What about the real estate transfer tax during the course of this whole 12-year program?
That is not one of the taxes that is exempted under this KOZ program. And I just did a double-negative. In 127 11/30/98 - WHOLE - BILL NO. 980788 other words, we still retain the real estate transfer tax.
Thank you very much. The Chairman recognize Councilwoman Verna.
Thank you. Mr. Mullin, I heard Councilman Cohen questioning you about the Navy Yard Site. Other than the Byberry project, can you tell me how many new businesses we have at the Navy Yard now just off the top of your head.
Yeah. I want to say something between 30 and 40 new businesses.
So that's 30 or 40 businesses. Would they be excluded from this?
They are new to the 128 11/30/98 - WHOLE - BILL NO. 980788 community. I guess the sense is they made their business decision based on the -- based on the then current operations. And the one thing that I would note, that if there was a business, say, going to Parcel A -- and I don't want to sound like a broken record. But if they bought that Parcel A for at least for a certain price, and that is pre-KOZ, post-KOZ there would be more of a demand for that. So part of what their neighbors will be doing is paying more for the land that they are in. I mean, in theory, all that would completely equilibrate. The prices would go up to take it, to capitalize all of the advantages of the lower taxes. We don't anticipate that to happen, but we anticipate -- and the number was 100 percent. But we do anticipate some rising of the value of the prices. So one company that is in there now -- do you know what I mean on that particular case? What the company that is in there now would lease some space for less than what another company afterwards would be 129 11/30/98 - WHOLE - BILL NO. 980788 leasing. I would be paying lower rent, higher taxes; someone else would be paying higher rent but lower taxes.
I recall when we had the meeting in the mayor's office you said to be eligible you would need acres and now you 9 are talking about zones today. Does each zone 10 have 20 acres that the mayor testified to? 11
There is always 12 confusion. Because stateside there would be 12 13 zones, but each one of the zones can have 12 14 subzones. So lists of what you can -- and each 15 one of those subzones has to be at least 20 16 acres. 17 So you can add up the different 18 parcels that are in each one of the subzones. 19 And as I was describing to Councilman Cohen, the 20 Lower Delaware, the Middle Delaware, each one of those is a subzone that has at least 20 acres in it. And so -- and it could be in the American Street Corridor, there are a lot of small sites, the Byberry or the Naval Business 130 11/30/98 - WHOLE - BILL NO. 980788 Center, for example, we certainly -- I mean, one small section of that takes care of the acres 4 to begin with. 5 West Parkside is another one where 6 there are three separate parcels all adding up to 7 about 60 acres but we call that one subzone. 8
Mr. Mullin, does 9 New Jersey have a similar program, for example, 10 no taxes, or are there empowerment zones at 3 11 percent sales tax? 12
New Jersey has various 13 types of zones and empowerment and state 14 enterprise zones and stuff. To your knowledge,, 15 they don't have anything -- it's only Michigan 16 and Pennsylvania that have these very broadly 17 sweeping zero tax zones. 18 But New Jersey and other states and 19 other competitors, for example, Maryland and 20 Delaware, too, in this area, do have various types of -- if you are in this particular zone, you can get lower utility rates or sales tax exemptions and other things like that. They have these various packages, partly because of the uniformity restrictions 131 11/30/98 - WHOLE - BILL NO. 980788 here in Pennsylvania. We don't have the ability to sort of zero out different things like sort of one for one versus New Jersey or one for one versus Delaware. But, to my knowledge, no, it is only Michigan that has the program that is this extensive for these particular parcels.
Mr. Mullin, if Council were to approve legislation on the zones or the sites and nothing happens in a couple of years, two or three years, can we just repeal it take it all back and say we don't want to do it, it's not working, it's too late, or are we stuck for 12 years?
In that terminology, I think we're stuck for 12 years. The State does not allow for anyone taking particular parcels out afterwards or changing any of the tax -- in other words, we couldn't say for this -- after five years we are no longer going to do the property taxes in these particular...
No, I didn't ask that question. 132 11/30/98 - WHOLE - BILL NO. 980788
And you can't zero in on anything else and take it back out. Likewise, you can't add anything back in afterwards. So we are stuck for years. 6
I would like to 7 have that in writing, too, when we are ready to 8 give an opinion. 9 And once an opinion is established, 10 there can never be a way of ending it, any 11 parcel, until the end of the 12-year period. 12
Mr. President, on that, we have the power to send the zone --
It would seem to me that we have the power to amend zones. You are saying, we may not be able to rule anybody out or operate it on the basis of existing zones, but wouldn't we be able to follow up what was happening and change the zones?
To add or subtract, providing we don't to take away any rights from somebody who -- 133 11/30/98 - WHOLE - BILL NO. 980788
I think no, because it is also the State -- I mean, these zones are both City and State zones. And the only thing that keeps them in is the State legislation. I guess the State could potentially decide they wanted to do a KOZ update or something like that.
Then give us some guidance on what the circumstances under which new zones can be added or existing, previously identified zones could be withdrawn. And if it requires companion state legislation, fine. Can we correctly understand that there will be a specific number of these KOZ areas throughout the entire state?
That's what I thought. Now, are all of the KOZ zones stateside the same? Do they all authorize the elimination of all local taxes and all state taxes?
All local taxes, and in a lot of cases, they don't have a local version of an income tax. But the property taxes and the wholesale resale tax is exempted and the state 134 11/30/98 - WHOLE - BILL NO. 980788 taxes are exempted for everyone.
Now, when this legislation was being considered, did the City appear and testify?
We didn't testify. There was city legislators that did work. But we worked with DECD, the Department of Economic Community Development, when they were working up the mechanics of the both the legislation and the guidelines. And one of the things that we -- to give an example of something we weighed in fairly heavily was the notion to restrict the ability of firms just so to move willy-nilly across without adding -- without adding employment or adding new investment in plant and machinery. In other words, there has to be a hurdle besides having everybody sort of rearrange the deck chairs inside -- inside the state. We also -- I don't know the exact number, but during the course of the development of the official department guidelines in the application, we have virtually been in constant contact with the Department of Economic and 135 11/30/98 - WHOLE - BILL NO. 980788 Community Development as we have been talking about, what can we add in here, their lawyers, you know, how might this work in urban setting back and forth. And I think we've had some -- I would say that we've had some influence positive and I think everybody would consider -- positive influence on the development with of the product of the state.
But what do you regard as being the weakest and most troubling part of this program?
On behalf of the administration, I think the most troubling part on behalf of the administration, and it probably lines up personally, too, is the fact that in this you are talking about parcels, and so you are including some and excluding some others. And sort of at the margin, there is no hard and fast rule that says, this should -- 136 11/30/98 - WHOLE - BILL NO. 980788 everybody agrees this should absolutely be in, everybody agrees this should absolutely be out. I am sure that all of the councilmembers recall when we were talking about empowerment zones, we have two rules that really defined ultimately what we had to do. One, was it had to be a census tract; and two, we had a population cap. And so there were literally a finite number of ways that we could come up. If you set the computer program running and say, give us all of the census in the three subzones, give us all of the census tracks that fit all of this, there really weren't that many options. And if someone said, well, what the south side of Girard Avenue or what about east of American Street, or something like that, we would say, the line is the census tract. Here, it is hard to say, you know, where would this boundary end, and what should be included. And that's something that we tried to -- we tried to -- all of the comments that have been raised here today represent things that reflect issues and things we have been trying to address on this. 137 11/30/98 - WHOLE - BILL NO. 980788 I think the most troubling thing is there is just no perfect "yes, you're in" or "yes, there is a reason for you to be in" or no 5 perfect "there is a reason to be out."
Councilman, I would request permission to leave the chambers.
Thank you very much. Leave will be granted. The Chair recognizes Councilman Nutter.
Thank you very much. The Chair recognizes Councilman Nutter.
Thank you, Mr. President. Just to go back real quickly, Mr. 138 11/30/98 - WHOLE - BILL NO. 980788 Mullin, are there any estimates at this point on either the number of businesses you expect to attract to these subzone areas? What do we 5 know about these areas and any problems that 6 we've experienced in marketing them? 7 Who do you think, other than the 8 companies that -- you made reference to a 9 California high tech company, and two America 10 Street businesses who may want to expand. The 11 California company, I guess, would be a new 12 addition. I mean --
-- what have you been able to determine would be the ultimate effect of this? And you made the decision about these 12 areas that extend for 12 years? And then with the question I was asked earlier either by Council President or Councilman Cohen, I've lost track, that there's apparently no real flexibility. This is a rather long-term decision about 12 areas that you may or may not know a great deal about.
Well, I think in a lot of cases, I'm not sure I would say I don't know a 139 11/30/98 - WHOLE - BILL NO. 980788 great deal about some of these cases. But number one, we don't have a forecast saying 350 new businesses or 12,000 jobs or anything like that. We have been concentrating more -- quite frankly, we have been concentrating more in sort of trying to identify places where we would like to see whether or not this kick start would work. I fully believe that there are some areas that are included in here that even with this -- I shouldn't say "fully," but a very high probability that even this type of incentive won't be enough to, you know, turn the economics in such that certain parcels will be able to be developed.
Right now the price continues to drop and in many cases the market price is negative because of environmental hazards or whatever. Let's say parcel is worth $1 million but it has $5 million of environmental problems with it so it's market price is minus $4 million, and let's say the KOZ, that adds $2 million to it 140 11/30/98 - WHOLE - BILL NO. 980788 so it's minus $2 million, maybe, maybe we can then work on some other programs to help remediate for the smaller amount of the environmental impact cost there.
What would you be doing at all of these sites if the State hadn't come up with this idea?
For the publicly-owned sites, we would continue to market, we would try to continue to market them over time. Some of them might have businesses, some might not. A lot of the -- what I refer to as the industrial underbelly type buildings, I think, many of those in 12 years we would take a drive down and see a lot of those buildings crumbled a little bit more but still there, but some where we might over time be able to amass enough money to be able the demolish, et cetera. In other words, I don't see things as being -- if we didn't have this opportunity to basically apply some public subsidy in the redevelopment of land, we would have to use some of other programs, which I think in a lot of cases there simply wouldn't be enough money to 141 11/30/98 - WHOLE - BILL NO. 980788 redevelop.
My last question is: Your testimony makes reference again to the Michigan Renaissance Zones and that the Pennsylvania Plan and the KOZ is essentially based on that program; is that right?
When I say "essentially based," I think that was its inspiration. I don't know that it follows it point-by-point. But the fundamental issue, yes.
But in response to an earlier question I believe, actually, from me, you indicated that in the case of Michigan, their tax structure is fairly significantly different than the Pennsylvania tax structure but were providing for your program that is essentially based on some other state's system even though our tax structures are very different.
I wouldn't necessarily say based on some of the states. I think the basis is that there are certain parcels.
Yeah, the concept is 142 11/30/98 - WHOLE - BILL NO. 980788 there. There are certain parcels of land in either the State of Michigan or the State of Pennsylvania that the market place concept was deemed unworthy or whatever, unworthy in the sense there is no viable economic use; a lot of them being in the cities, they do nothing but drag the city down. And second, second, our economic developer, our direct subsidies, aren't sufficient to turn that gap.
All right. Thank you for the second opportunity, Mr. President.
Thank you very much. The Chair recognizes Councilman Kenney.
Thank you, Mr. Chairman. Mr. Mullin, are you aware of any other counties, for example, Delaware County or Bucks County that may be working on a similar program or application?
I believe Bucks County and Montgomery County are looking at doing a 143 11/30/98 - WHOLE - BILL NO. 980788 joint zone, five counties surrounding here doing joint zones, they can do the subzones. They 4 can do little pieces in each. 5
Intracounty, correct. 7 And the City of Chester is doing it's own inside 8 Delaware County not with -- not with Delaware 9 County. 10 And it's my understanding that there 11 was a -- no one knows how many are going to apply 12 until December 31st. But my understanding is that there are 17 possible applications that DECD is expecting for the 12 zones.
So in the five-county area, now I am going to hypothesize this, because you can't really answer the question, but it is my belief that considering the fact that this is a State-sponsored program in cooperation of not only the Government's office but in leadership of the House and Senate and considering the fact that the Speaker of the House is from Delaware County and the majority leader of the Senate is from Delaware County and some on the part of leadership on major 144 11/30/98 - WHOLE - BILL NO. 980788 committees throughout the legislature are from surrounding counties in Philadelphia, that there is a good possibility that that application might be approved?
I tend to agree with you. I will also note that the governor has pointed that this is -- this is one of the things he is looking at for distressed rural and urban areas. So that a responsible application on the part of the City of Philadelphia would have a very good chance of --
And it would also seem to me -- I am not suggesting to anyone here, suggesting we won't do it in Philadelphia, but if for some reason we wouldn't do it in Philadelphia, I think -- and maybe you guys could come up with some analysis. I think it would be cataclysmic of what would happen to the potentially existing business in the city with the lure not only of maybe better conditions in 145 11/30/98 - WHOLE - BILL NO. 980788 the suburbs but certainly no taxes in the suburbs. I think they would be running out the door faster than we could stop it.
I think brokers and leafletters for businesses in the City. If Philadelphia didn't have one and the surrounding areas did, especially in light manufacturing, assembly and distribution, that brokers and leafletters would have a field day running --
And to look forward, in order to keep the playing field level at all, if they do it in the surrounding counties, we are going to have to do it here.
Mr. Mullin, the president asked you a question earlier about the artful persuasion of different areas within the city that at times try to attract a business from one part of the city to another part of the city. And I think the president gave you an example. Councilman Kenny raises the question 146 11/30/98 - WHOLE - BILL NO. 980788 of the surrounding counties. And I assume they will all probably do that. Given the leadership that he mentions, they more than likely will have very good allocations. Is there any prohibition to this that prevents a surrounding county from attracting to a cause a Philadelphia-based business.
There is no prohibition except that inside the state if a Philadelphia company wanted to go to a Bucks County Subzone, for example, they would still have that hurdle of a certain amount of investment or an increase in the employment that is looked at from a statewide perspective.
So everyone is playing by the same rules. So the actual answer to my question is there is no prohibition?
By Bucks nor Chester nor Delaware County with a KOZ in place from attracting qualified Philadelphia businesses that can meet the requirements of the KOZ to relocate to a county around us?
Vice versa that we would actually get businesses from the surrounding counties that would move into Philadelphia.
I think that there is one response of Councilman Kenney, the question that requires some clarification. I thought the witness said that counties can have a joint application whereby a KOZ area can cross county lines.
So there can be Intercounty. 148 11/30/98 - WHOLE - BILL NO. 980788
Intercounty. I said "intra." And I should have called it "inter."
Well, intercounty. What we all have is intracounty KOZ?
Correct. But I do want to note that it doesn't have to be on the board, doesn't have to be on the board that each KOZ can have subzones. There can be a couple in Bucks 11 County, a couple in Montgomery. So they are 12 connected.
So we could say, for example, connect KOZ in North Philadelphia with the KOZ -- what is the advantage or disadvantage with that? I have no idea.
I think the disadvantage 149 11/30/98 - WHOLE - BILL NO. 980788 of that is the number of subzones we could have. I think that we could have up to 5,000 acres and up to different subzones, minimum acres. 5 And I think if we joined, we would 6 basically have to share some of those subzones or 7 share some of that acreage. And I think it was 8 established that -- at least for the subzones if 9 not the total acreage, we could probably fill 10 that inside the city, if we have to do it 11 outside. And the surrounding counties also felt 12 that the 12 subzones, they could also do that 13 within 5,000 acres. 14
So why did the 15 state law permit it? I don't understand, if they 16 didn't think they needed it? 17
Why did the state 20 law permit anybody to do it if the surrounding counties felt capable of identifying enough areas in order to not have to --
Oh, I'm sorry. I think I was talking about Philadelphia County only, that we figured we had enough to fill out the 12 150 11/30/98 - WHOLE - BILL NO. 980788 subzones ourselves. The other surrounding counties had to sort of think of two things: One is, do they have enough to fill up subzones each; and, 6 two, what are their odds of getting one? Would 7 their odds of getting awarded one be greater if 8 they were joined there. 9 I think that's one of the things 10 that -- from my discussions with my counterparts, 11 that was one of things they were looking at. 12
Again, we suspect Philadelphia and Pittsburgh will get one, perhaps Erie; the larger areas getting one. And then that 12 potential going down, each urban area getting one, I guess you feel their strategy was to kind of couple parts to make their chances greater of being awarded.
My final point, I guess, is -- why I started to ask this question -- is if we need to keep paces with what they are doing in the suburbs and they are going forward with this, in order for us to be on an equal playing field in this particular area, we 151 11/30/98 - WHOLE - BILL NO. 980788 need to do this.
Mr. President, could I add one thing that I forgot to add in my testimony? I would like to just read -- and I will just pass this out. I would like to read into the record one of the amendments that -- quite frankly, there was a parcel in Eastwick that we were looking at. One had a business on it and an adjoining parcel didn't. And as I mentioned to Councilman Cohen, we are trying to get the ones that don't have business. Inadvertently, we inverted the BRT number for the one that has the business on it. And if I have could just note that instead of that particular parcel, you'll want to use Parcel G-3, I will get that information. But I have it in writing here.
Thank you very much. The Chair recognizes Councilman DiCicco. 152 11/30/98 - WHOLE - BILL NO. 980788
My question actually was asked by Councilman Kenny. But I did have one other question, I guess. Isn't this very similar to a TIF, I mean, when you think about it? I mean, if we go through the exercise of collecting the taxes and basically giving it back to the developer over a period of time, and in this cases we are just forgiving the taxes, we don't bother collecting them. Simply put, it is very simple.
In the sense that there is a public subsidy, if you will, from reduced taxes, I think yes. I think where it differs is the TIF, remember, there is still a base amount of taxes that is still getting paid to the jurisdiction. We have been very carefully trying to make that as long as possible any --
Forgive me. But -- (unintelligible) -- it's very similar.
Yes. And I think the answer is yes there. And the other very important thing to note is that once you do this, there aren't necessarily specific projects that you are going to be looking at. The answer is 153 11/30/98 - WHOLE - BILL NO. 980788 yes.
I have a thought. Would the stadium fall within the boundaries? Could the stadium fall within the boundary of the KOZ?
Your question was whether or not we are really thinking about approving stadium legislation? I already asked that question.
Isn't there one major difference though? because I thought about that TIF business; one major difference: We have a developer who is sitting here saying this is what I am going to do, this is what it is going to be like, if you do this, we will do that. And in this case, we say, we will do this but we don't know what the "that" is, you know, for 12 years or whatever it is. I mean -- and I guess that's the one troubling thing about all of this, is what we do is, we confer with the 154 11/30/98 - WHOLE - BILL NO. 980788 owner of the property without having any certainty that something that we like will happen. Now, we can take some precautions to make sure that some things we don't want to happen don't happen. And it's my understanding that the administration is considering a zoning classification that would prohibited any residents. But we can structure this thing so that if anything happens, we are likely to benefit if anything happens, and nothing is happening now and nothing is likely to happen. But I think that's very much different than somebody saying, I will build this great big hotel or I will put this facility, which today we know is not happening and is not going to happen. That doesn't mean we shouldn't do it. But to me it is just a little bit different. Because we can't ask to calculate the real estate tax any of this is going to generate, because we couldn't probably know. You know, we could be going through this exercise and nothing 155 11/30/98 - WHOLE - BILL NO. 980788 happens. But then again, as has been pointed out over and over again, nothing for nothing is nothing.
And if something happens, at least we have something coming in.
And then there is the other point that Councilman Kenny makes, you know, if other --
-- other surrounding counties have this whole area out there that is literally a tax-free area, then that creates another kind of problem for us. Can you tell me how what we are considering today compares with some of the economic development support that the State of New Jersey gives? It has always been very difficult for us to match.
I do think for the particular zones that we are talking about, and that one example that I gave of the California firm that is actually looking at New Jersey as well and negotiating with the State development 156 11/30/98 - WHOLE - BILL NO. 980788 officials and New Jersey for our zones, I think this makes us pretty competitive with some of the New Jersey programs. Some of the New Jersey programs are statewide. So the effective rebate of income tax is paid and on other types of loans or rebate job creation tax credits that they get, are substantially more than Pennsylvania. But in some cases, their specific districts do have additional incentives. But I think overall, for our areas in the KOZ, it makes us very competitive with many areas in New Jersey.
Not wanting to belabor this, but something occurred to me as we were talking about the drawing of certain zones. Is there any way and -- has there been any consideration to utilizing some of the boundaries of the proposed KOZ, because some of them are in the general area of some of the suggested sites of either a new baseball or football stadium to utilize the KOZ boundaries to enhance the development potential of a particular 157 11/30/98 - WHOLE - BILL NO. 980788 area as it relates to athletic venues? For example, and I am not saying we are going to pick a site here today, but some of the locations that we have talked about, the Lower Delaware River KOZ or perhaps the Upper or Central Delaware River KOZ, Post Office, Market Street, West Philadelphia, some of those areas around in the general vicinity of where some of the sites and post sites of baseball and football stadiums have been chosen to visit, is there any strategy or analysis that makes sense to include those potential sites in the event that happens?
I think -- I note it is my understanding that when we looked at these particular areas, there was no thought of possible athletic facilities. One of the reasons why they coincide with the talk and discussions that people have talked about and proposed is that these are sites that are of X acreage and pretty much laying -- "fallow" is probably too kind of a word. Basically being very, very much underutilized or the potential to be the post office, with the post office potentially moving, and potentially 158 11/30/98 - WHOLE - BILL NO. 980788 being very underutilized and hard to redevelop. I don't think that there is anything that would restrict that, but with this legislation here, we are not looking at that -- we are not looking at including any area because of that.
Well, I am not suggesting that either or both or one be built in South Philadelphia. But you've KOZ'd the Naval Hospital; there is the existing Veteran Stadium Site that would potentially have to be demolished for a new football or baseball venue. The site that you discussed, which is currently a parking lot -- I don't know if you consider a parking lot as a going business or not, but it certainly is an underutilized portion of land. And I am not just restricting it to Philadelphia. There are sites all along the Delaware River up into Central and Lower Delaware. But the Upper Delaware, which are all train yards and things which would be perfect for a waterfront, Center City view baseball facility. For example, could we potentially look 159 11/30/98 - WHOLE - BILL NO. 980787 at that?
Does it enhance the location and make it economically plausible? Because one of things that I am concerned about is when we push this legislation to Harrisburg, where do we get our share? I mean, does our share potentially come from these kinds of things?
Yeah, when you say "we," could "we" as the administration, or could people look at --
Again, I don't think there is anything that restricts that from happening or to be a possible use here.
It certainly fits into the improvement of land, the creation of jobs and all of the other things seem to fit. And I would just ask the administration to kind of pursue this in some way before we pass it 160 11/30/98 - WHOLE - BILL NO. 980787 finally. And then there is some way to draw it in.
Thank you very much. Do any Members of Council have any questions for these witnesses? Thank you very much. Is there anyone in the audience who would like to testify on Bill No. 980788?
Mr. President, if I would risk stating the totally obvious, if the Committee is not going to vote on this today, may I request that the meeting be adjourned to a date certain and time to get this passed before the session ends?
Is there anyone present who wishes to testify on Bill 980788? 161 11/30/98 - WHOLE - BILL NO. 980787 Say no one. At this time, the Committee will consider Bill No. 980787, an ordinance amending Chapter 19-2500 of The Philadelphia Code entitled "Wage to Net Profits Tax," and Chapter 19-2800 of The Philadelphia Code entitled, "Pennsylvania Intergovernmental Cooperation Authority Tax" on wage and net profits through the exclusion of those taxes of net profits earned by a business trust that quantifies as a Regulated Investment Company or that confines its activities to the maintenance, administration and management of intangible investments and activities of Regulated Investment Companies. Good morning.
I guess that qualifies. Please identify yourself for the record.
Good afternoon, Council President Street and Members of City Council. My name is Nancy Kammerdiner, and I the Revenue Commissioner for the City of Philadelphia. 162 11/30/98 - WHOLE - BILL NO. 980787 I am here today to testify in support of Bill No. 980787. This Bill provides for an exclusion for the Net Profits Tax and the Pennsylvania Intergovernmental Cooperation Authority Tax on Wages and Net Profits, for business trusts that qualify as regulated investment under Internal Revenue Code Section 9 851. A Regulated Investment Company, RIC, is a unique class of business entity that is given special corporate status by the Internal Revenue Code as long as it meets certain strict requirements on its investments and distributions to shareholders. A change in the Commonwealth of Pennsylvania's treatment of RICs organized as business trusts has provided an incentive for these companies to reorganize. These businesses were originally established as corporations and, as you know, corporations are not subject to the Net Profits Tax. Without this legislation, then you would be subject to the Net Profits Tax when they changed their business structure. This would 163 11/30/98 - WHOLE - BILL NO. 980787 create an undue financial burden and limit their ability to compete. We believe that this legislation is revenue neutral. Your support of Bill No. 980787 would maintain the tax status quote for these companies and assist in retaining this type of industry in the city. I request that the rules of council be waived to allow this bill to be reported out of committee and have its first reading at the next council session. I would be happy to answer any questions. Incidentally, I neglected to introduce Frank Piava from the City Solicitor's Office who is here also to deal with any technical questions you might have regarding this ordinance.
Thank you very much. Have you had very much discussion with representatives of the industry about all of this?
We've had some 164 11/30/98 - WHOLE - BILL NO. 980787 discussion with Regulated Investment Companies that would be affected by this. And basically they are looking for the status quo to be maintained in terms of their tax structure.
Is any representative of that group or those industries present here today?
Well, can you tell us who you've talked to? I mean, I am sure -- you didn't wake up one morning and say: Oh, I think we need to do this amendment. Somebody asked for it.
Mutual funds are the typical or most usually identified Regulated Investment Company. And there are a few companies in Philadelphia that manage and maintain mutual funds. And they will be the ones directly affected should they choose to reorganize as a business trust.
Well, are you offering this as a result of any specific requests, or is this something you are doing on 165 11/30/98 - WHOLE - BILL NO. 980787 your own, just kind of anticipating what might be a problem in the future if somebody decides to reorganize?
The major example of the firms that would be affected would be Delaware Investments. They are the largest firm in this city that would meet the definition that we are talking about here.
Well, have there been any specific requests of any companies?
They have basically brought their concerns to our attention, and when we looked at the situation --
I believe there were some others as well. I am not personally familiar with the names of the companies. They came to the commerce department. So I am turning to see if Steve 166 11/30/98 - WHOLE - BILL NO. 980787 Mullin can help with that because I know he has met with more than one.
Yes. The primary -- the first company that came to us was Delaware Investments. Several of the other mutual fund operations in the city -- there are only a few left -- also noted this. With the change -- with the recent change in the State and the state legislation and business tax structure, all of these mutual funds are switching over to this business trust. They first -- they were the first ones to recognize that if that happens -- as Nancy mentioned here, if that happens, all of a sudden, they get tagged as something different than what they will continue doing as far as our tax code is concerned. And we had basically already done something like this in the real estate industry where you are talking about businesses that take in other people's money, work with it, but their gross receipts could be construed as the taking in of each people's money as opposed to what they earn off of it. 167 11/30/98 - WHOLE - BILL NO. 980787 And so it was really their noting it because it was only something that was relatively recent that people were changing, VanGuard, for example, just changed to a business trust to take advantage of that new change at the State level a couple of months ago.
And I think there is one other factor. We have been attempting to attract more businesses to the city. As Steve Mullin mentioned, there are very few of them here at the moment. That is because our tax structure has been such that it has been a disincentive for them to be in Philadelphia. As we attempt to attract more of them to come, we would have a double problem if we also imposed the Net Profits Tax on a company that would otherwise not have been facing that. So we are looking at both a prospective situation, recognizing a technical problem that developed after the State made their change -- and it was called to our attention by one that is still here but would consider it to leave, if they find themselves in an adverse position.
Why is this being 168 11/30/98 - WHOLE - BILL NO. 980787 done by ordinance and not by regulation?
I believe that is on the advice of the solicitor's office. Let me turn to Frank Piava for that.
Frank Piava, Divisional Deputy City Solicitor for the Tax Unit. The reason we have to do this through an ordinance is because what we are doing here is creating a special treatment for a unique class of taxpayers. And in order to meet the uniformity standards, it has to be something that is not done through regulatory interpretation, but rather has to be done through law, that's to recognize that yes, we have this special group of folks, Regulated Investment Companies, who we are going to allow to have a special tax treatment as opposed to other taxpayers that also pay the Net Profit Tax. And in this case, what has happened here is that the State has given up these 169 11/30/98 - WHOLE - BILL NO. 980787 Regulated Investment Companies, these mutual funds, a tax-free status under corporate net income tax if they convert into a business trust. And clearly, these institutions are going to convert to get that tax savings. But what they are going to have to do, if they go that way, and they are looking to Philadelphia, is move out of Philly, because their initial burden on the Net Profit Tax would more than offset the savings they get from the State. So really what happens here is basically they are forcing these folks to move out of Philadelphia in order for them to be competitive with the other mutual funds throughout the state, who would be reaping this benefit of converting to a business trust.
Why did the State do it? I was not around at the time that they did this, but it was my understanding that they wanted to be competitive with other jurisdictions throughout the country where these mutual events, 170 11/30/98 - WHOLE - BILL NO. 980787 which are growing in leaps and bounds, are not paying taxes in other jurisdictions. And in order for Pennsylvania to remain competitive, and we historically have had a lot of large mutual funds in our state, in order to maintain their presence and the large salaries that they paid their people, the State had to create this exemption at the state level. And they also had to do it through a statute as well. It wasn't through a regulation but through a statute. So it was just basically to remain competitive, and that's what we are forced to do here as well.
And we propose to mirror what the State did for the income tax.
What we propose is a parallel to what the State did for the Corporate Net Income Tax; the same language in terms of the eligible entities.
The Chair recognizes Councilman DiCicco. 171 11/30/98 - WHOLE - BILL NO. 980787
Thank you, Mr. President. I guess this is for any one of you but probably Mr. Piava. How many businesses are we speaking to? And do know have any idea as to the number of the employees that would be affected by this, if these companies were to leave?
We talked to three companies right now, the largest of which is Delaware Investment with approximately 900 employees in Center City, and the other two with 100 employees. We have also spoken with companies that are financial service companies that are outside of the city when we were talking about the possibility of their moving. And one of the things that they have noted is that if this sort of anomaly exists, it will be -- there will be very -- it will be too high of a hurdle. I would also note one other thing to add to the Ms. Kammerdiner's notes here, too, the State is actually changing around a tax that would -- that would reduce what they are getting. 172 11/30/98 - WHOLE - BILL NO. 980787 In our particular cases, as Nancy mentioned, this is something we are not collecting now. It would be, just by dint of their reclassification, lumped in another category, so they would still be paying what they are paying now and hopefully, actually, even more as their business expands and their employment expands.
Before you do this, it would be a windfall to the City?
I think it would be -- I think it would be a windfall to the City in the following sense: That we would not have any higher burden of attracting financial services businesses inside the city as compared to outside the city where the differential would be -- if we didn't do this, the differential would be Mt. Everest instead of Mt. Washington.
So in the short-term it would be a windfall but in the long term it is smooth?
In the long term -- no. 24 In the long-term, I would hope that they would find that there was even more attraction to 173 11/30/98 - WHOLE - BILL NO. 980787 looking in city among the other things we are doing, too.
If we did not have this measure enacted, we would impose the Net Profit Tax for these firms. But I don't think they would be here long enough for us to see the benefit of the Net Profit Tax.
That's what I said: In the short-term it would be a windfall --
-- but we would be collecting from them taxes that have to be collect, never intended to collect, but they would lead to one --
And I think they would leave so quickly that we would probably would never see the windfall that you referenced.
Is there anyone 174 11/30/98 - WHOLE - BILL NO. 980787 else? Councilman Cohen.
If they are reorganized as a business trust, they would be covered by the Net Profits Tax. A corporation is not covered by the Net Profits Tax, but a trust is. And the state legislation will give them an incentive to reorganize. They are currently organized as corporations, but because of the state legislation, these types of entities, these Regulated Investment Companies are reorganizing their structure as business trusts. A business trust would be covered by the Net Profits Tax.
Because it is not a corporation. And so basically what we are proposing here is that their tax status remain the same if they need the qualifications of the Internal Revenue Code, Section 851.
Which defines the 175 11/30/98 - WHOLE - BILL NO. 980787 Regulated Investment Company and the strictures that they have to meet in order to meet that test. There are certain requirements that they have to meet in terms of how they handle investments, the distribution to shareholders. It's a fairly rigorous test that not every investment corporation or investment company would meet. And only those that meet the IRS test would be eligible for --
When they meet the IRS test, what benefits do they get at the federal level?