Okay. But overall, I mean, the City staff are hard-working people and they kind of know their business, and the PICA people are hard-working people and you know your business, is it fair to say that, for the most part I'm sure, a million here, a million there, you guys are pretty much on the same page in terms of the fundamental numbers and the analysis of what's going on with the City's budget.
Yes. And even if our numbers were more aggressive in the City, we did not take issue with that, because the economy was still growing, and we were creating jobs in the City. PICA feels that given the significant 135 2/12/02 WHOLE - RES. 010700 (TAX REFORM) surpluses that we have and given the, you know, the worst of all world -- September 11th on top of a recession -- and we still have growth year over year of 2 percent over last year's estimates.
And we still have a conservative level of expenditures. As my testimony said, we believe it's time that we reinvest in ourselves and start cutting taxes further.
On of your testimony and it's hard to belive, 'cause we were all here just yesterday for the start of the Five-Year Plan, but there's not a one to be found in the house, including on this mess of a desk of mine. You're saying that we should more aggressively reduce the gross-receipts tax to the -- according to the Mayor's plan, it would be 0.163 percent in FY '07; you're saying fast-forward that to FY '03
Do you recall what the Mayor's plan proposes the FY '03 number to be?
I think it's 0.24-something, 136 2/12/02 WHOLE - RES. 010700 (TAX REFORM) something like that.
That's what I thought. And then earlier actually in the testimony, you talk about -- you recommend a staged implementation of tax reforms and tax cuts. Have you taken this to the next level, and/or would you be able to show us what PICA thinks a five-year plan of tax reductions should look like, whether on the gross-receipts portion, the wage-tax portion, or, if you want to step out even further, on any other taxes, and show what the differences are in terms of the tax reductions' impact on the City, and then take a venture to guess what the true impact from a benefits standpoint would be on the City based on that schedule?
When I referred to "staged," I was also referring to the various levels of proposals in Controller Saidel's tax-structure paper, and I was highlighting one of the taxes that he talked about saying, Well, let's do the gross-receipts tax. And if we are to believe ourselves, 'cause we always said that supply-side economics work, and it has been working on the wage-tax side, 'cause although we consistently cut 137 2/12/02 WHOLE - RES. 010700 (TAX REFORM) the wage-tax rate over the past seven years, wage-tax revenues have been more each year.
So I'm saying let's gross up the gross-receipts tax. If we all believe, as I believe, that whatever we cut the rate, the tax revenues for that sector of tax would also increase 'cause businesses tax would increase or a wage-tax increase, then let's go the next level and let's say, Let's take the wage tax, which is scheduled to be -- which was on a schedule to go out four years, well, let's re-implement that and take a portion of that, and maybe since we're at the '07 level of the gross-receipts tax, let's look at the net-profits tax and give some more relief to the business.
That's what I'm talking about "staged," that it doesn't have to be done all at one time; it can be done compartmentally.
Could you, again, in the context of the previous requests both of the 138 2/12/02 WHOLE - RES. 010700 (TAX REFORM) earlier panel and now in our discussion, one, I would ask if you could -- and I think you were here earlier for that last panel.
If you could work with that group. But also, again, within a two-week, maybe a four-week timetable, have a series of options with the various taxes, with the actual rates, with what the revenue impact would be, and lay out a schedule for five years of a variety of different tax cuts and tax-cut options.
On behalf of PICA, I would feel more comfortable in working with the group in reviewing their figures --
-- to see what they are proposing, given the level of expenditures that the Mayor is proposing, balance the Five-Year Plan.
Okay. So let me make sure I understand. They would do whatever they would come up with, and you're saying that you would be pleased to review what they have.
And would you be in a 139 2/12/02 WHOLE - RES. 010700 (TAX REFORM) position -- I know it's a bit of a tightrope -- without locking yourself into anything, but at least -- it's kind of like if someone had an idea that was just so totally beyond reality, at least advise, "I don't think you should do that."
Right. One of the proposals, going back two summers ago, that Mr. Thornburgh and Mr. Levy made was significantly cutting the wage tax so much so that the City, their argument was, for about five to six years would be running deficits.
And I was at that presentation, and they asked me a question about that, and I said that is not something PICA could support.
Because our statute requires us to cause the City to have a balanced budget.
I will look at their revenues, knowing what the Mayor has speculated his 140 2/12/02 WHOLE - RES. 010700 (TAX REFORM) expenditures will be over the five years.
The specific detail being the current budget-year, but extrapolating those costs, as he has to pursuant to the PICA statute, we could then say that what they're proposing in this revenue estimate does cover the cost.
Gotcha. Two last questions. On of your testimony, you say that based on -- "More importantly from our perspective, PICA staff rejects that if the growth rate simply holds steady, Fiscal Year 2002 tax and local non-tax revenues will end the year nearly $47 million over the original Five-Year Plan projections." Now, what jumped out at me about that was my recollection from some of the materials and the speech was that the change in the tax-reduction schedule from the previous Five-Year Plan seems to now indicate that due to the reductions in the gross-receipts tax, stop the reductions in the wage tax, and over that five-year period, the City would save $50 million. Do I read this to understand, based on 141 2/12/02 WHOLE - RES. 010700 (TAX REFORM) what you're saying, that we could still do that schedule and not be financially harmed because you believe that we're going to have, in essence, an extra 47 just out of this year?
Now, Councilman Nutter, you have to remember that during questioning yesterday, Mr. Dubow said that this is $47 million over the currently approved Five-Year Plan, that in the Five-Year Plan that was submitted for your review two weeks ago, when the Mayor gave his budget, they adjusted this number because they raised their base estimates.
But we still believe that through a combination of whatever is left over and the fact that expenditures are not going to exceed the rate at which they've been spending now, there will be that extra money available to pay for a gross-up of the gross-receipts tax cut in '03 out of extra money this year that has not otherwise been appropriated or accounted for by this Council or this administration. 142 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Well, maybe you can clear up one other thing from yesterday, 'cause I was left with the impression to some extent that Mr. Dubow indicated that your numbers were possibly not the most up-to-date because you made your calculations based on last year's estimates and you didn't have the benefit of their knowledge of this year's estimates in terms of making your pronouncements or projections.
The only numbers that we are missing are the January numbers, which Mr. Dubow said he has, and unfortunately, given the schedule that we all get, and that includes City Council as well as us, although the City may have them in January, we don't get them distributed until February 15th.
So he was indicating that January wage-tax collections were down. There could be very many reasons for that; one of it being there were only two two-week pay period cycles in this January, but we will catch up by the end of May because May has three.
Yeah, I wouldn't know 143 2/12/02 WHOLE - RES. 010700 (TAX REFORM) about that. I don't know how many pay periods there were in January 'cause I didn't participate in any of them. My last question is, at the bottom of 4, you talk about the City surplus last year fiscal year was $230 million, a drop of $65 million from the previous year due mainly to a change in accounting procedures. What was the change?
The GASB 33, General Accounting Services Board, proposed a ruling some two years ago that said effective with fiscal years ending in '01 that an accrual period of revenues that would come in, which used to extend 60 days beyond the fiscal year and then even further, had to be strictly enforced. So although -- and it deals more with human-services money. We know we're going to get paid for the money we expended for human services --
-- in fiscal year 2001. And by the time the State gets around to paying it, it's September and October, and that's been tradition.
But you counted it for 144 2/12/02 WHOLE - RES. 010700 (TAX REFORM) the past.
Right. The GASB said if you don't have it within 60 days, by the end of August, you can't count it in closing your books for the fiscal year that ended June 30th.
And without that change, you're saying, the number would have been upwards of 300 million-plus.
Correct. And next year, we may see that catchup because the money that we should have gotten last year came in this year, and the fact that we're not getting this year's money until next year doesn't matter 'cause you got last year's money this year.
Absolutely. I was 145 2/12/02 WHOLE - RES. 010700 (TAX REFORM) right there with you. Thank you, Madam Chair. Thank you, Mr. Vignola. (Short break taken.) (Proceedings resume.) - - -
Thank you very much. We will resume our hearing. Councilman Cohen, you had questions for Mr. Vignola.
Yes. Thank you, Madam Chair. The last time I heard the phrase "supply-side economics," it was a pejorative term because it defined an economic policy which resulted in a tremendous increase in deficit financing at the federal level, and the only recent example of that seemed to be in the current President Bush's proposal, which immediately got rid of a 3 or $4 million surplus. Now, are using it -- in what sense do you use the term? How does it differ from those other 146 2/12/02 WHOLE - RES. 010700 (TAX REFORM) applications?
I think the term you're referring to is supply-side Reganomics, words like that. We're using it in the same sense, but there is a theory that says that if you cut tax rates, tax revenues do not necessarily go down. And for the past seven years, we have cut the wage-tax rate, and for the past seven years, wage-tax revenues have increased. That is the sense in which I'm using the words "supply-side economics."
Is there a point at which that would be reversed? For example, if we eliminated the wage tax, I don't think there'd be any income from it.
I think it's an inverse curve. As you approach zero, the growth in revenues becomes less and less, but no one knows where on that curve it's going to occur. But what you try to do is staged, gradually lower it till you hit that point and, then you decide what you want to do further to reduce taxes.
So you measure -- from 147 2/12/02 WHOLE - RES. 010700 (TAX REFORM) a point of view of total return from the tax, you're saying that at least up to some point, you increase the return by lowering the rate.
And so in that point of view, you can be called a "tax cutter," but from the point of view of the amount of taxes the particular -- the amount of revenue the particular tax raises, the opposite happens. You are, in fact, increasing the tax burden of the whole population by reducing the individual tax burden.
Councilman, you and I are veterans of the political wars of Philadelphia. If we cut the tax rate, we're called "tax cutters." The fact that more money comes in, nobody really cares about. If their rate's going from 4.96 percent to 4.5 percent, we cut taxes, and that's the message.
Mm-hmm. Well, it's an interesting approach. To increase the volume of taxes the government gets but get credit for being a tax cutter
Because there are other variables. If you go from having 100 jobs to 150 148 2/12/02 WHOLE - RES. 010700 (TAX REFORM) jobs and your rate is 4.96 percent on 100 jobs, but now you have 150 jobs and you're rate is 4.5 percent, when you do the multiplication, you have more revenue because you have more jobs, and that's what supply-side is saying, is that if you cut the rate, there's going to be another benefit, and that benefit may be the creation of more jobs or at higher base on which the lower rate is applied, which means more revenue.
But in the application by President Regan and the current President Bush, that does not seem to have been the result, and is that why you said your version of supply-side --
With President Regan, it didn't, because it goes to your next point. To keep on paying for the escalating costs of government or the programs he wanted to fund, he borrowed, and that is bad because in the long run, it catches up to you.
Well, let me ask you this question that concerns me. Mayor Street has proposed that to deal with the current school deficit of approximately $200 million, a deficit accumulated over many years, that what we ought to 149 2/12/02 WHOLE - RES. 010700 (TAX REFORM) do is to issue 30-year bonds, forget the legality questions of whether we have the authority to do the 30-year bonds, but he proposes 30-year bonds, which will cost the City somewhere between and 6 $25 million a year for the next 30 years, just to 7 reduce the deficit. 8 It would seem to me to make much more 9 economic sense to defer dealing with that short- 10 term deficit because there's no indication we've 11 solved the structural deficit, so there may be 12 brand-new deficits arising immediately upon solving 13 the two-year deficit. 14 Now, I don't know what brand of economics 15 that involves, but do you have a thought on that? 16
If you're quoting from the 17 Regan years and what George Bush-41 called it back 18 in 1980, he called it "voodoo economics," but let's 19 stay away from that and say, for instance, if the 20 commitment from the City is $45 million a year from now on into the future, then the School Board could decide or how they want -- or the School Reform Commission could decide how they want to apply that $45 million from the City and if they want to use part of that money to solve their Constitutionally- 150 2/12/02 WHOLE - RES. 010700 (TAX REFORM) mandated requirement, that every year, there be a balanced budget; i.e., a budget that does not contain a deficit. You know, it's legal and it's not hurting us, you know, it's not hurting the City anymore 'cause we're spending the $45 million. They want to spend the $45 million to amortize the cost of a deficit over however number of years it is. I mean, that's a policy decision and that's a decision you and the Mayor and the members of the School Reform Commission -- as the players in this, you as elected officials, you and the Mayor and the School Reform Commission as the, quote, governing body, have to deal with it.
From my standpoint as the oversight board, I'm looking at, can the City afford the $45 million expenditure each year? And my answer to that is, based on what I have seen, yes, it can
And the stadiums? 151 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Yes. Stadiums present a different problem. As I testified here December a year ago, my concern is that the Mayor put out in regard to the stadiums that the stadiums would pay for itself over the lifetime of the transaction. I Disagreed with it then, I disagree with it now. The way the transaction is structured, we won't feel those added costs until five to seven years from now. But we will see, in my opinion, an increase in costs that are not covered by increase in stadium revenues for the two new stadiums. I think I was right then, I think I'm right now.
And what would be the impact, then, on the economic health of the City?
Again, it depends on the state of the economy. If we are successful in wowing business by doing away with the gross-receipts tax, further reducing businesses, and we're fortunate to start going above the 700,000 job mark in Philadelphia, it may be a blip on the radar screen. If we fail and we lose our middle-class income base, we may have hell to pay.
What's the PICA tax? 152 2/12/02 WHOLE - RES. 010700 (TAX REFORM) What does that amount to?
The PICA tax is 1.5 percent of what you and I knew as the Philadelphia wage tax. The Philadelphia wage tax for Philadelphia residents is bifurcated. For the next fiscal year, it will be 3 percent Philadelphia wage tax, 1.5 percent PICA tax making up the 4.5 percent.
And what does that come to currently in dollar amounts?
That money first goes to retire the bonds that PICA issued at the request of the City in 1992, 1993, and 1994. In June of this year, we will make our last deficit-reduction bond payment. After June of this year, the debt service will go from approximately $110 million to somewhere in the $80 million range.
No. The PICA tax is 1.5 percent, and that cannot be changed. That is contractual, it is contractual between the City and 153 2/12/02 WHOLE - RES. 010700 (TAX REFORM) PICA and contractual by third-party beneficiary contracts -- yeah, I knew law school would come in handy for us both -- to the bondholders. We cannot change that without violating the bond convenance.
After the debt service is paid, it's returned on a monthly pro rata basis to the City account for the City to spend on its general operating, day-to-day financial needs. So if you were getting paid, part of the excess PICA tax would go to your salary, but since you haven't been paid since October, it just goes to pay for gas in your car.
Is that figure the difference between what we pay now and what will no 18 longer be required for the debt payment? Is that included in revenue in one form or another in the City's five-year projection?
That's already in the 154 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Five-Year Plan and it was in last year's Five-Year Plan as well. This is just another plan.
Well, because the Five-Year Plan, only the first year is the budget. And this is --
Do you know of any law that permits the issuance of a 30-year bond by the City?
Yes, sir. Most of our bonds can be upwards of 30 years. It's the municipal government -- I'm looking for them, but it's State statute that allows local governments to issue revenue bonds, and it's the State law that allows the City of Philadelphia to issue general- obligation bonds. 155 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Same thing with the school districts, and that's the School Code of 1949, as amended.
And your feeling is -- when I say "your," I mean PICA, 'cause you're here as a representative of the PICA board. Your feeling is that with this additional obligation of $45 million more -- it's actually 60 million more 'cause it was the 15 million that's been paid for a number of years not out of tax millage directly but out of specific contributions.
And under State law Act 46, the 60 million becomes required -- once the State takes over, that 60 million becomes a repetitive obligation of the City.
Well, the way I understand 156 2/12/02 WHOLE - RES. 010700 (TAX REFORM) the way the additional $45 million was pledged is that the State is seeking a waiver from Act 46, and unless the State agrees to the waiver of Act 46 in regard to the $45 million, that may not be paid over. But the million that started when I was 8 in Council with you, Councilman Cohen, is 9 grandfathered in by Act 46, and the City can't take 10 that away now. 11
And as of now, we know 12 of no waiver from the State yet. 13
That is correct, but that is 14 what I understood the Mayor said in his budget 15 address, and if I understood Chief of Staff Wilkerson yesterday during her testimony here, she said that the Administration is going to seek such a statutory waiver.
Yes, sir. We're by law, not technically, we are a State board.
A State board. Well, it seemed to me the witnesses in the earlier panels kept speaking of Philadelphia as if we had full 157 2/12/02 WHOLE - RES. 010700 (TAX REFORM) power to rewrite laws and could control income, and I may have missed somebody who may have said it, but during the lengthy time I was here, I didn't hear any effort being directed or any intention being paid to the State's role in the finances of Philadelphia. In fact, for example, that Philadelphia being a county as well as a state [sic] the only one in the Commonwealth, we're not supported by any outside people who live outside of Philadelphia. Pittsburgh gets help from the rest of Allegheny County, and most of the cities throughout the country, like Atlanta, gets help -- it's part of a county. So I think any analysis, to be meaningful, has to take that into account.
Well, Councilman, that's not true because we have a nonresident wage tax. If you work in the City and don't live in the City, you pay 3.8-some percent in wage tax. So, you know, you can't say that.
You can't say that we don't have support from the suburbs, that we don't have 158 2/12/02 WHOLE - RES. 010700 (TAX REFORM) financial support.
Well that "some," I think, is over $200 million a year in wage-tax revenues. That's a substantial amount of money, sir.
And that's always -- and that's a big bone of contention with people in Harrisburg and people who live in the suburbs.
But that to me does not serve as any basis for the State refusing to follow the Supreme Court order on financing the courts.
Well, the Supreme Court has to issue a final order. I don't disagree with you. If the State funded the courts in Philadelphia and funded all of the other judicial districts, the City could save upwards of $200 million, and with that $200 million, you could do a lot for public education and you could to a lot to cut the taxes, but the Supreme Court hasn't ordered the State to do it either, so we're hamstrung by this government
What do you mean when you say you thought the Supreme Court had issued a decision? 159 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
No, sir, it has not. It only took Justice Monamurro (ph) -- former Justice Monamurro made some findings of fact. The only implementation of the findings fact was Stage 1, in which the General Assembly funded statewide some $18 million to take the top-level court administrators in each judicial district and remove them from the county payroll -- or in the case of the City of Philadelphia, the City payroll -- and transfer them to the State payroll and make them State employees. That's the only thing that's been implemented as a result of Allegheny I and Allegheny II. And the two lawsuits that the courts brought against the City of Philadelphia in the last two years, the mandamus actions, the last two years of the Rendell Administration, are still pending before the Supreme Court of Pennsylvania
No, they were mandamus actions to require local government, this City Council and -- well, the former City Council and 160 2/12/02 WHOLE - RES. 010700 (TAX REFORM) the former mayor of Philadelphia to fund the court system, because you have to recall for Fiscal Year 2000 and for Fiscal Year 1999, you did not fund the court system as part of the budget and Five-Year Plan.
Well, no, it was a gentle person's agreement that you would provide the funding necessary to keep the courts in business while the matter ran itself through litigation.
All right. You've been very helpful in updating the level of the court action as well as the other answers you gave. Thank you very much, Madam Chair. That concludes my questions.
Thank you. Any other questions for Mr. Vignola? (No further questions.)
Eric Schlecht, John Barry, Witnesses 13 and 14. (Witnesses come forward.) 161 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Good afternoon, thank you for your patience. Would you identify yourself for the record and begin your testimony. Thank you.
Good afternoon, Madam President and members of the Council. Thank you very much for having me. My name is John Barry, and I'm the Director of Research and Chief Economist of the Tax Foundation. The Tax Foundation is a nonprofit, nonpartisan research and public education organization that has monitored fiscal policy at the federal, state, and local levels of government since 1937. In short, there is much to praise in the Controller's study and recommendations. My job at the Tax Foundation is to look at tax policies at all levels of government, literally hundreds a year, and I was struck by the thorough analysis and the economically-sound proposals in this report. In fact, there is a great deal that federal law-makers, not to mention other city councils and stat legislators, can learn from the approach taken here. The Controller's report does an exhaustive 162 2/12/02 WHOLE - RES. 010700 (TAX REFORM) job putting Philadelphia's overall tax environment in perspective. The general conclusion is that the City's tax structure contributes to inhospitable environment for businesses and residents. The Tax Foundation's own research unfortunately supports this unfortunate conclusion. Each year we calculates Tax Freedom Day for taxpayers for every state in the nation. Tax Freedom Day is the day when Americans will finally have earned enough to pay off their federal, state and local tax bills for the year. Last year, nationwide and for residents of Pennsylvania in general, Tax Freedom Day was May 3rd; Tax Freedom Day for residents in New Jersey was May 12th; in New York, May 14th; in Delaware, May 3rd; and Maryland, April 30th. This indicates that from an overall tax burden standpoint, Pennsylvania's average nationwide is slightly better than its neighbors to the North. However, Philadelphia as distinct from the rest of Pennsylvania, is below average as a taxpayer-friendly locale. In fact, compared to the largest city in each of the 50 states and the District of Columbia, Philadelphia has the fifth 163 2/12/02 WHOLE - RES. 010700 (TAX REFORM) highest tax burden; only Newark and the near vicinity is less tax-friendly. These facts would push the average Philadelphian's Tax Freedom Day well past May 3rd, most likely somewhere closer to the middle of the month, and that would put Philadelphia at the bottom. So while Philadelphia has a lot to offer residents and businesses, a tax-friendly environment is not part of the attraction. For this reason alone, tax relief would be a welcome initiative. And let me highlight a few particularly noteworthy aspect of the Controller's plan and put this in the context of looking at hundreds of plans at the federal, state, and local level. First, the plan is based on tax relief, not tax increases. In this time of tight state and local budgets, there's considerable pressure on lawmakers to increase taxes, and this includes the postponement of the scheduled tax cuts. This is exactly the wrong approach because it places governments and their budgets ahead of people and theirs. The correct approach is that taken in the 164 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Controller's report: Tax relief, particularly broad-based tax relief, aimed at small businesses and entrepreneurs helps spur economic recovery and job creation. This is an approach that has its priorities straight. The Controller's plan is, as I just mentioned, based on broad-based tax relief, and this is good compared to tax relief that is targeted or specific tax deals made with specific taxpayers. There is always the temptation, especially at the local level, to focus tax breaks on hot industries or even existing companies that promise large employment and hefty salaries. The problem with such targeted tax policies is that they assume that policy-makers can predict which industries and which companies will be successful. A much better approach is to enact tax reforms that are generally business-friendly.
This creates a fertile environment for all businesses and all industries, and produces overall economic growth that benefits everybody. This is the correct approach and it's one taken in the Controller's report Third, I was struck that the Controller's 165 2/12/02 WHOLE - RES. 010700 (TAX REFORM) plan is particularly jobs-oriented. The Controller is right to focus on business taxes that get in the way of entrepreneurship and job creation. Some may observe that giving tax relief to companies is unfair because it benefits big businesses. I think this overlooks two important facts: First, businesses don't pay taxes, people pay taxes, and any tax relief extended to businesses is passed along to employees in the form of higher wages, customers in the form of lower prices, and/or workers saving for their retirement through mutual funds; second, businesses are the job engine of the economy, and tax relief means very little to people if they do not have a job or an income. Anything you as a City Council can do to create a business-friendly environment will be good for jobs, good for growth, and good for people. For all of these reasons and more, the Controller's recommendations are sound from a principal tax and economic perspective. Tax relief of the nature described in the Tax Structure and Analysis Report would be a step in the right direction for Philadelphia, as it has been for 166 2/12/02 WHOLE - RES. 010700 (TAX REFORM) other cities. C. , the federal government and city government have taken several steps over the past five years to encourage economic growth and urban revitalization through tax reductions. This is a marked change from the early 1990s and 1980s when city officials felt that increased expenditures on massive urban projects was the only route towards revitalization. C. and a revitalization of neighborhoods that were once dilapidated. My point in highlighting these facts from my home town is not to encourage credits or other targeted provisions. As I stated, broad-based reforms of the kind recommended in the Controller's report is much more advisable. My point is only to make the point that tax relief makes a difference. Just imagine how much larger of an impact broad-based, growth-oriented reform such as 167 2/12/02 WHOLE - RES. 010700 (TAX REFORM) that outlined in the Controller's report would have here in Philadelphia. Again, thank you very much, Madam Chair. I appreciate the time.
Good afternoon. Thank you so much for your patience.
Thank you. I'd like to thank the City Council and the Controller for asking me to be here today and providing me this opportunity. My name is Eric Schlecht, I'm Director of Congressional Relations for the National Taxpayers Union. Just in a manner of introduction, NTU is a nonprofit taxpayer advocacy organization that lobbies for lower taxes and less government spending. We are the nation's oldest taxpayer advocacy group, formed in 1969. We have over 335,000 members nationwide, which makes us the largest taxpayer advocacy organization. If my memory serves me, over 9,000 of those members are in the State of Pennsylvania. I have submitted a brief statement for the 168 2/12/02 WHOLE - RES. 010700 (TAX REFORM) record that acts as basically a synopsis of my comments today, and I will just generally expand upon that statement for this afternoon. My purpose here today is to offer NTU's endorsement for the proposed reforms that are included in the Tax Structure Analysis Report, in particular, those reforms that would lead to a net tax reduction rather than some of the reforms that point more towards a changing of tax burden, a robbing Peter to pay Paul, so to speak. We offer our endorsement for several reasons: One, we believe that the taxpayers of Philadelphia are overtaxed and deserve tax relief and deserve to keep more of their hard-earned money; we also offer our endorsement because we believe that the reforms will lead to much needed economic growth in Philadelphia, and we believe this growth will lead to more jobs, a better standard of living, and increased revenues for the City, a matter of much debate so far today. As has been pointed out by many of the speakers, but I will reiterate briefly, Philadelphia's tax burden, in comparison to other major cities in the United States, is extremely 169 2/12/02 WHOLE - RES. 010700 (TAX REFORM) high. C. of several major cities, the overall tax burden on a family of 4 with an annual income of $50,000 in Philadelphia is the second highest in the country, ranking only behind Bridgeport, Connecticut. 5 percent during the 1990s. According to the Census Bureau, only Cleveland, amongst the top 50 or so cities that the Census Bureau examined of metropolitan areas, only Cleveland had a lower rate of growth in personal income than Philadelphia did between the years 1997 and 2000. So what to do about this? Well, we agree with the report from the Controller's Office that says the correct path to resolve this problem is tax cuts. We believe strongly that tax cuts will provided increased incentive to work and invest. I'd like to briefly go over three examples where tax cuts have had the results that we've stated they will have and the Controller's Office 170 2/12/02 WHOLE - RES. 010700 (TAX REFORM) suggest they will have, with an example from each level of government -- one from the federal level, one from the state level, and, again, one from the local level. I will begin at the federal level and reflect back on Ronald Regan's tenure. When President Regan took over office in 1981, the economy was in dire straits; we had high inflation, high unemployment, we were mired in recession, which was called at the time, "stagflation," which, incidentally, any respectful Keensian (ph) economist would have told you that stagflation was theoretically impossible, yet there is was. As most of us remember, Reagan responded to this crisis by initiating the largest tax cut in 35 or so years, which passed in 1981. The most important aspect of that in my mind was the marginal rate reductions. 8 percent rate of growth from 1974 to 1981. Furthermore, median household income rose steadily during the '80s, while the economy created 17 million new jobs in 171 2/12/02 WHOLE - RES. 010700 (TAX REFORM) America. The result of this growth in the economy was that federal receipts, and these receipts numbers I'm going to give you are in constant '96 dollars, so these are adjusted for inflation.
Federal receipts in 1980 were $956 billion. 2 trillion. That's a 27 percent increase in receipts after cutting taxes. You'll find the same thing happened after the so-called Coolidge-Mellon tax cut of the '20s and the Kennedy tax cut of the early '60s. I would also like to focus, just to give you an idea that this could work at all levels, on the state level upon example, but not the only example of how tax cuts could help a state and its constituents is Michigan. In the early 1990s, circa 1991, the economy in Michigan was also in dire straits. They had extremely high unemployment, their revenues were down. Governor Engler (ph) was then elected and over an approximately 10-year period, he cut taxes over 30 times -- I think he's up to 32 times now. That lead to ten years of unprecedented growth in 172 2/12/02 WHOLE - RES. 010700 (TAX REFORM) Michigan, and they ended up ranking third in job growth over that period of time. 5 percent in Michigan. 1 billion surplus in 1996, which ranked it as 8 the third highest surplus in the United States. 9 During that same period of time, welfare cases 10 decreased by 90,000. 11 Evidence of this working has occurred in other states as well. The ten states that significantly cut taxes during the 1990s grew their economies by 33 percent, whereas states that did not grew by only 27 percent -- that's between 1990 and 1995. 8 percent increase in job creation. Income for a family of 4 grew by $1600 more in tax-cutting states than in tax-raising states. 2 percent in tax-raising states. So, clearly, the lesson taken from the states in the 1990s is that if you cut taxes, your 173 2/12/02 WHOLE - RES. 010700 (TAX REFORM) economy will grow, your population will grow, your revenues will grow. If you choose not to do that or if you choose the opposite and raise taxes, the exact opposite will happen. The final example I'd like to give is at the local level -- in this case, a city, a city to our north, New York City. Mayor Giuliani, after taking office in 1994, began a series of tax cuts. The National Bureau of Economic Research believes that the cuts implemented by Giuliani's administration's cuts in personal income tax rates led to the creation of 55,000 jobs; that represents one quarter of all jobs that were created in New York City since 1998. It also states that the city's tax cuts since 1995 have boosted private employment in New York City by 4 percent. Conversely, Mayor Dinkins raised taxes in the early 1990s, and that led to a sharp decline in jobs in New York City. Again, lower tax rates led to increased revenues. Since 1995, New York City's revenues are up 27 percent. To break that down further, net collections from personal income taxes, which represented over half of the city's overall tax cuts -- they were in personal income 174 2/12/02 WHOLE - RES. 010700 (TAX REFORM) tax reductions -- the revenues for personal income tax collections increased by 65 percent. So clearly, the greater you reduce the tax, the greater revenue expansion you will see. In conclusion, I'd just like to once again state our endorsement of the reforms in the report and state once again that we believe that tax cuts included therein are good for taxpayers, they're good for business in Philadelphia, they're good for the economy of Philadelphia, and they're good for Philadelphia's budgets. And I thank you for your time.
Thank you. In your opinion, can you tell us what taxes should be cut? If we had a choice, say, from A to D, which do you think would be of top priority?
I would say corporate and personal income tax rates are probably my top priority. The overall theme that I would stress most of all would be broad-based tax relief, rather than, as my fellow panelist said, stay away from targeted tax credits or rebates, that sort of thing, because they tend to have a much smaller 175 2/12/02 WHOLE - RES. 010700 (TAX REFORM) effect on the economy and its growth and your revenues, and it also leads to something that is a bad in my opinion: It picks out winners and losers within the tax code. It would be our opinion that the tax code should not be used to promote social goods or ills or to, you know, to reward one class of citizen over the other. And the other thing that does is, it creates an extremely complicated tax code. I mean, our federal tax code is the prime example there, wherein compliance costs increase, and ability to collect revenue, because of tax evasion, is severely diminished if you have various loopholes and credits. I think my top priority would be corporate and personal income tax, but make sure any tax cuts you do are broad-based.
I would just second that. I would probably put in priority the wage tax and lowering that since relative to surrounding and other cities, that's particularly higher here in Philadelphia. As I mentioned, I think it's important to remember that no matter what tax you're talking 176 2/12/02 WHOLE - RES. 010700 (TAX REFORM) about, people ultimately pay those taxes, but when you look at the wage tax, lowering that would bring people back into the City. So it's not just jobs, but it's people living here and investing in the City, consuming in the City, etc.
Thank you. The Chair recognizes Councilman Ortiz.
That statement you just made, this city over the last years, maybe more, 11 actually maybe over the last -- since 1984 on, 12 really has dedicated itself to attracting and building an economy, attracting developers, attracting businesses. And during the last eight years of the Rendell and the Street administrations, the Tax Increment Financing District of just giving tax breaks to developers across the board in certain areas and abatements, again, that have been two tools used extensively, you just made a statement that those tools should be avoided.
Well, if that's what I said, then I overstated what I meant. They are preferable to no tax relief. Rather than high tax rates across the board, I would prefer to have 177 2/12/02 WHOLE - RES. 010700 (TAX REFORM) certain abatements or Tax Empowerment Zones, or "Empowerment Zones," as they're sometimes called, because those can be helpful in attracting certain businesses that the city decides they want to draw in. What I was trying to articulate is that it's my preference that you just reduce overall rates, both the wage rate and the corporate income rate, whatever that may be in this city, to attract all businesses so that you don't pick winners and losers. You don't say, We're going to give -- this section of the city's going to have one tax rate, this section of the city's going to have another tax rate; or this type of business has one tax rate or gets a certain tax break while another doesn't. I don't think that it's the business of government to pick winners and losers in the market. And, again, I think that leads to complexity. So if I --
So in essence, you level the playing field and let the market decide.
Whether people come in 178 2/12/02 WHOLE - RES. 010700 (TAX REFORM) or stay out.
Sure. Why not lower taxes for everyone in Philadelphia and let everyone have a fair shot at making money and attract as many business as you can instead of targeting the businesses that you bring in.
Thank you. Any other questions of the members of the committee? (No further questions.)
Gentlemen, thank you very much. I appreciate your patience.
Next panel: Josh Vincent, Nic Tideman, Joanne Denworth, Ed Schwartz, Jim Tayoun. (Witnesses come forward.)
How many years ago was it that you proposed this, Councilman?
Mr. Vincent, I think you're first. 179 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Could I ask the others to allow me to go first because we're on deadline at The Public Record, and I need to go right out again.
Okay, please proceed and identify yourself for the record.
My name is James Tayoun, a former Councilman and presently editor and publisher of The Public Record. One of my hallmark efforts in Council was to promote the adoption of the land-value tax system. We urged this simply because of the tremendous track record that particular tax has had wherever it has been accepted and adopted, whether it be in the United States or in other countries around the world, particularly in the civilized West. In Commonwealth of Pennsylvania when we began the effort, there were only six principalities or six cities that had adopted the land-value tax; today that number, I understand, exceeds over 20 and is close to 30, including some of the major other cities in the Commonwealth. Wherever that tax is imposed and replaces the 180 2/12/02 WHOLE - RES. 010700 (TAX REFORM) present configuration of the property tax system, we have an increase in permits and an increase in turnover of properties. And it can be summed up -- and I used to tell people, the John Wanamaker Building across the way then produced more taxes and revenue to the City of Philadelphia through its property tax than all the refineries in the City of Philadelphia did, because we don't tax the land; literally, we barely tax the land. And all the tanks and terminals and pipes and everything else on that land that make up a refinery were not taxed; they were not considered buildings. So you're looking at major refineries soiling our environment and our waterfronts and getting away with taxation murder.
They do not pay on anything on that land; it's considered vacant land. That's why you see those beat-up structures --
Very little. If you look at the assessments of those properties, you will be 181 2/12/02 WHOLE - RES. 010700 (TAX REFORM) depressed at how little money is coming from how much they're making from us. That's why at that time, we even tried to get a book, if you remember, in our school crisis for money pumped into those tanks, so many dollars for so many gallons, so we could fund the School District at the time. But not to confuse the issue and delineate from the importance of the land-value tax as a concept. You will actually be reducing in nine of the ten districts, based on the information we did back then -- and this city hasn't changed that much since, except for Center City values -- property taxes for the residents for those nine districts. The other district, I think, was the district now held by Darrell Clarke which then was John Street's district, and for some reason, some of the homes up there would show a slight increase in property taxes because they had huge pieces of property besides them. In short, if you think of a McDonald's, it's paying for its building, it's not paying for the land around it. Look at the parking garages or the parking lots -- they're not paying much for that land at all, and way in proportion to the 182 2/12/02 WHOLE - RES. 010700 (TAX REFORM) revenue they're getting, they're not paying anything. It's like stealing money. Look at the huge truck terminals where you've got open space. Anyplace where there's open space and it's being used to make money for people, we're not fairly receiving a tax return for that property. Citizens of Philadelphia invest in this city and everybody should be paying a fair toll. And people who are now trying not to get permits for instance, to fix their properties up, they do them in a fashion where they hope to elude the eyes of the inspectors and they renovate homes, they don't want those permits because those permits mean an increase in assessments, and an increase in assessments means an increase in taxes. The land value takes that onus away and puts more of a burden on the land on which the property stands instead of the property itself. So I'm urging my colleagues once again to seriously look at this. The Controller's Office has taken the ball and rolled with it, and they've done it in a very professional fashion, and everything they have to say for it, I think, should be honored and listened to, because this is the way 183 2/12/02 WHOLE - RES. 010700 (TAX REFORM) to go. And as far as the other taxes, what little I've heard, I remember a story from Brooks Provisions, Bobby DiMento, Sr., who told me, Jimmy, I stay in this city because I love it, and one day, I'm going to have to move my big operation. And he actually supplies almost one-third of the food vendors in the eastern seaboard with the merchandise he gets. For instance, he gave me an example. I would buy 30 tons of baloney and then I would find that I'd have to sell it for a penny under my competitors in other states because of the tax structure here, because there was a flood on the market and I'm stuck. I sell all of that tonnage of baloney and, guess what, I have to pay the City of Philadelphia a hell of a lot of money in taxes on that commodity on which I lost a lot of money, and that's the gross business tax, but you have to look at that. Tax that's an onerous tax, that's really a serious tax that has to be discussed at length and has to be reduced 'cause quite a few vendors, major vendors, who are in this town working, distributing foods, and commodities to 184 2/12/02 WHOLE - RES. 010700 (TAX REFORM) other areas of the Commonwealth and to other areas of the eastern seaboard, it's easier for them to relocate outside of the City and make hundreds of thousands of dollars a year more than if they stayed here because of that one tax. That's all I have to say and I want to thank you for allowing me to be here.
Can you share with us what your feeling is about the wage tax.
I find that the wage tax isn't what chases people out of the City much. If so, the station I work for, WYSP, would not have relocated into the City, 'cause all of its employees, once they crossed City Line, had to pay a wage tax. It didn't keep them away. If we have to cut taxes, I'm looking at gross business tax and I'm looking at a change in the way we assess our properties. That's two avenues. If the City wage tax, if you need to keep it stagnant for a while and not reduce it, that's fine, you've done a commendable job done over these past eight years, ten years in reducing that tax, and you ought to be commended for it, but let's address the other taxes as well. 185 2/12/02 WHOLE - RES. 010700 (TAX REFORM)
Thank you, Mr. Tayoun. Mr. Vincent, are you going to be the first one to testify?
Okay. Please identify yourself for the record and proceed with your testimony.
My name is Joshua Vincent, and I'm the Executive Director of the Center for the Study of Economics, a 501(c)(3) nonprofit foundation. We're based on Chestnut Street in Philadelphia, and I live at 3428 Vaux Street in Philadelphia. I've been the director of the Center, which, along with our other foundation, the Henry George Foundation, was founded in 1926 in Pittsburgh, Pennsylvania, by the City assessor and several present and future City Councilmen in the city of Pittsburgh. Pittsburgh, Pennsylvania, started using what we're talking about today, the land-value tax, in 1913, and those city officials were so impressed by the results at that time that they wanted to put together a foundation that would 186 2/12/02 WHOLE - RES. 010700 (TAX REFORM) study how it would impact other cities, and that's what we do to this day. Essentially what we're talking about is a program to shift the tax burden from buildings onto land, in conjunction with Controller Saidel's other tax proposals, to reduce wage taxes and business taxes. We work with the cities that do use the land-value tax all across the Commonwealth and overseas, and the message that we get and the message that we're giving to you today in the city is that your colleagues all across the State think that land-value taxation works. They think that it should be implemented wherever possible, and they think that it's easy to implement and that it's a fairly non-painful process to implement. Everybody today has agreed that we have to reduce wage taxes, that we have to reduce business taxes. But at the same time, we really have to address the fact that there are needs for revenue; we have to have certain amounts of revenue in the City, so where should we get that revenue if we're not going to get it from wages and we're not going to get it from business taxes? Land, we believe, is the only responsible 187 2/12/02 WHOLE - RES. 010700 (TAX REFORM) answer. Unlike jobs, houses, businesses, and whole neighborhoods, land cannot flee the City. To our knowledge, no one is loading up trucks with land and hightailing it out to New Jersey or to the suburbs. Land is the only species of property, if you will, that can be taxed and you won't diminish the supply of it. In Philadelphia today, about percent of 10 your property tax revenue comes from land. Well, 11 so what? Well, what it means is that about 12 78 percent of City property tax revenue comes from 13 what we desperately need, good solid buildings. 14 And if we can find a way to untax buildings, we 15 should take that avenue. 16 Now, we have for example, tax abasements, 17 which are exemptions on improvements. We have the 18 ten-year abatement on improvements, that's a great 19 idea, and everybody agrees it's a good idea. If 20 it's such a good idea, why can't we then make it a 21 permanent universal tax abatement on buildings, one 22 that will not stop after ten years, one that will 23 continually reward people to keep their buildings up to code and up to snuff and up to standard. Now, some people have built a lot of new, 188 2/12/02 WHOLE - RES. 010700 (TAX REFORM) you know, construction and have renovated their houses, but they haven't applied for the abatements. This would be -- by using a land-value tax, this would be an across-the-board reward for people that have done their part on their own dime and their own time to make the community a better place to live. Most homeowners don't take advantage of abatements and programs; they just do it on their own. m. so that no one will catch them from the Assessor's Office. If we make the system one that encourages development and redevelopment, I think you'll get a lot more development. We have people that are going to be testifying later in the other Pennsylvania cities that are going to attest to that. Now, one thing that any city has to consider if you're going to bring in land-value taxation, which we know works in theory economically, is how will people be affected.
Well, it's pretty clear that most neighborhoods, most blocks are going to see significant tax 189 2/12/02 WHOLE - RES. 010700 (TAX REFORM) reductions for owner-occupiers, people that own their own homes. There was a question from Councilman Cohen's office about what would happen in a certain neighborhood in North Philadelphia if you implemented a land tax; they were concerned that there were a lot of tax increases for the various parcels. Yes, but those tax increases would have been on absentee land owners, people that own vacant lots, people that don't even live in the City. When you consider those properties, properties where they do not live on the parcel, a land-value tax would increase their tax liability. However, when owner-occupiers are considered, there would be about a 6 percent decrease in tax liability, and that's in the one neighborhood where the land tax would seem to be not an appropriate application. In all the other neighborhoods, especially South Philadelphia, Kensington, Port Richmond, places that are holding on by the skin of their teeth, quite frankly, you see the vast majority -- in some cases, over 90 percent of the homeowners -- will see at least some tax reduction. 190 2/12/02 WHOLE - RES. 010700 (TAX REFORM) I think that as we go along through the process and as the community gets more and more educated about the idea of land taxation, it won't seem as scary as it seemed to some of the earlier speakers today because, frankly, it's not been tried in Philadelphia, but the communities that have tried it are very happy with it. Since Philadelphia is a world-class city, we can talk about a few other world-class cities that do use land values. They don't tax buildings at all or wages or businesses -- cities like Sidney, Australia; Nairobi, Kenya, Copenhagen in Denmark, and the list goes on and on. I think the Center can recommended land-value taxation in the City of Philadelphia, whereas we have not been able to recommend it necessarily in all of the cities that have asked for our services to see if it would make sense. And I did want to address something a while ago that Councilman Clarke brought up about green concerns and especially in neighborhoods that are perceived to be a risk. C. is considering land-value taxation along the same time, and the most at-risk, you could say, 191 2/12/02 WHOLE - RES. , and we have from that neighborhood and from that area the Watershed Society, Clean Water Action, the Friends of the Earth, the Environmental Defense Fund, the Institute for Local Self- Reliance, the Sierra Club, and I could go on and on. , they believe that land-value tax could only be beneficial. And I thank you very much for the time.
Thank you. Mr. Vincent, you indicated that the land-value tax originated in Pittsburgh?
They are not using it because they had a reassessment last year where they reassessed every property in Allegheny County, and that was done through a court order. What they did through this reassessment was get closer, probably, to the true values that had existed. 192 2/12/02 WHOLE - RES. 010700 (TAX REFORM) They hadn't been assessed in about 30 years, and, you know, it was particularly an egregious situation. And there was also at the time a mayoral primary, and that kind of confluence of bad luck led the opponent of the incumbent to say that a new reassessment made the land-value tax unfair, and it was perceived to be particularly unfair to the -- well, the equivalent of Chestnut Hill in Pittsburgh is called Shady Side and Squirrel Hill. So during the --
How long was the land-value tax in effect in Pittsburgh?
When they did the reassessment, I guess their property taxes skyrocketed?
In those neighborhoods, yes. Now, interestingly enough, in the center city, which is their Golden Triangle, and in the very poorest neighborhoods, which are, one, absentees, you know, big business and, two, poor people, they didn't really get heard. When they lost the land 193 2/12/02 WHOLE - RES. 010700 (TAX REFORM) tax, the biggest tax increases were in the very poorest neighborhoods in the Golden Triangle. So right now, the land tax is in suspension, essentially. The mayor, Mayor Murphy, is really hoping to bring it back, and about half of Council would like to bring it back, and the City Controller's Office in Pittsburgh is trying to find a way to bring it back after they get the reassessment sorted out.
In your testimony, did I understand you to say that you certainly could not go to all cities and talk about the land-value tax? Can you tell me why?
There are some places where the assessments are really bad, and if you did bring in a land-value tax, most homeowners would pay more. I think that the assessments for residential properties in this city are fairly accurate. They seem to compare well with all of the other cities that we've looked at. If we had somebody from a southwestern city come and ask, would a land-value tax work? Well, economically, yes, it would work, but 194 2/12/02 WHOLE - RES. 010700 (TAX REFORM) politically-speaking, it wouldn't work because there's so much low-density development in a Phoenix or something like that, that politically, I couldn't advise it; it would be a loser essentially. But essentially, that's when we say you should maybe wait.
Thank you. The Chair recognizes Councilwoman Brown.
Thank you, Madam President. Good afternoon. In your view, whom would be the losers? Should the City move to implement a land-value tax?
Well, I think that if you, first of all, encourage people to can come back to Philadelphia and you down-tax jobs and businesses, even if you do have a land-value tax where some property owners pay more, I think it's a win/win overall, quite frankly, because you're providing an atmosphere for people to come back. So although you might be increasing their liability on their land, you're increasing the opportunity for people to make a profit on every other human endeavor that there is. But if you look at it just sight unseen 195 2/12/02 WHOLE - RES. 010700 (TAX REFORM) and you go right into it, people that own vacant land in Center City are going to be the people that pay the most, quite frankly.
And what do you say to owners of large parcels of land, like Sunoco land and some of our parking lot entrepreneurs who, indeed, employ hundreds of people if that was to be implemented?
I would say if you owned a parking lot, you don't employ a lot of people, first of all, but you could make money by building a parking garage because you won't have a tax on the buildings. Now, a parking garage can employ hundreds in its construction and can permanently at least dozens in its daily operation. Now, a flat-top parking lot requires one wooden shack and one guy sitting in that wooden shack, taking people's money. I think, quite frankly, a flat-top parking lot would even see its profits increase if you're encouraging people to come back to Center City or downtown and open businesses.