COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Monday, February 27, 2006 10:35 a.m. - - - PRESENT: COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DARRELL L. CLARKE COUNCILMAN FRANK DiCICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JACK KELLY COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN KRAJEWSKI COUNCILMAN MICHAEL A. NUTTER COUNCILMAN JUAN RAMOS COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO BILLS 060004, 060006, 060007, 060008, 060014, 060089 and 060090 - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
Good morning, everyone. This is the Committee of the Whole's public hearings on tax bills. I would ask Mr. McPherson to please read the title of each of the bills before us, please. MR. McPHERSON: Bill No. 10 060004, an ordinance amending Section 11 19-1801 of The Philadelphia Code, entitled "Authorization of Tax," to further authorize the Board of Education of the School District of Philadelphia to impose a tax on real estate within the City of Philadelphia; all under certain terms and conditions. Bill No. 060006, an ordinance 19 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, under certain terms and conditions. Bill No. 060007, an ordinance 3 2/27/06 - WHOLE - BILL 060006, ETC. amending Chapter 19-1500 of The Philadelphia Code, entitled "Wage and Net Profits Tax," by deleting certain special tax provisions and related definitions and rates, all under certain terms and conditions. Bill No. 060008 an ordinance 9 amending Chapter 19-1800 of The Philadelphia Code, entitled "School Tax Authorization," by amending Section 12 19-1806, entitled "Authorization of Realty Use and Occupancy Tax," to further authorize the Board of Education of the School District of Philadelphia to impose a tax on the use or occupancy of real estate within the School District of Philadelphia. Bill No. 060014, an ordinance 20 amending Chapter 19-2600 of The Philadelphia Code, entitled "Business Privilege Taxes," by adding a new exception from the definition of "Receipts," under certain terms and conditions. 4 2/27/06 - WHOLE - BILL 060006, ETC. Bill No. 060089, an ordinance 3 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, under certain terms and conditions. Bill No. 060090, an ordinance 10 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, under certain terms and conditions.
Thank you. I would like the record to reflect that Bill Nos. 060004 and 060008 will be heard on Tuesday, April the 4th at 10:00 a.m. I would ask Mr. McPherson to please call our first witness. MR. McPHERSON: It's a panel from Philadelphia Forward. 5 2/27/06 - WHOLE - BILL 060006, ETC.
Good morning. Please identity yourself for the record and proceed with your testimony.
Good morning. My name is Brett Mandel and I'm the Executive Director of Philadelphia Forward. Madam President and members of City Council, thank you for providing this forum to discuss tax bills, specifically legislation to address the job-killing business privilege tax, and thank you to this City Council and to Mayor Street for continuing to engage in a debate about taxes and the City's future. The further removed we are from November 2003, when the Tax Reform Commission released its ground-breaking final report, it becomes more important to remember how we got here. As you know, 80 percent of the electorate voted to establish the Tax Reform Commission in 6 2/27/06 - WHOLE - BILL 060006, ETC. 2002, and the Commission spent nearly a year and about a half a million dollars in public funds to draft a plan to make our tax structure more fair and less burdensome so we can attract and retain jobs and residents. That plan was embraced by civic groups, business organizations and neighborhood associations. That plan was endorsed by the Mayor's hand-picked 21st Century Review Transition Team and that endorsement was echoed by the Mayor's invitation-only economic summit. Yet, we continue to debate these issues. We debated whether our high and unfair taxes chased firms and families from the City. We now understand that they do. We debated whether we could afford to reduce our oppressive tax burden without threatening vital City services. We now know that we can. We now are determining how soon, how certain and how structured tax reform should be. There is much tweaking that we 7 2/27/06 - WHOLE - BILL 060006, ETC. could do with the business privilege tax and the way it exempts certain firms or forces others to pay higher tax burdens, but the true problem is that the tax exists at all. Simply put, other cities and other locales around Philadelphia do not impose a tax like this, and the very fact that we do puts us at a competitive disadvantage. So while this Council is right to consider Councilwoman Reynold Brown's and Councilman O'Neill's legislation to create an exemption for bookbinders in Philadelphia and while the Council is encouraged to lengthen the net operating look carryforward, adopt single-factor apportionment and eliminate the situation that forces sole proprietors and partnerships to actually pay an effective tax rate that is higher than their corporate competitors, the Tax Reform fundamentally concluded that we must, and that we can, fundamentally phase out this job-killing tax and end all of its 8 2/27/06 - WHOLE - BILL 060006, ETC. problems. We firmly believe that if we reduce the burden of this tax, we will grow jobs and we will increase the value of commercial real estate in Philadelphia, which will increase overall tax revenues in the City in the future. In fact, our experience in the last decade of tax reductions has demonstrated that we have cut taxes, but increased tax revenues in each year of our tax reduction program. But you have certainly heard this before from me. Therefore, Philadelphia is pleased to present two panels of informed witnesses for your consideration who will make brief statements and then make themselves and their expertise available for your interrogation. Panel will include employers who have located jobs and businesses outside Philadelphia because of the job-killing business privilege tax. Panel 2 will include employers and 9 2/27/06 - WHOLE - BILL 060006, ETC. members of the Tax Reform Commission who can attest to the idea that we must end it, not mend it. We don't need half measures; we need true tax reform. Today taxes hold Philadelphia back. Tomorrow tax reform can move Philadelphia forward. With that, I will introduce Lou Katz, who will begin our testimony.
My name is Lou Katz. I employ over 300 individuals, and my business is located on the Montgomery County side of Township Line Road. When my current lease was about to expire, I began looking for locations within the City limits where I could better take advantage of what the City could offer to me and to my employees. I found a building that had stood empty for almost a year and was ready to purchase and renovate it. In 10 2/27/06 - WHOLE - BILL 060006, ETC. addition, I was prepared to increase key employee salaries to offset Philadelphia wage taxes. In other words, I was ready to fully commit to the City by bringing in new employees, renovating non-income-producing property and becoming a new contributor to Philadelphia real estate taxes. However, when I shared my new vision with my accountants, they attempted to explain the Philadelphia business privilege tax. They pointed out that I would be paying taxes on revenue whether I made a profit or not. They said that given my rising expenses, including the ever-increasing medical malpractice, the likelihood of an increase in minimum wage which would spiral salaries upward, even though my salaries are well above the current minimum wage, in my low-margin industry, the addition of a business privilege tax is an expense I could simply not afford. It made no sense for me to pay such a tax 11 2/27/06 - WHOLE - BILL 060006, ETC. when I could avoid it by staying a mere 200 yards out of the City. I renewed my lease in Montgomery County. I stayed out of the City because of the BPT. On the flipside, I have an option to terminate my lease if I purchase a building, even if it's in Philadelphia. But for the BPT, I would move into the City. I would add new employees to the Philadelphia tax roles. My business would be growing in Philadelphia. I would be purchasing and renovating a building somewhere within the City limits. I hope this City Council will reduce both the gross receipts and net income portions of the BPT and provide a fixed schedule of at least five years of legislated cuts and provide a schedule to phase out this job-killing tax. I need some certainty to plan for the future growth of my business. Thank you.
12 2/27/06 - WHOLE - BILL 060006, ETC. You're welcome.
Just a moment, please. Councilman Kenney, you have a point of order?
We have around 30 office workers and the rest are in the field.
Do we have another witness? Please identity 13 2/27/06 - WHOLE - BILL 060006, ETC. yourself for the record.
Good morning. My name is Lisa Salley, S-A-L-L-E-Y, and I'm the owner of a mortgage brokerage by the name of Heritage Capital Services. Actually, just to give you a little bit of history, I'm a native of Philadelphia. I went to the public school system here in the Philadelphia area, left after high school, did collegiate studies and did the first 13 years of my corporate career before 14 coming back to Philadelphia full time in 15 2004, but beginning to plan for it in 16 2003. 17 I decided to come back to 18 Philadelphia, that I would open the 19 mortgage brokerage, and as I began to 20 evaluate where to put the business, where 21 to have the core operations, how and 22 where to recruit, I looked at the City of 23 Philadelphia because I am a native 24 Philadelphian. I live in Philadelphia 25 currently, my family, grandparents, 14 2/27/06 - WHOLE - BILL 060006, ETC. aunts, uncles, cousins and so forth. And I'm actually still very active in Philadelphia. But the long story short, I ended up locating my business in Montgomery County because of the business privilege tax, when I looked at just strictly the numbers associated with starting a small business and where the tax monies could be used to do other things in the start-up operations. So I made the initial decision in 2003 to physically locate outside of the City, and I did that. It's now 2006, and two major things have happened from a growth point of view from the business. We spun off one other financial business. That business also employs people now outside of Philadelphia, but in the metropolitan area, in Montgomery County. So we've got one spin-off in that area. The second thing is, because of the growth and the size of the business, with the amount of volume that we're 15 2/27/06 - WHOLE - BILL 060006, ETC. doing, I'm now considering purchasing space. I've been actively looking for space to purchase since November. I did look initially in the City of Philadelphia, but, again, as I do the numbers and because of the business privilege tax, I am leaning towards Montgomery County right now. And I would ask that the City Council would consider reducing and even potentially eliminating the business privilege tax so that people like myself who are native Philadelphians, who make a commitment as we return or even stay in Philadelphia, would like to have businesses in the City itself, but the business privilege tax in itself is an uncompetitive edge that we have to figure out how to work against. So I would just implore the Council as you consider these discussions and the evaluations this morning to eliminate the tax itself, to consider that strongly, to give small businesses an opportunity. 16 2/27/06 - WHOLE - BILL 060006, ETC.
I'm rather curious. If in fact Council were to reduce the BPT tax, would you be inclined to move back into the City?
I would be inclined to move the current operations in the county back into the City, number one. The second thing that I would be inclined to do would to not purchase, because I'm looking to make my first purchase commercially for the operation itself. I'd purchase physically in the City instead of in the county.
Thank you very much. Councilman Goode, did you want to be recognized at this point?
Okay. Good morning, sir. Please identify yourself for the record.
Good morning. My name is George Brenner, and my current 17 2/27/06 - WHOLE - BILL 060006, ETC. occupation is to provide small- and medium-sized businesses with financial, operational and business development consulting services in the pharmaceutical contract research field. My background also includes years of experience as 8 Vice-President at a contract research 9 organization, as well as experience in 10 healthcare, public accounting and 11 insurance. 12 I'd like to address City 13 Council regarding a company called 14 Philadelphia Association for Clinical 15 Trials, also known as PACT, P-A-C-T, and 16 a decision that this company had to make 17 which was impacted by the City of 18 Philadelphia taxes on businesses 19 specifically. 20 The company was founded in 1980, and PACT was formed by a consortium of Philadelphia area hospitals with the mission of taking advantage of the wealth of healthcare talent in the Philadelphia region and to attract pharmaceutical 18 2/27/06 - WHOLE - BILL 060006, ETC. research and development funds into the local economy. By 1989, PACT, which was located at University City Science Center, had grown to approximately 50 employees. The company was faced with a decision to relocate its office space in order to accommodate additional staff. A number of variables, including location of current employees, access to public transportation, cost of new office space, moving costs, personal taxes and business taxes, were considered in determining where to relocate. In 1989, around that time, the Goode Administration had recognized that the City-imposed business taxes were a major contributing factor to the exodus of many businesses from Philadelphia. The Goode Administration announced a five-year plan to begin the reduction of Philadelphia business taxes. Now, based on this news, PACT contacted the City and worked side by 19 2/27/06 - WHOLE - BILL 060006, ETC. side with City representatives to look for office space within the City of Philadelphia, as well as get a better understanding of the planned tax reductions. Now, while looking at the factors of the suburban locations and the Philadelphia locations, most factors were very comparable. Office buildings close to public transportation in the suburbs meant that there would be little impact on the existing employees, and the rental rates were competitive. However, comparing the business tax structure in the suburbs to the Philadelphia business taxes became a deciding factor. Even with the Goode Administration's five-year plan, which was not approved at the time, the suburban business taxes were dramatically lower and, thus, much more favorable to PACT. As a result, a decision was made to take the 50 employees and move out to the suburbs. Now, since 1989, PACT and its 20 2/27/06 - WHOLE - BILL 060006, ETC. successor companies have had to relocate to additional space in the suburbs, as well as acquire additional office space three additional times. The company continues to grow and reached an employment of approximately 450 employees. Now, the question for City Council to consider is, does the collection of business taxes from a company such as PACT outweigh the economic impact of 450 additional City-based jobs? Now, since PACT moved out of Philadelphia years ago, obviously the 17 City has not collected any additional business tax revenues from PACT. Consider, however, if the City waived its business taxes and not collected any business taxes from PACT and kept the 450 administrative jobs, the scientific jobs, the medical jobs, the technological jobs, what would the value be to the City of Philadelphia? Not only has the City of 21 2/27/06 - WHOLE - BILL 060006, ETC. Philadelphia lost tax revenues from a business that moved out, it has also lost the economic impact of City-based jobs. Thank you.
Thank you. Good morning. Please identify yourself for the record.
Scott Ziskind, Z-I-S-K-I-N-D. I'm a former Philadelphia business owner. I am the Philadelphian. I was born here. I went to public schools here. I started a business here. I own a house here, and I'm raising my family here. My company does work all over the United States, but even with the high rate of business taxes that my company has paid, I've remained here. Ninety-nine percent of my business is outside of the City. Seventy-five percent of that is outside the state. And, yes, I do pay taxes in the states that we do business in. California and New York are a few of many that I have 22 2/27/06 - WHOLE - BILL 060006, ETC. returns in. But I remain here, until a routine audit of my Philadelphia sales tax a few years ago, where we also own and operate another company in Camden, New Jersey, which because of the nature of the business is not allowed to operate in the state of Pennsylvania. It's wine storage. And going through this audit, the auditor picked up that one company, the company based in Philadelphia, is the management company for the company in New Jersey, and he asked me why I kept my business in Philadelphia if I already had another company out of state. When I asked the man to repeat himself, he realized what he had said and would not repeat himself. By the end of that year, we had formed another corporation in New Jersey and had moved. I still maintain a Philadelphia business license, because one percent of my business is still in Philadelphia. I cannot calculate how much money I've 23 2/27/06 - WHOLE - BILL 060006, ETC. saved in the last few years, but I know that it's helped pay for the offset of my health insurance increases and things like that. We also have purchased a commercial building in Camden since we've moved. But I'm still true to Philadelphia, still live here. You guys have to do something about the business privilege tax. There are a lot of very small businesses like myself. We don't employ nearly the numbers that I've heard here this morning, but my little company feeds five families, and those five families are five individual businesses that every year get clobbered by this business privilege tax. And it's the small guys. It's not like Comcast that you guys are giving a free ride on a lot of the taxes that we have to pay, but it's the little guys that are supporting the City, and pretty soon there won't be any little guys left.
I 24 2/27/06 - WHOLE - BILL 060006, ETC. really want to thank you for taking the time to come in to testify. At this time, the Chair recognizes Councilman Goode.
Thank you, Madam President, and I thank all of you for your testimony. I want to deal a little bit with the who, what and where of job creation, starting with the who. Who can create jobs? How does Philadelphia Forward and the panelists intend to address the issue of racial and gender discrimination in small business lending?
I employ the best contractors I can find. I was raised in a color-blind family.
That's not the question I asked. The question is, how does the panel expect to address the issue of racial and gender discrimination in small business lending, the issue of who can create jobs in Philadelphia? If you don't have access to capital and 25 2/27/06 - WHOLE - BILL 060006, ETC. credit or equitable access to capital and credit, you can't create businesses and create jobs at the same rate. And that is part of the problem, the fact that the City is majority female, majority people of color, but there is still discrimination in small business lending.
I'll let each of the panelists speak for themselves, but I think you're absolutely right, Councilman. There's no question about that. This panel was assembled to talk about the effects of the business privilege tax. Absolutely the work that you've done in documenting the problems with small business lending and calling attention to it, we need to focus on that, but today at this point --
The simple message is that business tax reforms equals new jobs. I'm asking a question about that job creation. The first question is, who can create jobs and how do we address the issue if there's not 2/27/06 - WHOLE - BILL 060006, ETC. equitable access to business development because there's not equitable access to capital and credit?
Let me address that. The type of business that I represented here actually is not a capital-intensive business, and I can tell you that when this business was originally formed, it was thinly capitalized, and it had been a constant struggle to maintain its profitability. The issue that this business faced from an employee perspective was not so much looking for minority employees, but looking for qualified employees.
That's not the question I asked. I asked about small business lending and racial and gender discrimination in small business lending.
And I guess I'm not sure. I'm in a business that actually does lending, and we do lending 27 2/27/06 - WHOLE - BILL 060006, ETC. irrespective of gender or race. There are certain, if you will, underwriting criteria that has to be met. I'll use my business as an example. When we were about to start, I made a decision to do it essentially from a cash-driven funding process as opposed from a debt-based scenario to get started. As I now look at the growth -- I've proven the business model and the structure of the business itself -- I now consider myself in Phase 2 of the growth of the business and I'm now considering a different growth strategy. I am considering a debt mechanism to help get me there. I am going through very formal processes with the bank and so forth. So if you could help us understand your question a little better relative to job creation, I'd answer to the job creation piece that the --
The issue is very simple. As we talk about business tax reform, we're talking about the issue 28 2/27/06 - WHOLE - BILL 060006, ETC. of economic growth and we're talking about the issue of job creation. The issue is whether we are also at the same time addressing the issue of economic equity and whether there's equitable access to capital and credit and there was equitable access to business development and the ability to create businesses and create jobs. I'll move on to my second question, which is the what and what type of job quality. I'd like to ask each of the panelists, what is your position on the state minimum wage?
Excuse me, sir. You're going to have to use the microphone.
I have a 29 2/27/06 - WHOLE - BILL 060006, ETC. non-union company --
Excuse me, sir. You're going to have to identify yourself for the record.
I'm sorry. Scott Ziskind again. I have a non-union company. We pay better than prevailing union wages. Even my laborers make more than a union laborer would make in a given week.
My question is, what is your position on the state minimum wage? What should the state minimum wage be?
I'm not aware of what it is now because I don't pay anything near it. I pay a lot more than what it is.
Does another panelist want to answer the question? What should the state minimum wage be?
My third 30 2/27/06 - WHOLE - BILL 060006, ETC. question is the where. Other than business tax reform, what's your organization doing to help neighborhood businesses? Can you name specific initiatives to deal with neighborhood commercial corridors?
Other than business tax reform, what is your organization doing to help neighborhood businesses? Can you name any specific initiatives to help neighborhood commercial corridors?
Philadelphia Forward has been working to promote the recommendations of the Tax Reform Commission. We've also been outspoken on the need to improve the ethical framework with which we make decisions in Philadelphia. We've talked a lot recently about the budget system itself and improving the public knowledge about what the budget is. That is what we are 31 2/27/06 - WHOLE - BILL 060006, ETC. doing. Lisa, if you have initiatives that you're working on.
I happen to live in Mount Airy. Mount Airy USA is very active in that particular area. One of the things I've done as an interim strategy is to put a processing office there to try to create jobs specifically there, and I also serve on the Design Review Board for Mount Airy USA to help encourage jobs into the City, in particular in the downtown Mount Airy area. So I try to put not only voice but hands with the things that I believe in as well.
You're welcome. Mr. Mandel, do you believe that we should be reducing the net income portion of the BPT tax or should we just continue with the gross receipts 32 2/27/06 - WHOLE - BILL 060006, ETC. reductions?
To understand the answer to that question would just take a step back and look at what those two different taxes tax. The gross receipts portion taxes City receipts. So if you sell something, a dollar comes over the cash register in the City, you're paying a tax on City receipts, and as you know, it's whether you make a profit or not. The net income tax is about whether you're making money. You can have lots and lots of sales and make no 16 money. So that is a very compelling reason why we should be focusing on the gross receipts tax. But you can also have a business in Philadelphia that exports its goods and services all around the world and pay little or no gross receipts tax. These companies that -- yes, little or no gross receipts tax. So they feel it only on the net income tax. These are companies that 33 2/27/06 - WHOLE - BILL 060006, ETC. compete nationally, compete globally. If they don't have a business reason for being in Philadelphia, well, it's very compelling for them to say, I'll move my firm a few steps over City line and not pay any business privilege tax. So you certainly need to concentrate on both sides of the equation. The gross receipts side disproportionately hurts small and growing neighborhood businesses that are selling to Philadelphians. The net income side hurts firms that compete nationally and compete globally. We need both in a thriving economy in the City of Philadelphia. That's why the Tax Reform Commission fundamentally said we have to attack both sides of this problem.
Thank you. For the record, I would ask you another question. The Administration has taken the position that we should only legislatively reduce taxes one year at a 34 2/27/06 - WHOLE - BILL 060006, ETC. time instead of multiple years to coincide with the Five-Year Plan. As a business person, what are your thoughts on this issue?
I'll let the business people answer, but I will just make a few comments about that in general. Philadelphia has a legislated schedule to reduce the wage tax over the next ten years that was passed by this City Council, signed by our Mayor. The tax schedule that we are debating changing today was, again, approved by this Council, signed by our Mayor, a legislated schedule of taxes. There is a misnomer, a falsehood that by legislating a schedule of tax cuts in the future, that would tie the City's hands. We would not be able to change this. As you know, as I said, right now you are debating legislation to change a schedule. The state has announced a schedule to phase out the 35 2/27/06 - WHOLE - BILL 060006, ETC. capital stock and franchise tax twice, I believe, during the phase-out. We have reconsidered and said, Let's change the schedule, let's pause it for a year. The City locks future taxpayers into expenditures when it sells bonds, when it adopts multi-year contracts. It is almost the easiest thing that this City Council does to change tax rates, because within literally a few weeks, you can legislate and unlegislate tax rates. There is no reason why not to legislate tax rates. And as I'll ask the business owners to respond, there's a very compelling reason why you should legislate a multi-year schedule. Businesses are making decisions for years in advance. Mr. Katz is looking to sign a multi-year lease. Ms. Salley is looking to buy a building. I'll ask them to respond, but we need certainty, to the extent that we can provide it, and to the extent that we can say this is what we're going to do in 36 2/27/06 - WHOLE - BILL 060006, ETC. the next year and the year after and the year after and the year after, it's very compelling.
George Brenner. Let me just elaborate on that. When businesses decide to relocate, typically it's at the end of a lease and you're looking for new office space. The decision really comes down to a financial modeling approach. You're putting in the cost of renting the new space. You're putting in other costs, present value, doing all the mathematical gyrations that require you to come to a sound decision. If you think about it, businesses don't sign one-year leases typically. It's a five, seven, perhaps ten-year lease. So the decision that you're making is a longer term than a one-year term that you're looking at. So that argument goes for putting together a five-year plan, at a minimum. Just like we saw back when my company was considering leaving, Mayor Goode at the 37 2/27/06 - WHOLE - BILL 060006, ETC. time put together a five-year plan, which helped. Unfortunately, the plan never got legs.
So what you're saying, it's the question of predictability.
Okay. The Chair at this time recognizes Councilman Kenney.
Madam President, with all due respect, and I apologize, I really don't understand what we're doing here. I just want to understand so I understand the framework in which we're having this discussion today. We're basically dealing with five bills.
Two of them are Administration bills with one-year reductions. Two of them have been sponsored by Councilman Nutter and 38 2/27/06 - WHOLE - BILL 060006, ETC. others, which are multi-year reductions. And one is a kind of a niche tax issue, which the Administration supports, which is a multiple-year tax reduction, not a one-year tax reduction. Is that correct within the framework?
Why are we having this discussion now? Because it seems that what everyone is testifying to we've heard for years now. I mean, this is nothing new. With the exception of the niche tax issue, there's really nothing new we're discussing. Shouldn't we be having this discussion when we're ready to consider the passage of the budget? Certainly it's our job to listen to testimony, and I don't mind staying here and listening to it, but --
Well, I think today starts that process of the budget. 39 2/27/06 - WHOLE - BILL 060006, ETC.
I'm always willing to be enlightened. I just think we've been going through this process for years now.
As I said, I think you're taking for granted that Councilmembers who felt one way last year are going to feel the same way this year.
I have not taken a poll, but I think that sometimes people are inclined to change 40 2/27/06 - WHOLE - BILL 060006, ETC. their position.
And I also think being around here as long as I've been around here, and it's not as long as some others, but part of the problem we run into with this process is that I can see a scenario where everybody votes for all of them and it gets so confusing, that the Administration then decides which ones they're going to choose. I think we've been through this with item pricing and some other issues in the past. So that now there's so many of these bills in consideration, you could argue that I voted for 060006 and 07 and I've done tax reform, but it's not what the Commission has recommended and it's, in some people's opinion, not something that's going to be effective over a long-term period. I mean, I just think it's in ways confusing the issue with all these bills. Certainly the process is what it is and we're going to proceed through it, 41 2/27/06 - WHOLE - BILL 060006, ETC. but I just want the record to be clear that I've heard all this testimony before. And I appreciate people taking time out of their busy workday because they have to pay such high taxes in Philly to come in here and testify and leave their businesses, but none of this information is new.
Well, are you suggesting that we not have any hearings on the tax bills --
-- and we simply come in and cast our vote and leave?
No. No. 19 I'm confused. I think the issue is getting confused or wanting to be more confusing because of the number of bills we have here now and the ability to kind of legislatively hide in the guise of tax reform, because I voted for one, I didn't vote for the other. We've had this 42 2/27/06 - WHOLE - BILL 060006, ETC. scenario before. I just want the record to be clear --
-- a bill that we have already passed some time ago.
07. And 04 and 06, as I said at the very beginning of the hearing -- I'm sorry; 04 and 08 are going to be continued until April the 4th at 10 o'clock, because they deal with the School District and they were inadvertently added. The others, as I said, one pertains to the business privilege for one year. The other is the multi-year. So I don't know what --
I just want the record to be clear that this is information that we've heard forever and 43 2/27/06 - WHOLE - BILL 060006, ETC. I don't see anything new, unless you know something I don't, which hopefully you're correct, something has changed, but I just wanted to make the record clear. Thank you.
Councilman, I couldn't agree with you more. I would be thrilled if we had settled this issue any number of times before we come back, and I would urge this Council to adopt a comprehensive consensus tax reform legislation that would follow at least on the spirit, if not the letter, of what the Tax Reform Commission reported to you everything you asked us to do.
Thank you. The Chair recognizes Councilman Goode.
Thank you, Madam President. Just for clarification of the 44 2/27/06 - WHOLE - BILL 060006, ETC. record, the bills before us all have multi-year schedules. One is a three-year schedule; one is a five-year schedule; and beyond that, the Five-Year Plan contains a five-year schedule, not to mention the fact that even if we were to pass a bill as a five-year schedule, we can come back the next year and change it. So what beyond the five-year financial plan and the schedule contained within the five-year financial plan do you really require? If one bill is three years and one bill is five years --
The recommendation of the Tax Reform Commission, which I think makes sense in terms of a framework, is a complete phase-out schedule that in the Tax Reform Commission's legislation was a ten-year complete phase-out of the business privilege tax.
And that's not considering any of these bills today? 45 2/27/06 - WHOLE - BILL 060006, ETC.
No, it's not. Neither is, I think, anything that we have presented as the Tax Reform Commission's recommendation. None of the bills cuts the gross receipts side, cuts the income side, with an ultimate phase-out of the tax. We hold that out as what is desirable. That's what the Tax Reform Commission concluded. That's what we think makes sense. We asked these people to join us and help echo that.
To go a little bit further with it then, it's clear that by passage of any of these bills, at the end of any of these schedules, we're not in a competitive position. What puts us in a competitive position is if the Mayor and the City Council in the future decides to continue these cuts beyond the schedules within these bills.
That is why our second panel, which I have titled "End 46 2/27/06 - WHOLE - BILL 060006, ETC. It, Don't Mend It," will speak to the idea that playing around with the edges, small cuts, small exemptions, are not what we have to be talking about. We have to be talking about fundamentally getting rid of this tax over time. We'll present other employers who have looked at could we do tweaks, could we do some things to help, and we'll also have members of the Tax Reform Commission up here to talk about why we fundamentally concluded it's not about making a tweak over here, making a change over here. Fundamentally over time this tax has to go for Philadelphia to be as competitive as we should be.
You're welcome. Are there any other members who have questions for this panel? (No response.)
47 2/27/06 - WHOLE - BILL 060006, ETC. Seeing none, thank you.
Thank you. With that, I would like to bring up the "End It, Not Mend It" panel of Robert Cheatham, David Rech, Bill Mifflin, Patrick Diogenia, and I'll ask any members of the Tax Reform Commission who have joined us to provide moral support for us as well.
Good morning. Please identify yourself for the record and proceed with your testimony.
Good morning. My name is Robert Cheatham. Madam President, members of Council, thank you for allowing us to talk to you this morning. My name is Robert Cheatham. My business develops web-based software to perform geographic analysis. I'm here to talk about geographic analysis. You all thought I was here to talk about taxes. I employ 14 people, seven full 48 2/27/06 - WHOLE - BILL 060006, ETC. time and seven part time. My wife and I live in the Fourth District. We pay a lot of taxes: Wage, school tax, real estate, real estate transfer tax, net profits, gross receipts, use and occupancy. It's a pretty long list. I'm here today to express how damaging this tax environment is to both Philadelphia and my business. The business privilege tax is killing jobs at both my business and many others. My company is an S corporation. This is a special kind of corporation that is designed for small businesses. Because Philadelphia does not recognize this status, I actually pay triple taxes. I'm forced to pay both on my business profits tax, my gross receipts and then again on the school tax at a personal level on the same profits. We've gone after every opportunity we can to minimize this burden on our business. We applied for the job creation tax credit. We 49 2/27/06 - WHOLE - BILL 060006, ETC. qualified for it. It's a great idea, but it's largely ineffective. The tax credit is complicated and relatively inflexible to take advantage of. I wasn't born here in Philadelphia. I grew up in Michigan. I lived overseas for several years. I came here for graduate school, stayed here to work and started a business here. I've worked hard to build that business. My wife and I enjoy this City and we care about its future. We want Philadelphia to succeed, and we want to be part of that success. I don't want to live and work in the suburbs, with all due respect to the people that preceded me. I'm not really interested in that. I want to live in the City. For me, it's not about Montgomery County. It's about moving to Boston, Paris, Istanbul, Seattle, Montreal. I and my staff are being pushed to those places. So where was my latest hire? 50 2/27/06 - WHOLE - BILL 060006, ETC. Seattle. And the one before that? Burlington, Vermont. My business is growing, and I'm really happy about that, but I'm learning that if I want to continue to be successful, I don't want to grow it here in Philadelphia. I'm not against paying my fair share. I pay wage tax, and while it's high, I think it's not unfair. If Philadelphia is successful, I know my real estate taxes are going to go up. I think that's fair. But the triple tax that I'm paying is unfair, and it targets small businesses. I'm really tired of seeing Comcast and Dechert and other large corporations getting tax breaks, while my business is left subsidizing them. I don't think they need subsidies. I'd like to see it fair. If you're worried about Philadelphia's future, cut business privilege tax across the board. Be bold. It doesn't need to result in service 51 2/27/06 - WHOLE - BILL 060006, ETC. cuts, and in the long run, it will give the City more money, particularly if it's paired with real estate tax restructuring. Without serious business tax reform, the City's economic development spending, all of the investment that's been made in the last several years in economic development in neighborhoods is going to be futile. I urge you to do something about it for the sake of one of America's finest cities. I'd like to -- I didn't prepare this, but I'd like to respond to Councilman Goode's question earlier with a story that I recently went through. We grew the business, started the business with a small amount of cash, relatively thinly capitalized, but we recently made a decision to apply for a line of credit to help manage our cash flow. The way this works is, the bank examines your books. They look at your P&L statement. They look at your balance sheet. The 52 2/27/06 - WHOLE - BILL 060006, ETC.
BPT, in particular the net profit tax, severely impacts our cash flow and our net profit, damaging our ability to qualify for credit, and I would argue that it does so disproportionately to small businesses, and I believe that cutting something like this would actually make qualifying for credit an easier thing.
Councilman, you're going to have to put your microphone on because I don't know if the stenographer could hear you.
Thank you, Madam President. I agree with everything you said. It has nothing to do with the question that I asked. And there is an issue of credit gaps that exist in terms of offering access to capital and credit to women and people of color. That's the question I asked. In terms of long-term strategy for economic growth, isn't that an equally important issue? The fact 53 2/27/06 - WHOLE - BILL 060006, ETC. that the City is majority female, majority people of color, but there is an issue of bank redlining and unfair lending practices that keeps any number of people from starting businesses and creating jobs because they were born female or born a person of color, what does this panel suggest in terms of addressing that long-term issue? And the second question I asked, which you did not choose to answer is, what should the state minimum wage be?
I'm not an expert on the subject, but I think it should be raised. I think it's a very good point. 54 2/27/06 - WHOLE - BILL 060006, ETC.
Good morning. Please identify yourself for the record.
Good morning. David Rech, R-E-C-H. Scribe is the company's name. Good morning, Councilperson President Verna and other Councilpeople. I was concerned about the time, because Brett told me I only had two minutes, but Robert basically said everything that I wanted to say. I will make a couple other points, however. First of all, in response to Councilman Kenney's question, I too am confused. I don't quite understand what issues are up right now, and I try to stay informed, but basically from my business perspective, if we had a fair, predictable, comprehensive tax and it was obviously reformed and dropped for the BPT, we would be in better shape. 55 2/27/06 - WHOLE - BILL 060006, ETC. Now, moving on, there's a couple of things. Last year I testified to the Council when we were considering the BPT and I made several points, many of which were elaborated in an article in the Philadelphia Inquirer and also the Philadelphia Business Journal. I also am not a native Philadelphian. I'm a native Floridian who moved here for graduate school, stayed and started a business in 1999. I'm not going to recount everything, but when I testified here before, I basically explained to you that we're a technology-based company that has imported a number of people here. Since starting in 1999, we've had an average growth of 36 percent. And when I reported to you last, I was explaining to you that we would probably hire our 30th employee sometime in the first quarter of '06, which is now, and that we were considering moving our business out of Philadelphia to possibly Birmingham, 56 2/27/06 - WHOLE - BILL 060006, ETC. Alabama or Nashville, Tennessee or other places. And then, lastly, I was explaining to you that the difference between staying here in Philadelphia and moving out. We are a globally competitive company. It was only a small percentage. So we're not talking about large percentages of distinction between here and other locales. As of today, we are contracted out to equal 50 percent growth for 2006 as of today, and we're still growing. So we've done quite better. We just hired our 35th full-time employee, also employ six part-time employees, have nine current openings in our company. Unfortunately, for the City of Philadelphia, we've set up a separate corporation in Broward County, Florida, and all of those hires are going to take place out of the City limits here. Our lease ends at the end of this year and we're considering downsizing. We will 57 2/27/06 - WHOLE - BILL 060006, ETC. remain in the City of Philadelphia because the Northeast corridor is a very strategically important corridor for publishing, but we do not need to do our work out of Philadelphia. I love Philadelphia. I moved here. I have been active here, and I would love to continue to grow here, but it's going to be impossible. I urge you to, A, develop a complete and comprehensive decision about the BPT now, please, so that we can gain predictability in my business, we can plan for the future. The second thing I would say is, when you're considering these, make sure that you consider the companies' in general contribution to the City and who the tax burden falls most greatly on, and you will see that it is businesses that are similar to mine. And then obviously not only give consideration to the gross receipts part of it, but also to the net income 58 2/27/06 - WHOLE - BILL 060006, ETC. part of it. It's exceedingly important that the net income part be considered. As Robert was saying before, it really affects our ability to get credit, valuation of our company, the ability to grow, et cetera. And then if you don't mind, just one quick thing or two quick things. Councilman Goode asked about the racial and gender discrimination in small business loans. I can't speak to that. I'm a cash-funded business. We never borrowed any money. But I can tell you this: In addition to having funding to provide jobs, you also have to have the skills and knowledge to start a business.
Ninety percent of businesses fail. Our company when it hit recently its fifth year anniversary, we were a statistical anomaly. And if you look at the environment in which my business operates, you will see that we are predominantly minority and predominately woman, people who are employed by my 59 2/27/06 - WHOLE - BILL 060006, ETC. company, though I am the owner and I'm a white male. The people who will grow, develop skills under our tutelage, who will go out and start their own businesses, who will go out and get better jobs from my company all have that opportunity here in the City of Philadelphia, and they're no longer going to be able to have that. That's it.
Thank you very much. The Chair recognizes Councilman Goode.
I'm not sure you fully addressed my question of who can create jobs and whether there is discrimination in terms of who can create jobs.
Well, I would say that is not an issue that I can deal with in a sort of global philosophical sense. I can only deal with that issue --
It's not a 60 2/27/06 - WHOLE - BILL 060006, ETC. philosophical issue.
I can only deal with that on an ad hoc basis, and what I can tell you is that when we make hiring decisions in our company, these are the future people who will be holding positions of importance and also starting their own businesses, going on to graduate careers and everything else. And in our company, it happens to be that we give preference to people who are not white men.
You should be fully concerned that as you train those employees, as they grow to learn your business, are ready for entrepreneurial opportunities, if they are female or person of color, they will face lending discrimination. You should care about that.
I do, but like I said, they also have to have the knowledge and skills to be able to perform the jobs. 61 2/27/06 - WHOLE - BILL 060006, ETC.
No, I'm not. What I'm saying is that if you asked me 6 years ago whether I was going to be able 7 to run my company, my answer would be 8 sure, I think I can, but in reality, I 9 did not have the knowledge and skills to 10 perform the job that I do to run my 11 business, to examine budgets, to 12 understand all of the -- 13
So you're 14 assuming that racial and gender 15 discrimination that exists in terms of 16 small business lending is due to a skills 17 gap as opposed to -- 18
Like I said, I'm not 19 addressing that issue. I'm addressing 20 the issue of preparedness.
You chose to address it. You raised the issue. You chose to address it. Thank you.
Thank you, Madam President. I have only two questions. My first for the panel is, if the BPT were eliminated, corporations would pay no 9 taxes on income, while sole proprietors and partnerships would continue to pay this net profits tax. Please expound on that and explain what happens then. What happens to those businesses and individuals?
I can give the perspective from the Tax Reform Commission. I don't know that anybody else on the panel wants to --
In the ideal world, if you were looking at restructuring the City of Philadelphia's tax structure from a blank slate, you would probably not have a tax on wages at 63 2/27/06 - WHOLE - BILL 060006, ETC. all in Philadelphia. You probably would not have a tax on business income at all in Philadelphia. The model for local tax structures across this country is, by and large, dependence on a levy on the value of place, the value of property, a little bit coming from sales as well. When we looked at the wage tax, which is also the net profits tax that partners have to pay, our fundamental conclusion was, it's impossible to get rid of it totally because it represents such a huge percentage of the City budget. That said, we should dramatically reduce it, and as you know, this Council has approved a plan and this Mayor has signed a plan to phase that down over the next ten years, which would be a big help. So in terms of the fairness, anyone making a wage in Philadelphia, and that includes owners of business, have to pay a tax on wages. One of the striking features of the business privilege tax is 64 2/27/06 - WHOLE - BILL 060006, ETC. that, well, you know some businesses don't have to pay taxes at all. If you are a utility, if you are a bank, if you are a port-related company, you don't have to pay the business privilege tax at all. In looking at how to make the business tax more fair, some of the ideas that we considered on the Tax Reform Commission were, should we broaden the base? Should we make everybody pay? Would that make sense? Should we ask people to pay one side of the tax, whichever is higher, whether it's gross receipts or net income tax? Does that help us maybe on the fairness? That doesn't necessarily help us on the competitiveness. So fundamentally, in terms of what was fair for the business tax, if we reduce, eliminate the business privilege tax, certainly you're left over with partners still having to pay this net profits tax, but that is the -- fairness is a terrible word to use for this 65 2/27/06 - WHOLE - BILL 060006, ETC. subject, but that is the fairness of the wage tax, that anybody who earns a wage in Philadelphia has to pay that tax. If you could start from scratch, if we were going to say, Let's eliminate every single tax and build a new tax structure in Philadelphia, we might look a lot like Boston. We might look a lot like Lower Merion. We might look a lot like almost every other jurisdiction in the United States that does not tax wages, that does not tax business income.
I'm very glad to hear you give me your whole convoluted philosophy of taxes in Philadelphia. That was the most convoluted response I've ever heard. I asked you a question on one kind of tax. So you respond to another. But we're living in times where, unfortunately, a lot of our problems are due --
Think of how long it would have taken you to read all 500 66 2/27/06 - WHOLE - BILL 060006, ETC. pages of the Tax Reform Commission's report.
-- to people who have their own self-interest in mind and do not look at the greater good for the greater number of people, including sole proprietors and others. They haven't dealt with them, but only their own interests.
I'll open the question then to the panel. You are sole proprietors. Do you feel that getting rid of the business privilege tax and paying your tax on net profits makes sense?
Excuse me. You chose to answer. Let us run our hearing. You just respond, if you don't mind, Mr. Mandel. What about the position taken by the Tax Reform Commission that higher real estate taxes, including full valuation, should be used to pay for business tax reductions? Let's hear your 67 2/27/06 - WHOLE - BILL 060006, ETC. response to that. I'm sure it would be just as convoluted.
As long as you don't sing, though, we can handle it.
Right now in Philadelphia the value of property, specifically the value of commercial property, is low. The notion that we are looking to convert Two Liberty Place into condominiums, that it makes more sense for the owners of office towers to get rent from residents as opposed to rent from offices is not a good thing for the City of Philadelphia. So when we are not able to attract jobs, when we're not able to retain jobs, when the jobs that we're able to attract and retain are going to buildings that are paying no taxes, no 24 business taxes, like the Cira tower or the new Comcast tower with its deals, 68 2/27/06 - WHOLE - BILL 060006, ETC. when we're doing that, we are reducing the value of commercial property in Philadelphia. By not allowing us to capitalize on the increase in the value of commercial property means we give up revenue for the City and for the School District. I'm sure you remember when Paul Levy came before this City Council and testified that for a while, our commercial property values in terms of the entire property value for the City were creeping up. In the late '90s, we were starting to get more money from commercial properties, and that was a good thing, but then the bottom fell out of the market. As you know, many of Center City's trophy buildings have come forward to the City and have been reassessed. Because they can't charge enough for office rent, they have to reduce the value of their building. People from the Building Owners and Managers Association are here to testify 69 2/27/06 - WHOLE - BILL 060006, ETC. to that fact today. If we were able to rent square footage in the City of Philadelphia for $30 a square foot, $40 a square foot, which is not unheard of in other cities, the value of our commercial buildings, our trophy buildings, Liberty Place, Two Liberty, would be so much higher, we would be generating so much more revenue to the City. Because some of our trophy buildings are only renting for $20, less than $20 a square foot, the value of commercial property is not returning enough to the City of Philadelphia. If you would phase out the business privilege tax, the tax that is on business would get capitalized into the value of commercial structures. That's the research that the Tax Reform Commission showed, that if we reduce the business privilege tax, we generate more money from the real estate tax, specifically more money from the commercial real estate tax. So when you 70 2/27/06 - WHOLE - BILL 060006, ETC. say businesses would not be paying tax, no, businesses would not be paying this tax; they would be paying increased money in real estate tax. Again, I'll ask you to pay attention when the Building Owners and Managers Association testify to this, because they could speak much more knowledgeably to that.
I will say, Madam President, to my colleague, Councilman Goode, he asked about jobs. The panelist even responded to jobs somehow, whatever that meant. They didn't answer the question before, but they did now. But thank you very much, Madam President.
You're welcome. I think we have a couple other members that would like to testify.
Councilman DiCicco, do you want to hear 71 2/27/06 - WHOLE - BILL 060006, ETC. from the other witnesses or do you want to be recognized now? COUNCILMAN DiCICCO: I'd like to be recognized now, Madam President. Just one quick question.
Thank you. COUNCILMAN DiCICCO: Maybe Mr. Mandel can answer this. Do you happen to know how many Chapter S corporations there are currently in the City of Philadelphia? And if you can give me some background and give it to the Chair, the number of people they employ, what the cumulative taxes that they're generating for the City of Philadelphia, that might be helpful, because I suspect there's a significant number of those types of corporations.
I don't know off the top of my head. COUNCILMAN DiCICCO: One of the other witnesses talked with the triple 72 2/27/06 - WHOLE - BILL 060006, ETC. tax on Chapter S, so it's something I'd like to --
Right. As you know, the Tax Reform Commission, one of the other recommendations was to eliminate that disparity where sole proprietors and partnerships have to pay not only the BPT, but also the net profit tax. We allow them to offset one against the other, but not enough so that the total offset. One of the recommendations in the Tax Reform Commissions's report was that as we are phasing out the business privilege tax, that we eliminate that disparity. I do not have that information in front of me. I'm confident that the Revenue Department has that information. I see Ms. Kammerdeiner is here. I would urge you to -- COUNCILMAN DiCICCO: I'll wait for Ms. Kammerdeiner to come up as well. Thank you. Thank you, Madam President. 73 2/27/06 - WHOLE - BILL 060006, ETC.
Thank you. Councilman Ramos, do you want to be recognized now or do you want the panel to complete its testimony?
If you can permit me, it's a very quick question for Mr. Mandel.
Mr. Mandel, are you in support of repealing the wage and net profits tax that is No. 060007?
Yes, I am. I don't think that was the most effective way to target tax relief to low-income residents in the City. When the Tax 74 2/27/06 - WHOLE - BILL 060006, ETC. Reform Commission looked at this recommendation, we struggled, because in providing this, it's sometimes referred to as low-income tax cut. It's not a low-income tax cut. It's a low-income tax credit. And what we found when we did the research was that there is a state credit, there is a federal credit, and this would add a local credit. But one of the problems with the state and the federal credit is that not everyone who is able to take advantage of that credit has taken advantage of it. So the Tax Reform Commission's recommendation was to dramatically expand the efforts to make sure that people take advantage of the state and federal taxes. So we would be -- state and federal tax credits, the Earned Income Tax Credit and the state equivalent, so that we could actually reach the people who are not being affected, as opposed to create a new program that would help some of the people who are already being helped by 75 2/27/06 - WHOLE - BILL 060006, ETC. these other programs.
Thank you. Mr. Mandel, who is next to testify? Please identify yourself for the record and proceed with your testimony.
Yes. My name is Patrick Diogenia. In 2003 and 2004, I was on the payroll of the Philadelphia Industrial Development Corporation, working in student retention. At that time, I was also living in the City and enjoying its many sublime amenities. When I wanted to get somewhere, I used SEPTA, but when I decided to start a marketing consulting business, I knew getting somewhere in business would require me to move out of the City I had come to consider my 76 2/27/06 - WHOLE - BILL 060006, ETC. adopted home. Given the Philadelphia taxes revenue without regard to profit or loss, the burden is significant for a professional services firm, which may begin with a few clients, but like your neighbor down the street, Red Tettemer, may eventually grow to employ 100 people in highly compensated, professional positions. These people would live in Philadelphia, shop in Philadelphia and possibly raise children in Philadelphia. As I expand my consultancy into a full-service ad agency, I cannot tell you exactly how many people we will employ or what our market cap will be, but I can tell you that whatever potential is here has been lost to New Jersey. And for a City whom I personally toiled to retain the creative class, it is sad indeed that I must contradict my own work and avoid Philadelphia as I expand my business.
Thank 77 2/27/06 - WHOLE - BILL 060006, ETC. you very much. Mr. Mifflin, so nice seeing you again.
Thank you very much, Council President. It's very nice to be here.
My name is William E. Mifflin. I'm representing a custom contract furniture manufacturer this morning. Tracey/Soltrace is a custom contract furniture manufacturer in North Philadelphia. We have a factory size of about 30,000 square feet, and we're relatively a small contractor employing people. Twenty-four of those happen 20 to be Philadelphia residents. 21 As with most companies, and 22 especially with manufacturing, we are 23 constantly striving for a competitive 24 edge to ensure that our product will be 25 produced in the most economical and 78 2/27/06 - WHOLE - BILL 060006, ETC. efficient manner. We not only compete with companies from the southern part of the United States, but we're now competing with international firms as well. We are a third-generation furniture manufacturer, all in the state of Pennsylvania, and our company was moved to the North Philadelphia location in the mid 1990s, with the support of Councilman Clarke, along with others. Essentially, I'm here today to ask members of City Council to encourage the economic vitality and growth of the City by supporting legislation that would systematically and equitably reduce the present business privilege tax. Specifically, we're asking City Council and the City Administration to work expeditiously and cooperatively to reduce both the gross receipts and net income portions of the BPT, provide a fixed schedule of at least five years of legislated cuts, and ultimately provide a 79 2/27/06 - WHOLE - BILL 060006, ETC. schedule to phase out this job-killing tax. I realize, perhaps more than many other people or taxpayers or businessmen, the difficulty and complex challenges facing City Council as you consider a City budget which must maintain adequate and appropriate City services for all our citizens. At the same time, the business community is requesting that you act boldly and proactively to an existing problem that will only get worse in the future unless we take the necessary steps now to ensure that our City continues to provide jobs and attract new businesses. A reduction and ultimately the elimination of the BPT would enable our company to hire additional employees from our community to provide them and their families with the opportunity to live, work and contribute to our City in a meaningful and productive manner. Given the present tax structure of the City of 80 2/27/06 - WHOLE - BILL 060006, ETC. Philadelphia, it's very difficult for businesses to consider expanding their workforce, given the high cost of doing business. We are encouraged by the Mayor's recent willingness to consider short-term reduction to the BPT, but from a planning perspective, businesses need to know what we can anticipate in future years regarding our tax burden. Our company made a commitment to move to Philadelphia in the mid 1990s. We continue to invest in the City in many ways, including street cleaning, graffiti removal, weed removal on public property, at our own expense. We wish to remain in Philadelphia for the foreseeable future. We are native Philadelphians who care passionately about our great City and want Philadelphia to succeed. However, those responsible for economic development in New Jersey are frequently making inviting overtures to relocate. This would obviously not be 81 2/27/06 - WHOLE - BILL 060006, ETC. our desire, but we must consider all opportunities. We ask that you support our efforts to remain a productive partner as we contribute fiscally to the improvement of our City. Thank you for the consideration of this important legislation and an opportunity to appear before you today. That concludes my formal remarks. Thank you.
Thank you very much. Are there further questions from Councilmembers?
I would be pleased to talk to the Tax Reform Commission's report, but I'm also joined by other members of the Tax Reform Commission. Al Taubenberger is here, Tom Forkin is here, Drew VandenBrul is here and Stu Weintraub 82 2/27/06 - WHOLE - BILL 060006, ETC. is here. I would certainly encourage if any of them have any different answers or additional answers to any of the questions that I tried to respond to about our report, with your permission, I'd be thrilled to ask any of them to echo or add comments.
Councilwoman Blackwell, members of Council, my name is Stewart Weintraub, and as Mr. Mandel has stated, I was a member of the Tax Reform Commission. I would like to respond to the two questions that Councilwoman Blackwell raised --
-- to Mr. Mandel. I will try to make my answers a little bit more brief. With respect to the corporations not having to pay the business privilege tax if it is repealed, 83 2/27/06 - WHOLE - BILL 060006, ETC. and we hope it is repealed, the corporate officers, the owners of the corporations are salaried employees of the corporations. They pay wage tax. The net profits tax is the self-employed persons corollary to the wage tax. So while the corporation itself under a phase-out would not be paying the tax, the individuals who work for the corporation, including the owners of the corporation, would still be paying the wage tax and paying taxes to the City. As far as the other question concerning the real estate tax increase, while it has been commonly said that the Commission recommended raising the real estate tax to fund tax reform, that is not what the Commission report said. Let me say that very clearly. We did not recommend that. We were asked in our charge to make tax reform recommendations that were socially and fiscally responsible. So that when we made our recommendations to reform the tax 84 2/27/06 - WHOLE - BILL 060006, ETC. structure, we also laid out a roadmap of various options that City Council could consider to fund the tax reform. In our report, what we basically said was, if everything else failed, Council could look to the real estate tax, but there were many, many other sources of funding for tax reform that was in the recommendations of the Tax Reform Commission that would have precluded the necessity of looking at the real estate tax. Also, unrelated to responding to the questions, I would like to just bring one other --
Excuse me, Mr. Weintraub. We have a point of order before you continue. Councilman Nutter.
Thank you, Madam Chair. I made the point at this moment. I think Mr. Weintraub is about to go into Bill 14? 85 2/27/06 - WHOLE - BILL 060006, ETC.
He was responding to questions I had asked. I had one follow-up as well.
I understand. Mr. Weintraub, I thought you in your explanation -- and I know you're trying to respond quickly, but I think it bears repeating and a bit of a slowing down. Let's talk about the net income portion of the business privilege tax as it relates to sole proprietors and partners.
That's exactly my line as well, because you responded to the wage tax issue, but we asked you about the business privilege aspect of them, not the wage tax part. And Councilman Nutter -- 86 2/27/06 - WHOLE - BILL 060006, ETC.
Councilwoman, would you like me to wait for Councilman Nutter's question or to respond?
Let me try to restate what I said, because I believe I was responding to your question, Councilwoman. The corporations, if they are not paying business privilege tax as an entity, the corporate officers, who are the owners of those corporations, are still paying wage tax, and that wage tax is the profits of the corporation that is being paid to the corporate officers. The profits of the corporation being paid to the corporate officers are paying wage tax. 87 2/27/06 - WHOLE - BILL 060006, ETC. Most of your corporations in Philadelphia today, what they should be doing if they're not doing is paying out the profit of the corporation as salary to their owners. That way, they pay no 7 net income tax on the business privilege tax and they're paying wage tax. But many of them don't do that, and they wind up paying the higher business privilege tax instead of the wage tax. And that's what I was trying -- the point I was trying to make.
Thank you, Madam Chair. I think part of this discussion in its explanation revolves around the intermingling of terms. Mr. Weintraub, when you talk about corporate entities and their officers, some may pay the regular commonly known, for instance, resident wage tax rate, which we know to be four 88 2/27/06 - WHOLE - BILL 060006, ETC. point something. The net income portion of the business privilege tax, which I want to make sure that we're narrowly focused on that, is a higher rate --
So who actually pays the net income portion of the business privilege tax?
Any corporation that has a profit where the profit is not paid out to the owners of the corporation as salaries.
Well, many of your publicly traded companies, they would not be necessarily paying out all their profits to the officers because they have a responsibility to their 89 2/27/06 - WHOLE - BILL 060006, ETC. shareholders, but where the shareholders of the corporation are the officers of the corporation and are the owners of the corporation, are operating the corporation, many of these small corporations that Councilman DiCicco asked about a moment ago, these S corporations, they should not be paying the net income portion of the business privilege tax if they are paying out the profit in the form of salaries to the officers. Unfortunately, many of them don't do that, because for federal purposes, there is no distinction between the wages and the corporate profit. For an S corporation, they're taxed the same.
Sole proprietors and partners, well, they pay the net profits tax and they pay the business privilege tax, and they get a credit --
Are you 90 2/27/06 - WHOLE - BILL 060006, ETC. saying that they pay the net income portion of the business privilege tax and the gross receipts portion?
Yes, they do, and they also pay the net profits tax, but they get a credit on the net profits tax for a portion of the net income part of the business privilege tax.
And is that at a rate that's higher than the regular resident wage tax?
So is it fair to say that notwithstanding continued reductions in the gross receipts portion of the business privilege tax, there are some business owners, small, medium and large, who end up paying a net income rate that is higher than the regular residential wage tax rate?
Is it fair 91 2/27/06 - WHOLE - BILL 060006, ETC. to say that the net income portion of the business privilege tax, which has not changed and it's presently at 6.5 percent, has a negative effect on businesses, depending on how your business is set up, even if you are a small business versus a large business?
Councilman, I believe the answer to that is yes. I think we've heard much testimony about that from actual business operators who have said just that.
Thank you very much. I have one comment, then I'll call Councilman Clarke. Your Tax Reform Commission document, and I read per quote, "Increase property tax revenues. If all other revenue-generating options fail and there is no other way to fund the package of 92 2/27/06 - WHOLE - BILL 060006, ETC. tax reform, the City could increase property tax rates. Evidence suggests that shifting from local business and wage taxes to property-based taxes will result in substantial increases in jobs, resident incomes, business activity and property values," end of quote. Now, we're trying to keep our residential community intact. We don't want to lose more people than we have in the past. None of us does. So I don't understand how you favor increasing property taxes for everyone when we run the risk of losing our population base.
The Tax Reform Commission's three-volume, 500report certainly says a lot more than that one paragraph, and I would direct you to read the previous couple of paragraphs where we offer other 93 2/27/06 - WHOLE - BILL 060006, ETC. recommendations in terms of where the City can find revenues to handle any short-term gaps that there might be from a tax reduction.
Why don't you just answer. We all know you're smart. We all know you --
Why do you do things like that? Why don't you just respond to our question? We all know you're a smart guy.
The Tax Reform Commission suggested that any shortfalls in revenue in the short run could be made up by finding some of the revenue that we don't collect in outstanding taxes --
Nor should you tell us what we could read. We know that, don't you think, Mr. Mandel?
Madam Blackwell, you read one paragraph of the Tax Reform 94 2/27/06 - WHOLE - BILL 060006, ETC. Commission's three-volume 500-page report to make it seem as if we're suggesting that we should raise the tax --
No. 6 This is your document. I quoted your document. If it can't be quoted -- Thank you, Mr. Weintraub. Maybe if Mr. Weintraub commented, we could get a little further, because his attitude is more friendly. Thank you.
Councilwoman, what you read is exactly what I said. At the beginning of the paragraph you read, it said, if all else failed to help fund the services necessary for the City that the Tax Reform recommendations would yield, then you could look towards the real estate tax. Now, all of the data that was in the report from the Commission, if you look at, I think it was, the second volume -- what you're reading from is the first volume, which was just the recommendations. The third volume had 95 2/27/06 - WHOLE - BILL 060006, ETC. all of the reports that we relied upon. In that third volume, among the information provided to the Commission was that by lowering the business taxes, by lowering the wage tax, we're going to create jobs in the City. By creating jobs in the City, a corollary to the creation of jobs in the City would be an increase in the value of real estate. At current rates, without changing rates at all, if the value of the real estate increased, that would generate additional real estate tax revenue to the City. We didn't recommend that that happen, because City Council has the right to come in and adjust that rate downward to compensate for the increase in the value of the real estate. But, again, as you read, which confirmed what my original statement was, this was an absolute last resort in the event all of the other ideas that the Commission put forward to help fund tax reform failed. 96 2/27/06 - WHOLE - BILL 060006, ETC.
Would you like to say any of the other recommendations we have?
Thank you, Madam Chair. I just wanted the record to be specific as it relates to real estate taxes. Mr. Weintraub, I guess I'll ask you this question because you brought it up. Are you referring to the recommendation, Recommendation 7, the budget-based property taxation?
It essentially says that the Commission recommends creating a system of budget-based property taxation by legislatively obligating the Mayor and Council to determine all annual real estate taxes after setting the budget and 97 2/27/06 - WHOLE - BILL 060006, ETC. reviewing the assessments; therefore, maintaining stable revenue. Essentially, we set a budget. If there is any shortfalls in the budget, then address the revenue associated with real estate taxes to either stem the increases or increase it to fill any potential budget gaps.
Councilman Clarke, the recommendation you're reading from is a different one from the one that Councilwoman Blackwell was reading from. Councilwoman Blackwell was reading from the section where we were talking about how to fund the revenue shortfall that the wage and business tax cuts would generate. What you are reading from is one of the recommendations that the Commission made to reform the overall real estate tax system that the City currently has in place.
And to that question, I think it's a question of 98 2/27/06 - WHOLE - BILL 060006, ETC. fundamental fairness. Right now the way the real estate tax system works -- this is the background to why that recommendation is there.
Let me stop you there, if I can. The reason I'm referencing it is because you tie it to the budget, and I remember at the time, there were some concerns that if there were any budget shortfalls, although you didn't specifically have that language in the recommendation, that potentially if there was a budget shortfall, you can increase the revenue from real estate to fill the budget shortfall, because at that time, the budget was a big part of the discussion. You had the pro and con tax cut, and people were concerned that if you continue to cut the budget as it relates to workforce and other things and expenditures on the City, that we would make it up on the real estate side. You've answered the first part of my question, you're not referencing 99 2/27/06 - WHOLE - BILL 060006, ETC. the same thing, but the second part is, do you continue to --
Well, Council can always adjust any budget shortfall by looking at the real estate tax rate. That's nothing new. I mean, I'm not telling you anything you don't already know about that.
The recommendation was really a question of fairness in the system itself. The way the system currently is in place, the assessments themselves are coming out after this Council does the budget and fixes the rate. So when the assessments come out -- and you'll remember back -- it was 2002 or I think it was summer 2003 when this Council was inundated by constituents who had very large assessments coming up after you had done the budget, and they were getting large tax increases, because their values 100 2/27/06 - WHOLE - BILL 060006, ETC. of their property were being adjusted upward by the Board of Revision of Taxes. What that recommendation was designed to achieve was, let the assessment process do its thing before you do the budget, so that when you do the budget and you fix the rates for the real estate taxes, you can compensate for any increase or decrease in value that the Board of Revision of Taxes might have. That way, this Council is fixing the rate as needed to compensate for valuation adjustments, and that's what that recommendation that you read was intended to adjust.
But you understand it could be construed as a potential budget gap filler?
I understand it can be construed that way, but that's not what was recommended.
I believe the 101 2/27/06 - WHOLE - BILL 060006, ETC. report expresses itself as this is clearly a question of trying to make the system more visible, more clear to be clearly understood and fair to the constituents, fair to the residents of the City.
Mr. Weintraub, Mr. Mandel, maybe you could answer this. As you well know, I'm sure it's no secret that we have a surplus of approximately about $160 million. Mainly it's due to the increase in revenue in the business privilege taxes, as well as the increased revenue 102 2/27/06 - WHOLE - BILL 060006, ETC. from the real estate transfer tax. Now, I'd just like to know, if we do nothing on these bills whatsoever, do you anticipate that we would still be generating the same amount of money or the same revenue if we do nothing with these bills?
I can't forecast. I'm not an economist, Councilman. I can't forecast what businesses will do from the standpoint of increased profits, increased revenue, increased jobs, more real estate turning over. Right now the real estate market in Center City seems to be still flourishing. I understand the Administration in its budget has projected increases, continued increases, in those revenues. I would hope they would, but I can't forecast that. That's not my expertise, if I might cop out on you.
I would add that based on our work that we performed for 103 2/27/06 - WHOLE - BILL 060006, ETC. the Tax Reform Commission, certainly all of the people that you heard from here today, there is nothing that we should expect in Philadelphia if we don't do something about our business tax structure that would be anything aside from we will continue to lag economically. The nation right now is growing jobs. The region right now is growing jobs. The City of Philadelphia continues to lose jobs. When the nation and region grow, we should be growing. We will continue to lag economically unless we address this problem.
In other words, what you're saying, in effect, is, if we continue to receive surpluses, what we may do with those surpluses is to reduce taxes, which would generate additional revenue for the City.
Well, certainly that's what has happened in each of the last 11 years that we've been reducing 104 2/27/06 - WHOLE - BILL 060006, ETC. tax rates. We have been increasing tax revenues. Mr. Weintraub has something illuminating on that subject.
If I can just add to what Mr. Mandel just said. Last week, on February 21st, Pennsylvania Revenue Secretary Gregory Fajt testified before the House Appropriations Committee on the Commonwealth's budget, and I have a copy of his testimony with me. If I could just read a couple of sentences from his testimony, I think it will be helpful to this Council. After saying that the Governor's proposal called for a fourth straight year of tax reductions, business tax reductions, Secretary Fajt went on to say, "I am also pleased to report that Pennsylvania's lower business taxes, along with a $2 billion economic stimulus program that you helped develop," meaning the General Assembly, "are jump-starting Pennsylvania's economy. In 2002, we ranked 41st out of the 50 states in 105 2/27/06 - WHOLE - BILL 060006, ETC. employment growth. Today we are 15th. Our unemployment rate is below five percent for the first time since 2001, and most important of all, 120,000 new jobs have been created in Pennsylvania since February 2003."
120,000. "In the same time frame, Philadelphia has lost jobs." So there was more than 120,000 jobs created elsewhere in the state, and Philadelphia's loss of jobs brought that down to 120,000.
Thank you, Madam Chair. Mr. Weintraub and Mr. Mandel, I want to go back to a question that Councilwoman Blackwell asked. I believe 106 2/27/06 - WHOLE - BILL 060006, ETC. that as wordy as you tried not to be, still there's a simple way to present this question. I'd like to address it in two ways. The first being, is it safe to say that the Tax Reform Commission concluded that businesses and workers were overtaxed and that property owners were undertaxed?
I didn't ask whether you said that. I asked whether you concluded that.
Well, then let me ask the question a different way. Wage tax cuts are locked in; is that correct?
This Council has now enacted ordinances to reduce the wage tax over a period of time, yes.
They're locked in to 2015; is that correct? 107 2/27/06 - WHOLE - BILL 060006, ETC.
I believe that's the year. I don't remember the exact year.
The Tax Reform Commission recommended that we lock in business tax cuts, and your preferred approach is to eliminate business tax cuts on a schedule that would go to 2015 or '16 or '17; is that correct?
The recommendation back in 2003 was for a ten-year cut, which would have taken it to 2015, I believe, and now we're a couple years down the road.
So while we would lock in wage tax cuts to 2015, lock in business tax elimination 2015, 2016, 2017, we would then have to adjust or potentially adjust the real estate tax rate based upon assessments possibly on an annual basis?
No. I disagree with your statement, Councilman. Number 108 2/27/06 - WHOLE - BILL 060006, ETC. one, at the time the Commission rendered its report, there were substantial issues, as Mr. Mandel indicated in his original testimony, of how do we fund it. Today there's a $140 million surplus in the budget. So the question of how you fund it is not the issue anymore.
So the point at which we complete the full valuation project, if it is completed and completed to our satisfaction, that beyond just going to full valuation, that those properties that were underassessed are more fairly assessed and those properties that were overassessed are more fairly assessed, are you suggesting that we lock in a property tax rate, the same as you're suggesting we lock in wage tax rates and business tax rates?
I'm suggesting that when you go to full valuation, this Council has an obligation to adjust the rate to reflect what is needed.
I understand 109 2/27/06 - WHOLE - BILL 060006, ETC. that, but I'm asking in terms of the long term. After the full valuation project, after we are satisfied with those properties that were being underassessed are being fairly assessed, those properties that were being overassessed are being fairly assessed, we've moved to full valuation, at that point, are you suggesting that we lock in real estate tax rates like you're suggesting that we lock in business tax rates and wage tax rates?
No. As a matter of fact, that was the recommendation that Mr. Clarke was talking about, was to create a budget-based system. Every year the value of real estate in the City will change. It will go up; it could go down. That's when City Council should take a look and say, What revenue do we want to get out of the real estate tax base. Real estate values can go up, the tax rate can go down, and we could still bring in more revenues. 110 2/27/06 - WHOLE - BILL 060006, ETC. Alternatively, the value of real estate might go down, and to maintain the same amount of revenues, you might look at adjusting the rates. So if you create a system that says we're going to be reducing the wage tax rate, we're going to be reducing the business tax rate, if the City is going to maintain its overall revenues, one of the places that you're going to be needing to look is real estate tax.
Workers and businesses could be making more money. You're not suggesting that we adjust the rate based upon making more money, are you?
If workers and residents are making more money, that should be reflected in the value specifically of commercial real estate. If the value of commercial real estate goes up, we can tax the value of that commercial real estate.
This is a 111 2/27/06 - WHOLE - BILL 060006, ETC. debate that we can keep simple or not, that in fact you're asking us to lock in wage tax rates, to lock in business tax rates, but not to lock in property tax rates, and your basis for that is that the value of property shifts, but corporate profits shift. The bottom line is income.
Councilman, I understand your question, and from a policy standpoint, that's the decision this Council has to make, and, candidly, I don't have a problem with it. It's not one of the recommendations that was made, but I don't have a problem with this Council doing that.
I'm contemporizing the discussion and asking right now, since we've already locked in wage tax rates and since this panel is specifically telling us to end it, not just mend it, to eliminate the business tax over a long-term schedule and to lock it in and address the Councilwoman 112 2/27/06 - WHOLE - BILL 060006, ETC. Blackwell's question, isn't that based upon increased property tax revenue, increased property tax values and our not locking in a property tax rate?
I don't think so. If you look at the history, the current rates on real estate taxes in this City have been the same for the last years. So if 15 years ago this 11 Council had chosen to lock in the current 12 rate that it is today and which have been 13 in effect for the last 15 years, we'd be 14 in the same financial position today that 15 we are.
Well, we would not if those properties that were being underassessed were fairly assessed.
The whole question of fair assessment. Fairness in the assessment process is a different issue from funding the budget. I mean, the assessment system should be fair in the first instance. It should be a fair system. That's one of the reasons why 113 2/27/06 - WHOLE - BILL 060006, ETC. the Commission was created, to recommend a fair system of taxation for the City, not just business taxes. We were charged with the responsibility of making recommendations for the entire City tax structure, and that's why we looked at real estate taxes. And what we concluded when we looked at real estate taxes was that the system itself was not functioning fairly.
Let me ask this question. I think it is fair to ask in the context of what Councilwoman Blackwell was trying to get to. Is it the position of this panel that once full valuation is done, that we should make it revenue neutral to the City's Five-Year Financial Plan?
Thank you, 114 2/27/06 - WHOLE - BILL 060006, ETC. Madam President. Mr. Weintraub, what was the time frame you referenced on the increase of jobs in Pennsylvania?
I'm not going to ask you this question, because you're probably not the person that should be answering it. One of the things I want to find out, this issue about reduction in City workforce, and it's been, I don't know, between 1,500 and 2,000, and somehow during the course of the discussion, it never really rises to the level. Because I think that the City municipal jobs are extremely important, given the fact that they're traditionally decent-paying jobs and 115 2/27/06 - WHOLE - BILL 060006, ETC. they're residents of the City of Philadelphia and they pay a higher rate as it relates to wage tax. And somehow that never seems to factor in the loss of jobs as it relates to the City. I'll ask you the question. If you don't know it, I will understand. What percentage of the job reduction in the City of Philadelphia can be attributed to the reduction in the municipal workforce?
I don't know the answer to that question, but I know that from the numbers that I have been told over the years, it has been much larger than the 1,500 to 2,000 jobs. We're looking at like 10,000 jobs a year. Each year 10,000 jobs or more have been lost. Governor Schweiker in his testimony last year before this Council when we were discussing the budget, you recall there was a chart over in the corner there showing the jobs lost in the 116 2/27/06 - WHOLE - BILL 060006, ETC. City and it was five figures each year.
Did he categorize the types of jobs? Was it that level of specificity?
Okay. That's all right. Thank you. Thank you, Madam President.
You're welcome. The Chair recognizes Councilwoman Blackwell.
Thank you, Madam President. With regard to the old issue of tax cuts and the wage tax issue and real estate issue, we note that none of the major corporations we're talking about -- and I mention this to the panel -- the Wal-Mart, the Sun Oil, SmithKline, all of these folks who are expected to get and who you say need a big tax break, but none of them testified that if we cut 117 2/27/06 - WHOLE - BILL 060006, ETC. taxes, they're going to hire our City residents. So do you somehow have some assurances where we are with regard to that? Because if the whole issue is increasing jobs and that that will help increase our economy, what assurances can we have that that will take place?
I think when you're looking at the issue of cutting taxes, the big firms come into City Hall and get what they want whenever they want it. If they want a tax break, they get a tax break. If they want a tax rebuilding, they seem to be able to get a tax rebuilding. The panels that we brought for you today were small employers, people that can't walk into City Hall and ask for a break, people who can't walk into the Governor's office and ask for something special. The gentleman who started off our testimony would be in Philadelphia 118 2/27/06 - WHOLE - BILL 060006, ETC. but for the business privilege tax and his 300 jobs.
I believe that you brought these people in to try to give us the impression that you don't only speak for special interests and large businesses, but that you do in fact have some interest in small businesses, which I really don't believe you have any interest in. So I think you try to give us a different impression of who you are and what you believe than what you do. So I would suggest that you let Mr. Weintraub answer for me, and I'll probably feel that he has an overall view and an overall interest in understanding of our City's views and where we're trying to go and not just his personal interest and view.
With all due respect, what is it that Philadelphia Forward has done to give you the impression that we speak for large 119 2/27/06 - WHOLE - BILL 060006, ETC. businesses? The Tax Reform Commission released its report. Philadelphia Forward formed and created our organization, and we have directed people toward you. You have received e-mails, faxes, phone calls, letters from business owners and residents across the City. To my knowledge, the largest of businesses have not used our conduits to connect with you.
Mr. Mandel, you've Xeroxed things and had everybody sent us the same e-mail. We've been around too long not to recognize that, if you want to say that, if that's your response. Everybody knows when you get a rode answer, when it's passed around and everybody is told to send it in. That's nothing new. That doesn't mean we have a varied view by everybody.
Each of the employers that we brought to you today had a different story, had a compelling story. We really took no effort at all 120 2/27/06 - WHOLE - BILL 060006, ETC. to find them. These are people who contact us and say, My goodness, this business privilege tax is a terrible thing, how can we help you. I say, Come tell your story to City Council.
I would ask that Mr. Weintraub respond to my question about the issue of jobs and Philadelphia residents and large corporations in our City, because you have not begun to respond to that, and I would ask him that he respond to my concern.
Councilwoman, I cannot sit here today and tell you where the jobs would be, whether they would be in the Wal-Marts, the Suns, the Comcasts of our City or whether it would be small neighborhood businesses. I mean, that would be impossible for me or I think anyone else in this room to answer that question. All I can say to you is that if you cut -- if the business privilege tax 121 2/27/06 - WHOLE - BILL 060006, ETC. is repealed totally, and we've recognized on a phase-out or a scheduled reduction in the rates, we feel extremely confident that there will be an increase in jobs. I think the Pennsylvania Revenue Secretary's statement is indicative of that and supports our feeling on that. But to say to you that Company A or Company B is going to be the one to create those jobs, I mean, that would -- if I were to say that, I'd be lying to you, and I won't do that.
You're welcome. The Chair recognizes Councilman Ramos.
Thank you, Madam President. I feel just a little bit like Councilman Kenney, though I think now I'm tuned in a little bit better than I was earlier where we're at on this 122 2/27/06 - WHOLE - BILL 060006, ETC. discussion, or at least in a formatted way. So I would like, for the sake of clarity, if Mr. Mandel would tell us or tell me where you stand on these following bills, whether you're for or against them. There are five of them that we're taking up today. Or if your organization does not have a position, I will accept that reply as well. Bill No. 060006, where do you stand on that bill?
If you amend it to cut the gross receipts side and the net income side and provide a fixed legislated schedule to eventually phase out the business privilege tax, we're all for it.
Okay. If you were giving that answer to Jannie Blackwell, she'd be all over your case right now.
If it stands 123 2/27/06 - WHOLE - BILL 060006, ETC. the way it is before us, how would you vote? What would be your position?
As it stands before you, if I had to vote on this and nothing else?
You would not be for it the way it stands, right? So that's a no, unless it's amended. All right. How about 060007?
You're for 124 2/27/06 - WHOLE - BILL 060006, ETC. that bill? It strikes me quite ironic you stand -- you seem to have been taken aback by the idea that you only represent big business interest, but the only thing here that actually helps, although there will be debate on it, helps the working poor, you seem to be in favor of the repeal.
As I answered your question earlier, from the work on the Tax Reform Commission, the idea of creating a low-income tax credit locally sounds like it helps the vast majority of low-income workers, but the research shows that those kind of programs only help some low-income workers. Our recommendation from the Tax Reform Commission was to fund efforts through the Greater Philadelphia Urban Affairs Coalition to dramatically expand the reach of those programs so they're getting to people who right now don't get the benefit of those tax programs, as opposed to create more tax programs that 125 2/27/06 - WHOLE - BILL 060006, ETC. will only be accessed by a small percentage of low-income residents.
But you leave an impression that you're for all this tax reduction, wage tax at all the levels, but when it comes to furthering the wage tax reductions, something that's already in law, that you're not for, so, therefore, you support the repeal of that bill.
Well, I'm sorry if we create an impression that we're not trying to create, but fundamentally, if we're going to try to create jobs in the City, we want to phase out the business privilege tax. If we want to encourage residents of all income level to prosper in the City, we should be reducing the wage tax. Those are the fundamental conclusions of the Tax Reform Commission. If we want to specifically help low-income residents in the City, our recommendation was not that we should create a program that helps, again, a 126 2/27/06 - WHOLE - BILL 060006, ETC. certain portion who are already being helped by federal and state programs. We should try to expand the reach of those federal and state programs, the money that's left on the tables, literally dozens of millions of dollars, that could be going into the hands of low-income residents in the City of Philadelphia, but because they're not able to access the Earned Income Tax Credit and because they're not able to access the state's equivalent of that, that money goes uncollected.
You don't think there's a benefit in reducing wage tax for the working poor, meaning people under $15,000 a year? I see them a lot in my office. Don't you think that gives them an opportunity to pay a bill that they might not be able to pay because the wage tax is too much for them?
Absolutely, but, remember, the mechanism to do that as created by law would be to create another 127 2/27/06 - WHOLE - BILL 060006, ETC. hurdle for people to jump through, another form for them to fill out, another bureaucracy for them to deal with. It wouldn't say anybody who is making below $15,000 doesn't have to pay the wage tax. It says that you would have to know who to talk to. You would have to know who to call. Those programs already exist at the state and federal level, and what we've seen is that not everybody takes advantage of them.
The Chair recognizes Councilman Goode for a point of information.
Thank you, Madam Chair. And excuse me, Councilman Ramos. Mr. Mandel, very specifically, two things. One, there are state and federal tax credits that don't seek to help people, as you say, but basically 128 2/27/06 - WHOLE - BILL 060006, ETC. exclude them from paying taxes because of extreme poverty. Basically, the point of those tax credits is to suggest that they don't make enough money to pay taxes. To suggest that that shouldn't be the case on the local level because of a state and federal tax credit doesn't make a whole lot of sense to me, but on top of that, to suggest that that should not happen because the state and federal tax credits are underused still doesn't make sense, because those people who are taking advantage of the state and federal tax credit should also have a local credit. And so what you're denying then by asking for or supporting a repeal of that is saying those people who are being suggested that they take advantage of the state and federal tax, you're taking away a local credit as well and acting as if they couldn't use it, acting as if they are not in extreme poverished conditions.
They absolutely could use it, but I think that when we 129 2/27/06 - WHOLE - BILL 060006, ETC. looked at what we could do tax-wise with tax policy as part of the Tax Reform Commission, we thought we could do more to help low-income individuals by creating jobs and by creating across-the-board wage tax cuts that will help everybody and affect everybody whether or not they apply for it or not. Again, it was our experience in looking at what has been the experience with the federal EITC and the state level credit that when our advisors came to us and said what's happening with those programs, we said we could offer this program and it would make some people very happy, but it just won't reach fundamentally a lot of people. We wanted to expand the reach of the programs that aren't reaching them.
But people who are taking advantage of the state and federal credit need the local credit as well. They are that poor.
Well, I'm actually not supporting necessarily anything. You asked my opinion on the bill.
The question was asked of you by two or three different people, do you support the repeal of the Cohen bill or not.
Fair enough. Because we think we can do much more with tax policy by creating jobs and by expanding the reach of the federal --
So you can shift tax relief to someone else other than extremely poor people?
All right. I'm a big defender of the business community, but I'm not a defender of the business community at all costs, 131 2/27/06 - WHOLE - BILL 060006, ETC. especially when we have obligations to other sectors of our population. How about Bill No. 060089? Is your organization in favor of that or opposed to it?
You came here to testify on this discussion today. It's calling to adopt the accelerated gross receipt rate reduction.
We would urge you to amend it to reflect the spirit and letter of what the Tax Reform Commission had wanted. Reduce the gross receipts, reduce the net income rate, provide a legislated schedule that ultimately eliminates the tax.
We would urge you to amend it. 132 2/27/06 - WHOLE - BILL 060006, ETC.
All right. I'm going to pass these questions on to Councilwoman Blackwell. How about 060090?
All of these tax bills are certainly moving in the right direction. We need to reduce this tax. We need to fundamentally eliminate the tax. But the Tax Reform Commission that 80 percent of the citizens voted to create, that charged the taxpayers a half million dollars of public money, that took us almost a year of time to create, fundamentally said this is what we should do, cut both sides of the tax, ultimately phase it out.
How about 060014? Again, you're doing this. I appreciate you cooperating, to the extent that you're cooperating with me, on answering where you stand on these bills 133 2/27/06 - WHOLE - BILL 060006, ETC. that we're taking up today.
We support that bill. We just wish it would apply to all taxpayers in Philadelphia.
You're welcome. Are there any other questions from members of the Committee? (No response.)
Do we have anyone else to testify on this bill 16 or on the bills?
Mr. McPherson, who is our next witness? MR. McPHERSON: The Chamber of Commerce.
Good 134 2/27/06 - WHOLE - BILL 060006, ETC. afternoon. GOVERNOR SCHWEIKER: Good afternoon.
Mr. Schweiker, do you have copies of your testimony? GOVERNOR SCHWEIKER: Yes. I think they've been provided beforehand. Thank you, President Verna.
Do we have it? GOVERNOR SCHWEIKER: I think they've been circulated.
Please identify yourself for the record and proceed with your testimony. GOVERNOR SCHWEIKER: For the record, I'm Mark Schweiker, President and CEO of the Philadelphia Chamber of Commerce, and I certainly appreciate the opportunity to come before you today and the same goes for the Committee of the Whole. Having said that, it's nice to 135 2/27/06 - WHOLE - BILL 060006, ETC. be with you, as I have on at least four prior occasions in the last three years, to urge your collective support for reduction of the business privilege tax. As you likely know by now, our members have long felt that the BPT stands out as one of the biggest points of contention they face in doing business in Philadelphia. It is a tax that burdens small businesses. In fact, both of these gentlemen to my right and left -- and I might add as a parenthetic thought that I had other small business operators today, but they've got some obligations and the typical challenges that come with operating a small business and they could not remain. It is a tax that burdens small businesses in particular. It hurts neighborhood economic development and carries a devastating impact over the long term. If local businesses were able to hire more folks in their neighborhoods, creating paychecks, hope 136 2/27/06 - WHOLE - BILL 060006, ETC. and opportunity, there likely would be less crime on the streets of Philadelphia, as an example. Although, I greatly appreciate the opportunity again today, I must say that not much has changed since my last appearance just a few months ago on November 17, 2005. The Chamber remains staunchly committed to getting a multi-year bill 12 passed that cuts both sides of the BPT, the gross receipts portion and the net income portion. 415 in the year 2008 and then thereafter. However, we remain concerned that the Administration's proposal does not currently address the issue of making the City's tax structure more competitive. We believe that any 137 2/27/06 - WHOLE - BILL 060006, ETC. proposal which does not address both gross receipts and net income does not meet the competitive standard. Our membership feels that anything less is not real tax reform. Let me just take a moment to introduce to you the business people joining me today at the witness table. I do want to mention, and I know your testimony references, a Cassandra Hayes and Tim Durney. Both of those folks, and Connie, had to move on to other things. They operate small businesses, and an hour and a half out of their day affects their top and bottom line performance. But on my left is Jorge Lovera, who has got a small architectural services firm here in the City, and Michael Powell -- or Michael Pearson. Pardon me. Michael Pearson of Union Packaging. If they look vaguely familiar to you, they should. The Chamber recently spent a considerable sum on television and radio commercials that 138 2/27/06 - WHOLE - BILL 060006, ETC. aired in December just prior to the final vote, the recent vote, on the BPT on December 22nd. These fine folks, real business people here in the City who are motivated to hire City residents, although Mike's firm is Union Packaging just outside the City line, took time away from their busy days in businesses to appear in these commercials and are anxious for your help in reducing their tax burden. They run real neighborhood businesses, whose plans for growth and expansion are dampened by a tax structure that renders them unable to provide more jobs to the residents of the City. And I assure you as real business people -- and you can ask them yourselves -- their collective individual preference is to hire and bring more City residents onto their respective payrolls. Also joining me today and earlier had comments are Drew VandenBrul and Stu Weintraub, and I would point out they serve as co-chairs of the Chamber's 139 2/27/06 - WHOLE - BILL 060006, ETC. Tax Committee. You may also remember them, they were members of the Tax Reform Commission.
I would personally like to thank them for the tremendous amount of time and attention that each has paid to the single issue of business privilege tax reduction. And, finally, I would like to recognize Mike Pearson on my right of the Chamber's Small Business Board. As I've already mentioned, Mike is the owner of Union Packaging located in Yeadon just outside the City limits, and the primary reason he is not located in the City is due to the business tax structure in Philadelphia, although he would like to be here. I do want to thank them for their regular and consistent support of our efforts, both in presentations before the City Council and in other venues. Now back to the point of why we're here. Let me also say that in light of the City's $168 million surplus, I am hopeful that we can do a little 140 2/27/06 - WHOLE - BILL 060006, ETC. better than million in tax reform in 2007. billion budget presentation to City Council on January 24th when the Mayor offered several new initiatives in his Five-Year Plan. Plans to develop riverfronts, reduce youth violence, expand police overtime and infrastructure improvements are all very important to the economic well-being of this great City. But I would suggest that until we reduce the most onerous tax borne by the business community, we will not be able to retain and attract new business to the City, and that would be unfortunate given our current real estate boom, pending Convention Center expansion, new sports stadiums, Kimmel Center and the highly anticipated impact of gaming within the City. As you certainly know, more and more workers in the region are commuting to their jobs outside of the City where 141 2/27/06 - WHOLE - BILL 060006, ETC. companies find a more palatable tax structure. This region would be even more dynamic with a more economically competitive Philadelphia. We strongly believe that the City, too, can experience job growth and revitalize neighborhood business corridors to complement its remarkable housing boom if it makes business tax reform a top priority. As much as some would like for this issue to fade away, the need for business tax reductions continues to dominate the thinking of business owners in every neighborhood of the City. If anyone thinks that tax cuts no longer matter as much to the business community, then, respectfully, I would ask them to think again. I'll tell you why. Most important in consideration, with the City hemorrhaging jobs, 250,000 lost since 1970, we desperately need a commitment to reducing business taxes over the long term, and that is why in a letter I had 142 2/27/06 - WHOLE - BILL 060006, ETC. hand-delivered to each and every one of you last week, I made it crystal clear that business tax reform in Philadelphia remains the top priority of the business community and of the Greater Philadelphia Chamber of Commerce. In closing, let me again mention the presence of the small business operators here, and perhaps they would offer a brief reaction or two, and we're available to answer questions, but I do want to, as a forerunning remark, make it clear that they are interested in doing business in the City and would be hiring Philadelphia residents should the tax structure improve. So, Jorge, if you'd like.
I thank you for having us here, Madam President and Councilmembers. I have to correct --
I am Jorge Lovera from Agoos/Lovera Architects, and I'm a 143 2/27/06 - WHOLE - BILL 060006, ETC. founding principal of the firm. And I do have to correct Mark. We are actually a medium-sized architectural firm in Philadelphia. We presently have 35 people on staff, with actually about 7 percent of them really of other color and 8 gender. I mean, so that goes to 9 Councilman Goode. In fact, we've been on 10 a growing spurt, except that -- 11
The 14 Chair recognizes Councilman Goode for a 15 point of information. 16
I have not 17 addressed the issue of minority hiring. 18 I've addressed the issue of who is able 19 to start businesses and is able to hire 20 based upon the issue of access to capital and credit.
144 2/27/06 - WHOLE - BILL 060006, ETC. You're welcome.
And my wife and I live in Philadelphia. We have lived in Philadelphia for about years. But the 6 business privilege tax is, as Mark said, 7 a very onerous tax. It is one that 8 really hinders us from actually being 9 able to bring additional people on board, 10 because of the fact that it's just such a 11 painful experience. And whatever profit 12 you are able to make, it's something that 13 really hits me directly at the end of the 14 year and in such a way that it's just a 15 difficult thing to do. As a matter of fact, our accountant and attorney, who the attorney is actually in the City but the accountant is outside of the City, have for years really requested every occasion of the firm. We stand firm only because of the fact that about 50 percent of our staff is actually in the City, and it would be a very difficult thing for them to move. We have such a great staff, 145 2/27/06 - WHOLE - BILL 060006, ETC. that that is really what our reputation is about. So it would be difficult for them to make that move. But I would definitely urge all of you to recognize -- and I'm not saying that you don't, but I will go this far to say recognize the times we live in, and it is an extremely competent society that we live in. I'm not talking about just nationally, but also internationally. And this is a city that has a great opportunity. I mean, just what we are seeing or we have seen over the last couple of years regarding entertainment, regarding residential projects, just about any part of what makes this great city great has generally gone in the right direction, and this is just one more aspect of what it takes for us as united people to really get us up to the top, and I think that is critical for us to do so.
Thank you for taking the time to come in to 146 2/27/06 - WHOLE - BILL 060006, ETC. testify. We really appreciate it.
Please identify yourself for the record and proceed with your testimony.
Michael Pearson of Union Packaging and also a Board member of the Chamber's Small Business Board. Some time ago I had the inclination to start a business in Philadelphia, roughly 1999. My company now, Union Packaging, employs 80 individuals, 30 of which are residents of Philadelphia, which includes myself. I would have liked to have started that business in Philadelphia, but the tax made it prohibitive while I was in start-up mode. And now that my customer base -- some of those customers include the three largest fast food companies in the United States -- have graced me with more business, we're in expansion mode. So I could be as high as 150 employees 147 2/27/06 - WHOLE - BILL 060006, ETC. going forward, and I'm looking for a building, probably 150,000 square feet. Well, I'm here today because when I come to that point of evaluating additional space, I want Philadelphia to be a viable option. I love downtown. I love the City. But I am a business person, and that tax is somewhat prohibitive right now. And I would like to have those opportunities created so that we can look at a facility in Philadelphia in the future. And with that, I conclude my comments. GOVERNOR SCHWEIKER: I just wanted to point out, Council President Verna, we do appreciate the opportunity to provide remarks. I know these folks are busy, and I think it's important that they have the opportunity to be in the City's Council room to give firsthand their take on things. And the only thing I also wanted to mention is, at times I think there is some political handicapping that the Chamber presents 148 2/27/06 - WHOLE - BILL 060006, ETC. positions that are espoused only by the folks in the tall buildings here in the center of town. That's just not so. These are small business people that, in Jorge's case, have 50, 60 employees or an aspiration to be -- it's 50 and 60 employees, with 35 now. And whether it was our effort in December or to our presence here today, I just wanted to debunk that myth and give you one specific as far as the Chamber's makeup. Fourty-five percent of our businesses have employee counts of six and below. So make no mistake, the Greater Philadelphia Chamber of Commerce, while we have members from Princeton to Wilmington, 6,000 in total, 3,000 of whom have a City address, and most of them small businesses I've just tried to describe, and it is those folks who really don't have the time to come in hour after hour after hour to City Council Chambers and pursue this issue and ask for a business privilege tax 149 2/27/06 - WHOLE - BILL 060006, ETC. reduction. That's our job. But that's a picture I wanted to paint and deal with that back-channel assessment, that somehow the voice of small business is not associated and part of the Greater Philadelphia Chamber of Commerce. It's the farthest thing from the truth, and these kind folks I think drive home that picture today, and I wanted to thank them for their interest in being here.
Thank you. I see that there are a couple Councilmembers that would like to be recognized, and the Chair recognizes Councilman Goode.
Thank you, Madam President. Good afternoon, Governor, members of his panel. As you may have heard earlier, the issue of tax reform has been presented as being an issue of job creation, and my earlier questions 150 2/27/06 - WHOLE - BILL 060006, ETC. deal with the who, what and where of job creation. And acknowledging your testimony, it reads on , "If local businesses were able to hire more folks in their neighborhoods, creating paychecks, hope and opportunity, there likely would be less crime on the streets of Philadelphia." So the first question I ask will deal with the what of job creation and what type of job quality are you referring to in that statement and throughout your testimony. What is the Chamber's official position on the state minimum wage? GOVERNOR SCHWEIKER: The Chamber at this moment does not have one. Their feeling is, they'd like to know more about the impact, and they expect those involved in state government who are advancing that perspective to provide that information. But I think to some extent, there's a healthy subset, Councilman Goode, that are comfortable 151 2/27/06 - WHOLE - BILL 060006, ETC. with its elevation. It's to what level that they need to zero in on. But having said all that, formally speaking, the Chamber is without one formally established outlook.
I can't speak for the Chamber, but I can speak as an individual business owner. Part of my goal was to create positions that have sustainable wages so that people can educate their children, so they can become homeowners. I'm proud to say our starting or entry-level positions exceed $10 an hour. I provide 80 percent of medical benefits, and I offer tuition reimbursement.
Likewise, for my firm, the lowest income employee or salaried employee is about $35,000 a year. And of that also, as I was saying previously, about percent are 23 African-Americans and about probably 30, 24 35 percent of the overall population is 25 women. 152 2/27/06 - WHOLE - BILL 060006, ETC. GOVERNOR SCHWEIKER: Councilman Goode, if I can, as far as the jobs that -- as you know, you've been at this long enough, it's difficult to lay out cause and effect and say if you do this, you'll get this, but my individual opinion is -- and I think a lot of the smart people that operate the businesses in this City are determined to hire -- I think the growth would be across all industry sectors that define the City today. Just a matter of time. We've got to lower the business privilege tax.
My specific question in terms of "what" is, what type of job quality. My specific question is, what should the minimum wage be? GOVERNOR SCHWEIKER: I don't have that for you.
Second question is, let me sort of amend the statement you made in your testimony and rather than say if local businesses were able to hire more folks in their 153 2/27/06 - WHOLE - BILL 060006, ETC. neighborhoods, let me change that and say if minority businesses have better access to capital and credit and were able to hire more folks in their neighborhoods, creating paychecks, hope and opportunity, there would be less crime on the streets of Philadelphia, what does the Chamber intend to do about who creates businesses in Philadelphia and the fact that there is not equitable access to capital and credit? In fact, as we've stated in the past, and I've asked you this question in the past, where that is in fact a greater issue for businesses owned by minorities and women than tax reform. GOVERNOR SCHWEIKER: Yeah. Well, I can tell you on an everyday basis we operate what's called the Supplier Network. This is for small businesses who 90 percent of their folks are coming from the neighborhoods, their employees.
Are you addressing lending discrimination right now? My question is about lending 154 2/27/06 - WHOLE - BILL 060006, ETC. discrimination. GOVERNOR SCHWEIKER: No, I'm not. I thought you were asking me about what type of jobs.
My question is about lending discrimination and whether -- the lending discrimination has been documented in the City with regard to small business lending -- creates female borrowers, and the City is comprised of mostly women, and minority borrowers, and the City is mostly comprised of people of color, whether we are in fact creating an economic disadvantage for the City and possibly a greater economic disadvantage to the City than even our tax structure by allowing lending discrimination to the extent that it exists and, in fact, whether there couldn't be more businesses hiring people and affecting the issues that you claim you want to affect. In other words, I amended your statement to say that if minority businesses have better access to 155 2/27/06 - WHOLE - BILL 060006, ETC. capital -- GOVERNOR SCHWEIKER: I'm comfortable with that.
So what is the Chamber doing about it? GOVERNOR SCHWEIKER: I came here today expecting to be fielding questions germane to reduction of the business privilege tax and the City's tax model. So we can provide you with a formal response, but I believe you would find -- I don't know what the source of your research is, but --
I can tell you the source of my research. GOVERNOR SCHWEIKER: -- we can -- if you could just allow me to finish, Councilman. I know you raised the question. I'm trying to be respectful of your place here. I believe had we had the opportunity and had been informed ahead of time that you were interested in that kind of information, we could prepare the 156 2/27/06 - WHOLE - BILL 060006, ETC. answer, and we will do that.
I've asked that question in previous tax reform hearings. Not just in other hearings, but previous tax reform hearings. GOVERNOR SCHWEIKER: That may be so.
And your response then was that access to capital and credit is probably the primary issue for minority and women businesses. So I would expect that you would expect me to ask the question again, and I would expect that with all that's been said in terms of legislation in public policy recently and the fact that there is data out there that shows that less than a third of small businesses that make less than a million dollars a year receive loans in minority census tracts -- in other words, if you were located in a minority census tract, you only had access to less than a third of small business loans of the business that make 157 2/27/06 - WHOLE - BILL 060006, ETC. less than a million dollars a year, and that places the City at an economic disadvantage. But I'll move on to the third question, which is the where. Other than tax reform, what specific initiatives does the Chamber have with regard to neighborhood commercial corridors, which you referenced in your testimony? GOVERNOR SCHWEIKER: Well, I would cite -- thank you for your vigilance on this and how you describe it, at least in those three categories, but I would mention, and certainly Mike has some conversance with this as an active member of our Small Business Board, the Chamber on an everyday basis operates what's called the Supplier Network, and that is for those bigger firms out there that are looking to expand their pool of qualified vendors and suppliers, and all small businesses who would like to be big businesses some day -- and, yes, many of them are 158 2/27/06 - WHOLE - BILL 060006, ETC. minority lending. We track all that -- have the opportunity to understand exactly what these big firms want in terms of procurement, and it's a formal commitment required where they experience a lot of insightful education, certify that they can be a vendor or supplier for big businesses. They're all through the City of Philadelphia, or they have the opportunity to participate if they'd like. And through that channel, they come to know what's required for them to do business. That's the Supplier Network, and we continue to operate that.
My question was more related to not minority business development. That question was related to neighborhood business development and specifically neighborhood business districts, and as we are here talking about how to create a better environment for doing business in Philadelphia in general, we know some of the most challenging areas to do business happen 159 2/27/06 - WHOLE - BILL 060006, ETC. to be on the many neighborhood business strips and commercial corridors throughout the City. I'm asking whether the Chamber has any specific programs to make those business strips within low- and moderate-income and minority neighborhoods more attractive? Is that part of the Chamber's formal agenda? GOVERNOR SCHWEIKER: Yeah, I believe that it is, and I would again cite the Supplier Network as an example of our promotional effort that brings more -- our attempts at landing more business to bring them to the City so they in turn do business with the firms inside those corridors.
Can you name any members of the Supplier Network that happen to have their businesses located within a neighborhood business district? GOVERNOR SCHWEIKER: I can get that for you.
Thank you, 160 2/27/06 - WHOLE - BILL 060006, ETC. Madam President.
You're welcome. The Chair recognizes Councilman Kelly.
Thank you, Madam Chair. Thank you, Governor, Mr. Lovera and Mr. Pearson, for coming in here today. I just have a question for Mr. Pearson. You mention in your testimony that you're interested or you were interested in acquiring a 150,000 square foot facility. Could you tell me if you did purchase that facility, would you anticipate hiring additional employees?
Clearly, the goal is focused on growth and making that commitment to expand from where we're currently at about 80,000 square feet. Clearly, I anticipate growing the business.
Could you 161 2/27/06 - WHOLE - BILL 060006, ETC. give us an idea on where that facility would be located? Have you had --
I'm presently located in Yeadon, Pennsylvania. Obviously I am leasing a facility. The next move would be to purchase a facility. Initially when I started the company, I didn't have the capital to commit, because it's a capital-intensive business and I had a lot of equipment to buy. Now I'm at the point where that becomes a more realistic investment, and, again, I'm looking for access to transportation, not only mass transit so that my workers can get to work, but also trucking. I'm looking for ceilings. I'm looking for a solid building that does not have any hidden environmental challenges. And I think Philadelphia can offer me that opportunity, but, again, at the end of the day, it's got to make sense on a balance sheet.
Well, the question I have is, if you did hire 162 2/27/06 - WHOLE - BILL 060006, ETC. additional people, would they be from probably the same area that you would have the facility in or would they be from everywhere?
Generally that follows suit. A lot of businesses will give you anecdotal studies. If they draw a map of their business and they stick pins for every employee, generally those employees are drawn from those communities.
Okay. That's all I wanted to say. I find it very interesting, though, and I do have some other questions for you, but I'd rather address them with you personally, if I may. GOVERNOR SCHWEIKER: Councilman Kelly, I tell you, how close is his company to this City? As close as that exit door of the Council Chambers to this table. And they're in that location. And that's the difference as far as a place who does extract 6.5 percent on net 163 2/27/06 - WHOLE - BILL 060006, ETC. profits and one who does not.
Well, that's true. For the testimony that we've been listening to today, I think that many small businesses have said the same thing, and I think that the only thing that I can say is, it comes down to either you believe in supply side economics or you don't. If you believe that these tax reductions are going to really spur development, economic development, it's going to bring in new businesses, it's going to have new employees, then I think you're going to vote for tax reduction, but if you don't, if you don't think it's going to do anything, then I think you won't. I think if you stay status quo, if you think that's good, that's where we are in this Council. I think that we have to do whatever we have to do. I would rather take the risk, if there is a risk, in getting in some tax reductions so that we could really send a message out to the 164 2/27/06 - WHOLE - BILL 060006, ETC. business community that we are serious about gaining new businesses in this City. That's all I'd have to say, and I again thank you for -- GOVERNOR SCHWEIKER: Councilman, thank you. We're trying to accent the positive, and during my remarks, I did mention that we're pleased with Mayor Street, and we said so a couple weeks back, that that particular day we were happy to see the Mayor embrace the need for business privilege tax reductions. And I think with some of the legislative eagles that exist that have been circulated by members of this very Council, the opportunity to blend interest and outcome, possible outcomes, creates a positive opportunity, and by June, perhaps we have in place the reductions of which you speak. So one of the things, too, I wanted to point out to Councilman Goode, Cassandra Hayes was here today -- and this is relevant to your question 165 2/27/06 - WHOLE - BILL 060006, ETC. about -- and I know where you're going; that is, real jobs held by real people in the neighborhoods near these corridors and what the Chamber has done. Perhaps Cassandra Hayes would have been the most appropriate respondent. And she was here, but she runs a small business and to take two hours out of the workday hurts the top and bottom line. That's just the way it is. They can't hang out in City Council all day. But having said that, she runs Bodacious. It's a promotional gifts and basket production, small firm. I think it kind of epitomizes the kind of firm or company that's on your mind, small. And she would tell you about the Chamber's mechanical help and commitments so that she could thrive in business, but she had to take off.
Well, essentially for your own edification, according to our most recent study, there were 28,019 small businesses located in 166 2/27/06 - WHOLE - BILL 060006, ETC. minority census tracts. They only received 2,276 loans, small business loans. There were 33,792 small businesses that made less than a million dollars in nine minority census tracts. They received 4,636 loans. In terms of those businesses that make less than a million dollars, in minority census tracts, they received 32.93 percent, less than a third, of lending resources. So the anecdotal testimony would have meant nothing to me at all. Thank you. GOVERNOR SCHWEIKER: Hopefully we can work with you on improving that picture.
Thank you. Are there any other questions from members of the Committee? (No response.)
Seeing none, thank you very much. GOVERNOR SCHWEIKER: Thank you. 167 2/27/06 - WHOLE - BILL 060006, ETC.
Good afternoon. Nice seeing you, Stan. Please identify yourself for the record.
I'm Stanley Shapiro, coordinator of One Philadelphia, and I'm here with a panel of three of my colleagues from One Philadelphia to testify on the principles in these bills. I'd like to say that we have not yet had an opportunity to examine the details of the bills, so we can't comment on those precise items of legislation, but we do want to talk about the principles in the legislation.
And we're going to start off with a former member of the Tax Reform Commission, Jonathan Stein.
Good 168 2/27/06 - WHOLE - BILL 060006, ETC. afternoon, Mr. Stein. Nice seeing you.
Nice to see you, too. I'm Jonathan Stein. I'm general counsel at Community Legal Services. The testimony I have is in a written form and in fact in letters that I sent to each of the Councilmembers last week, and I have copies here for distribution. If you recall, the last time I was here in City Council, I was honored to participate in the memorial service for the late Councilman David Cohen, and I really thank both Council President Verna and other members of Council here who helped make that memorial service possible. I'm here today to solely speak against the repeal of the ordinance that was called the David Cohen ordinance, but is really the ordinance of this entire City Council. If you recall that memorial service, many people, both who spoke and those on City Council, took 169 2/27/06 - WHOLE - BILL 060006, ETC. great pride in the accomplishment of establishing, for the first time in the City's history, a tax credit for not only the working poor. That's how it's been described, but it's really any working family earning less than $32,000 would be eligible for some graduated credit. So that we're not only talking about working poor, but we're talking about what you might call working-class or low-middle-income families, tens of thousands of families across the City of Philadelphia. And that was not only the accomplishment of David Cohen, the late Councilman David Cohen, but I would say the accomplishment of this entire City Council. This is an achievement of City Council, and I think one of the greatest achievements of the last decades, to establish this working tax credit. And we're somewhat chagrined that this is even before you for repeal. This is probably the most significant piece of progressive tax policy that this 170 2/27/06 - WHOLE - BILL 060006, ETC. City and City Council has ever adopted in the last seven decades. And I'd like to just mention very briefly just in a few minutes the reasons why this repeal issue should really be taken off the table. The first and foremost is that there's no fiscal reason to repeal this ordinance. It's not going to affect next year's budget. We know its first year of impact is Fiscal Year 2010. It won't in fact impact Mayor Street's last year in office two years from now. And the only impact it would have is for Fiscal Year '10 or 2010 and 2011. And even there, even if you implemented the ordinance in those outer years to the Five-Year Plan, you'd still have a budget surplus, according to Mayor Street's figures that he supplied Council with in the Five-Year Plan fund balance just a few weeks ago. So there's absolutely no reason budget-wise or fiscal-wise why this ordinance should even be discussed for repeal, much less repealed. 171 2/27/06 - WHOLE - BILL 060006, ETC. Secondly, related to that is that because the tax credit would work by requiring people to apply for it, we know that it won't have 100 percent take-up rate, and those in the Administration that estimated the cost of the tax credit did not take into account that there will not be 100 percent take-up rate. In fact, the current federal Earned Income Tax Credit, or EITC, is one where the take-up rate is currently about 75 percent. So that the cost estimates of the City Administration are really way off in terms of what these costs will be down the road. On the merits of this ordinance -- and it's sort of strange to be able to have to defend a law that's already law that this Council overrode the Mayor's veto on just not too long ago, but the most important aspect of this tax credit is that it injects one element of progressivity and fairness in this City tax structure. We noticed our 172 2/27/06 - WHOLE - BILL 060006, ETC. tax structure is not a fair one across the board, but this says we're going to make a small dent for working families who have incomes under 32,000 a year to parallel what we have at the state level and at the federal level.
We also had economists who testified before City Council from the Keystone Research Center that made two main points I can summarize in two seconds. One is that unlike these across-the-board wage tax cuts, which help suburbanites who work in the City, this tax cut because it is focused on more working-class families is almost all going to Philadelphia residents and not non-residents. It also is one because of who would benefit that would go to people spending the money and not putting it off into investments or vacations in Europe or whatever. They would actually spend the money on City businesses and maybe even on some bills like those owing to the Water Department or the Gas Works. 173 2/27/06 - WHOLE - BILL 060006, ETC. So this makes a lot of sense impacting Philadelphia residents and on consumer demand in Philadelphia. And the last point I'll make before turning it back to Mr. Shapiro and Sharon Ward is really the legacy of this Council and the City of Philadelphia. This should be the pride of this City, an extraordinary accomplishment, made in a difficult way. Obviously, there are competing interests and budget problems, but this is a shining star of tax fairness and equity in this City. Councilman Ramos wrote in the Daily News it's the right thing to do, it's moral politics, and he added, We are strong and smart enough to do right by the poor and solve our deficit, too. And when he said "poor," he really also, I think, meant working-class and low-middle-income people as well. So we urge City Council to put this repeal aside and to take pride in this major accomplishment that you all 174 2/27/06 - WHOLE - BILL 060006, ETC. voted on within this past year. Thank you.
Good afternoon. Thank you for the opportunity to testify once again on taxes in Philadelphia. I'm Sharon Ward. I'm with Philadelphia Citizens for Children and Youth. When I came here today in writing the testimony, my sentiments did echo those of Councilman Kenney. Here we are again. Here we're having the same conversation and where will that bring us. And I think that my position today is that we've had a great deal of discussion and testimony about business taxes in Philadelphia, and I think it's been very helpful over the past three years, and I think today's hearing was 175 2/27/06 - WHOLE - BILL 060006, ETC. very helpful. Because the fact of the matter is that we are a City that still has tremendous needs and a great demand for services and we've had a good discussion around business taxes. And I think from hearing three years of testimony, what has become clear is that citizens in Philadelphia and City Council members have a variety of goals, and what I would submit to you today is that it would be a more productive use of Council's time at this point to begin to consider tax proposals that reflect all of those goals rather than just one. It is relatively clear, given the comments of Councilmembers and the issues of consideration today, that members of Council and Philadelphia residents value a number of things. We value the continuation of necessary services, whether they're police or fire departments or libraries or a variety of other things that have struggled over the past few years. We value affordable and 176 2/27/06 - WHOLE - BILL 060006, ETC. stable property taxes. We value a tax system that does not hit the lowest-income workers disproportionately. And we value job growth. I would simply submit to you that the conversations that we have had over the past three years about eliminating business taxes address one of those issues at the peril of the other three, and suggest that it is time for Council to consider some alternatives that would allow us to embrace all of those values rather than simply one. We're fortunate this year that we are in better economic times than we have had over the previous couple of years, but I do want to point out that we've really only begun to recover from the retrenchment and staffing and services that this City has experienced over the past four years. If this budget is enacted as proposed, Philadelphia will still have 1,200 fewer employees than it did in 177 2/27/06 - WHOLE - BILL 060006, ETC. 2001. We will have experienced reductions in staffing in every department in the City, with the exception of two, the prisons and the Department of Human Services. And while prison spending and positions have gone up considerably, even the Department of Human Services, which addresses our most vulnerable citizens, has only had a modest increase in positions. There are several areas where we have continued to fail to recover. This Council has raised the issue of police staffing levels. There are three other departments in particular that have experienced significant reductions in staffing. The Department of Licenses and Inspections, one that I will submit to you has probably an equal impact on the business climate in this City, as do its taxes, has had more than a 20 percent reduction in staffing, as has Fairmount Park, and the Department of Public Health now has about 18 percent fewer staff than 178 2/27/06 - WHOLE - BILL 060006, ETC. it did in 2001, and you can see that when you try and make an appointment to get services at the department. We know the business community doesn't like taxes. They don't want taxes. They've gone to great lengths to express how much they dislike paying taxes, and that's true here and that's true pretty much in any business community at any level, municipal, state or federal.
But I think -- and we want to point out again that in fact Philadelphia is a city that doesn't raise business taxes, hasn't raised business taxes, has in fact reduced business taxes on a predictable schedule for the past ten years and in fact has reduced business taxes by more than a third over that period in time. Unfortunately, the position of the business community is that only eliminating business taxes will do. So that's the proposal on the table. I think what your hearings and 179 2/27/06 - WHOLE - BILL 060006, ETC. this dialogue has introduced is simply the notion that Council can do that, you can eliminate business taxes, but we've learned two things. One is that it will cost a lot of money, $265 million when fully eliminated.
Excuse me a moment, please. The Chair recognizes Councilman Nutter for a point of information.
Thank you, Madam President. Ms. Ward, I sincerely apologize, but by the time I am able to actually come back, we'll be several pages into the record. I know we've been down this road so many times that it may be difficult for all of us to keep track of what's in front of us and what's not in front of us. I don't believe there's a bill in front of us that eliminates the business privilege tax. You've mentioned it a couple times. 180 2/27/06 - WHOLE - BILL 060006, ETC.
That's true, but I believe much of the testimony here today has been about the need to not to mend but to end the business privilege tax, so my testimony is simply following that vein.
Well, I understand that. I can't account for what people say. I just want to make sure that the record is clear and that your testimony is clear and doesn't potential lead to further confusion on the record. When you say definitively that we're talking about eliminating the business privilege tax, at the moment that is not true. There is no bill that does that in front of us right now.
That's true. And then I can modify my comments to say that there is legislation that would enact a one- or three-year reduction, further reduction, in the gross receipts tax on a schedule to eliminate the gross receipts tax in 2020. 181 2/27/06 - WHOLE - BILL 060006, ETC.
There is no 3 such proposal in front of us that does that either.
Can I just interject? My understanding, very quickly, is that people will propose amendments which would put such a schedule in place.
I believe that people have suggested, at least from this table, amendments that would put such a schedule in place. So I think that's why we're addressing it.
Again, people can suggest whatever they want, respectfully, at that table. There are only people at 16 of these tables that get to do anything about it, and I want to make sure that the record is clear and that people who are testifying are clear 182 2/27/06 - WHOLE - BILL 060006, ETC. that you cannot say at the moment that there is a bill or even an amendment that eliminates the business privilege tax in front of us at the moment. There is no 6 bill in existence --
-- in front of us at the moment that does any of that.
I just want to make sure that we're all speaking about the same thing. There have been. There have been many in the past. People have talked about it. People can talk about whatever they what to talk about. There is no bill that exists at the moment that does that.
Thank you, Madam Chair. 183 2/27/06 - WHOLE - BILL 060006, ETC.
We'll note that. There were some -- again, there's a conversation here about how to protect citizens and grow Philadelphia's economy. So let me suggest that there are three things that we should consider and we would urge you to consider that would enable the City to do so. First was the point that Councilman Goode has raised continually throughout the day, that taxes are not the only things that businesses worry about, that issues related to ability to get permits and access to capital are very important. We believe it would be productive if there were proposals that were considered and enacted that helped to address those issues. The second is, we would urge Council to look at the existing tax reduction and deferment programs better and to report back on how they are 184 2/27/06 - WHOLE - BILL 060006, ETC. working and if that's not a strategy that should be pursued. We have enterprise zones, opportunity zones where businesses can locate and pay few or no taxes, and I would submit to you that many of the individuals who are testifying here today might do well to move their businesses to those areas if they were concerned about business taxes, and that certainly would help them to thrive. The third is that we would urge that Council look at approaches that are more targeted to new and small businesses. The conundrum that's been presented is that the reduction in overall tax rates affects small struggling businesses and large thriving businesses, and in an area of scarce resources, it does not make sense to provide tax relief to large and thriving businesses if your goal is to attract and retain smaller businesses and businesses that grow. Simply, we'd urge Council to 185 2/27/06 - WHOLE - BILL 060006, ETC. change the debate and move the debate to make sure that we are protecting what's valued in the City and that we are not considering proposals that will do harm to the City's ability to continue to deliver services to its citizens. Thank you.
Good afternoon, sir. Please identify yourself for the record.
My name is Mark Stier. I'm speaking on behalf of One Philadelphia. Thank you, Madam President, for allowing us to testify on 186 2/27/06 - WHOLE - BILL 060006, ETC. this important issue. Over the last few years, it seems to me the debate about economic development in this City has been narrowing from a general debate about the kinds of things that improve our economy to a debate about tax reform, and now we seem to be focused almost solely on reducing one tax, the business privilege tax. I'd like to suggest that we take a little broader look at how to grow businesses in Philadelphia, and I want to draw on my own experience as President of West Mount Airy Neighbors and as a member of the Board of our community development corporation, Mount Airy USA. And I think we ought to start with goals, because there are a lot of different kinds of goals we can have from growing the economy. I suggest the most important goal is to grow businesses in our neighborhoods, to revitalize our commercial corridors, to focus on small 187 2/27/06 - WHOLE - BILL 060006, ETC. businesses. I think it's those small businesses that are most likely to employ Philadelphians and, in particular, to employ Philadelphians who are less skilled and who are very much underemployed and unemployed right now. I also think it's those small businesses that are most likely to contribute to the whole neighborhood by, for example, reducing the prices of goods and services, which are often far higher in our distressed neighborhoods than in our more affluent neighborhoods. Now, if that's our goal, what kinds of strategies should we adopt to attain that goal? I would suggest first our strategy should focus on investment in these commercial corridors. First we have to help businesses secure the capital they need to start up, and here I think I agree with Councilman Goode's eloquent testimony and questions about the barriers to African-Americans and to women in starting businesses. 188 2/27/06 - WHOLE - BILL 060006, ETC. I also think we need to focus on improving these commercial corridors, improving their streetscapes, cleaning the streets, providing an environment in which businesses thrive. And, secondly, after these investments in businesses and commercial corridors, I suggest we need to deal with the crime problem. One of the greatest barriers to crime, particularly in our distressed -- sorry. One of the greatest barriers to new businesses starting up in especially our distressed neighborhoods is the high rates of crime, and I think City resources need to be spent to deal with that problem. Third, I think we need to make the process of starting businesses much easier. D. who recently opened up a consulting firm in Center City and he told me that after three to four weeks of running from one agency to another and dealing with the morass that's the Department of L&I, he 189 2/27/06 - WHOLE - BILL 060006, ETC. D. or a consultant with that kind of expertise to start a business here. I think that's an important barrier to business development and it's one this Council ought to address. So those are the first three things I would start with. Then I would come to taxes, and I want to suggest a number of things that we need to think about when we think about taxes and business growth. The first thing, though, I suggest is, we need to worry about reducing revenue to such an extent that we can't make the investments in our commercial corridors and helping businesses attain the capital they need to start up, and improving streetscapes and improving the Department of L&I and the other departments that are such barriers to business development. If we cut our taxes to such an 190 2/27/06 - WHOLE - BILL 060006, ETC. extent that we don't have the funds to make these investments, I think we lose some of the greatest opportunities we have for improving our economy.
And just as a parenthesis, I want to say the model I'm suggesting for economic development is a community-based economic development model, one in which CDCs, other local agencies work with small businesses and with the City to grow our economy. And when one wants to find an example of how that could be successful, I'd say look at the South Bronx, which, despite the high taxes in New York and other problems in New York, has seen an almost miraculous recovery largely to due to the CDC movement and the community-based economic development movement. But let me come back to taxes. Suppose we want to focus on taxes as a way of growing our economy. Well, first I'd suggest we need to reduce taxes on low-income residents, and that means we need to keep the Cohen tax credit for the 191 2/27/06 - WHOLE - BILL 060006, ETC. working poor. If we want to grow businesses in our commercial corridors, we need to increase demand for the goods and services those businesses supply. Reducing taxes on our low-income workers is one way to increase that demand. It doesn't really make sense to invest in commercial corridors, particularly in distressed neighborhoods, if we're not at the same time giving our workers the means to buy goods from those businesses. Second of all, I suggest we have to deal with property taxes, because as neighborhoods improve, then there's the likelihood that gentrification takes place and that a greater burden is placed on residents who live through the bad times in the neighborhoods and really deserve to stay in the City for the good times. And after we deal with those two tax issues, then I suggest we come to the business privilege tax, and here I 192 2/27/06 - WHOLE - BILL 060006, ETC. may disagree a bit with my friends from One Philadelphia in that I actually truly do think the business privilege tax is a bad tax. Like most business taxes, it falls, on the one hand, on consumers, in which case it's really a more aggressive tax than our sales tax, which has exemptions for medicine and food, and it falls, on the other side, on capital, but it's a very unfair tax in that there's absolutely no progressivity and an important part of the tax is paid on gross revenues. So I suggest we do begin to reduce the business privilege tax as a way of growing the economy, but I would suggest we do it not by general cuts, but by focusing our cuts on small businesses, businesses with few employees and by focusing our cuts on start-up businesses. And I know there's some question about whether we can do that under the Uniformity Clause. We've consulted with attorneys who have looked over the case 193 2/27/06 - WHOLE - BILL 060006, ETC. law, and they suggest that in fact we can do that. It seems to me that's a much more equitable way of reducing the business privilege tax, and it's also a way that gives us more bang for the buck, that really helps support the small businesses that are the prime engine of economic growth and job creation in the City. Lastly, I would say when it comes to taxes, it's very important, at least in the short run, the tax changes we make are revenue neutral. While I want to see cuts in the business privilege tax, I think we need to do that without sacrificing revenues. It may well be that over the long term, cuts in the business privilege tax will lead to economic growth, will lead to higher property taxes and so forth, but my suggestion is, that is going to be a little longer than many people expect. Most of the econometric research on this question looks at -- was done at a time 194 2/27/06 - WHOLE - BILL 060006, ETC. when businesses were leaving the City, when there were trends in the City where people were leaving for lots of different reasons, when businesses were prepared to leave the City and at one point maybe another tax increase was the last straw.
Getting people back into the City I think is going to take a lot more than reducing the business privilege tax and it's going to take a little longer than most people expect. So the question I would think you would want to ask me then is, how do we have revenue-neutral cuts in the business privilege tax? I suggest we look elsewhere for revenues. Ms. Ward suggested some alternatives. I suggest we take a serious look at creating a personal income tax in the City. This was a proposal the Tax Reform Commission looked at quite closely. My understanding is, they came close to endorsing it, but they didn't have the data from the City that would enable them 195 2/27/06 - WHOLE - BILL 060006, ETC. to fully understand its impact. But one estimate suggested that by creating a personal income tax, we could raise an additional $70 million at the same tax rates that we have presently in place. Now, a personal income tax/revenue wage tax expands the tax to capital, to interest and dividends. I would suggest that would be a fair trade for a very large cut in the business privilege tax, which is also a tax on capital. It would be a much more progressive way, a much fairer way and a much more sensible way of taxing capital. And as some folks suggest, cuts in the business privilege tax would over time lead to growing economy, and the other proposals I've suggested would also lead to a growing economy. We could then gradually reduce that personal income tax to much lower rates, and, of course, we'd be able to reduce it anyway because we're going to get the gambling revenues eventually, 196 2/27/06 - WHOLE - BILL 060006, ETC. which would allow us to reduce that tax. So my suggestion then is, we take a very broad look at how to draw the economy and not focus just on taxes, but focus on the kind of investments the City can make to help our economies grow, to focus on the neighborhoods that really need the economic development in this City. Thank you very much.
You're welcome. Mr. Shapiro, are you going to --
Yes. Justice, equity, fairness, progressivity. These are words which should be central to any discussion of taxes in Philadelphia. Less than two years ago, this Council took those words very seriously when it enacted Councilman Cohen's landmark proposal to exempt low-wage workers from a major portion of the wage 197 2/27/06 - WHOLE - BILL 060006, ETC. tax. I hope that Council continues to respect those important words. Too many of our leaders, particularly in the business community, would have the Council focus instead on, quote, being realistic, unquote. To them, being realistic means viewing taxes solely as an economic development tool. Thus, we have heard today, businesses can march with their feet to wherever the tax price is right. We must retain and attract business. Thus, we must keep reducing business taxes. And that must be our first, if not only, priority in tax policy. But is that just? Is that fair? Is that equitable? Because poor and working people can't readily flee this City, that doesn't make it right to impose high wage and property taxes on them. I don't think we've yet adopted in this City the notion that people who are poor deserve to be poor. Thus, we need 198 2/27/06 - WHOLE - BILL 060006, ETC. not care for or about them. They are poor because industries and government have abandoned all cities, not just Philadelphia, and because jobs that are left are largely low-paying jobs. Traditional liberals, and I think that there are some of us left, believe that government's highest calling is to ease the burdens that a cut-throat economy imposes on the poor. So the question before the Council is whether a cold-blooded utilitarianism should be the only principle at work in making tax policy. This fundamental policy question is more starkly posed this year than most, since the Administration has put forward bills that would cut business taxes and raise taxes on the poor at the same time. Passing those bills would put Council in lockstep with Congress, where benefit programs for the poor were just cut in order to find room for tax cuts for the wealthy. There too, the 199 2/27/06 - WHOLE - BILL 060006, ETC. justification is, "Well, that's what works to get the economy going." One Philadelphia doesn't agree that business tax cuts do work. And we don't think anyone without a crystal ball can prove otherwise. All we know for sure when we cut business taxes is that we've cut taxes for business. And all we know when we cut taxes for working people is that we've reduced the burden of being poor. When this is all we know, the choice should really be an easy one. If there's money for tax cuts, let's help those who may otherwise need to choose between food and shelter. Apparently, the Mayor and the business community are clear that there is money for tax cuts. That leaves no 20 justification whatsoever for repealing the Cohen tax cuts and replacing them with business tax cuts. If some of the Cohen tax cuts are later found unaffordable, then let's look for other sources of revenue. We've heard 200 2/27/06 - WHOLE - BILL 060006, ETC. discussion of some of them from the previous witnesses. Perhaps we should look at an income tax, one which taxes all income, not just wages, and one which is graduated. Or perhaps we should look at broadening the base of the business privilege tax so that banks and others that now get preferential treatment pay their fair share. But let's not first impose burdens on those least able to bear them. Cities with class, whether world class or otherwise, just don't do such things. Thank you.
Thank you very much. Are there any questions from members of the Committee? The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. First let me say that I was 201 2/27/06 - WHOLE - BILL 060006, ETC. very pleased and proud to have played some role in the enactment of the bill 4 that's now under some measure of attack, having worked with Councilman Cohen on the legislation, developed a schedule and worked with him on moving it to a time that, as you indicated from the testimony, would not go into effect until 2010. And that was a fine piece of work by Councilman Cohen. It does strike me and it's been mentioned a couple times here this morning that we've been down a couple of these roads before. Although having great love of irony, I do find it quite interesting that last year the bulk of the testimony from the organization generally known as One Philadelphia was primarily targeted at trying to make sure that we did not take any action on taxes in any way, shape or form and you now find yourselves, I guess, with a bit of the shoe on the other foot, now finding yourself under attack for a piece of 202 2/27/06 - WHOLE - BILL 060006, ETC. legislation that you worked on, where you now feel that you have to fight to hold on to something. So I guess in the course of the last year, we've all pretty much had the same experience, just in different ways, and so it is an interesting irony that you find yourselves in this position this year. Why do you think this proposal is in front of us?
Why do we believe the proposal to repeal the Cohen tax cuts is before us?
You really would have to ask the Mayor that. I really certainly could not --
Well, I understand, and I often do ask the Mayor his opinion about different things, and he is never shy about letting me know, but since you're at the witness table, I thought I'd ask why do you think the 203 2/27/06 - WHOLE - BILL 060006, ETC. Administration sent this bill up here.
I really can't say any more than what the Administration has said. The Administration has said that --
-- in the Mayor's budget address that there was going to be a budget problem in the out years if the bill remained intact. That's what I recall the Mayor having said.
We did, Councilman Nutter, look at those numbers, and it's just not comprehensible. Because when you look at the estimated cost for Fiscal Year '10 and '11, even if you implemented the ordinance -- and I wouldn't call it the Cohen ordinance. I'd call it the City Council ordinance, because this body 204 2/27/06 - WHOLE - BILL 060006, ETC. voted for it, overrode a mayoral veto and should take pride in it. That ordinance, even if implemented in 2010, 2011, would still allow a budget surplus, a fund balance for those two out of years of the Five-Year Plan. So there's no rational basis that we see in this proposal. I'm not sure that answers your question adequately, but that's my response.
Not really. I mean, do you think the Administration has any concern that the lessening of those revenues or giving up those revenues would have any impact on our ability to provide services?
Again, you really would have to ask them. I believe they're going to testify later on, and I'll be very interested in that answer as well.
So is it the consistent position across One Philadelphia that the bill should not be repealed? 205 2/27/06 - WHOLE - BILL 060006, ETC.
We have not -- those of us who are here are speaking to the principles that we as individuals will be bringing to that discussion in One Philadelphia. One Philadelphia has not taken a formal position, and I did try to say this at the beginning, has not taken a formal position on any of these bills in front of us. We're talking about general principles. Some of us as individuals have very strong positions, which we pretty much articulated, and we are all grappling with this inside One Philadelphia, but we've not as an organization taken a position.
But, Councilman, I, speaking as general counsel of Community Legal Services who represents thousands of people in this group of lower-income working poor, I mean, in my mind, I have a very definite opinion that this ordinance should not be repealed.
I guess I'm 206 2/27/06 - WHOLE - BILL 060006, ETC. a little surprised that there would be, given the general focus of the organization as I know it, why would there be a dispute within the ranks of One Philadelphia about something like this?
I don't know if it's a question of disputes. There is discussion. There is a concern that there might be an impact on services if there are any tax cuts, either those that are scheduled to go into effect already or those that might be added on. And I think we are unanimous in One Philadelphia that we don't think the City can afford any further service cuts and that service cuts which have already been put in place ought to be turned around. So that's a concern that some of us have. Others of us feel that the tax cuts that are scheduled for low-wage workers will themselves have an extremely positive economic development effect on the City; that tax cuts for poor folks 207 2/27/06 - WHOLE - BILL 060006, ETC. and working folks, especially who live in the City of Philadelphia, get you the most bang for the buck; and that it may well be that as we get closer to the time when those tax cuts are actually scheduled to be implemented, we can find even more as a consensus that those tax cuts are not a threat to City services. But I think the discussion is really, as Jonathan pointed out, it's a very premature discussion. These tax cuts will not go into place until 2010. There is no need to enact -- there's no 15 one who has been able to --
But there is no 23 current impact that repeal of that bill 24 would have on the City budget. It is way premature to really even be looking at 208 2/27/06 - WHOLE - BILL 060006, ETC. that matter, and so we want to -- those of us who have that point of view want to put it forward.
Well, there's a word that was mentioned earlier which I always enjoy. I don't use it much myself, but it was the "conundrum" word. It seems like you find yourself in a bit of a conundrum with your argument, only in that I heard you say earlier that there's a positive economic impact by reducing this tax on a certain population of people, but you've argued in the past that you don't get virtually -- not just the past, I think in the current testimony -- that you don't see any economic impact from reducing other taxes. How can you have it both ways?
The overwhelming -- let me finish. The overwhelming majority of businesses in Philadelphia are small businesses. 209 2/27/06 - WHOLE - BILL 060006, ETC.
But that doesn't necessarily mean that the benefits that they get -- and we actually have been kind of clear that we think --
They're probably more likely to hire Philadelphians and neighborhood people since they're so small.
We do think that cuts in the business privilege tax, if they take place and if they are revenue neutral, should be focused on smaller neighborhood businesses. We've testified to that a number of times, including today.
Whatever we do with taxes, small neighborhood businesses get whatever their proportionate benefit are anyway, right?
Well, yeah, but 210 2/27/06 - WHOLE - BILL 060006, ETC. if the --
If the proportion is a small proportion or even a less than 100 percent proportion of a tax cut which is only needed for them, then it's sort of a waste of City revenue to also throw money at businesses which don't need that tax cut.
Well, you'd probably have to go through -- I mean, in 2003, tax year 2003, you had 79,000 filers.
79,000 filers on BPT. So unless you're prepared to go through and analyze each individual business's circumstances to see whether or not they, quote/unquote, need the cut, I mean, you're either going to do across the board or -- I mean, I've had some thoughts, and I'm sure other members have had some thoughts, about more targeted 211 2/27/06 - WHOLE - BILL 060006, ETC. rates or exemptions, first X thousand dollars of your BPT might be exempted, something comparable to what they do with real estate taxes on a homestead exemption or something like that. But, I mean, it's not that it may be true. It is true. The overwhelming majority of businesses in Philadelphia are small businesses. They pay a fairly small portion of the business privilege tax as compared to a host of other businesses. But in any event, as you've indicated, I do look forward to further explanation, but it's a wonderful opportunity to work together again. We look forward to what happens over the next couple of months.
I'd like to reecho the thank you in your role in making that Cohen ordinance law.
I appreciate that, and I didn't raise it 212 2/27/06 - WHOLE - BILL 060006, ETC. for that. I got my props a long time ago. I would say, though, gentlemen, you have crowded out Ms. Ward, who was up at the table first and now you guys have taken up all the room. So I'd love to hear her perspective on some of these matters. I know they all have generally better manners than that, Ms. Ward, but they've gotten beside themselves. What's your --
I think Stan has 213 2/27/06 - WHOLE - BILL 060006, ETC. told you One Philadelphia's position. Let me tell you PCCY's position, since I'm here reflecting that. Our overall position is that we are most concerned about the City's ability to deliver services to its citizens, and that our number one priority is adequacy of revenue. Within that context, we believe that our tax system needs to be fair and equitable and needs to allow individuals to be able to support themselves. So at this point, PCCY's position is that we oppose the repeal of the Cohen bill. We believe that based on our work with the state tax forgiveness and the Earned Income Tax Credit legislation, that the economic impact estimates are way overblown. We believe that they will have -- that the cost to the City is much less than is projected in the Five-Year Plan. We think that the impact, therefore, will not be as detrimental to the City's ability to 214 2/27/06 - WHOLE - BILL 060006, ETC. deliver services.
Given your concern about services, if the purpose of the bill, from the Administration's perspective, is because of their concern with regard to the impact on service delivery, what would your position be?
Well, I'm sure that's probably the case. As I testified today --
No. Councilman, as I testified today, the City and your efforts are around trying to balance a variety of needs, and I think what you've heard from One Philadelphia and from me today is that we believe that there needs to be the capacity to balance all of those needs and that we didn't think eliminating the business privilege tax would do that. As I indicated, if we want to maintain services, protect low-income tax 215 2/27/06 - WHOLE - BILL 060006, ETC. forgiveness and grow jobs, we simply thought that there were a variety of different strategies and that eliminating the business privilege tax is not one of them. Does that mean that there would be some loss of revenue if we have tax forgiveness for low-income workers? Certainly that's the case. We also suggested, as Mark did, in a variety of proposals that we've been discussing that might actually help to generate additional revenue for the City. Our position is for, at least on the business privilege tax side, revenue-neutral tax reduction, and we are happy to work with Councilmembers in identifying some strategies that might be able to do that.
This is my last question. Are you opposed to the Administration's BPT reduction bill?
The One Philadelphia position is that we believe that in the first year, it accelerates reductions in 216 2/27/06 - WHOLE - BILL 060006, ETC. the gross receipts tax. We're not opposed to that. We're concerned about elimination of the gross receipts tax over time. That's our position.
Okay. So you support the additional reduction in the business privilege tax and you oppose the repeal of the low-income wage tax bill?
Well, let me clarify our position, because I think I misstated it. Our position around business privilege tax reduction, I'm sorry, is that we would prefer to see more targeted tax reductions that don't cost a lot of money and that might help to address the needs of neighborhood and small businesses. Is that an accurate reflection of our position?
I 217 2/27/06 - WHOLE - BILL 060006, ETC. understand that, but there's going to be a bill that's going to come up for a vote one day, and I appreciate everything you said. Sometimes we get to make a comment or even a speech to the Chief Clerk, but she really kind of insists on a yes or a no when all of that is done. So you're in support of the Administration's proposed reduction of the business privilege tax. You're opposed to --
You're opposed to the Administration's reduction of the BPT. Okay. All right. Thanks. Thank you, Madam President.
You're welcome. 218 2/27/06 - WHOLE - BILL 060006, ETC. Are there any other questions from members of the Committee? (No response.)
Thank you all for coming in. Brian Carrigan. Is Brian Carrigan here? (No response.)
Philip Kelton. Is Mr. Kelton here? (No response.) MR. McPHERSON: Mr. Mark Merlini.
Good afternoon. Thank you so much for your patience. Please identify yourself for the record and proceed with your testimony.
Good afternoon, President Verna and distinguished members of Council who are still here. My name 219 2/27/06 - WHOLE - BILL 060006, ETC. is Mark Merlini, and I'm a partner and Vice-President of Brickstone Realty. Our company has developed nearly 4 million square feet of office and retail space on East Market Street, including the Wanamaker Building, the Lit Brothers Building, 1234 Market Street and City Hall Annex, which is now the 400-room 10 Marriott Courtyard. I am here today as Chairman of the Building Owners and Managers Association of Philadelphia, commonly referred to as BOMA, in support of the reduction of the business privilege tax. BOMA representatives have appeared before Council on a number of occasions advocating on behalf of meaningful tax reform. Our goal continues to be to work with Council and other interested parties to build a strong, economically vibrant Philadelphia by creating an environment which will attract and retain jobs within the City limits. By making Philadelphia an 220 2/27/06 - WHOLE - BILL 060006, ETC. appealing place to do business, the City will build a firm foundation on which it can grow and prosper. Creating the Philadelphia of the future should be a broad-based effort. The time has come to move beyond the stereotypes of yesteryear, big versus small business, Center City versus the neighborhoods, the business community versus private citizens. In one way or another, the City's tax structure affects us all. Furthermore, by working together, the various groups and coalitions within the City can rework the tax structure in such a way that it will be the catalyst for growth and prosperity for all. Several years ago, Council made a bold move to help stimulate the City by offering a ten-year tax abatement for new housing development and renovations. To this, we say kudos. It worked. Look at what's taking place throughout the City. We have a rejuvenated residential 221 2/27/06 - WHOLE - BILL 060006, ETC. marketplace, one that has had a profound impact on property values for all City residents. There are also new opportunities for small businesses and retailers who seek to cater to those living within the City. Furthermore, the quality of the labor pool has been improved, which in turn bodes well for attracting new companies. Now is the time for us to set the next bold initiative into motion. Now is the time to take the step in making Philadelphia great. The fact of the matter is, is that the current business tax structure in this City is not what it could be or should be. Within the business community, it is one of the significant factors cited by companies as they decide whether to locate their offices in Philadelphia or to locate them in suburban or other locations. The reality is, because of the business privilege tax and the use and occupancy tax burden, the 222 2/27/06 - WHOLE - BILL 060006, ETC. 97 per square foot greater than it is in suburban locations. To a 100,000 square foot firm, this represents almost a half a million dollars in annual tax burden. I ask if this were your company and you're faced with the decision, Location A, located in the City, which had an additional $500,000 annual cost, versus Location B, outside of the City, without the burden, which would you choose? You couple this with the factor that the more profitable your organization is, the greater the burden, this makes the decision all that much easier. You would probably opt for Location B. One of the ways in which we can better compete for jobs and employers locally and regionally is to change the public perception of the way in which business is done here. We advocate broad-based reform which will foster even greater economic growth. Your existing 223 2/27/06 - WHOLE - BILL 060006, ETC. constituents will be served by providing new jobs and greater economic opportunities.
A larger employee base will in turn increase City revenues through wage taxes, and a higher real estate tax revenue should result from increased property values due to higher occupancy. Thanks to Council's excellent management and the resulting flexibility in the City budget, now is the time to institute changes to the City tax code. Thanks, too, to all who have introduced business privilege tax reform legislation that will pave the way for new and improved Philadelphia. BOMA's position continues to be that legislation approved by this body must involve cuts to both the gross receipts and net profits portion of the business privilege tax calculation. In order to have a meaningful impact, these reductions must be multi-year in nature. Companies do not make business decisions on 224 2/27/06 - WHOLE - BILL 060006, ETC. single-year fiscal policy. Philadelphia cannot delay in its pursuit of increased business opportunities, jobs and revenue. By attracting the companies and industries of the future, the City will move forward towards brighter horizons. Meaningful tax reform today will ensure the City's future prosperity. As a body, you have the power to effect positive change and public policy. You have the power to give Philadelphia that competitive edge that will make its future bright and optimistic. Thank you.
Thank you, sir. Any questions from members of the Committee? (No response.)
Seeing none, again, I thank you. Our next witness? MR. McPHERSON: Stewart 225 2/27/06 - WHOLE - BILL 060006, ETC. Weintraub.
I suppose this is the proper time for me to deliver testimony for Councilwoman Blondell Reynolds Brown.
Thank you. Councilwoman Blondell Reynolds Brown is out today and I'm reading her statement with regard to Bill No. 060014, bookbinding BPT correction. It is my pleasure to offer Bill 20 No. 060014 to the Committee of the Whole today. Prior to the enactment of the BPT, the law allowed bookbinders to exclude from gross receipts the receipts they derive from deliveries outside the 226 2/27/06 - WHOLE - BILL 060006, ETC. City. When the BPT was enacted, the provision of the law allowing bookbinders to exclude from gross receipts the receipts they derive from deliveries outside of the City was inadvertently changed. As a result of this change, what had been a thriving industry in Philadelphia has suffered losses arising from small businesses either leaving the City or closing their doors. The result was the loss of neighborhood jobs in the City. This amendment is intended to restore the binding industry the exclusion to which they had been entitled prior to the enactment of the BPT. It is my hope that through this bill, we can correct a mistake from the past and assist this important industry to thrive in Philadelphia. Thank you, Madam President. And I'll make this statement as part of the record as well.
That would be fine. 227 2/27/06 - WHOLE - BILL 060006, ETC. Mr. Weintraub, thank you for your patience. Please proceed with your testimony.
Thank you, Madam Council President. I'm here today -- I guess this is the third time I've been up at this table this morning. This time I'm here as the attorney for Oxford Bookbinding Company, one of the affected taxpayers in the industry for which this bill has been introduced. My testimony was going to be basically laying out how we got to where we are today from a technical and historical perspective. Councilwoman Blackwell's reading of Councilwoman Reynolds Brown's statement basically incorporated most of what I was going to say. I may be repeating a little bit of it, but let me just say for the record, there was a provision in the old mercantile license tax, which pre-dated the business privilege tax, that allowed 228 2/27/06 - WHOLE - BILL 060006, ETC. the bookbinding industry and others to exclude their deliveries outside the City from gross receipts and now in the business privilege tax from net income. The definitions in the business privilege tax changed that interpretation of the law, and as a result, the City's position has been to deny bookbinders and others similarly situated the right to this exclusion. We are asking City Council today, just like they did ten years ago in 1996 when a similar amendment was made with respect to the dying industry, to restore the exclusion to gross receipts that the business privilege tax would provide. I have two witnesses with me today. One of them stepped out, and I know she will be back in a moment. Margaret Baumhauer, who is the Executive Director of the Graphic Arts Association. Until she returns, what I'd like to do is introduce Stewart Gritz, who is the 229 2/27/06 - WHOLE - BILL 060006, ETC. President and sole shareholder of Oxford Bookbinding Company, so he can explain to you how this tax as in its current structure affects his business.
Before Mr. Gritz testifies, can you tell us how many bookbinding companies we have in the City?
I can, but if I might, Ms. Baumhauer just arrived and that's part of her testimony. She will be answering that in her testimony. So why don't --
Ms. Margaret Baumhauer, who is the Executive Director 230 2/27/06 - WHOLE - BILL 060006, ETC. of the Graphic Arts Association, is going to describe for Council the structure of the Association, the demographics of the Association and how the Association has changed over the years.
Thank you. Good afternoon, Madam President and members of Council. As Stewart mentioned, I'm President of the Graphic Arts Association. We're the trade association for the printing industry in Pennsylvania, New Jersey and Delaware. I've been asked to give a brief summary of the binding industry section 16 within Philadelphia in the last 20 years. As far as I can tell from our records, we had 26 bindery members in Philadelphia in the early '80s. They employed approximately 800 people. I'm sure that there were a few companies that were not members of the Association, but I can't tell you how many. Of these 26, six have moved to Bucks County. Ten are now out of 231 2/27/06 - WHOLE - BILL 060006, ETC. business. Most of them moved and went out of business in the late '80s, early '90s. There are approximately ten binders left in the City. They employ about 250 people, total sales of about $22 million. And I just got a phone call two weeks ago from one of our members who wanted to know what they would have to -- some of the legal implications of moving to New Jersey.
And if we were to do this, how much would the City really be losing financially?
Madam President, I believe Commissioner Kammerdeiner, who is here and will be testifying for the Administration, has that information. What has been provided to me is that it is a minimal impact on the budget.
Okay. 232 2/27/06 - WHOLE - BILL 060006, ETC. Fine.
Now if Mr. Gritz can now proceed with his testimony, I'd appreciate that.
Good afternoon. Madam President and members of City Council, my name is Stewart Gritz. I'm the President and sole shareholder of Oxford Bookbinding Company. I'm here today to urge the passage of Bill No. 15 060014. Oxford is located at 3101 Red Lion Road in Northeast Philadelphia across from the Northeast Philadelphia Airport where 30 employees work in its 57,000 square foot plant. Oxford is in the business of binding and finishing printed matter, such as books, brochures, point of purchase displays, CD sleeves, et cetera, for a diverse group of end customers 233 2/27/06 - WHOLE - BILL 060006, ETC. throughout the Midatlantic region. We receive printed matter from commercial printers and bind and finish the product. We bind and finish products for major financial institutions, pharmaceutical companies, schools, sports teams, et cetera, within the region. Oxford is a very old Philadelphia company. It's been in Philadelphia for 140 years, since 1866. Almost 60 years ago, in 1947, my father purchased the company and he managed it with his brother, my uncle, until 1978. During 1978, my father sold the company to my uncle, who continued to operate the company with his son, my cousin, until 1994, when he sold the company to my cousin. In 1998, I purchased the company from my cousin. Mr. Weintraub has already described how Philadelphia's business taxes have developed and how they have been applied to the bookbinding industry. I would like to describe the unfairness 234 2/27/06 - WHOLE - BILL 060006, ETC. of the business privilege tax as it is presently being applied to the bookbinding industry. First, Oxford is being denied the benefit of the exclusion this amendment would restore solely because it does not own the paper upon which the printed material is printed. There is no 10 question that the printer who provides Oxford the printed material receives a benefit of the exclusion Oxford is being denied because it purchased the paper upon which the printed material was printed. Similarly, there is no question that the printer who prints the printed material and does the same thing Oxford does, binding and finishing the product, receives the benefit of the exclusion Oxford is being denied. In other words, we, the binders and finishers, are the only ones who are denied the benefit of the exclusion. Second, I must convey to you 235 2/27/06 - WHOLE - BILL 060006, ETC. why as a longstanding Philadelphia business owner and long-time paying Philadelphia taxpayer I find the situation so frustrating. As I noted earlier, Oxford is located near the Northeast Philadelphia Airport. Oxford's location is also directly across the street from the Keystone Opportunity Zone located in the Northeast Philadelphia Industrial Park and a short distance from the Philadelphia-Bucks County line. If Oxford bookbinder were to locate within the KOZ or across the county line in Bucks County, Oxford would have a significant competitive advantage, because it then would be able to operate without paying any of Philadelphia's business taxes. I am not here today asking for wholesale tax relief, nor am I here today threatening to leave the City. Instead, I am only requesting legislative relief from the blatant unfairness of this quirk in the business privilege tax law as it 236 2/27/06 - WHOLE - BILL 060006, ETC. is being applied. This is especially important to Oxford now. Since I acquired the company, I have been fortunate enough to see the business grow. Oxford has grown to the point where we have outgrown our current facility. I must now make a decision. I can expand Oxford's capital facilities and workforce or I can review my other alternatives. I can move Oxford to a Keystone Opportunity Zone or I can move Oxford a few miles away into Bucks County. I love Philadelphia. My preference would be to keep my business where it is and where it has been for several generations. I would like to expand Oxford's present facility.
Regardless of what I do, I must make a significant investment in my business. I also need to continuously analyze my costs so I can remain competitive with businesses in the suburbs and New Jersey. While your enactment of this 237 2/27/06 - WHOLE - BILL 060006, ETC. amendment will not totally level the tax playing field, it will at least demonstrate a recognition that the City cares about imposing a fair tax structure and that the City Council values the many small companies which make this City great. I urge the passage of Bill No. 9 060014.
Thank you very much. Are there any questions from members of the Committee? (No response.)
Seeing none, gentlemen, thank you. Could we have the Revenue Commissioner come up, please. Are you able to testify on this bill at this time? COMMISSIONER KAMMERDEINER: Yes, I am. I have some testimony that I can share.
Please proceed. 238 2/27/06 - WHOLE - BILL 060006, ETC. COMMISSIONER KAMMERDEINER: Good afternoon, President Verna, members of City Council. I'm Nancy Kammerdeiner, Revenue Commissioner. I'm pleased to be with you today regarding Bill No. 060014. As has already been stated, this ordinance will amend Section 19-2600 of The Philadelphia Code and it will add a new exception from the definition of "Receipts." Because of the precedent this bill would establish, the Administration does not support its passage at this time. This bill would add a new Paragraph 12 to the list of receipts that are excluded from the definition of "Receipts" for the purpose of calculating the business privilege tax. Beginning with tax year 2006 and in the tax years that follow, the receipts or portions of receipts attributable to the delivery of goods, wares or merchandise by persons engaged in bookbinding, tradebinding, sample mounting, postpress services and 239 2/27/06 - WHOLE - BILL 060006, ETC. other print finishing services to a location that's regularly maintained by the other party to the transaction outside the City would be excluded from the receipts that are taxable under the BPT. And let me add, and it's not stated here, that one of the concerns we have is just in how this definition is worded. We think it may be overly broad to deal with the issues that are before us and were presented by the previous witnesses. Perhaps it would help to clarify a little bit. The definition of "Taxable Receipts" in Section 19-2601 of The Philadelphia Code provides that receipts attributable to any sale of goods, commodities, wares or merchandise to a location regularly maintained by the other party to the transaction outside the limits of the City may be excluded when calculating the BPT liability. However, the receipts for services can 240 2/27/06 - WHOLE - BILL 060006, ETC. only be excluded if they are actually performed outside the limits of the City. Thus, services performed in Philadelphia are taxable for the BPT even if there's a resulting product that's delivered to a party regularly located outside the City. The businesses referred to in this proposed amendment process improve the value of the product, but do not manufacture the product. Under the current law, the receipts from all of these services are taxable for the BPT even if the finished product is delivered outside the City. The proposed amendment would permit these businesses to allocate receipts based on delivered products in and out of the City just as if they manufactured the entire product. Our records indicate that approximately 15 businesses are registered with us that have identified themselves as being engaged in this type of business activity. The total annual tax liability for this group of 241 2/27/06 - WHOLE - BILL 060006, ETC. businesses was approximately $100,000 in tax year 2003. We estimate if this bill 4 had been in place in that year, the tax liability of this group of businesses would have been reduced to $40,000 to $50,000, or a cost to the City of $50,000 to $60,000 in lost BPT revenue. The issue here is not lost value resulting from this particular exclusion. The concern is that this exclusion opens the door for additional special legislative treatment for other industries that can, and legitimately have, made identical arguments for exemption from the tax. The City is moving aggressively to eliminate the gross receipts portion of the tax for all businesses. We need to stay the course and not carve out exemptions on a piecemeal basis. This concludes my testimony. I'd be happy to answer any questions.
Thank you. 242 2/27/06 - WHOLE - BILL 060006, ETC. Are there any questions from members of the Committee? Councilman DiCicco. COUNCILMAN DiCICCO: Thank you, Madam President. I'm a little bit confused and maybe Mr. Weintraub -- did we not have this exception or this exclusion in the past? If you would ask him to come back.
Please approach the witness table, Mr. Weintraub.
In the predecessor to the business privilege tax, the mercantile license tax, this exclusion was available. When the business privilege tax was enacted, there was a change in the definitions, which is now what is causing the problem. COMMISSIONER KAMMERDEINER: And so for approximately 20 years now, this definition has been in place, and it's the definition that I quoted in my testimony in terms of the way a service 243 2/27/06 - WHOLE - BILL 060006, ETC. is handled for taxation purposes. COUNCILMAN DiCICCO: Okay. I just wanted to be clear. I was a little bit tired here from being here this morning. I thought I was missing something. Okay. Thank you. Thanks for clearing that up.
Thank you. Any other questions or comments from members of the Committee? (No response.)
Seeing none, thank you very much, Commissioner. COMMISSIONER KAMMERDEINER: Thank you.
I would ask Mr. McPherson to please call our next witness. MR. McPHERSON: David Thomsen.
Good afternoon, Mr. Thomsen. Please identify yourself for the record. 244 2/27/06 - WHOLE - BILL 060006, ETC.
Yes. My name is David C. Thomsen, T-H-O-M-S-E-N. I live at 2328 Parrish Street here in the City. I've been in Philadelphia since 1965, and I'm a retiree of Sunoco. The reason I'm before you today is to speak briefly, and I hope I can be very brief, about my experiences with the Revenue Department. I'm amazed to see the Revenue Commissioner here. She'll understand exactly what I'm talking about. In the late 1990s, I had had a real estate business, but I got rid of all the properties, but I didn't file 17 required business privilege taxes after I had no business. Now, I'll read just a little bit -- because I'm a little nervous, I'll read a little bit of my testimony, which makes it easier for us all. If the proper papers are not filed to show that there's no longer any business being conducted, the Revenue 245 2/27/06 - WHOLE - BILL 060006, ETC. Department will take a business to municipal court, they will seek a fine of $5,000, and if there's not a response within 30 days, they will impose a judgment of $5,000. To get the judgment lifted, what you have to do is to file the tax forms, and in this case tax forms showing all zeroes, no income, no tax to be paid, and then the Law Department will reduce the fine to $500, plus court costs. And eventually there's papers filed in municipal court which will say that the judgment has been lifted. Now, when this started happening to me, I did not believe the Revenue Department was really serious trying to collect $5,000 from me for years in which I had no business whatever, but they did. And I am asking City Council to look at the Section 23 19-509(4)(e) of The Philadelphia City Code with a view to amending the provisions there so that there won't be 246 2/27/06 - WHOLE - BILL 060006, ETC. punitive fines imposed for years in which there is no business whatever. I'm willing to answer any questions from Councilmembers, but I hope that you don't pursue all my personal business affairs. I just hope to testify before you and prevent other innocent victims from falling into this kind of trap. And I don't know of anybody else that would try to impose a $5,000 fine for a year in which there were no taxes. Certainly the Internal Revenue Service in the state would not attempt to do that. That's my testimony. Thank you very much.
Thank you. Do we have any questions or comments from members of the Committee? (No response.)
Mr. Thomsen, thank you very much, and I'm sure that your problem had been addressed long before you came here. 247 2/27/06 - WHOLE - BILL 060006, ETC.
I hired an attorney to get it addressed. It took years and years, because he didn't do the job. I finally settled it myself. It cost me $2,500 in fees to the City and even more in legal fees. I really think that the City needs to think through their policy on this, and perhaps the Administration can do it administratively. But I brought it to you because you have responsibility for the Code and could change the Code.
Thank you very much, sir. Our next witness. MR. McPHERSON: Joyce Wilkerson.
Good afternoon. My name is Joyce Wilkerson. I'm Chief of Staff to Mayor Street. With me today are Nancy Kammerdeiner, Revenue Commissioner; Dianne Reed, Budget Director; and Sean 248 2/27/06 - WHOLE - BILL 060006, ETC. McNeeley, Head of Policy for the City. Thank you for this opportunity to present testimony on FY07 tax measures. The PICA statute requires the City to provide a Five-Year Financial Plan that balances in each year and provides procedures to avoid future fiscal emergencies. Although the immediate goal of the Mayor and City Council each year at this time is to enact the detailed operating and capital budgets for the upcoming year, the Mayor is also required to propose a Five-Year Financial Plan that meets with PICA's approval. 2 million, just one year after we finished FY04 with the first negative fund balance in 12 years. And this year's fund balance is projected to increase further to approximately $168 million. Although we are all happy at this turnaround in our fund balance, we 249 2/27/06 - WHOLE - BILL 060006, ETC. must be mindful of balancing the proposed Plan for a full five years. million before increasing in later years, mainly due to the assumed repayment of the $45 million loan made to PGW. I'd like to summarize briefly some of the factors driving the fluctuating fund balance projections as well as related risks. Employee benefit costs, mainly pension obligations and health and medical insurance, are projected to continue to grow faster than tax revenues, which provide 87 percent of discretionary revenue. This imbalance destabilizes the budget. Some relief is in sight, as the City's minimum municipal obligation for pensions is projected to level off beginning in FY10. However, as PICA has noted, more could be done to address the unfunded liability of the Pension Fund that is now currently only approximately 59 percent funded. 250 2/27/06 - WHOLE - BILL 060006, ETC. There are no wage increases assumed in the Plan after FY08. Scheduled wage tax reductions accelerate beginning in FY10, leading to tax revenue growth below the assumed rate of inflation. As a consolidated city-county in one of only in the country, we 10 administer our own child welfare 11 programs. We are increasingly at risk from proposed federal funding cuts to programs such as TANF and Title IV-E. These cuts increase the pressure on the Commonwealth to change funding formulas and increase local funding match requirements in order to maintain services. In November, I appeared before you to provide testimony on business privilege tax legislation. At that time, I testified the Administration acknowledges the higher-than-expected FY05 fund balance and tax collections provide an opportunity for further tax 251 2/27/06 - WHOLE - BILL 060006, ETC. reductions beyond wage and business tax reductions already planned or in law. I also testified that we preferred to make further reductions on a year-by-year basis and in the context of the annual budget and Five-Year Plan process. Bill 8 No. 060006, our proposal for accelerated action on the BPT, would provide an additional cut in the gross receipt portion of the BPT for FY07, on top of the reduction already scheduled in law. This additional cut has an FY07 impact of $5 million. 7 million, all of which is assumed in the Administration's revenue estimates. This one-time tax cut represents the amount that we believe we 252 2/27/06 - WHOLE - BILL 060006, ETC. can invest in additional tax reductions at this time, while leaving intact necessary fund balances in later years of the Plan. We ask for your support on this legislation. Bill No. 060089 would set the proposed schedule of gross receipts rate tax reductions assumed through FY11 in the proposed Five-Year Plan into law, including the rate reduction proposed in Bill No. 060006. As such, it would have no net impact compared to the net projections proposed in the Plan.
However, we do not support enacting new multi-year tax rate reduction commitments at this time, faced with numerous fiscal uncertainties, PICA concerns over the assumptions in the proposed Plan and accelerating wage tax reductions through 2015. Bill No. 060090 would implement new annual reductions to the net income portion of the BPT, while leaving the gross receipts rate at levels currently 253 2/27/06 - WHOLE - BILL 060006, ETC. set in law. If this bill is enacted as a stand-alone measure, while neither Bill 4 No. 060006 nor Bill 060089 were enacted, this bill would actually result in at least $18 million more revenue over the life of the proposed FY07 to '11 Plan than is assumed, because the gross receipts tax rate would be higher than is assumed in the Administration's revenue estimates. If Bill No. 060006 and Bill No. 13 060090 are both enacted, or Bill No. 14 060089 and Bill No. 9 million less revenue over the life of the proposed Five-Year Plan than is assumed in the Administration's revenue estimates. Again, we do not support enacting new multi-year tax rate reduction commitments at this time and so we do not support 254 2/27/06 - WHOLE - BILL 060006, ETC. passage of either of those bills. Current law calls for sharply accelerating wage tax relief even without considering projected additional wage tax relief through state tax reform. Legislation passed in 2004 scheduled the bulk of this additional relief beginning in FY10 after the Five-Year Plan period that was relevant at the time. This law is now increasingly impacting our ability to balance the Plan. The City's tax reduction program that began in FY96 was conceived and implemented as a moderate and affordable annual investment in our economy and workers. A ten percent reduction in the resident and non-resident wage tax rate took nine years to achieve through this successful program. The combination of the annual wage tax rate reduction schedule after 2009 and the phase-in of the low-income wage tax credit are projected to reduce wage taxes by ten percent in only two years. Taken together, between 2009 and 255 2/27/06 - WHOLE - BILL 060006, ETC. 2015, these two laws are projected to eliminate 30 percent of the City's wage tax collections, the source of the majority of the City's tax and discretionary revenue, without any plan to offset the loss of collections. The combined revenue reduction from wage tax relief currently scheduled in law is projected to be over $130 million in FY10 and '11 alone, increasing to 670 million from FY10 through FY15. And I've included in my testimony a schedule so you can see the impact of just those two tax measures by year out into the future. The PICA statute dictates that we take action now in order to balance the proposed FY07 to '11 Plan. This action is entirely consistent with the Mayor's warnings that the combined impact of these laws would be unaffordable in future years, as well as our preference for year-by-year rather than multi-year tax reform. Accordingly, Bill No. 060007 256 2/27/06 - WHOLE - BILL 060006, ETC. would repeal the low-income wage tax credits scheduled to take effect in FY10. Faced with the need to address the fixed, accelerating and unaffordable wage tax cuts, we have proposed retaining the rate reduction that provide relief to all workers in Philadelphia. If Bill No. 8 million to reflect assumed tax forgiveness and refunds. This would be even harder to accommodate in next year's Plan, which will be debated in spring 2007, when the combined impact of the low-income wage tax credits would be a projected $94 million in foregone revenue during the Plan period. This is a difficult proposal that is not made lightly. Unfortunately, these credits were not affordable at the time they were passed, which is why they were delayed for six years, and they are not affordable now. Bear in mind that 257 2/27/06 - WHOLE - BILL 060006, ETC.
the annual wage tax rate reductions and state tax reform will benefit low-income workers much more than other workers. Bill No. 0600 -- Do you want to take testimony on the school bills or just skip over that?
No. 10 We're going to continue them, as I said earlier in the day, until April the 4th at 10 o'clock. That will be 04 and 08.
Thank you. The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Good afternoon, Ms. Wilkerson, Commissioner Kammerdeiner and Ms. Reed. Just a couple questions on the testimony. First, on Bill 060006, you're proposing to adjust the rates on the 258 2/27/06 - WHOLE - BILL 060006, ETC. gross receipts portion of the business privilege tax in what is referred to as tax years 2006, 2007 and 2008, and I know often there is back and forth between even some of the budget people and certainly the tax office and others about, of course, the difference between our fiscal years and our tax years. Just to touch on that, the tax year 2006 means that when people pay their taxes in, what, February or April of 2007, they use the rate for tax year 2006, right? COMMISSIONER KAMMERDEINER: Let me take that one, Councilman. Nancy Kammerdeiner, Revenue Commissioner. The tax year is a calendar year and so the rate would apply to business activity in calendar year 2006. However, the return that gets filed that deals with that calendar year is not due until April 15th of 2007, which is in Fiscal Year 2007.
Right. COMMISSIONER KAMMERDEINER: And 259 2/27/06 - WHOLE - BILL 060006, ETC. that's why we're dealing with this at this point in terms of the fiscal '07 budget.
Right. Which I guess makes it a little easier to even make an adjustment in the rate for a particular tax year, and especially in this particular case since it's anticipated to be lower, I guess no one is really going to complain about that when they -- COMMISSIONER KAMMERDEINER: Generally speaking, they don't complain when it comes down.
Yes. I'm sure we can find someone who will be upset. Now, the discussion around this particular bill, it's been mentioned on more than one occasion that it is a one-year tax cut, and, of course, this is in contrast to, as the Chief of Staff laid out on , I guess, of the testimony, that the Administration is not 260 2/27/06 - WHOLE - BILL 060006, ETC. in favor of multi-year tax reductions. Is that the current position?
Our position is, we don't support multi-year tax reductions.
Now, what I'm trying to understand is, if that's the position, this bill, 060006, has three years of tax cuts in the bill, which hopefully we can at least agree on is multiple years.
No. The Administration proposed accelerating the rate of reduction in the gross receipt tax, and it was against the backdrop of previously enacted multi-year tax cuts. In order to preserve what had been previously legislated, although we didn't support it, it was previously legislated, we --
Well, you 261 2/27/06 - WHOLE - BILL 060006, ETC. may not have supported it, but the Mayor signed it.
That's right. It was previously legislated. We were not interested in opening that whole issue up again. We thought that because of the fund balance, we were in a position to do more. In FY07, we proposed accelerating by $5 million and then adjusted the tax rates in the out years for legislation previously enacted as a way of previously enacted.
So that we wouldn't have been in the position of having to either repeal or minimize the value of what had already been enacted.
Right. Now, the current guaranteed schedule of gross receipts tax cuts, if there's no 22 vote on any bill, whether it's a bill 23 offered by the Administration or a bill 24 offered by myself, in the spring budget 25 cycle, either April into May, May into 262 2/27/06 - WHOLE - BILL 060006, ETC. June, somewhere in that time frame -- I think it may have been sometime in June of 2003 -- the Mayor signed a business privilege tax bill that had a schedule of five years of guaranteed cuts; is that correct?
And do we at least agree that that was a multi-year tax cut?
This bill 14 has the last three years of the original five years of multi-year tax cuts.
But it reflects -- that's right, but, as I testified earlier, the number is moved to reflect the acceleration in FY07.
Right. Or, I mean, you could have changed the tax 263 2/27/06 - WHOLE - BILL 060006, ETC. year 2006 rate from 1.75 just to 1.665. I mean, that would be a one-year tax credit.
What we tried to do is act in good faith, and that these have been raucous tax discussions, and sometimes we win, sometimes we don't. Sometimes we buy into compromises that we would not have proposed. But there was a multi-year tax reduction set. The rate of tax reduction was legislated. We looked at the budget, thought that we could do more this year and proposed doing more and, in good faith, tried to preserve the rate of 264 2/27/06 - WHOLE - BILL 060006, ETC. reduction that had been previously enacted.
That's why we end up in what has turned out to be, I think, the confusing position of appearing to endorse multi-year -- being all for multi-year tax. What we tried to do was act in good faith to preserve the rate of reductions that had been previously enacted.
Well, I understand that, and I appreciate that good faith. I mean, I guess maybe what I'm not understanding is, there would not be any confusion but for the fact that it was upon its announcement stated the Administration is sending over a business privilege tax bill, it is a one-year tax cut, while the plain reading of the bill -- I mean, there's no footnote, there's no other explanation -- it's a three-year schedule. It lays out what the schedule is of the cuts and it's for 265 2/27/06 - WHOLE - BILL 060006, ETC. '06, '07, '08 and every year thereafter for '08. So it is a three-year guaranteed tax bill.
What I've said is, we acted in good faith. What we didn't want to do was be in the position of appearing to repeal what had been already enacted. There was a lot of back and forth, a lot of trading that happens when these numbers are nailed into effect. We tried to make a good-faith effort at preserving what had been previously enacted, and in order to do that, we were going to have to restate the out year rates, and that was the basis for our action. I think that our underlying concern remains, and I think we're faced with that -- at some point, I'm sure we'll talk about the Cohen tax reduction where we do have multi-year tax reductions, and we're now faced with having to unwind what I've testified was not affordable when we enacted. As we 266 2/27/06 - WHOLE - BILL 060006, ETC. try to craft five-year financial plans, it becomes increasingly clear that it's not affordable, and I think we have cast before us a very clear example of what happens when you get into these multi-year reductions. I think we start down the road of sending exactly the wrong message, where we enact and then repeal and enact and repeal. As circumstances unfold, these various initiatives are not affordable.
Well, I mean, I think some of it may also just be in the explanation. I mean, we made an adjustment to the wage tax schedule, the ultimate result of which was moving from a fiscal year to a calendar year. I mean, the City ultimately was the beneficiary of doing that. It could have been characterized by some in a different fashion, but I think we got through that one. I know you made a good-faith effort. I agree with the effort. I 267 2/27/06 - WHOLE - BILL 060006, ETC. mean, the issue seems to be one of perception in how it's explained, is it a one-year cut or is it a three-year cut, and I think in the language that's been used in recent times, can't we just agree that this is a three-year tax cut bill 8 and you just accelerated the rate? Isn't that the way to characterize this?
No. I think that an effort -- I think that what the Administration did was budget $5 million in FY05, a one-time additional reduction, that plays out through the entire plan, and in order to reflect that in the tax rates, we were forced to restate it in each one of three years. I think that we have not retreated from what we've been articulating as a concern about locking in reduction of revenues, particularly in times when we have a lot of things going on in the budget. As Councilmembers know, we're faced with --
We got two over here. 268 2/27/06 - WHOLE - BILL 060006, ETC.
I don't have to worry about turning my back on them. I'll talk to the Council President.
As it may drive you crazy, you're kind of stuck with me over here at the moment. That's just the way it is.
We're faced with erosion of our federal and state support that is going to make it difficult. Just last week we were at arbitration testifying in the Act 111. There are a lot of risks and contingencies that I think make it imprudent to begin legislating locking in tax reductions in out years. I think we do our best to plan for that. I think it's imprudent to begin legislating, and I know the Mayor does, to begin 269 2/27/06 - WHOLE - BILL 060006, ETC. legislating those.
Why don't we say this on that, that the Administration's good-faith proposal to put additional dollars toward business privilege tax reduction supports a continuation of a three-year schedule of tax cuts. Is that accurate?
Okay. And should this bill pass, there would be a new rate for 2006. We would not have to vote on further reductions in the business privilege tax in '07 or in '08 as a result of this.
So you support the continuation of the three-year tax cut. Now, on the other hand, you do have a schedule of proposed cuts through 270 2/27/06 - WHOLE - BILL 060006, ETC. for the whole Five-Year Plan.
We have done what has been done since 1996 in this City. We have projected what appear to be at this point reasonable tax reductions in out years. What we do is take a look at that on a year-by-year basis. And if you'll recall back in the '90s, I guess, sometimes the cuts were not as aggressive, sometimes they were more aggressive by the time they were actually legislated. In just this year, we in fact have proposed a more aggressive cut than was previously thought to be feasible. So we are committed to tax reductions. We're committed to business tax reductions. We try to work with them in our Five-Year Plan, but make decisions about the rate of reduction on a year-by-year basis.
But having said that, either your memory or Commissioner Kammerdeiner's memory, of 271 2/27/06 - WHOLE - BILL 060006, ETC. course, could be better. Do you recall during any of those years, either the '90s or certainly in the last five or six years, that other than various proposals from members here or even now in this particular situation the Administration is proposing its own accelerated, for the most part, the rates have been the same from the Five-Year Plan that ultimately get enacted and I think the only big change has been reductions? Has there been a time that the rate went up? COMMISSIONER KAMMERDEINER: I can't remember which year it was, but I don't think it was the rate went up, but the amount of decrease was not as great as was proposed in the prior year's Plan and so there had been variations, as the Chief of Staff indicated a few moments ago, that the amount of decline from year to year, though there was a constant decline, was not always at the same rate as had been proposed in the prior year's Five-Year Plan. 272 2/27/06 - WHOLE - BILL 060006, ETC.
Do you remember what year that was? COMMISSIONER KAMMERDEINER: No, I don't remember which year, although Budget Director has some things. This is what was enacted. We'd have to go back and look at each Five-Year Plan and compare a Five-Year Plan to what was actually enacted in the ensuing year. It was early in the process of the reductions, if my memory serves me correctly, but I can't tell you which year.
So you think somewhere in the '90s? COMMISSIONER KAMMERDEINER: Yes.
Now, lastly on this issue of, quote/unquote, locking in, what is the significance, I guess, if any, to approving the Five-Year Plan with a schedule? Of what value is that if it's not some preview as to where we're 273 2/27/06 - WHOLE - BILL 060006, ETC. trying to go? And then, of course, we do a budget every year and as we need to make adjustments, we can do that. But, I mean, what's the point if we're not going to try to do our best to follow some schedule?
Well, I think it is a forecast. We forecast revenues. We try to make projections about what's going to happen with expenses, but from year to -- and I think it's been a good thing for the City. I think that all the rating agencies will tell you that it gives us a real opportunity to avoid huge problems, because we're always looking a little bit down the road, and most other jurisdictions don't do that. But there are a lot of changes that happen from year to year. I know that we've seen enormous changes in our pension obligation. We've seen big changes and are currently witnessing big changes in the level of support for human service programs. And so their 274 2/27/06 - WHOLE - BILL 060006, ETC. projections, things really don't begin to crystallize until you get much closer. I think that's why it's prudent to plan on a future of tax reductions, but to hold off until you begin to have a clear sense of what's going to happen, what's actually going to happen with revenues. I think right now we're particularly vulnerable, because we are as dependent on the real estate transfer tax as we are -- we've got a couple of taxes that are performing in ways that are completely unprecedented now that have the Plan carrying more risk than I think it's probably carried in the recent past. And I think that we need to be cautious about over -- we just need to be really prudent about the investments we make. We have to be prudent about the tax reductions we pursue, because we are working off of -- we're working at a time -- when I think back about the years I've been here, it's probably more in flux in a lot of ways than it's been for 275 2/27/06 - WHOLE - BILL 060006, ETC. a while.
Well, at the same time, if the rates are reasonable and you at least have laid out a schedule, not only do you, of course, have to be concerned about the revenue side, but it does impose some amount of fiscal discipline on the spending side --
-- on the expense side, because you know at least what you're anticipating. I guess where we might have a slight difference of opinion is, you've mentioned on a couple of occasions this concept of locking in rates. I mean, I know there was, I don't know, some bill at the federal level a bunch of years ago that required that once they locked in certain things, then certain cuts automatically happen and they were virtually irreversible. I mean, we don't find ourselves in that situation. We can change our taxes and their rates at least on an annual basis 276 2/27/06 - WHOLE - BILL 060006, ETC. in any way, shape or form we want to.
Well, I think it's going to be interesting to see what happens with the repeal of the wage tax credit. I think that's where we'll have the opportunity to see whether or not there's the resolve to undo things that become unaffordable. I know that the previous panel testified that --
It was proposed because it is unaffordable in the out years. The previous panel I believe testified, Oh, you've got a fund balance, there's no need to undo the Cohen bill. The fund balance, in large measure, protects against the possibility that PGW does not repay the $45 million. I think if you look in the year after that, it becomes even more apparent as the level of the wage tax credit is -- the funds diverted to that begin to really take 277 2/27/06 - WHOLE - BILL 060006, ETC. off. It becomes clear how unaffordable that is, and that if it's not going to be significant, you have to wonder why you start down that road at all.
Let me ask this question. I know the Administration did not support it, but to have any amount of insight into the inner workings of the operation, was there any discussion about either reducing the rates and simultaneously even stretching out the schedule as opposed to you reached the conclusion and the only thing to do is, well, I guess we just need to end it?
I think that the Administration's position has been clear since, I guess it was, 2004 when we attempted to shift from wage tax reductions to business tax reductions, although nobody seems to remember that. We think that there is more benefit as a result of business tax --
I think 278 2/27/06 - WHOLE - BILL 060006, ETC. that was 2002.
Yes. Time flies when we're all having fun here. COMMISSIONER KAMMERDEINER: We're having so much fun.
Which, by the way, is what started all this in the first place.
It's ironic now that we're the enemies of business tax reduction. I never will understand how all that happened. And so have preferred business tax reductions. I also believe that, in measure, as a result of the economic development summit, I think it put a finer point on the need not just to commit and invest in business tax reductions, but to also focus on other components of our economic development, 279 2/27/06 - WHOLE - BILL 060006, ETC. and that's why we have proposed an additional borrowing to support the arts and make additional resources available for the neighborhood commercial corridors, that we can't focus just on tax reductions, we've got to be broader than that. We do think that business tax reductions have a clearer benefit than the wage tax reductions that would have been affordable.
You had asked did we look at a lesser amount of tax. We don't have faith in that tax credit as --
Not at the levels that we were able to make it, and so chose instead to invest in more for business tax reductions and to make investments through a borrowing.
But how do 280 2/27/06 - WHOLE - BILL 060006, ETC. you address the whole issue of -- I mean, that particular bill does not go into effect until 2010.
2010 is not just a date in the offing. Particularly when you have numbers as large as the numbers proposed with the Cohen tax cut, if you don't want to have things cataclysmic happening in the delivery of services, you have to begin planning sooner rather than later; that if we're going to stay on course to absorb the kinds of expenses that Cohen triggers, we're going to have to start making changes in how we do business well before we get to 2010. Just otherwise we would be -- it would be like when we had the 281 2/27/06 - WHOLE - BILL 060006, ETC. $60 million problem a couple years ago. If it's not going to be cataclysmic, you have to take a longer run at it.
What I'm taking out of this is -- and the couple panels ago, there was mystery and intrigue and wonderment by those panelists as to why this is being proposed. I mean, the answer is because of potential cuts in services?
The numbers get to be so large, at this point, we don't see how you get to those kinds of savings. Nobody is projecting revenues sufficient to cover these kinds of increases. When I look at what could happen with some of the labor negotiations, I don't know how you get to absorbing one-year cuts 30 million, 47 million. I don't know how you get to those numbers without impacting services. You can't wait until FY12. You can't wait until FY11. You've got to begin changing how you do business well before 282 2/27/06 - WHOLE - BILL 060006, ETC. that. And I think service has become an issue. The other thing that I want to continue to emphasize is, we're headed in a direction with our state-derived revenue that leads me to believe there's going to be less, not more. They've changed to the whole Medicaid realignment that we first saw last year. I think it's going to continue. You see the federal government beginning to pull back on things like TANF. All of those things lead me to believe that we're going to have less, not more, and that we are going to see some changes in services. We're still working through the potential impact of the state budget, but I'm not seeing more on the horizon.
Last question. Bill 060089 mirrors the proposed rates in the Five-Year Plan. Is it my understanding from reading your testimony that because of that, there would be no financial impact to the 283 2/27/06 - WHOLE - BILL 060006, ETC. Five-Year Plan?
Those numbers would be anticipated already in the Plan. I think that depending on what happens with the Cohen bill, if that's not repealed, all bets are off, depending on -- but those numbers currently would be in there.
Just as a last follow-up, since they are exactly what's in the Five-Year Plan and you're asking us -- at some point, you're going to ask us to approve a Five-Year Plan with those same numbers in it. Why would you be --
I think Council is taking the position it doesn't approve the Plan?
No. I thought 284 2/27/06 - WHOLE - BILL 060006, ETC. that was the position.
No. I assume that we're going to approve a Five-Year Plan at some point.
Our position at that point would be if you were to have the repeal of Cohen, if the other numbers in the Plan don't change, our objection to that would be largely because it legislates on a multi-year basis, and we don't believe that's prudent.
But you already signed a multi-year reduction. You signed two of them.
Councilman Nutter, excuse me. I believe Councilman Rizzo has a question.
I just have a quick question. Chief of Staff, you just said about Council not approving. What were you referring to? What Plan?
I think I'm good. I mean, the position is, even if the rates are the same, the Administration does not want to support further extension of multi-year tax cuts, 286 2/27/06 - WHOLE - BILL 060006, ETC. notwithstanding the current situation involving --
-- multi-year bills that have already been signed in the past. Okay. Thank you, Madam Chair.
Thank you, Madam President. Ms. Wilkerson, many of us -- and as you well now, because you've been around here for such a long time doing this hard work, I get in my office, I've gotten over 2,000 people that have signed into my office alone, and I've been in office only a little bit over the two years. Around 50 percent of the people that come are very low-income families that are in need of a variety of immediate pressing things in their lives, and this wage tax reduction means a lot to low-income and poor working-class 287 2/27/06 - WHOLE - BILL 060006, ETC. families. In the numbers that you -- and I understand why you want to repeal. I'm note sure I agree with it, but you in your statement on , the number in FY10 in your graph says that there will be a total impact of wage tax relief of 48 million some dollars. That total is a combination of the wage tax reduction program that the City of Philadelphia has been involved in for quite a few years now. So the number of the Cohen bill, correct me if I'm wrong, is not actually that 48 million number, but the $15 million number. The impact that it will actually have will be an impact of 15 million additional dollars in our wage tax reduction. Am I correct?
So the impact that this would have starting in FY10 will be an impact of $15 million, not $48.9 million --
-- that's correct? And then we see that this continues to balloon in the out years. Is this Administration saying that we cannot take in this additional $15 million reduction by FY10?
We might be able to afford it in FY10, but we would have to jettison other things. That 12 million standing alone, yeah, maybe we 13 could do that, but there are other things 14 that -- you'd have to drop out $15 15 million of other spending or else show additional revenue equal to that. And that alone, it's our position that alone is not sufficiently significant. But when you begin to couple it with the other changes, an additional 31 million in FY11, it begins to build in such a way that we can't afford it.
I understand your point of view, but you very well also acknowledge the surplus that we have 289 2/27/06 - WHOLE - BILL 060006, ETC. at hand, that the surplus looks like it's going to grow. Hypothetically, if it continues to grow and we still are able to do, let's say, most of the things that the Administration has proposed that I thought were very well thought out and a lot of it I'm in agreement with, if this economic trend continues and all indications are thus far -- I'm not a financial expert by any stretch of the imagination or an economist, but it looks like our economy is going to continue to grow. Isn't there a way that we can work to make this wage tax reduction for the working poor possible?
I think, first of all, the fund balance doesn't continue to grow. It drops to only $4 million in FY08 and then begins to increase. We don't project that it will ever reach during this Administration where it is presently. So it's not all rosy. And I think that if the decision is made, if this is a priority, then we'll have to 290 2/27/06 - WHOLE - BILL 060006, ETC. talk about getting rid of other things. It may be getting rid of projected business tax reductions. It may be getting rid of proposed spending. It may be getting rid of the bond issue. But you will have to get rid of something, because the next several years, a $4 million fund balance is extraordinarily low, and when you take into consideration that we don't have all the potential increases in our labor costs, when you look at what we aren't doing for the pension fund, you begin to see how close to the edge we really are and that the conversation is going to have to change from constantly giving back revenues.
I'm very cognizant of that last fact, and I'm glad that we coincide with that thinking ahead in our obligations. I think that there should be a way that we can make this happen so that low-income wage earners will have some relief so that they can make ends meet, because that seems to be 291 2/27/06 - WHOLE - BILL 060006, ETC. the biggest problem with people that are at the bottom end of the wage brackets. I believe that we have an obligation as we go and reduce business privilege tax, which was a question that I posed to Mr. Mandel -- and I don't know if I got it in with the Chamber -- that as we continue to do business of tax reduction, which I think is a very good thing as long as we use some austerity and realize that we have a broader population to serve in this City as well, that we should be able to, in the same light as we're doing those type of tax reduction, that we treat the other bottom end of the economic ladder the same way, that if they need some relief, that we'll be able to give them some relief within some limitations. But I would like to continue to have this discussion with the Administration to see if there's a way that we can come to an agreement on this.
I think that 292 2/27/06 - WHOLE - BILL 060006, ETC. there are things. Part of what the gaming revenues are to support in Philadelphia anyway is reduction, further reduction, in the wage tax. We've all had conversations about doing things to protect people with lower income and fixed income when it comes to the property tax. I think when we engage in that conversation, we put on the table potential new revenues it's going to cost us, because we're going to have to do carve-outs to protect low-income people and to protect senior citizens on fixed incomes. But that does offer another opportunity for us to begin doing the kinds of things that you're talking about or that folk want to see have happen.
Thank you. Are there any other questions from members of the Committee? (No response.) 293 2/27/06 - WHOLE - BILL 060006, ETC.
Seeing none, I thank you. Thank you for your patience.
Do we have anyone else to testify on the bills before us? (No response.)
Seeing no one, the Committee will stand in recess until tomorrow morning at 10:00 a.m. Thank you. (Committee of the Whole adjourned at 3:00 p.m.) - - - 294 CERTIFICATE I HEREBY CERTIFY that the proceedings, evidence and objections are contained fully and accurately in the stenographic notes taken by me upon the foregoing matter on February 27, 2006, and that this is a true and correct transcript of same. ______________________________ MICHELE L. MURPHY RPR-Notary Public (The foregoing certification of this transcript does not apply to any reproduction of the same by any means, unless under the direct control and/or supervision of the certifying reporter.)