will see that in every 78 2/12/02 WHOLE - RES. 010700 (TAX REFORM) neighborhood across the City, there are people, substantial numbers of people, who work in our downtown office buildings who rely on SEPTA to get into the downtown. Again, this is not an either/or choice; we need both entry-level jobs, hospitality jobs, and office jobs. But the bottom of is a very simple statistic. 6 times as much wage tax as the average hospitality job. Not either/or, we need both. But failure to grow office jobs means a major missed opportunity. Top of is just a visual representation of that challenge. Zero growth in office supply in Center City in the strongest economy we've experienced in this country, 41 percent growth in office supply in the surrounding suburbs. Zero growth in Center City, 41 percent out in the suburbs. Is this the fate of all cities? Top of . Just benchmarking against Boston, in the decade of the '90s, the central business district of Boston captured 30 percent of their region's office growth and has now bypassed us in terms of 79 2/12/02 WHOLE - RES. 010700 (TAX REFORM) total supply. We captured only percent. If you look at the bottom of , "the sprawl capital of the world," Atlanta, is only slightly better than we are. Only percent of 6 all regional employment is now in our central 7 business district. Other regions have done better 8 holding employment in the center. 9 I remind you that we have a mass-transit system that takes people from neighborhoods into the downtown. It is harder and harder for neighborhood residents to get out to the jobs in the suburbs. We are subsidizing transit and subsidizing welfare individuals to get out to jobs at the edge when we have a major transit system that feeds the center. Pages 12 borrow from the work that David Thornburgh's organization has done. The point about this is, we have sprawled all over the suburbs and created vacancy within the City. To conclude, on , our strategic advantage clearly is, it takes 1,364 square miles of Montgomery and Chester Counties to provide as much office space as we put together in the downtown. 80 2/12/02 WHOLE - RES. 010700 (TAX REFORM) If you flip over to , we talk a little bit about the opportunity costs, that we've grown at the same rate is the suburbs in the last part of the decade. 5 percent, the City would have enjoyed $50 million more in wage-tax revenue. So the fundamental question which I think you face, that we all face, that the Administration faces: Do Philadelphia taxes affect the choices made by businesses and office workers?
And can you, can anyone, demonstrate that the reduction in taxes will attract businesses and generate new taxes without dramatic cuts in services? Now, I'm not an economist or a social scientist, but on , I thought I would imagine the following situation: I'd like you to image an office park where all of the property within that center had the same access to highways, the same access to labor, the same great restaurants, but imagine if you drew a line down the middle of that office park and taxed one side of the park at one rate and one at the other. Fortunately, Councilman Nutter has conducted this experience for us on City Avenue. 81 2/12/02 WHOLE - RES. 010700 (TAX REFORM) If you look at the bottom of , you will see the commercial office district that is on both sides of City Avenue. 8 million square feet of commercial office space aligned around City Avenue. 6 million square feet of that office space are across the City line, in Montgomery, and only 200,000 has located in Philadelphia, and a good portion of that space is vacant. We clearly have extraordinary competitive strengths. Sixty-severn percent of our office workers come by mass transit; we ought to be reinforcing that. Ask office workers what they like: It's convenient commute, it's shopping and dining, it's all of the amenities we have spent the last decade building. It's our access to education, it's our access to a whole series of great transportation opportunities at the airport bottom. Bottom of , we are incredibly affordable. Cost of living. If you wanted to take a $60,000-a-year salary in Philadelphia and earn the same thing in Manhattan, you would have to earn 82 2/12/02 WHOLE - RES. 010700 (TAX REFORM) $122,000 a year to afford to live in Manhattan. We have extraordinary advantages that we capitalize on. And so in conclusion, I would say simply that as a city, we have made very wise strategic investments in a convention center, in arts and entertainment. I think if we looked at the cut in the wage tax as a strategic investment, it's a strategic investment that could yield extraordinary returns for the City. Thank you for this opportunity.
Thank you, Mr. Levy. As usual, your testimony was very informative. Thank you very much.
Thank you, Madam Chairman. Madam President, members of City Council, my name is Al Taubenberger. I'm President of the Northeast Philadelphia Chamber of Commerce. We have just under one thousand members, mostly small, in Northeast Philadelphia and even some in the surrounding suburbs. When Mayor Rendell talked to our chamber sometime back, former Mayor Rendell, he said, "I 83 2/12/02 WHOLE - RES. 010700 (TAX REFORM) just reduced the City wage -- by a small amount, I understand -- but nobody thanked me. I didn't expect thanks. But had I increased the City wage tax by the same amount as I reduced it, there would have been an outcry from the City that would have been louder than any cheers or screaming from any sports events that we've ever had in this town." He simply realized that our city, our community, and our businesses are taxed to the maximum. They are literally at, what economists would say, "What the market will bear." With 68,000 people leaving in the last 10 years, 48,400 jobs leaving in the last 10 years demand an overhaul of our tax policy. The Northeast Chamber thanks City Controller Saidel and his staff for putting together this proposal. Some of the things that we have looked at and we like: significantly reducing the business taxes; reducing the net-income portion of the business-privilege tax from 6.5 percent to 4 percent; reduce the gross-receipts portion of the business-privilege tax from 0.24 percent to 0.20 percent; 84 2/12/02 WHOLE - RES. 010700 (TAX REFORM) eliminate the City net-profits tax; shift taxes to dramatically; cut the wage tax and encourage development; change how property is taxed by shifting taxes from buildings to land values; discourage speculation and encourage development; reduce the wage tax to 4 percent for City residents; accelerate the pace of the wage-tax reductions; reduce the wage tax in steps to 3.5 percent for residents and 3.375 for non- residents by Fiscal Year 2007; improve business-friendliness of the tax structure; implement a Philadelphia new tax deduction to encourage companies to create new jobs. And quite frankly, as a chamber executive, a good job at a good wage is better than any government program. Splitting the real-estate tax from land and for buildings is a very realistic approach. 85 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Taxing land at about three and a half times the rate of buildings gives owners the incentive to develop rather than just hold land on pure speculation. Nineteenth-century Philadelphia resident Henry George said it very simply: "As development and obs and other economic activity grows, the local economy blight is chased away." One just has to look at some surrounding cities to see what this is all about. Harrisburg slashed its vacant land stock by 80 percent in 12 years. Two-term Allentown Mayor William 13 (indiscernible) left office with three out of four 14 homeowners paying less taxes than they did in 1994. 15 For these reasons, the Northeast 16 Philadelphia Chamber of Commerce enthusiastically 17 supports City Controller Jonathan Saidel's 18 proposals. 19
Madam President, I have a question. 86 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Do you mind if the panel finishes their testimony, and then we'll take questions.
Well, I understood that and I'm trying to do it, but I'm struck by one thing that I wanted to mention. No one yet mentions the particular facts concerning Philadelphia as a city which is also a county; no 10 one yet that I've heard of mentions anything about the State's imposition on the City of the cost of the courts, of its unwillingness to pay fair amount for educational purposes, and I'm wondering whether these facts have been considered.
I don't know that the gentlemen at the table can answer that , but Mr. Saidel is going to make himself available after all of the panels have testified.
So we can question him at that time. Thank you, Mr. Katz. Please proceed.
Thank you, Madam President. I'm Sam Katz, CEO, Greater Philadelphia First. I've been here a couple times and told the members 87 2/12/02 WHOLE - RES. 010700 (TAX REFORM) of our Council that our business organization, Greater Philadelphia First, has as its mission trying to take actions and implement strategies that will help accelerate the transformation of this region's economy from an industrial and service base to a knowledge-based economy. And we believe very strongly that the City of Philadelphia can be an anchor for this future, principally because the most significant investment in a knowledge-based economy are universities. We're the brain power factories of the 21st century. The City of Philadelphia has the quality-of-life amenities that few suburbs can compare to. It has diversity of neighborhoods and diversity of people. But isn't Philadelphia leading the charge to the 21st century? And I would argue that taxes, schools, image, and determination are all contributing to the City's myopic perception as a place to start, launch, and grow a 21st-century business. Both David Thornburg, Paul Levy, Paul Tirjin, and others have done a good job of explaining some of the factors here. But we always talk about trying to land a 88 2/12/02 WHOLE - RES. 010700 (TAX REFORM) big fish when it comes to economic development -- going out and bringing in a Boeing or bringing in a big company. It's very hard to do, it's very expensive, and it experiences a very high rate of failure, not only here but throughout the country. But the little fish, properly nurtured and given room to grow can sometimes grow into big fish. Who would have thought 30 or 40 years ago that a little cable company in Tupelo, Mississippi, started by a Philadelphian would be the biggest cable operator in the room and likely will lead the advancement of interactive communications in ways that we can hardly imagine. And that company calls Philadelphia its home. But the problem for entrepreneurs, the Ralph Robertses of today, is the Philadelphia City wage tax. It strangles economic growth and it is an icon for Philadelphia's lack of competitiveness. I think the statistics will clearly bear out the view that the wage tax is a disincentive for corporate location and corporate retention, but it's equally important that the perception of the wage tax drives all of the perception about Philadelphia as a place to do business. 89 2/12/02 WHOLE - RES. 010700 (TAX REFORM) The Controller's Tax Structure Analysis Report is a courageous and analytically persuasive contribution to this city's long-term debate about how to rein in and reform its tax policy, and we congratulate Controller Saidel and his staff, and particularly Brett Mandel, for a job well done. And while we could focus on the very intricate and variety of proposals that are in it, GPF continues to believe that it's the wage tax that will determine Philadelphia's future competitiveness. In another part of my business life, I'm an investor in technology start-ups, most of which are in the greater Philadelphia region. One of our investments, a life-science and medical publishing company based here, Med Cases, provides an interesting and useful case study on how the wage tax stifles the very kind of economic development that will characterize 21st-century economies. In many ways, despite its continued presence in the city, Med Cases is a poster child for why technology start-ups with the highly-skilled and highly-paid workers move out of the City to escape a punitive tax structure. The 90 2/12/02 WHOLE - RES. 010700 (TAX REFORM) company presently employs 59 people, of which 41 live in the suburbs. In terms of wage taxes, the average high-skill employee of the company pays nearly $5800 annually in City wage taxes, a cost which Med Cases has to make up directly in higher salaries in order to keep that talent coming to their company. 8 million in City wage taxes.
8 million more in salaries to offset the effect of our wage tax. 8 million of the capital generated from venture investors like myself directly to the City treasury. Speaking for our company, we would have preferred to have seen these funds expended on new 91 2/12/02 WHOLE - RES. 010700 (TAX REFORM) software products. In Med Case's case, that money could have generated over new products and given 4 our current development costs an investment that 5 would have increased our earnings or our revenues 6 by $12 million over that same time. 7 Multiply these numbers by dozens of 8 start-ups year after year and it translates into 9 lost opportunity, lost employment and wages, and a 10 loss of economic prestige. It's no wonder that one 11 suburban economic-development director recently 12 told me that his county's most successful economic- 13 development strategy is simply to keep its borders 14 with Philadelphia open. 15 It's time to cut the wage tax, not to 16 abandon the cuts. It's time to speed them up. It's time to develop a plan to commit to a wage tax number that gets us to a place where the wage tax stops being an issue affecting the economic future and vitality of Philadelphia. Over the past several years, Keystone Opportunity Zones have been created to relieve companies of state and local tax burdens, except for the one tax that is driving business and jobs away from the City. Maybe it's time to test the 92 2/12/02 WHOLE - RES. 010700 (TAX REFORM) validity of this theory by selecting for two Keystone Opportunities for tech start-ups and rebating collected wage taxes; in that way, we would avoid the problem of the Constitution of Pennsylvania, which requires the uniformity in taxation. Then we could measure the business growth in those KOZs and put this issue to rest. Madam President, we're at the dawn of the coming age of biotech. Philadelphia is the center of academic medicine and life science research. A $100 million is about to be made, centered in Philadelphia, in the biotech greenhouse funds and in new-venture capital funds that will spawn numerous companies. Today, the suburbs are filled with Philadelphia start-ups and biopharmaceuticals, medical devices, and life-science companies. Eighty-five percent of all pharma employment is located within 50 miles of the City, but almost none of it is located in the City. Will we act together to keep the dozens, or even hundreds, of new start-ups that the biotech phenomenon is creating, or will the seeds planted here in Philadelphia grow into great companies in Malvern and Exton. 93 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Recently, one of the members of Council told me nobody complains about the wage tax in her district. I understand that point of view, because the people that complain about the wage tax have already left. How we deal with the wage tax will provide much in the way of answers to the question, can Philadelphia lead the way in the 21st-century economy? Thank you, Madam President.
Thank you. Mr. Mazzacola, are you a member of this panel?
Madam President, I'm Stuart Weintraub who is sitting in for Mr. Pizzi's questions.
Okay. I thought that Mr. Mazzacola was called; however, he's not on this panel, as I understand it So at this time, I would like to recognize Councilman Nutter.
Thank you, Madam Chair. Gentlemen, I wanted to, one, ask you the same question that I asked the last panel, and then 94 2/12/02 WHOLE - RES. 010700 (TAX REFORM) I wanted to ask Mr. Levy and maybe Mr. Weintraub and possibly Mr. Katz a couple of questions. One, can you share with us your level of involvement with regard to the recent proposal on the acceleration next year of reduction in the gross-receipts tax and the ending of the reductions in the wage tax, as announced by the Mayor in his budget address the other week; as well as just yesterday, our Budget Director was here talking about the advice that the Administration had received from a wide variety of economists, business people, and others throughout the City. And I just wanted to know what your involvement was, if any, in that as well as your thoughts on that particular idea.
If I could respond first, Councilman Nutter. We were not consulted in any substantive fashion on that choice, and I think you saw in the testimony that I have presented today that in our modeling of some of these situations, it doesn't appear that accelerated cuts in the gross-receipts tax would have a significant difference on the business decisions that we're trying to understand today. 95 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
For the record, my name is Stuart Weintraub, sitting in now for Mr. Pizzi. I am a partner at Schnaeder, Harris, Segal & Lewis, and I am Co-Chair of the Chamber's State and Local Tax Committee. Both in my capacity as Co-Chair of the Chamber's State and Local Tax Committee and professionally representing my clients, I was not consulted at all by the Administration concerning those proposals.
Mr. Weintraub, are you -- I mean, are there others -- I know you to be a relatively modest person, but are there others in the City or in the region who would, at some level, consider you to be somewhat of an expert in the tax area?
I've been practicing in Philadelphia taxes for 30 years, represented -- I was in the Law Department for ten years, representing the City of Philadelphia and its tax works. So I think some people do consider me such.
Thank you. 96 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Anyone else care to respond to the question? Okay. First, Mr. Levy, I do deeply appreciate, I think, the compliment with regard to the City Avenue Special Services District, but actually I will give one back. Your work tremendously assisted in the creation of the quite unique City Avenue Special Services District, which covers two separate political jurisdictions, and I do want to thank you publicly again for helping us with that. We continue to try to model ourselves after the Center City Special Services District and hope to continue to do you proud. A very compelling presentation, and I tagged a couple of the pages. And, I guess, jumping to of your presentation, you do both ask the right question and then almost kind of answer it with a question, and I guess through your work or through the work of others -- I mean, one, I know you're very sensitive to the notion that if you have general or even radical tax change, it could have the potential, at least, for a serious impact on the City and its ability to run the government, provide a certain level of services. 97 2/12/02 WHOLE - RES. 010700 (TAX REFORM) And I am continually grappling with the what-if question. And your shorter question is, isn't this a huge gamble? I think we at least know that one side of it is to do nothing. It's not only -- I mean, it's not really so much a gamble; we already know the answer to the question, 'cause we can see the results. To your knowledge, has anyone proposed the much more aggressive model and shown through that model for even -- for the transition and if there were a relatively significant decrease in tax revenues, how would we get from the current place, whether we like the current place or not, to the better place and survive? And, I mean, if others want to respond to that...
Councilman, I think David Thornburgh may be better equipped to answer the last part of your question. But I would say simply, one, that no one can predict the future, obviously. What we can do is look at past patterns, and I think there is some very compelling data that shows that we have had growth in professional and business services 98 2/12/02 WHOLE - RES. 010700 (TAX REFORM) throughout this region, and other people have testified about very extraordinary growth in the technology sector. And we can document that a huge portion of that growth has bypassed Philadelphia, and that has cost our neighborhoods jobs, our neighborhoods across the City jobs. I think we also know that when we ask both employers and employees, they point to the wage tax either substantially or symbolically. So I think there's a tremendous amount of circumstantial evidence out there, the most compelling of which is the drive when you get off the expressway on City Avenue and look to your right, and there are apartment buildings and there are hotels and there are tax-exempt hospitals; and you look to your right and there are 2.6 million square feet of commercial office space with jobs paying high wages, all avoiding City taxes. I would really defer to my colleague David Thornburgh, who, I know has done a great deal of work on the what-if scenarios, 'cause that is not my area of expertise. Thank you.
Thank you, Councilman 99 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Nutter. We have, in fact, been working on a variety of questions that, I think, are similar to the kinds of questions that you are envisioning, because you do have to look at this in kind of a transitional form. And I would be very happy to share those with you and your colleagues on Council and the Administration and a wide variety of folks when we're ready to, but we're not quite ready to.
But I can tell you -- I think you heard in my testimony and in Dick Voith's testimony, who we've been working with on some of these things, that we will be able to produce as state-of-the-art as you can get in these things, 'cause Paul's right, we can't predict the future, but we will be able to put some things on the table that suggest, based on historical relationships, what cuts in various taxes might mean to the growth of tax bases, which is what this is all about.
And then once we're able to size that number, then we can go -- because, again, this is about growth, and once we have some 100 2/12/02 WHOLE - RES. 010700 (TAX REFORM) sense of how reductions in tax rates affect growth in tax bases, then we can put other things on the table to try to --
Let me ask you a question -- not to press you too much, but to press awe little bit. Do you have a sense of the timing of when that work might be completed? We are --
We are at a fairly -- I mean, I think we're at a fairly unique and good point in time in the year. We are -- I mean, yesterday, we officially started our budget process.
And so we're going to have a lot of this discussion going over time, and so I guess I would now, in a more formal way, ask both yourself, Mr. Katz, Mr. Weintraub on behalf of the Chamber, if you have, or if you could propose, a variety of scenarios involving taxes, whether it's wage tax, gross-receipts tax, or other taxes, that you believe could show over a five-year period of time the kind of change and growth that this city needs, I'd be very interested in hearing that 101 2/12/02 WHOLE - RES. 010700 (TAX REFORM) and having the opportunity to have that discussion and that debate. That discussion and debate needs to take place right now. And it would be helpful to all of us, I believe, if somewhere -- and I don't know what your timing is, but certainly somewhere in a two- to four-week timetable, you have a document that people of good reputation and expertise were prepared to stand behind and have a serious discussion about, I think that, kind of in the vernacular, we need to "get it on" and have that debate and lay it all out, and then we can have, you know, every person have their say and have their piece, but that discussion needs to happen right now from people who are in business or who know business and are willing to put their name and reputation behind something and then lay it on it, and then people can just make a decision and decide once and for all what we're going to do and how we're going to do it and have the debate right now.
Councilman Nutter, I think in speaking for our organization that that two- to four-week timetable is very, very doable.
Doable. I like that word, okay. Mr. Weintraub, Mr. Katz, any response or reaction to any of this or -- I mean, are you comfortable with -- I don't know to say "a charge," but at least a request.
Yeah. I think our inclination would be to work with David on this. There was a piece -- I think it was written in the Inquirer and it may have been a more detailed that Jeremy Nowak and the Reinvestment Fund put out about a year ago. It was a fairly radical proposal, but I think in many ways, you know, we don't have five to ten years, in my opinion, to deal with this --
-- because the erosion, despite a nearly half a point reduction in the wage tax since 1995, has continued relatively unabated, even during a very substantial period of national economic growth.
Jeremy's proposal, as I 103 2/12/02 WHOLE - RES. 010700 (TAX REFORM) remember it, called for a massive cut in the wage tax, with some kind of combination of federal and/or State interim funding to the City, a loan, to help bridge the period in terms of lost revenue. I don't know whether that's politically feasible; obviously, there's not a lot of sentiment to doing that if it was done by multiple urban centers because of the impact on budgets. But it may be a sale of assets, for example, the Airport, to a region authority or a municipal authority, or some other combination of actions might create a pool of capital sufficient to help the City bridge a dramatic cut in the City wage tax, the effect of which should have much more substantial impact on reversing economic loss because of the size of the cut, and it would be the case if it was a ten-year increment to get down to 2 percent or 1.5 percent or whatever its number was.
And I would encourage you to look at it or talk to Jeremy about those ideas.
I would be glad to do that. 104 2/12/02 WHOLE - RES. 010700 (TAX REFORM) And, again, my comments with regard to a five-year timetable is only in the context of, at least during my time in government, which is still relatively short, all discussions about finances are now generally discussed in a five-year context because we now have a requirement, as a part of the PICA statute, to have a five-year plan. And so you can't have a financial discussion here without a five-year timetable that lays out the impact. I do also, in recognition -- and then I'll be done, Madam Chair. Councilman Cohen left; he did raise, though, or attempt to raise earlier, the other side of a very serious question, and I would only, again, throw out, because many of you have a variety of contacts in other places and other governments and political jurisdictions. As we try to deal with our own tax situation, there are many costs that this city pays as the only city and county in the Commonwealth of Pennsylvania that impact our budget in a fairly unique fashion as compared to any other city or county in the Commonwealth of Pennsylvania. And it would also seem to me that in a true spirit of partnership, not only would I 105 2/12/02 WHOLE - RES. 010700 (TAX REFORM) request that we have the tax discussion, but we also have the discussion and then action on issues like court costs and social services and a whole host of other things that other cities are not responsible for here in the Commonwealth of Pennsylvania. And I don't know to get into, you know, who what made what ruling when and how long that's been going on and the like. But I think in the best spirit of the word "deal," if there was an ability to do certain things and take certain risks on the tax side, and if as a part of that deal, we could get some relief on some of these other county-related costs for which we have no county to turn to but ourselves, then I think all of us make out in that process, and I would only ask you think about that when you're talking to some of the other political players in this discussion. Thank you very much. Thank you, Madam Chair.
Thank you. The Chair recognizes Councilwoman Brown.
Thank you, Madam President. 106 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Good afternoon, gentlemen. Could any one of you, or all of you, speak to the land-value tax and whether you think the time is ripe, R-I-P-E, or right to do it, given where we are with regard to NTI in its current state?
I'll just repeat my earlier comments, I guess. We have not looked at that, the potential impact of that tax in-depth, but I think there's a certain powerful logic to it, that if accompanied with the ability to fairly and efficiently administer that and to deal with some of the concerns that, I think, Charlie Pizzi raised, it could help.
Councilwoman, if you're asking the question purely in the context of neighborhood transformation, that it's probably going to have a positive impact. Among the choices of things that the City might do if it were only doing a couple of things or one thing in tax reform, I would urge 107 2/12/02 WHOLE - RES. 010700 (TAX REFORM) that the wage tax be at the top of the list.
Councilwoman, there are a whole host of issues that need to be studied with respect to the land-value tax, ranging from the legal issues as to whether or not it would pass scrutiny under the uniformity clause, and even though it has been implemented in some other cities in Pennsylvania, to my knowledge, it has never been judicially tested.
So that would be an issue that would need to be addressed. There are issues that have been raised, as Councilman Nutter suggested, on the cost side, the cost of implementing it.
You know, given that my practice is very heavily into real-estate assessment appeal work, I can tell you that the number of appeals that would be filed with the board just routinely, not just because of any 108 2/12/02 WHOLE - RES. 010700 (TAX REFORM) challenges to the system, just normal annual routine appeals, would dramatically go up. So, you know, those are other issues that need to be addressed, plus the economic issues as to how the impact is on various sectors of the economy. Mr. Pizzi in his testimony suggested in the petrochemicals, the refineries, the auto dealers, and others, they all generate significant jobs in the City, generating significant wage tax for the City; and what the land value tax would do to them would be a significant question. And these are all issues that need to be addressed.
Very helpful. Thank you have very, very much.
Thank you. The Chair recognizes Councilman Ortiz.
I think I concur with Councilman Nutter (inaudible, off-mic.) ... It isn't only the wage tax that makes the middle class leave; the bad educational system or an educational system that is efficient. And I think the aspect of lack of a middle class and a 109 2/12/02 WHOLE - RES. 010700 (TAX REFORM) middle class that is leaving impacts on the type of educational system that you have, because you don't have people that are contributing to that system. And as the reform movements that have impact on low- and low-income and poor people across the nation and the safety net that had been built since the Roosevelt era goes out of existence, the need for a job-creation machine, a job-creation motor, becomes even more evident in urban areas such as Philadelphia, specifically in the Northeast. And I've been getting intrigued as to whether and how -- and I think Michael was speaking to that -- that transition period, because if we can have all of the neighborhood transformation aspects that we want, but unless there are actual jobs that are created, unless a new middle class is created within the City of Philadelphia, unless we stop the migration of our people outside of our borders and begin an immigration of people, I agree with you, Sam, I don't think we have ten years; we have a very short period of time. The level and percentages of poor people in Philadelphia is not decreasing; it's increasing. 110 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
So I'm intrigued as to how do we begin pitting this into effect and how do we transition so that the services that the people that are currently living in Philadelphia do not get diminished and begin a new process of people leaving because of services and the lack of ability for the government to be able to function. So I am, as a liberal and a person, I'm getting more and more intrigued as to the job- creation aspect of this issue and what is the potential and how long and when do we see results. I think that's...
I think that's an encouraging statement, because I would say that there is a perception among many people, among many executive in the business community, many entrepreneurs in the region, many people that run small businesses that the will to sustain significant changes in the taxes as they impact job creation does not exist in Philadelphia. And so if the message from this City Council is to the contrary and if there are going 111 2/12/02 WHOLE - RES. 010700 (TAX REFORM) to be a continued set of hearings such as what Councilman Nutter is proposing to do in which this Council has done in response to Controller Saidel's report about how to create a tax climate in Philadelphia that will be a job -- a sustainable job tax climate, I think that in and of itself would be a very important first step. And I have to tell that you from my point of view and from where I sit, I don't think that perception even remotely exists as it relates to the whole of City government -- not just this Council or the Administration, but in general, that this is a high-tax market because that's the way it's always been and that's the way it needs to be. And I hope that your message today is one that others on the Council share 'cause I think that we can do a heck of a lot better here and make a substantial impact on sustaining employment.
I think if you heard the debate over the NTI process, I think if those of us who arguing not against it but for a process and a structure that makes sense, it was because we were concerned about the huge expenditures of taxpayers' money without any sort of conscious plan 112 2/12/02 WHOLE - RES. 010700 (TAX REFORM) for job development. And we were -- we wanted to put into place a certain structure in there that we could begin to influence the process of how that money was spent, because we've seen millions of dollars spent to build low-income housing that has not created the jobs that are necessary, and those families are in the same sort of situation that they found themselves years ago because they haven't had 11 the ability to increase their income and their 12 family's ability to be able to change their way of 13 life. 14 So if you heard and people kept tabs and 15 did not confuse what we were talking about and put 16 it into a Council versus whatever it is, I think 17 this Council was talking very clearly as to -- that 18 we want to be able to influence and come up with a 19 new strategy to be able to create a new middle 20 class, job development. I think we were talking about the cost of construction in the City of Philadelphia that prevents development and the ability to be able to bring in developers so that they can build middle-class housing within Philadelphia, which 113 2/12/02 WHOLE - RES. 010700 (TAX REFORM) they now can't, and how we restructure that. And I think people do have the will as long as that makes sense. And we can see that there is a transition period in which people that are now poor are not just going to fall through the cracks and we're not going to be able to provide for that.
Councilman Ortiz, I'd like to address that in a simple way, which is -- and let me first say, I have enormous respect for anybody whose job it is to balance a budget of an organization. I direct a $12 million organization and I employ over 140 Philadelphia residents, and I would be very concerned if anybody said to me, Cut your budget and still try to provide services. So it is a very real challenge that this administration and this Council faces. But in the handout I provided, I'd like you to look again at and just look at those bars of office buildings and just remember the decade of the '80s, when we built Liberty One and Liberty Two and Commerce Square One and Two and the Mellon Bank Center. If you realize from the time we finished Commerce Square out at 21st and Market 114 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Street, for the last ten years, there has not been a single new office building built in downtown Philadelphia. Meanwhile, there have been million square feet of new space built in the 6 Pennsylvania suburbs -- that is 12 Liberty Places. 7 Every Liberty Place is 5,000 permanent job, let 8 alone the construction jobs, you know. 9 So that if you look at that 12 million 10 square feet and you look at the vacant parcels 11 between PECO and Commerce Square and you look at 12 the vacant parcels on Arch Street and you imagine every one of those as containers with 5,000 jobs, and recognize every one of those containers is 2,000 neighborhood jobs -- 42 percent of all jobs in the City are here in the downtown; that's private-sector jobs. I think a neighborhood transformation strategy is key and I applaud the neighborhood to that. I would go as far as to say that the key to a neighborhood transformation strategy is to cut the wage tax and generate jobs. Thank you.
Councilman, if I can just add to what Mr. Levy and Mr. Katz and 115 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Mr. Thornburgh said, I think you've really put your finger right at the nub of one of the important issues here, and that is the job-creation question. Back in 1993, former Councilwoman Fernandez was asked by then-Council President Street to chair a select committee on business reform. I was privileged to serve on that committee, as was Councilman Nutter, and I think Council President Verna was on that committee as well. One of the cornerstones of that report was a new-jobs credit for creation of new jobs in Philadelphia. That, among others' recommendations in that report, had never been implemented by -- whether it required State legislation or Council ordinance, they have not been implemented. Controller Saidel's report also recommends the new-job credit. I would urge this Council to look at the Fernandez report and to look at the recommendations in there. Now, quite a few of those recommendations have already been implemented through the Rendell and the Street Administrations. But to the extent that those recommendations have 116 2/12/02 WHOLE - RES. 010700 (TAX REFORM) not been implemented, I would urge Council to look very closely at them and to enact whichever ones would be job-creating, and I suggest to you that many of them would be job-creating. You asked a question about timing of them and how quickly the jobs would get created. I don't know that anybody could predict that but, like Mr. Levy said earlier, we can look to history to see what we might expect in the future. A number of years ago, the Commonwealth of Pennsylvania enacted a new-job credit. We know that that credit did create new jobs within the Commonwealth of Pennsylvania. So we could go -- and we should be able to obtain information from the Commonwealth as to, you know, numbers of jobs created by the credit, how long it took for those jobs to come into place after the credit was enacted. So I think that there can be some information available to answer some of those questions. Lastly, I would, you know, also suggest that, you know, one of -- since everybody's also raising the question of the expense side of the budget, many of the concerns which you and 117 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Councilman Nutter have articulated have been on the social-services side and the costs there. Well, it would seem to me -- and, again, this is more anecdotal than with hard numbers -- that with the creation of the new jobs, that there wouldn't be as much of a need for some of the social services. Now, there might be some expense-savings by creating jobs 'cause some of the jobs that would be created would be going to the people who would be the users of these social services, so you have a balancing effect there, that the jobs would also help on the expense side of the budget as well.
Thank you. Are there any new questions? The Chair recognizes Councilman Clarke.
Thank you, Madam Chair. I'm going to be asking this question of Mr. Saidel, but I'd like to ask Mr. Levy this question, given that he's had the experience of running a miniature government here in Center City, and I know it quite well. One of the issues with respects to our 118 2/12/02 WHOLE - RES. 010700 (TAX REFORM) tax-reduction package is what impact it will have on the delivery of services to our citizens, and I noticed in Mr. Saidel's proposal, he talks about the City of Philadelphia's conservative revenue projection, and it talks about us having a higher fund balance that is either published or anticipated. But what I wanted to get a sense of is how realistically or has thought been given to us reducing employees but keeping the same level of service or increasing the level of services to the citizens of Philadelphia and doing it in a more efficient way. Do you have any ideas of what we can do if we decided to go that route?
Councilman Clarke, I mean, first of all, I would say that, I mean, every one of us here are recommending a growth strategy that would increase tax revenues to the City. So I thin, again, it's circumstantial, but we think that while there is a transition problem here, which is a real problem, if you simply look at employment growth elsewhere, the reason why this is being proposed by many people is to say we will increase the tax base of the City and potentially be able to 119 2/12/02 WHOLE - RES. 010700 (TAX REFORM) provide a higher quality of service. So that I don't think tax-cutting and service-cutting go hand in hand at all. I think you can have a broader base and provide better services. There are clearly lots of ways of efficiency; I mean, we balance that all the time. The mechanical cleaning equipment you see us having on the street probably can do the work of three sidewalk-sweepers. We choose to have people out as sidewalk-sweepers because visibility matters and frequency matters, but mechanization clearly is one way of doing that, and that has to be balanced. I mean, clearly I think there are major portions of this city which require a much higher level of service. And so I think to the extent that you grow the tax base, you can increase services where they are needed. So I would avoid an either/or choice here. We need to provide better schools, we need to provide more police, we need to provide better parks, and I certainly propose a growth strategy so we can do that. 120 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Okay. With respects to that, I think that you will agree that the short-term effects of tax reduction are immediate. If we reduce taxes, however significantly, the effect will be the next fiscal year. The ability to grow our revenue as a result of that tax, I think, will be the longer-term. So my question is, how do you do that and no effect services? because realistically, I mean, we're not going to increase the revenue stream by growing jobs in the short term -- I mean, within the next two or three years, even if we agree to have a substantial --
Again, I would not pretend to be a municipal-finance expert; there are many people who could do this much better than I. But I would just say if you look to the west of this building and look at the office buildings there, there are 30 to 40 major tenants who, over the next two or three years, will be making decisions either to renew those leases, move elsewhere, or expand here in the City. So I think a tax cut could send an immediate message to employers here as to whether 121 2/12/02 WHOLE - RES. 010700 (TAX REFORM) they're expanding, whether they're renewing, and I'd let others who know the technology in the start-up sector address that better, but there are a whole set of decisions that hang in the balance right now in which this city's tax policy affects the location decision of leases up and down West Market Street this year and next year and the year that follows.
Okay. So the answer to my original question with respects to service delivery depends more on the ability to grow revenues as opposed to streamlining --
Well, there are many people that could address the issue of transition, but I just -- I think that you can send a signal that will affect business decisions tomorrow and the next day. I think there are people who might be able to address other portions of this better than I.
Councilman, I'm not going to suggest that I'm better qualified to answer that question you're asking, but I know there are people who are, and it strikes me that incenting managers 122 2/12/02 WHOLE - RES. 010700 (TAX REFORM) in City government to find ways to deliver at least the same if not a higher quality of service at a lower cost is a powerful message for this Council to give to the Administration and to the leadership of the Administration. And I think you can look at a lot of cities, including this one, when its back was against the wall, as you well remember, in 1990 and 1991. There were cuts and there were some changes in the way services were delivered. And my general sense, though, is that the City came through it pretty well, and that there is a sustainability here, at least from the standpoint of delivering service that existed through a very substantial one-half percent cut in the wage tax and some other cuts as well. I think that unless we find a way to balance tax cuts and delivery of service through efficiency and productivity and just a general change in attitude, it will be very difficult politically to get the support for wage-tax cuts that are required. But if that's something that this Council decides it wants to do, I believe the talent and the resources and the best practices are 123 2/12/02 WHOLE - RES. 010700 (TAX REFORM) out there to be implemented by Philadelphia City government managers to do that.
Yeah, we will be asking those questions during the course of the budget hearings. I just asked that question today because that is a key component in the tax reduction initiative. Thank you, Madam President.
You're welcome. Mr. Levy, what is the vacancy rate of the office buildings that we have?
At the end of 2000, we were quite good; we were at about 7.5 percent. Right now, at the end of 2001, it's probably 12.5 percent. That is tracking a national average, though. Philadelphia -- I mean, that happened across the country with the recession that began in the beginning of March of '01, and then the after-effects of 9/11 have had that effect. So our vacancy rate in the commercial-office sector is almost identical to the national average of about 12 percent.
Thank you. Are there any other questions of this 124 2/12/02 WHOLE - RES. 010700 (TAX REFORM) panel? (No further questions.)
Seeing none, gentlemen, thank you very much. Our next witness?
Good afternoon. thank you for your patience. Good seeing you.
Good afternoon, Council President Verna and members of City Council My name is Joseph C. Vignola, and I am the executive director of the Pennsylvania Intergovernmental Cooperation Authority (PICA), and I am pleased to testify regarding the findings and recommendations of the City Controller's tax structure analysis report. I would like to address two issues that the PICA Board believes are critical to today's discussion: The value PICA places on tax reform in Philadelphia and the state of Philadelphia's finances. In almost every staff report and white paper issued by PICA, we have called for a 125 2/12/02 WHOLE - RES. 010700 (TAX REFORM) simplified tax structure and a reduction of the taxes in such a way as not to jeopardize the fiscal health of the City. We commend the Controller's Office for issuing the most comprehensive strategy for reforming Philadelphia's difficult tax structure since the advent of the tax cuts in mid-1990s. Philadelphia, in the '70s and '80s, was a case study for the effects of a negative tax cycle. Taxes were raised to make up for a shortfall as some businesses left. Higher taxes caused more business to leave and individuals to leave as well, eroding the tax base. The City responded by further raising taxes, and the vicious cycle continued. In the 1990s, with the help of many partners, including PICA, the City began to attempt the positive tax cycle. The City lowered the tax rates and the tax base grew. It is time for the next round, and the ball is in your court. We believe that Philadelphia can become the case study for the benefits of a positive tax cycle. The incremental tax cuts were an important policy step at a time of economic uncertainty. 126 2/12/02 WHOLE - RES. 010700 (TAX REFORM) They effectively sent the message that Philadelphia's taxes were headed in the right direction. The City now has the opportunity to reinvigorate that "wow" factor, to put the word out, We want your business. This message will be especially powerful at a time when many governments are facing tax increases to cover budget deficits due in part to the economy and in part to overly aggressive revenue projections. Philadelphia's 11-year record of responsible forecasting has put us at a better position than many other municipalities. It is also important to know note that there will be some supply-side effects to these tax cuts. The Administration has routinely touted the impact that the incremental tax cuts has had on improving the City's economy and bringing in jobs. This has helped raise the City tax base. Every year the wage tax rate has been cut, wage tax collections have increased. Although we do not consider all of the money identified in the Controller's report to be available, the opportunity exists for tax cuts beyond the currently prescribed incremental tax 127 2/12/02 WHOLE - RES. 010700 (TAX REFORM) cuts described in the City's Five-Year Plan. PICA's success throughout its existence has been predicated on a responsible approach to budgeting and forecasting. The strength of the Controller's report is that each recommendation stands on its own. We would recommend a stage implementation of tax reforms and tax cuts so as to minimize the risks associated with these changes and to allow for the supply-side benefits to offset further cuts. Specifically, the PICA Board recommends significant business-tax cuts in the first year to reinvigorate the message that Philadelphia has a tax-friendly place for business. Our analysis of the City's fiscal health, which I will address shortly, should certainly permit cuts in the gross-receipts portion of the business-privilege tax and net-profits tax. The Mayor's Five-Year Plan, proposed two weeks ago, makes a reasoned case for significant cuts in the gross-receipts portion of the business-privilege tax. However, we believe the City can afford to move beyond incremental tax cuts.
A good first step in the staged implementation of a more business-friendly tax 128 2/12/02 WHOLE - RES. 163 percent in Fiscal Year 2003 rather than waiting until Fiscal Year 2007. Alternatively, implementing an incremental gross-receipts tax cut, as prescribed in a new Five-Year Plan, should not require a simultaneous freeze in the proposed wage-tax cuts. Any revenue-neutral recommendation should be implemented immediately. Although conversion to a land tax has some merit and could dovetail nicely with the Neighborhood Transformation Initiative, PICA staff has some concerns regarding the initial cost of implementation, its citywide applicability and would suggest delaying such an effort. We recognize that some of these changes require approval from the Commonwealth. Should the Administration and this Council choose to pursue these changes, the PICA Board is prepared to help promote these positions with the General Assembly. Recently, the City has made much of the state of the City's finances. We have been in a national recession since March 2001. The attacks of September 11th hurt the tourism and transportation industries so critical to 129 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Philadelphia's economy. Just last December, the City committed itself to an additional $45 million a year for the School District. PICA also remains concerned about the status of PGW, which has not been adequately addressed by the Administration and may now have its $45 million loan extended. We also note that the Five-Year Plan does not, and effectively cannot, include any increases resulting from future contracts with the City's uniformed and non-uniformed workforce. On the positive side, despite the changes, the City economy continues to grow. Unlike past recessionary periods, Philadelphia has felt less of an impact than the national economy. In fact, although the November Bureau of Labor statistics reports indicated a year-over-year job loss, without the tremendous job loss in the airline industry, Philadelphia would have had a year-over- year growth. PICA staff believes, as do many regional economists in the Federal Reserve, that the recession should be over by the second quarter of this calendar year. We also believe that the transportation industry will be bolstered by the 130 2/12/02 WHOLE - RES. 010700 (TAX REFORM) hiring of security guards at the Airport, expected to begin in March 2002. These new higher-paying positions should generate higher wage-tax collections for the City as well as additional secondary economic boost. Even before this expected surge, PICA feels it is important to point out that during this difficult period, the City's tax revenues have continued to increase. 66 percent growth rate from July through December 2001, tax revenues have grown at 2 percent. More importantly, from our perspective, PICA staff projects that if this growth rate simply holds steady, Fiscal Year 2000 tax and local non-tax revenues will end the year nearly $47 million over the original Five-Year Plan projections. We consider this figure to be conservative, as it does not account for the continued recovery in the local economy, the multi-million dollar economic impact of the NBA All-Star Game, which was concluded this past weekend, and the increase in the real-estate tax revenues due to the increased assessments. 131 2/12/02 WHOLE - RES. 010700 (TAX REFORM) On the spending side, we believe that even with the additional monies for the School District and security-related expenses, the City will end the fiscal year at or below its Five-Year Plan projected level of total expenditures. These projections do not even take into account the millions of dollars in savings resulting from new efficiencies promised last August by the Administration. The PICA Board's confidence has also been increased due to the proposed Rainy Day Fund legislation, which will provide a more meaningful emergency fund should the City experience unexpected economic woes.
In short, we believe the City's fiscal situation is remarkably stable, given the past year's events. This light, the debate over the City's tax structure and possible tax reductions is prudent. The City surplus last fiscal year was $230 million, a drop of $65 million from the previous year mainly due to a change in accounting procedures. Without this one-year procedural aberration, PICA staff believes the actual surplus 132 2/12/02 WHOLE - RES. 010700 (TAX REFORM) would have been anywhere from $314 million to $345 million. Although a surplus is preferable to deficit, it is not ideal. Government is not a for-profit business. The City has reached a critical point in time: We have so far weathered a recessionary period remarkably well; we have a significant surplus; and very shortly, a mechanism for building a true emergency fund. The time is right to responsibly invest our surplus money in ourselves through tax reform. With that, I conclude my testimony and invite any questions you may have Thank you.
Thank you. Mr. Vignola, what additional tax reductions does PICA endorse?
At this point, given the proposal of the Mayor and the Five-Year Plan submitted to City Council, what we're saying is to take the gross-receipts reduction that is to be phased in over four years, pursuant to the Mayor's submitted Five-Year Plan, and take it all in 2003. 133 2/12/02 WHOLE - RES. 010700 (TAX REFORM) We believe that the, quote, reduction in revenues, while gross, will, as a result of the increasing recovery in the economy and the fact that we have seen supply-side economics work in creating increases in wage tax revenues, will not show a diminimization in tax revenues for next fiscal year, and we can again, at this time next year, revisit implementing further reductions in the wage tax and further reductions in business taxes.
Thank you The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. One, Mr. Vignola, I appreciate your forthright, open-minded, and fairly aggressive testimony. We actually need a little more of that kind of discussion around here. Let me ask this question just from a historical perspective: Have there been in the past many disputes from a revenue estimate standpoint between the City and PICA over the past few years during your tenure over there, or do you guys and gals pretty much end up at the same place 134 2/12/02 WHOLE - RES. 010700 (TAX REFORM) based on revenue estimates and expenditures?
Given the fact that we look at revenues over a five-year period and not for each budget year, we have been fairly close. There were some disputes in the early years, when I was here in City Council and not at PICA, where there was some dispute as to the revenue estimates that the City was putting out were too high, given the stage of the City's recovery.