COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE OF THE WHOLE - - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, February 16, 2005 10:35 a.m. - - - - BILL 040789 - Amending Chapter 19-26000... BILL 040767 - An Ordiance amending Section 19-2604 of The Philadelphia Code... BILL 050007 - An Ordinance amending Chapter 12 19-1200 of The Philadelphia Code... BILL 050008 - An Ordinance amending Section 19-2604 of The Philadelphia Code... PRESENT: COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JACK KELLY COUNCILMAN JAMES F. KENNEY COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN JUAN RAMOS COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO V A R A L L O Incorporated 215.561.2220 215.567.2670 I N D E X WITNESS JOYCE WILKERSON, Chief of Staff...... DIANNE REED, Budget Director......... SEAN MCNEELEY, Policy Director....... 15 NANCY KAMMERDEINER, Revenue.......... 26 MARK SCHWEIKER, Chamber of Commerce.. 109 MICHAEL PEARSON...................... 120 STUART WEINTRAUB, Chamber of Commerce 140 BRETT MANDEL, Philadelphia Forward... 173 VINCENT DEFINO, South Philadelphia Business Association............. 177 AISAMAH MOHAMMAD, Lancaster Avenue Business Association............. 181 AL TAUBENBERGER, Greater Northeast Phila. Chamber of Commerce....... 185 KAREN GAIN........................... 188 JESSE FRISBE (ph), South Street West Business Association. .......... 190 ROBERT ZURETSKY, Phila. Parking Assoc.234 ALAN BLAKE, Central Parking.......... 239 KRISTA BARD, Center City Proprietors. 241 ANDREW CHIRLS, Phila. Bar Assoc...... 245 AL PERRY, Assoc. of Realtors......... 250 TONY BROWN, Assoc. of Realtors....... 253 STAN SHAPIRO, One Philadelphia....... 265 THOMAS CRONIN, DC 47................. 266 CATHY SCOTT, Local 2187.............. 282 SHARON WARD, PCCY.................... 298 JONATHAN STEIN, Community Legal...... 316 TAMMY GAVITT, NOW.................... 323 MAURICE SAMPSON, SBN................. 327 BETH MCCONNELL, Penn PIRG............ 338 ANDRE BUTLER, One Philadelphia....... 346 ENRICO SCUILLI....................... 355 DAVID RECH, Scribe................... 358 JOSEPH HANLEY, BOMA.................. 369 FRED MURPHY, CCRA.................... 374 3 02/16/05 - WHOLE - 05007, 05008, 040767
Good morning, everyone. This is the public hearing of the Committee of the Whole regarding Bill 5 Nos. 040767, 050007, 050008, and 040789. I would ask Mr. McPherson to please read the title of the bill.
Bill NO. 040767, an ordinance amending Section 19-2604 of the Philadelphia Code, relating to tax rates, credits and alternative tax computation for the business privilege tax, by reducing certain tax rates; all under certain terms and conditions. Bill No. 050007, an ordinance 16 amending Chapter 19-2100 of the Philadelphia Code, entitled "Parking Tax," by establishing a rate of taxation of parking transactions for Fiscal Year 2006 and thereafter and making such rate contingent on certain decreases in business privilege tax rates. Bill No. 050008, an ordinance 23 amending Section 19-2604 relating to tax rates, credits and alternative tax computation by reducing certain tax rates and making such 4 02/16/05 - WHOLE - 05007, 05008, 040767 reductions contingent on an increase in the parking tax. Bill No. 040789, amending Chapter 5 19-2600 of the Philadelphia code, entitled "Business Privilege Taxes," to provide for an exemption from the tax on gross receipts for certain new businesses, under certain terms and conditions.
Good morning. I am Joyce Wilkerson, Chief of Staff to Mayor John Street. The testimony is going to be given by Dianne Reed, the Budget Director; and Sean McNeeley, Policy Director for the Administration.
Good morning, Council President Verna and Members of Council. I'm Dianne Reed, Budget Director of City of Philadelphia. Thank you for the opportunity to present testimony on Fiscal Year '06 tax measures that are currently before Council. I would like to provide you with a brief written testimony before we discuss the attached 5 02/16/05 - WHOLE - 05007, 05008, 040767 presentation Power Point, which is Exhibit 1. The Administration remains committed to responsible tax reduction and reform, despite the City's ongoing challenges and stresses. 6 million, the negative year-end General Fund balance in 9 years. In order to offset the structural 10 problems faced by the City, including 11 projected growth in benefit costs that exceeds 12 the projected growth in tax revenue -- pension costs alone are 800 million higher in the proposed '06-'10 plan than in the '02-'06 plan -- the Administration has undertaken numerous initiatives and across-the-board budgets reductions to provide balanced budgets while maintaining the City's tax reduction program. The Administration is drastically reducing the workforce through a variety of means, including layoffs, curtailing the purchase of services by non-reimbursed departments, and pursuing a series of management and consolidation initiatives to maintain service and reduce staffing levels. 6 02/16/05 - WHOLE - 05007, 05008, 040767 These steps are described more fully in the introduction to the Five-Year Plan. 1 billion to taxpayers through 7 consecutive years of tax reductions, including 8 over 200 million this fiscal year. No other 9 state or local government in America can lay 10 claim to this record of sustained annual tax reduction. The City's resident wage tax rate is almost percent lower today than it was 13 when the reduction program began in 1995, and the non-resident portion is over 11 percent lower. The gross receipts portion of the business privilege tax is over 40 percent lower today than it was when the program started in 1995, and by next year it will have been cut in half if the Administration's proposals are implemented. 1 billion in future savings from the rate reductions that were already enacted between Fiscal Year '96 and this year. This projection assumes the continuation of the annual reductions in the gross receipts portion of the business privilege tax as well as the annual wage tax reductions passed in Bill No. 040607, and the low income wage tax credits passed in Bill No. 11 040397, but it is does not include the value of the wage tax relief that will be provided when the benefits of state-wide tax reform take effect. The impact of the wage tax reductions and credits enacted into law increases sharply beginning in Fiscal Year "10 when the size of the wage tax reductions increases and the phase-in of the tax credits begins. The proposed Fiscal Year '06 to '10 Five-Year Plan estimates that the tax revenues will increase by only 7 million in Fiscal '10 due to these impacts compared to annual projected tax revenue increases of over 50 million per year in '07 through '09. The Administration strongly believes 8 02/16/05 - WHOLE - 05007, 05008, 040767 that faced with accelerated levels of tax reductions and credits that could lead to flat or declining general tax revenues in the next mayoral administration, any tax reductions beyond those already planned should be offset by a specific funding source. At the same time, further affordable adjustments to business taxes could improve Philadelphia's economic outlook. Accordingly, the Administration proposes a gross receipts tax base for 06. The Administration proposes an expanded gross receipts rate reduction in '06 to be funded by a budget neutral increase in the parking tax rate. Bill No. 5 mills, a percent reduction.
18 This reduction, which is more than twice as 19 the one previously scheduled, would provide 20 $71 million of business tax relief over the 21 life of the plan, in addition to the 109 million in relief already planned through the continuation of the existing BPT reduction program. 125 mill in later years, the bill would place the City on pace to eliminate the gross receipts portion of the BPT by 2018. The BPT tax rate reduction proposed in Bill No. 050008 is contingent on the passage of Bill No. 050007, which would increase the parking tax rate from percent 9 to 20 percent, generating 13 million in net 10 additional parking tax revenue. These two 11 bills create a budge neutral tax shift that is 12 consistent with a report of the Tax Reform 13 Commission which suggested that an increase in 14 the parking tax to 20 percent would be one way 15 to change Philadelphia's tax mix to fund wage and business tax reform. The Commission's report noted that Philadelphia's parking tax rate has been as high as percent in the 19 past, and at this rate would still be lower 20 than the City of Pittsburgh rate which is currently 50 percent. " The expanded gross receipt rate reduction proposed 10 02/16/05 - WHOLE - 05007, 05008, 040767 in Bill No. 050008 is the full amount of tax relief that can be funded from this suggested increase in the parking tax rate. The Administration believes that the proposed shift from the BPT to the parking tax represents sound fiscally responsible tax policy. Research has shown that the gross receipts portion of the BPT is an impediment to economic growth in Philadelphia. Accelerating the proposed reduction in this tax is an investment in economic development. If done in a way that does not cause deficits or service reductions that would undermine the value of the tax reductions. By contrast, there is little evidence that the parking tax is a major deterrent to business location in the City. Further, economists believe taxes on activities with social costs, in this case road maintenance, traffic congestion and pollution, are efficient because they can generate public revenue that offsets the social cost of that would otherwise go unpaid by the consumer. Increasing the City parking tax could encourage greater use of public 11 02/16/05 - WHOLE - 05007, 05008, 040767 transportation, reduce road congestion, improve air quality in enhanced SEPTA's revenue base over the long term, and we are all aware that SEPTA needs all the help it can get at the moment. In short, the proposed shift from the BPT to the parking tax should result in significant economic benefits to Philadelphia with no net impact on City revenues or services or the City's fiscal stability. Bill 040767 would enact 12 years of rate reductions in both the gross receipts and the net income portions of the BPT with a goal of eliminating the BPT by 2017. The bill 16 would layer annual reductions on top of those already scheduled. The bill is projected to cost 207 million in foregone revenues from '06 to '10, compared to the proposed plan which would create a revised Fiscal Year '10 fund balance projection of a negative 142 million that would have to be offset by service cuts or workforce reductions in order to present PICA with a balanced plan. This cost projection reflects only the bills proposed 12 02/16/05 - WHOLE - 05007, 05008, 040767 reductions for the net income portion of the tax, as the proposed plan assumes lower gross receipts rates than those contained in bill 5 040767 through Fiscal '10, contingent on passage of Bills No. 050007 and 050008. 7 million in revenue loss in Fiscal '10 which is greater than the combined budgets of the free library and Recreation Department in that year. As with the tax reductions and credits already enacted by City Council, the cost of Bill 040767 would escalate in future years. The bill is projected to cost 713 million from Fiscal '11 through '15.
The combination of Bill 040767 and existing tax ordinances projected to cause annual declines in tax revenue beginning in Fiscal '11. 5 percent is carried forward into future years, the annual growth and the base is projected to be smaller than the combined impact of wage and BPT tax rate reductions and the phase in of the low-income 13 02/16/05 - WHOLE - 05007, 05008, 040767 wage tax credits. This would cause tax revenue to fall each year. The next mayoral administration would then have almost no 5 ability to fund increases in the cost of wages, health insurance, or pension benefits for its workers, let alone expand services, respond to emergencies or meet inflationary cost increases for services and materials. Bill 040767 would almost certainly cause drastic tangible service reductions over the Five-Year Plan period and would significantly impair the next mayor's ability to operate the government. The Administration cannot support this bill. Bill NO. 040789 would effectively exempt businesses from paying the gross receipts portion of the BPT during their first three years of operations in Philadelphia. " Some exceptions to this rule exist at the state and local level under varying authority, but it is not clear this is the type of exception that would be legal. Furthermore, the definition of new businesses used in the bill is unclear and could lead to additional legal uncertainty as well as the possibility that existing businesses would manipulate their legal and organizational structures to qualify for the bill's exemption. 9 million over the life of the '06 to '10 plan. Passage of the bill is projected to cause negative fund balances in '07 and '08. The Administration believes that any tax reductions beyond those already planned should be offset by other funding, but furthermore would prefer allocate scares tax reduction dollars toward across-the-board relief to all businesses which seems to be the fairest and most economically productive use 15 02/16/05 - WHOLE - 05007, 05008, 040767 of those dollars.
We've prepared a power point presentation. The numbers begin to converge at some point, and Mr. McNeeley is going to step through a Power Point presentation that provides graphic explanation of some of the risks that the City faces, and that's attached to the back of the testimony.
Good morning. Sean McNeeley. As you know, the City finished FY '04 with the first negative fund balance in 12 years. The first page of the presentation projects the fund balance through the life of this proposed FY '06 to '10 plan. In FY '06, FY'07 and FY '08, the fund balance is projected to be less than 1 percent of expenditures and then our anticipated PGW repayment kicks in in FY '09. Passage of Bill No. 040767 is projected to result in negative year-end fund balances in each year beginning in FY '07 and would require corrective action in order to present a balanced plan. 16 02/16/05 - WHOLE - 05007, 05008, 040767 The next few pages give some context for what we're doing other areas of the budget. covers deficit cutting actions. The Administration used a combination of across-the-board budget reductions targeted initiatives, a hiring freeze since November 2001, position eliminations and layoffs to offset recurring operating deficit projections. These across-the-board reductions were applied in a number of the past few years. It's identified there. In order to reach the FY '06 target by July 1st, the City was forced to implement layoffs and positional eliminations. The initiatives we've pursuing over the last few Five-Year Plans are all identified in the introduction of the Five-Year Plan. The City's workforce is currently at 23,297 general fund positions. That's the lowest in decades. The FY '06 budgeted level is even lower at 22,653. That represents an 11 percent reduction from the '03 budget and an 8 percent reduction from FY 2000 when the 17 02/16/05 - WHOLE - 05007, 05008, 040767 Administration took office. The increase between 2000 and 2003 is mainly due to DHS and prisons staffing increases. The chart at the bottom shows that the City has cut the size of the workforce in proportion to the City's population on a per capita basis. The City's workforce in the FY '06 budget will be at about the same level as it was in FY '65, higher than it was in FY '55, but if you control for mandated county functions like courts, DHS and prisons, it's roughly the same as it was in FY '55 and lower than any point since then. About 32 percent of the City's FY '06 budget is for purchase of services. That includes a lot of different types of things. Payments for the care of individuals, adoption subsidies, placement for juveniles, and other reimbursable social service expenditures account for more than half of that total. Fixed debt payments and the mandated SEPTA subsidy account for another 12 percent, and then basic operating expenditures and unavoidable expenditures account for another 18 02/16/05 - WHOLE - 05007, 05008, 040767 13 percent. So there's relatively little that we would consider to be discretionary in that purchase of services budget. Nevertheless, purchase of services budgets for most departments have been cut or held constant starting in FY '03, and in the Five-Year Plan they are projected to remain flat over the plan period. The. Chart shows what happens if you adjust the City's actual purchase of service obligations over the past few years for inflation, and you see that since FY '02 those obligations have dropped in real terms. They've also dropped from FY '02 to FY '04 even without controlling for inflation. In addition to what we're doing on the expenditure side, with City Council's help and the help of the General Assembly, the City's been pursuing a number of non-tax-related revenue enhancement initiatives. Those are expected to generate over $210 million in additional revenue to balance the plan that was presented to you. And those initiatives are detailed, and we 19 02/16/05 - WHOLE - 05007, 05008, 040767 covered a lot of those Monday. gives you an overview of where we have been with taxes, where we are and where we're going.
It's a lot of numbers on the page, but basically the plan assumes up to 4 percent gross growth in wage and business privilege tax bases and about 2 and a half percent inflationary growth in all the other taxes. 7 percent annually. Stepping through the table a little bit, you can see that in FY '02 overall tax collections only increased by half a percent, and that's even after adjusting for some one-time revenue received in '01. The wage tax grew very slowly in '02, and the BPT and sales tax fell. In FY '03 the wage tax again was pretty flat. It was flat after the effect of the tax reductions, and once again BPT and sales tax fell. Overall, the City's tax revenue fell in FY '03 but largely as a result of the millage shift to the School District. In FY '04, we started to experience 20 02/16/05 - WHOLE - 05007, 05008, 040767 strong recovery. Wage taxes grew by percent. The wage tax base grew by percent. 4 The BPT came back strong. And as you know, 5 the transfer tax went through the roof. Then going forward, you can just see the assumptions for each tax. just gives you the table showing where we're going with the wage tax, what's already in law, and what those reductions are compared to when we started the tax reduction program in 1996. In addition, if when we get the state-wide tax relief for gaming, that would push the resident wage tax rate below 4 percent. So that would be in addition to what you see in the table there.. On the BPT side, the proposed plan assumes passage of Bill Nos. 050007 and 050008, which is a budget neutral tax shift, that increases the parking tax in return for an accelerated reduction in the gross receipts portion of the business privilege tax. The proposed shift would result in 21 percent reduction in the first year, providing about $13 million in business tax relief and would 21 02/16/05 - WHOLE - 05007, 05008, 040767 put the City on a permanently lower track in its gross receipts tax reduction plan until by FY '18 it would be completely eliminated. As we commented in the testimony, the tax cuts and tax credits that are already enacted are projected to escalate sharply and impact beginning in FY '10. If Bill No. 9 040767 were passed, that effect would be even more dramatic. shows the annual impact of tax reductions in each year as they're passed going back to '96. And you can see that between FY '96 and this year, the impact of the tax reductions has been within a range of 12 to 30 million dollars in each year. In FY '06, that includes the shift to the parking tax. And then beginning in FY '07 you have higher impacts than any year tax of the ten-year tax reduction program. Starting in FY '10, you really double the size of the impact in that year, and then it continues to escalate after that. It increases sharply in FY '10 because the wage tax rate reductions increase in size beginning in FY '10 and also 22 02/16/05 - WHOLE - 05007, 05008, 040767 the low-income wage tax credits that were passed begin to be phased in in FY '10. The City's tax base in projected to grow by an annual average about $62 million, and that's represented by the dotted line on the chart. When the impact of the tax cuts is greater than that line, then that means the City would lose tax revenue from year to year. That's illustrated a little more on . You see that in FY '06 tax revenue is projected to be flat, and that's mainly we assume that the transfer tax is going to slow down. Between FY '07 and FY 'O9, the plan assumes about $50 million with tax revenue growth each year. In FY '10, the plan assumes only $7 million in tax revenue growth because of the impact of wage tax reductions and the low-income wage tax credits. If Bill No. 20 040767 were passed, we project that we would see annual losses in tax revenue beginning in FY '10. And for years after FY '10, we're just carrying out the same basic growth assumption that we have in the Five-Year Plan.
So not only do the tax revenue start to show a 23 02/16/05 - WHOLE - 05007, 05008, 040767 loss, but you see the impact of the tax cuts increasing on the line. The City's tax reduction program was begun years ago on the premise that 6 moderate tax reductions each year could be 7 incorporated into a balanced City budget that 8 maintains City service levels by generating 9 efficiencies and taking advantage of economic 10 growth. For Mayor Rendell and Council President Street adopted this premise after consultation with Professor Inman of the Wharton School of Business who's performed numerous studies and models for the City's finances and tax structure dating back to 1987. As I mentioned on the other chart, the annual impact of the City's tax reduction program has averaged about $20 million per year to date, and that's roughly at a level that could be incorporated year to year through the kinds of things I just mentioned: Efficiencies, cost containment, economic growth. The reductions that are already enacted for future years and that could 24 02/16/05 - WHOLE - 05007, 05008, 040767 potentially be enacted if Bill 040767 is passed are far beyond that level of manageable reductions with an annual impact as much as 5 times higher than the previous average. The 6 potential FY '10 impact of $76 million when included Bill 040767 is greater than the budget of 40 out of the 47 City operating departments. To touch on supply side a little bit, Professor Inman periodically does a report on taxes and the economic future of Philadelphia. On his 2004 report estimates that supply side improvements in the economy return only a fraction of the lost revenue from tax cuts to the City. And the quote there is, "Lowered City tax rates will mean less City revenues. " And he was referring to last year plan. The plan's proposed reductions in the City's gross receipts tax rates in 25 02/16/05 - WHOLE - 05007, 05008, 040767 resident and non-resident tax rates will stimulate additional business activity and new City jobs, but the resulting increases in tax base will lead to additional revenues which are likely to offset only to percent of 7 the projected decline in revenues over the 8 life of the plan. Not only would we not get 9 part of the revenue that we cut through the 10 reduction, but Professor Inman also noted that 11 if you have to run deficits or cut services as 12 a result of tax cuts, that can undo the 13 initial economic benefits of the original tax 14 rate reductions. 15 So in other words, if tax cuts are 16 so large they force reductions in City 17 services, then lasting increases in business 18 activity and jobs will not materialize. 19 If the supply side effect is 20 proportional at, say, 15 to 20 percent, then larger tax cuts mean larger revenue losses for the City. Assuming the 20 percent supply side effect, then $1,000 tax cut causes the City to collect $800 less revenue. A $2,000 tax cut causes the City to collect $1,600 less 02/16/05 - WHOLE - 05007, 05008, 040767 revenue. So the larger the tax cut, the less to the revenue. The Administration believes that the tax growth assumptions in the proposed plan are already pretty aggressive. We also believe that any supply side effect in the nine years of tax reductions already made is reflected in trends in the City's tax base growth, and we use those trends as a basis for our future projections. The tax growth projections in the proposed plan are on average the highest assumed in any of the City's 14 plans and exceed inflation estimates, as shown in the chart. The chart has the Five-Year Plan wage tax growth estimates from different points in time, the first Five-Year Plan and then roughly each five years after that. percent. 2 percent and 4 percent 27 02/16/05 - WHOLE - 05007, 05008, 040767 means that we have to either generate additional employment or generate 2 percent per year growth in real wages. I would like to conclude with a summary of each bill before us today. Bill 7 No.
050007 increases the parking tax rate, and you the '06 impact as generating $13 million in net revenue in the FY '06 to FY '10 impact. That bill is assumed in plan. O50008 reduces the gross receipts portion of the business privilege tax contingent on the passage of the previous bill 14 but, again, those two bills roughly offset one another and they're both assumed in the plan. Bill No. 040767, which would reduce the net income portion and the gross receipts portion of the BPT is projected to cost $11 million in the first year and roughly $207 million over the plan. It's not assumed in the plan. And Bill No. 040789, which exempt businesses from paying the gross receipts portion in their first three years, projected to cost about $4 million in the first year and 28 02/16/05 - WHOLE - 05007, 05008, 040767 then escalate each year after that to the full annual cost of $12 million or a Five-Year Plan cost at $50 million. That concludes our testimony.
Thank you all very much. At this time the Chair recognizes Councilman Goode.
I'm sorry. Councilman, before you start, there are a number of Councilmembers that want to recognized, so for the first go-around each Councilmember will have five minutes.
Thank you. Good morning, Ms. Wilkerson. A couple days ago on Monday, I addressed the tax reform policy shift by the Administration from a single sales factor apportionment to a gross receipts tax cut in Fiscal Year '06 and asked what accounted for that shift in policy. Can you better address that today?
The Administration 29 02/16/05 - WHOLE - 05007, 05008, 040767 last year proposed the single factor shift and proposed to offset it with the parking tax that was not -- that proposal was not accepted by City Council. And so we did not -- despite the fact that it had been recommended by the Tax Reform Commission. The Administration has long advocated support for a reduction on the gross receipts tax. We believe that it is particularly onerous and discourages the creation of new businesses, and this year we decided to take another stab at that. We understand that you have long supported the reduction in the gross receipts tax. I think your position has been shared by a number of other people in this Council and thought that not only did it make good sense for the City, not only would it be a stimulus for business growth, but it also might enjoy political support that at the end of the day it takes an order to make ha happen.
And I support the bill and won't change my mind on the bill and believe that we should target gross receipts first and then look at net income, but I'm not 30 02/16/05 - WHOLE - 05007, 05008, 040767 sure that you necessarily changed your policy position because of me. So my question is, why did you move from single sales apportionment to gross receipts? And is one better than the other? Is that the Administration's position that one is better than the other?
Our position is the gross receipts tax is probably the most onerous in limiting job growth, even more so the wage tax or some of the other taxes. In 1903 or 4 -- I forget now which it was -- we had proposed slowing the rate of reduction of the wage tax in light of the City's overall financial condition and had proposed focussing instead on a more aggressive reduction in the gross receipts tax. That did not happen, and so was born some of the tax reduction discussion.
Let me ask another question. Did you get any specific tax reform policy message out of the Economic Development Summit? What did the Administration the draw 31 02/16/05 - WHOLE - 05007, 05008, 040767 from the Summit in terms of tax reform policy?
I'm not prepared to comment on the specifics. I think there was expressed substantial support for tax reduction. I think the Summit participants thought that the City's overall taxes were a major deterrent to growth.
But do you believe there were any specific recommendations that came out of the Summit related to tax reform?
You're welcome. The Chair recognizes Councilman Nutter.
Thank you, Madam 32 02/16/05 - WHOLE - 05007, 05008, 040767 Chair. Madam Chief of Staff, I need to go back over a statement that you made in a response to a question raised by Councilman Goode. I thought I heard -- and if I'm incorrect, you'll correct it. I thought I heard you state that in last year's discussion about a variety of tax measures that the Council did not pass the single factor apportionment bill? Did I hear you say that?
I misspoke, because that does not require Council passage. But the Administration proposed coupling the move to single factor apportionment with the parking tax. The revenue from the parking tax was necessary in order to offset the loss. As that conversation evolved last year --
It was tied to the wage -- the reduction BPT and so it wasn't available to offset the loss revenue from moving to single factor apportionment. The Administration had the right to do that -- 33 02/16/05 - WHOLE - 05007, 05008, 040767
Well, wasn't that because the Mayor vetoed the BPT bill? That did happen, right?
The Mayor vetoed the BPT in part because with the bills that were on track, the City was moving towards a loss of revenue that we didn't feel could be sustained and so we did end up vetoing that, yes.
Which is why the parking tax revenues weren't available to you?
That revenue wasn't available nor were the revenues lost from the more aggressive reduction in the BPT.
Let me ask a couple of -- what I had planned to ask. Two things for the record. Is it correct that the Mayor signed Bill 020092? That would be the wage tax bill from 1992.
And is it 34 02/16/05 - WHOLE - 05007, 05008, 040767 correct that the Mayor signed bill 040607?
That would be the wage tax bill from last summer with the 10-year rate reduction.
So the Mayor signed both the wage tax bills which are often the topic of discussion about wage tax reductions or proposals by this City Council. The Mayor signed both of those bills, correct?
Just a minute, we'll get that. 35 02/16/05 - WHOLE - 05007, 05008, 040767
I don't have that with me, but I would guess somewhere in the range of 5.
Could be. I would add that 7.2 percent is down from 8.2 which we hit in 2003, 2002.
And I know -- 36 02/16/05 - WHOLE - 05007, 05008, 040767
I'm sorry, Councilman. Would you mind repeating? Because I don't even know if the stenographer heard you.
No problem. 7.2. percent for November is down from 8.2 percent that we reached in a couple points in 2002 and 2003.
And according to the Department of Labor, Bureau of Labor statistics, how many jobs did we lose last year?
That's an interesting question because there are several different BLS sources of data. The one that the City usually uses is current employment statistics which shows the City losing about 10,000 jobs. There's also another source which some other people use, the Quarterly Census of Employment and Wages which actually shows a much higher loss. But part of that is what's called a non-economic loss which has to do with reclassifying --
Ms. Reed, do me 37 02/16/05 - WHOLE - 05007, 05008, 040767 a big favor. Just move it over.
Non-economic reasons which have to do with classifying businesses in the wrong location. So it was quite a large adjustment there. Now, all of these data that we have --
Would you say it's fair to indicate that it's somewhere between either the 10,000 or 10,600 that was reported about a week or so ago?
No, actually the fourth quarter CES data shows that the loss may only be about 3100 jobs. The thing about all of the numbers for last year is at this point they are preliminary, and it's really the matter of the rate of loss that's more important than the absolute numbers, painful though every single job is, of course, because we actually are improving with respect to this kind of a measure. We were losing in the 4 percent range in the '80s, and we're now down to about 1.2 percent. And, you know, we are experiencing wage tax growth too, so those are just a few perspectives on that. 38 02/16/05 - WHOLE - 05007, 05008, 040767
In FY '04, the wage tax base grew by 5 percent. And after the effect of the tax collections grew by about 4 percent.
We're currently reviewing the numbers from both sources and trying to reconcile it with what's going on with the wage tax. We also -- another thing that factors in, one of the segments that's experienced the largest decline is actually government. And these numbers reflect the fact that the City of Philadelphia will have lost over 2,000 jobs. And so we contribute to the loss in employment that we're talking about.
Yes, it 39 02/16/05 - WHOLE - 05007, 05008, 040767 did.
But it is interesting the hear that the tax receipts are up.
Ms. Wilkerson, I guess we can give many reasons why we're in the financial position we're in; however, it's hardly if ever mentioned that the State mandates programs, however, many of those programs are never funded by the State. Do we have any indication as to how much it costs for these mandated programs that are not funded?
I don't have -- I can get an aggregate cost for all the programs. We know that there are any number of expenses, for example, the whole court system. If we had the more than hundred million dollars annually that we spend for the courts that the State Supreme Court has opined is not our responsibility, the tax reductions we're talking about would not be an issue. 40 02/16/05 - WHOLE - 05007, 05008, 040767
I think the Supreme Court ruled on that at least six years ago.
Oh, my. 8 Time goes by when you're having fun. 9
They remain real 10 constraints on City's ability to reduce its 11 cost, but we will get an aggregated number. 12
What, if 13 anything, are we doing to try to get these 14 state revenues? 15
The Administration, as I testified on Monday, is pursuing either the revenue or turnover of the responsibility for the state roads. As the conversation on Monday made clear, although the legal obligation is clear, actually getting the State to assume the responsibility is a different matter. We are working with the State trying to get the State to use its federal dollars to assume costs for the prisons. So we're pushing these initiatives. 41 02/16/05 - WHOLE - 05007, 05008, 040767 Some of it has a greater likelihood of happening. We don't have the federal judiciary cost on the front about burner. It's our assessment that if we get that, we'll loss other revenue, other discretionary revenue that might come to the City. We also are working aggressively to try to manage the court costs. This year, the Administration's proposed a Five-Year Plan that reduces the first judicial District's costs by the same percentage that the rest of City government is being asked to absorb. We're also working -- just yesterday, I heard about an unfunded mandate for the computer systems for the courts. We'll be pushing back on something like that so we're not continuously burdened with these expenses. But we have things that have been legislative with respect to benefits for City workers that end up being cost to the City. And we have advocated aggressively against those, but we're not always successful. And they are the kinds of initiatives that further limit our ability to use resources in ways that might 42 02/16/05 - WHOLE - 05007, 05008, 040767 stimulate the growth of our economy.
I think it would be very interesting to know how much it's costing the City for these mandated unfunded programs.
The Five-Year Plan actually has a discussion of it. In the fiscal stability portion of the plan it identifies those kinds of burdens that the City has that are unusual for the City in comparison to other counties but also in comparison to the other jurisdictions in the country. We're frequently compared to other major cities, but those major cities aren't also counties and don't have all the burdens that we have that we have to fund out of our tax base.
And you mentioned about the Supreme Court's ruling regarding the courts. I believe, and correct if I'm wrong, my memory is that approximately six employees were put on the state budget; is that true? That was some time ago.
I don't know the 43 02/16/05 - WHOLE - 05007, 05008, 040767 exact number. This is before my time. But I think they proceeded with a phase 1 of a several phase plan.
Right. In FY 2000, which is also before my time, we zeroed out the First Judicial District out of the budget and I think we passed a budget that didn't have them in it and then they just took up us to court, and that didn't work.
Good morning. On of your Power Point, you show in Fiscal Year '07 and out, there's an increase in the wage tax collections, and it seems to be that way -- first, let's go to '05. What do you attribute the increase of collections in the various taxes in '05.
Well, first of all, trends through the time we were preparing, so our actual collections year to date as of 44 02/16/05 - WHOLE - 05007, 05008, 040767 November, December. And then second of all, the reason that those collections have been at those levels, we think, is a strengthening economy.
We think that the reason for those increased collections is a strengthening economy and our natural participation in the strengthening of that economy.
So these trends will have an impact on the growth of all of these collections throughout Fiscal Year 10?
Yes. I think we have aggressive assumptions for the wage and business privilege taxes going forward that we think reflects all the investments we're making, both in the investments in tax reductions, the investments in NTI, the investments in our schools, so we think that that combination of things along with assumes stability in the national economy leads to those projections. 45 02/16/05 - WHOLE - 05007, 05008, 040767
The Chair recognizes Councilman Nutter for a point of order.
I think you have surpassed now your mentor in the ability to lay things out. You made a comment in response to Councilwoman Tasco that part of the growth was attributable to the natural order of participation in the economic growth or something. Could you say that again?
Yes. What I meant is that as the national economy improves and grows, we gain some benefit from that. And that happens year to year. As the national 46 02/16/05 - WHOLE - 05007, 05008, 040767 economy declines as it did in '01 and '02, then we suffer from that.
So we're just kind of riding the wave of whatever happens?
That comprises the greatest factor in our local economic growth or decline, but there are also other long-term structural issues and there are things that we're doing to change that picture incrementally and change how we participate in the national trends.
Councilman Goode has a point of information, Councilman.
Thank you, Madam President. Mr. McNeeley, you testified in response to an earlier question by Councilman Nutter without giving specifically updated 47 02/16/05 - WHOLE - 05007, 05008, 040767 unemployment data to the fact that the City is performing below the rate of the national economy. The City's unemployment rate has persistently been two points lower than the regional and national unemployment rates. So we're not just riding the wave of the national economy, and it's not just natural participation in the national economy. And in terms of growth, our stagnant revenue growth and our stagnant economic growth is because of a local economic environment. Is that not true?
What I said is that as the national economy changes, we reflect that change. We may not get the full benefit, we may not get the full rate of return --
And the question is, it's not natural participation in the national economy if you don't get the full rate of return in terms of what's happening in the national economy. And the question is, what contributes to the fact that our unemployment rate is persistently two points lower than the regional and national level? 48 02/16/05 - WHOLE - 05007, 05008, 040767 And what contributes to the particular fact that our local economic performance is not as good?
I think that there are a number of long-term trends and demographics.
Be specific about those long-term trends and demographics that lead to the fact that our local economy is not performing at the same rate as the regional and national economy. You can't just tie us to the national economy because that is not statistically accurate.
You can -- in of the Five-Year Plan, we show that we are becoming much more like the national economy over time. If you track from 1970 all the way up through last year, we've gotten much more consistent.
And that's probably because of the improvement of the regional economy and whatever spillover effect it has on local economy. I'm asking you to account for still what makes us locally 49 02/16/05 - WHOLE - 05007, 05008, 040767 perform under the region? Let's not even deal with the national economy. Why are we performing -- why do we have lower performance economically than the region's?
I think those are issues that are faced by many older, big cities. I think it has to do with population loss.
I think that it has to do with trends over time in terms of people moving out of the City, moving to the suburbs, moving where they can economize on land, buy greater size of the house than the land they live on, and just sort of those long-term trends that have impacted all cities in America.
It's not all cities in America because the City's unemployment rate and job loss is not comparable to any place else other than probably Detroit. So it's not all cities in America. 50 02/16/05 - WHOLE - 05007, 05008, 040767
I don't have the numbers here. I think that it is typical for central cities to have a higher unemployment rate than their surrounding suburbs.
But is Philadelphia's higher than any place else; and why is that? Why do we have more job loss? Why do we have a higher unemployment rate? It's not that places haven't suffered losses, but we've suffered greater losses. Why is that?
I think part of it -- we acknowledge that part of it is our tax. The City does suffer disproportionately because of our tax structure. The Administration has acknowledged that all along. The question is how do you begin correcting that. And we have supported -- I mean, there have been fights along the way, but have supported the initiative to reduce the taxes in order to make the City more competitive. The question is how far can we go and how far can we go in light of all the other constraints. Part of the reason is that 51 02/16/05 - WHOLE - 05007, 05008, 040767 we can't go much further without doing it through shifts is because of all the other burdens that we have that the other cities don't have.
But I agree that -- and I don't Mr. McNeeley disagrees, that taxes have something to do with that.
Has a big part to do it. You would agree that it's not fair to say that Philadelphia goes as the national goes because the truth of the matter is is that Philadelphia is not even performing at the regional level.
We go more slowly. I think it's true to say that we move in that direction but we don't move as aggressively. So when the national economy goes up, we don't benefit to the extent that the rest of the nation does. But I think what we see is that we move in the same direction.
I'm simply just asking you to pinpoint that reason. 52 02/16/05 - WHOLE - 05007, 05008, 040767
And I think, once again, it's in part because of the taxes.
Based on the discussion, if you have an increase in your wage taxes, on what do you base that growth. If the economy does well, people increase -- they get raises and it doesn't have anything to do with increase of the decline and the jobs moving out of the City. You expect more jobs to move into the City.
The Five-Year Plan has, as I said, 4 percent growth in the wage tax base. We kind of put all that in the category of increases in salaries and wages in our plan assumes that employment stays the same, doesn't assume a net increase in jobs and it doesn't assume a net decrease in jobs. So we assume we kind of stay flat and people get 4 percent average increases in their wages. There can be differences between those 53 02/16/05 - WHOLE - 05007, 05008, 040767 two, and we think we'll still end up around percent.
Okay, let me ge the transfer realty tax. You have a collection of 165 million. What's the cause for the decline in the out years except for '09?
We have reset the realty transfer tax in '06 to 140 million because the receipts that we expect to get this year, which is about 165 million, is a historical high level. The '04 level was more in the 140 range, so we thought it would be appropriate to reset our expectations at a level that has some historical basis and is not too high because, of course, there would be spending authorization which would go along with a higher level of estimate, and we don't want to overshoot.
And what accounted for the 165 growth in the real estate transfer tax?
Well, we have been thinking about that quite a bit. It could be 54 02/16/05 - WHOLE - 05007, 05008, 040767 the tax abatement program. There has been an enormous number of new high cost units added into the City because of that. We also have had an absolutely fabulous effect of the Neighborhood Transformation Initiative in terms of raising property values all over the City. Interest rates have improved. There are some materials that were prepared by the Office of Housing and Neighborhood Transformation which show that the areas where NTI has made investments have improved their values in just in three years.
I think one of the reasons, though, that we taper off the real estate transfer tax is the interest rates aren't going to stay where they are forever. Some of the numbers trend rather slowly. This is one that can drop precipitously. So rather than go to the outer limits in our revenue projections, we've chosen to be more conservative, recognizing the fact that this is extremely sensitive to what's happening with the interest rates and that we could use lose this extra revenue quickly. 55 02/16/05 - WHOLE - 05007, 05008, 040767
You're welcome. The Chair recognizes Councilwoman Blackwell.
Thank you, Madam President. I want to piggyback on some things that have been asked and talk about a few things. On of the Five-Year Plan, we talk about the rapidly escalating pension costs. And in your testimony, Ms. Wilkerson, you stated that pension costs are $800 million higher. The Five-Year Plan says that the fund has meet its 9 percent goals in the past four fiscal years, losing 6 percent in '01 and another 5.2 percent in '02. What are we going to do about meeting our goals? Or do we have new investment strategy? What are our plans from here on to make life better for us?
Ms. Bell testified -- Gwendolyn Bell testified on Monday that the Pension Fund is looking at its investment policy, is evaluating taking on investments 56 02/16/05 - WHOLE - 05007, 05008, 040767 that would return a higher yield. It would involve more risk for the fund. It does periodically evaluate its managers. It's also looking at making changes in its managers as it makes changes in its policy. I can have her respond during the course of the budget hearings more particularly, but this continues to be a challenge. Mr. McNeeley explained on Monday that although the pension fund is exceeding the 9 percent return, that it assumes -- although it's exceeding that now, there were years when in '01 and '02 when it underperformed, but because there's a five-year rolling average, we'll continue to suffer from those years of under-performance for several more years. Hopefully, though, we'll come out of the woods. Probably not during the course of this plan, but perhaps in future years and so it won't be as large a burden. We will be underfunded, substantially unfunded, and it's going to remain a challenge.
Yes, we did 57 02/16/05 - WHOLE - 05007, 05008, 040767 hear that and we appreciate any further level of detail as it is available. On , you talk about the structural financial challenges, and we continue to be frustrated as well about the issue of social services and high crime and poverty rates going up, but yet the whole issue of the City facing identifying budget reductions, including services that result in high poverty and crime rates. And we just wonder how we see it. The President has talked and others have today about the cost of doing business and what areas we want to give over to the State and what we're going to do about crime here. We know that we can't reduce jobs, maintain service levels, and not have the State pay its share. Do you have any creative ways that we're going to deal with this whole area of employment, especially as it relates to minority inclusion?
We're looking at a number of initiatives to better focus the resources of the Administration to support job growth. We're looking at -- and it will be in 58 02/16/05 - WHOLE - 05007, 05008, 040767 the Blueprint that the Mayor announces, looking at ways to make better use of City job opportunities. For example, the NTI program was extremely successful in trying to create business opportunities and job opportunities for minorities and small businesses out of the demolition program that we operated. We want to try to expand that model in order to make sure that we do as we can do to create more opportunities. The Administration is going to -- there are ongoing conversations about trying to get the State to pick up its share. For example, we worked through the whole SEPTA discussion. SEPTA funding involves some kind of local match. That's an area where we have an annual expenditure in excess of $59 million. We pay more to support this transit system out of our General Fund than almost any other major City in the country. As we talk about adequate funding for SEPTA, the Administration is interested in trying to correct some of that formula, find funding resources for SEPTA that don't drain as 59 02/16/05 - WHOLE - 05007, 05008, 040767 heavily on the General Fund. But I think a lot of fixing Philadelphia is going to turn on getting the corrections at the state level. And, from my perspective, part of the problem with the tax conversation we're having to do now is that we look to do it all internally without trying to get some of the correction at the state level.
I'll come back because I specifically want to talk about SEPTA a little bit and the parking tax.
Thank you, Madam President. Good morning. I'd like to ask a couple questions about 040789, the abatement bill. I actually got a solicitor's opinion yesterday that talked about some Constitutional issues, and 60 02/16/05 - WHOLE - 05007, 05008, 040767 I'm not prepared to challenge that at this point because we have some of our staff looking at the constitutional issue, so I won't deal with that at this point. With respect to your chart and the projections, the impact 3.8 million in the first year and 49.9 in the Five-Year Plan. How were those projections made? And did you include the fourth year in the initial business starts as it relates to additional revenue?
Bring up the Revenue Commissioner in terms of the logistics, but kind of briefly, there's a first-year impact is that new businesses get the credit and then they get it in the second year, and then other businesses get it in their first year and so it kind of layers in. COMMISSIONER KAMMERDEINER: Good morning. Nancy Kammerdeiner, Revenue Commissioner. What Sean was outlining was basically what we looked at. We took information from new businesses that were created in a given period, looked at what they 61 02/16/05 - WHOLE - 05007, 05008, 040767 paid in the gross receipts tax. That was essentially $4 million. And that was in their first year of filing. And every time another group would come on in that three years, you would add essentially another $4 million, on average, in terms of the first year filing. We chose to be conservative here and not expect that businesses would grow dramatically, that their business level would be approximately the same in each of the following years as they were in that first year.
Why would you make that assumption, that there would not be any increase? If we pretty much concur to various degrees that the gross receipts tax is probably the most problematic business tax, if a business now doesn't have to pay that tax in the first three years, why would we assume that people now wouldn't take advantage of that? COMMISSIONER KAMMERDEINER: I'm saying that a given business, some of them 62 02/16/05 - WHOLE - 05007, 05008, 040767 will be successful in their second and third year, they will have higher gross receipts than they had in their first year, but others will have a lower gross receipt in their second and third year. So for purposes of this analysis --
But I'm talking about your assumption that there will not be any additional businesses created as a result of this incentive. COMMISSIONER KAMMERDEINER: Again, this is the conservative piece. To the extent that more businesses are created, to the extent that either this bill itself or the other bills that have already been enacted or may be considered will encourage new business come into Philadelphia, these numbers go higher. This is the --
Don't you think that that's a likelihood? If the gross receipts tax is the most onerous tax, why would you think that it would remain flat? Or is it that you just couldn't figure out how to estimate that? 63 02/16/05 - WHOLE - 05007, 05008, 040767
No. In fact, something that we prepared in terms of looking at this, the very next point is to the extent the other economic stimulus programs are successful in bringing new business to Philadelphia, the cost of this bill will increase. So we certainly did look at that as something that is very likely to happen both because of the potential success of this measure if it were enacted and creating new businesses.
The cost of the bill will increase based on addition businesses that will created as result of this bill, but in the fourth year -- or I'll give you the fifth year, assuming that the first year doesn't take off as dramatically as I think it will. Then we will have a drastic increase in revenue. COMMISSIONER KAMMERDEINER: We looked initially at what the cost would be in the first three years. And then as you go on, we would need some experience from this to really get a better sense of what the overall 64 02/16/05 - WHOLE - 05007, 05008, 040767 impact would be. And so the basic analysis was done --
But you say in your statement just now is that the cost of the bill would increase dramatically, assuming that the number of businesses increase dramatically. But yet you don't take into account that the revenue would increase dramatically. You can't have it both ways. You can't say that businesses are going to be created, if they're created dramatically then the cost will be more but not acknowledge the revenue side of it. COMMISSIONER KAMMERDEINER: As you get out into that fourth and fifth year, there would be some benefit from having these new businesses there. But at this point, we don't have a sense of what the value of that would be. And we're not yet ready to put a dollar figure on that.
I think we can't tell how many businesses would be created that would already have been created without the bill that we already assume in our Five Year 65 02/16/05 - WHOLE - 05007, 05008, 040767 Plan and how many businesses would be created specifically due to the bill. So to be as conservative and basic as possible, we don't assume any of that and we don't assume that the cost would be any higher either.
All right. It would probably be nice if you had like a question mark in this chart. Because, I mean, you're assuming the worse, and I think that assumption is, frankly speaking, a little ridiculous.
It could be worse -- there's a balance. It could be worse in that if these businesses do really well --
How could it be worse? You're assuming because the gross receipts tax are eliminated that we're going to create less jobs? I mean, come on. Less new businesses? How could it be worse?
In the short term, it could be worse. In the long run, if the incentive is effective, then you end up --
How can it be worse in the short term? How could you sit 66 02/16/05 - WHOLE - 05007, 05008, 040767 here and say that there will be less businesses created as a result of the elimination of the gross receipts tax? How can you say that? Based on what?
There are business created every year in the City of Philadelphia. There are over a thousand new business privilege licenses issued each year.
But not they're not going to start a business because we eliminate the gross receipts tax?
They won't be paying taxes. Business that currently are started won't be paying these taxes.
Councilman Clarke, excuse me, please. I believe Councilman Goode has a point of information.
Thank you, Madam President. Thank you, Councilman Clarke. Mr. McNeeley, you know I'm very familiar with this whole argument about the 67 02/16/05 - WHOLE - 05007, 05008, 040767 natural ebb and flow of jobs, because at one point the Administration tried to use it against one of my job creation tax credit bills. My question is, following your line of reasoning, why you would try to cut the gross receipts tax at all?
I think it is a little bit different line of reasoning. What we're saying as far as the cost to this bill 11 is that we assume that a good portion of these businesses would be created anyway, so that's already assumed in the Five-Year Plan. This would be giving an abatement to a business that otherwise would be paying tax and would start without the passage of the law.
The tangible benefit is that in the long run we get to our rates to levels more like surrounding areas in other big cities.
So you can't define what the actual benefit from your tax cut is? You've done no job projections based 68 02/16/05 - WHOLE - 05007, 05008, 040767 upon your tax cut?
I think that there are different models we could use to do that, and if we budget conservatively --
Have you used any? You can go through the different models you may have used to determine based upon your tax cut how many businesses and jobs will be created. I'm just asking did you do any quantifiable analysis?
So you don't know the economic impact of your own tax cut?
Tell me what it is. If you know what the economic impact of your tax cut is, just describe to us what's the economic impact in terms of creating businesses and jobs of your tax cut.
We have not explicitly identified a number for the creation of businesses and jobs as a result of 69 02/16/05 - WHOLE - 05007, 05008, 040767 the tax cut. We implicitly assume optimistic --
Is that a yes or a no? Do you know the economic impact of your tax cut? Do you know what it's going to do?
Councilman Clarke, your time is up so I'll give you an opportunity to ask one last question.
The next part of my question, it will take more than one question because I want to talk about the real estate abatement.
All right. Can we wait for the second go-around, please?